1-2-3-Formations and Ross Hooks

This is a discussion on 1-2-3-Formations and Ross Hooks within the Technical Analysis forums, part of the Methods category; I'm hoping to set the ball rolling for a discussion of trading with 1-2-3-formations and Ross Hooks, after there's been ...

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Old Jan 25, 2005, 1:43pm   #1
Joined Aug 2004
1-2-3-Formations and Ross Hooks

I'm hoping to set the ball rolling for a discussion of trading with 1-2-3-formations and Ross Hooks, after there's been some interest expressed in these methods recently in other threads.

I thought I'd start off with an example and chart, and now seems a nice time to do so, since I'm trading the EUR/$ at the moment on one of these set-ups.

In my next post, I'll give a link to an online introduction to 1-2-3's in "pdf" (Adobe) format which readers may download, save and print if they want to, and I'll try to give something approaching a "definition" of a Ross Hook without breaching Joe Ross's copyright, if I can.

But for the moment, let's talk about this chart ... it's a EUR/USD 30-minute chart from today, and like all my charts, the times shown on it are CET (that's GMT + 1 hour).

The "points" of the 1-2-3-formation are shown in red. The idea is to enter into the downtrend established by the 1-2-3-formation (which itself marked the end of an uptrend, of course), by entering a short position when the price broke through the 2-point, as happened a couple of bars later. Alternatively, one can use Joe Ross's "Traders Trick Entry" (as I did) by entering the short position higher up on the same bar, in the hope that if the "entry signal" turned out to be a false one, one would be able anyway to cover the spread and exit without loss, or even possibly with a small profit. This is a bit of a gamble, but it worked well on this occasion.

The stop-loss for this trade would be placed typically 2 or 3 pips above the "1-point", which is fairly close, as you can see from the chart. One might want to use a different method of stop-placement if a "round number" were involved, especially on an instrument as liquid as this one, but that subject's for another day. The point here is that if prices go up past the "1-point" it invaldiates the trade entry and means that we've basically "got it wrong", so it's where we'd want to get out, simply because we have no reason for being there.

A couple of bars after entering this trade, there was a Ross Hook (shown in green), which was the first failure of a price-bar to make a lower high during the downtrend. The significance of this is that if prices had subsequently turned around and risen (which they didn't), the taking out of the Ross Hook would have been an entry for a long trade (which didn't arise). So in this case the Ross Hook was not relevant to the trade, and I'm showing it simply because it was conveniently there.

Key concept, widely misunderstood: the fact that the top of that bar constituted a Ross Hook was not defined until the bar following it had closed. (Until then, it might have been a reversal). A Ross Hook can arise only during a trend (this is really fundamental), and can be defined only by looking at the bar after it.

My aim with these trades is to close a third (or sometimes a half) of the position fairly quickly to cover the trading costs, and then to let the remaining two-thirds (or half) run, closing it either in one go or in two seperate chunks, depending on all sorts of factors which (as the saying goes) we can talk all about some other time. For the moment, let's just say that 1.3020 or 1.3021 would be a possible "final exit" on this trade, for the unambitious like me anyway, because one might think it would be an area of some expected support, as can be seen from the bottom of the price bar 7 bars before the entry of the trade.

These 1-2-3-formations and Ross Hooks can be traded on virtually any instrument and any time-scale. Personally I find 15-minute and 30-minute charts useful. I sometimes use 10-minute charts as well, if I feel like conentrating hard and haven't got other things to do at the same time. Those wanting to make frequent trades are naturally more inclined to use charts of lower periodicity, to increase their "trading opportunities". They also increase their variability and chances of accidents, quite a common reason for failure. (I offer the observation that it's easily possible, by using charts which are too fast for your money-management and specifically position-sizing, to get wiped out with a system that would have made steady profits on slower charts.) But now we are talking more about risk-patterns and money-management than the trading method itself.

