T2W Trading Community

The above 15-min chart illustrates the beginning of a correction. The very strong market travelled almost vertically, made an eight bar narrow range consolidation below the 5169 level. Then, it dropped with a big down-bar, almost freely. The triple top pattern at the highest high is the guarantor of the reversal, beginning of a significant correction. It is highly probable that the down move will continue, for at least a few bars, with the same vigorous momentum.

Three Pawn Technique – Triple Order Preparation and Trade Execution
By observing the Figure 4, we note that the down move continues strongly, as anticipated, and created a down-gap, zooming through the upper median line of the ascending pitchfork.  Now that the zoom is accomplished, let us consider the following trade, in case of a test or retest of the upper median line (U-MLH): 

• Sell stop entry at 5125 – if test or retest, after zooming move, 
• Initial stop loss - buy stop at 5129 -  just above the last high of the previous trend,
• First profit target objective (target No 1) – buy stop at 5062  - at the confluence of the market price with the median line (ML). 
• Second profit target objective (target No 2) – buy stop at 4990  - at the intersection  of the market price with the lower median line (L-MLH). The value of this target has been calculated using the ATRs technique.

Due to the size and the location of the gap, which is probably a breakout gap, it seems that the trade has a high probability potential. Thus, we will consider, two trading units: 

1. First that will be exited at the target No 1 level, and 
2. The second that will be exited at the target No 2 level. Who knows, we might be able to get a free ride and trade with the market’s own money.

But before placing any orders, we will have to establish the reward/risk ratio, and verify if the R/R ratio value is above/below our 2.5 usual limit.

Let us proceed and calculate the reward/risk ratio (R/R ratio), for this low-risk high-probability short trade. The calculation per contract will be only done until the target n°1. For the target n°2 there will be no risk because as soon as the target n°1 is attained, we will move the stop loss to the break-even point at 5125 level: 

• Reward is 63 Dax points for target No 1, [entry level (5125) minus target n°1 level (5062)], 
• Risk is 4 Dax points  -  [stop loss level (5129) minus entry level (5125)], 
• Reward/Risk ratio is 15.75  – (63 divided by 4) – an excellent value.

Conclusion – the R/R ratio being excellent, we will place our three pre-arranged orders.

The second bar of the opening just retraced, slightly over the upper median line, thus executing the entry order (Figure n° 5). The third opening bar (last one on the chart) has its close in its lower quarter, hinting towards a down-sloping move. We are confident in our progressing short-trade, mainly because of the breakout gap and the down-zooming huge bar.