I know from PM's etc. that several other people here are trading these set-ups, so let's hope we can get some interesting discussion going.
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Old Jan 25, 2005, 1:48pm   #2
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Roberto started this thread I've found one convenient link which defines and explains 1-2-3-formations and Ross Hooks, and here it is:-

http://www.trading-naked.com/library/Law_of_Charts.pdf
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Old Jan 25, 2005, 2:02pm   #3
 
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Joe Ross wrote an article for the May-June edition of Traders' magazine entitled " Trading Stochastic Crossovers with 1-2-3 top formations."

I found this article very helpful indeed and I trade these formations frequently using Joe's stochastic crossover technique.

Very easy and effective.

The thing about these 1-2-3 formations is that they are easy to spot in real time ( an absolute must ), they occur pretty frequently and for me at least it has been a pretty reliable pattern to trade.
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Old Jan 25, 2005, 2:04pm   #4
 
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rob

if I've got you right isn't there another on your chart with long entry on break of red line?

good trading

jon
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Old Jan 25, 2005, 2:17pm   #5
 
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roberto,
this thread will turn out to be very popular !!

I have gravitated towards these 1-2-3 patterns.
They are easily identified in real-time. There is a definite stop-loss, which is generally a low risk entry.

I was going to start another thread regarding "many-names, same-pattern", which I may now leave till later, after seeing how this thread turns out !!
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Old Jan 25, 2005, 2:17pm   #6
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Quote:
Originally Posted by barjon
if I've got you right isn't there another on your chart with long entry on break of red line?
Absolutely; well spotted. (Too early in the morning for me to have been watching it form!).

These things are everywhere.

The entries are always easier to manage than the exits, and there are lots of different opinions about exits.

Some people set a small-ish fixed target and close the whole trade when it's hit. A friend of mine trades these things all day, every day, with a 10-point stop and a 5-point take-profit target on very fast charts and although the R:R ratio sounds strange (not that I really believe in them), she's been successful in 326 out of her last 400 trades, so it's certainly working for her. (Not my idea of fun trading, though, I must say).

Others (including me) do "partial closes" and try to let some proportion run for a long way, with a trailing stop. When I occasionally get lucky enough to have hit the start of a big trend (which can happen, of course), I even have the habit of trailing my stop on the "last part" at a slightly wider distance than normal. I have no real evidence that this is more profitable in the long run than a tighter trailing-stop.

Of course, all these considerations vary quite a bit depending on the instrument being traded and the method used to trade it.
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Old Jan 25, 2005, 2:24pm   #7
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Quote:
Originally Posted by trendie
this thread will turn out to be very popular !!
I was worried that everyone likes using indicators so much that it wouldn't be at all, to be honest. But I'm certainly heartened to see some responses already. Mind you, if necessary, I can talk for England, you know, so I can always keep it going on my own.

Quote:
Originally Posted by trendie
I was going to start another thread regarding "many-names, same-pattern"
Maybe you should, then ... I _think_ I can envisage roughly what you mean: you're thinking about likening 1-2-3-'s to double-tops and bottoms and Ross Hooks to trend-line breaks and the ways these things can be dressed up with various other style of terminology, perhaps? I've always thought the Joe Ross style of trading has a lot in common with "break-outs", and it certainly includes plenty of support and resistance, too. I tend to come at it from the Ross angle, though, simply because (like many people) he was my original source for "putting it all together" and that was what made me a profitable trader rather than a struggling one.
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Old Jan 25, 2005, 2:34pm   #8
 
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Maybe I've misunderstood but my understanding from the book was that the Hook is the "pointy bit" that follows a 1-2-3 set-up and can only be defined as such retrospectively if the following bar(s) fail to match or exceed the high/low of the hook.
Also from reading the book I understood that the standard entry was a breakout of a previous hook (or slightly before if using TTE). This is supposedly more conservative than trading a b/o of the "2" position.

Excellent thread by the way.
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