1-2-3-Formations and Ross Hooks

[egro1egro]

I wonder why people underestimated rcar1046 question. That is the main problem with Joe Ross technique and exactly this problem should be addressed before using RH and TTE profitably. All this blah-blah about failed patterns and that they happen everywhere and no signal is perfect is going nowhere.
What we have here is clearly would-be-unprofitable pattern in case we trade multiple contracts and intend to close some part of them very soon after the TTE-entry.
I will try to address the problem. But, hopefully, Joe Ross can do it much better, although it seems so obvious to him and that is exactly why he doesn't go into it.
I see several ways to avoid rare big losses that turn a profitable pattern into a looser.

1) Put initial catastrophic stop very closely to the entry point. Or keep the catastrophic stop under the bottom of #3 (if long) but mentally be prepared to exit if the price doesn't go immediately in our direction. The idea is - we either have a big enough upside momentum or not. Although market needs to breath and we don't put S/L on breakeven straight away. We just need to watch the price closely (may be even every tick). As for Joe Ross, in one place he says that the initial S/L should be placed under #3 but moved higher as soon as possible, in another he says what I just said about big momentum. But it is still ambiguous. What if we are opening on a 4 hour chart? Watching every tick is ridiculous - it is too small-scaled. Price momentum on a 4 hours chart is not a movement tick-by-tick. On the other hand, if we are dealing with 10-30 min charts than potential bottom of #3 is never too far from entry, so the risk is not too big anyway.
For instance, would-be-#3 bar is 10 pips in length (in Forex 30 min chart). We open and set small target + 5 pips and S/L -10 pips. If we are trading in 2 lots, intending to close the first one on the small target, than in 40% we are stopped on -10, in 60% we hit +5. When we are stopped 4 times (out of 10) we loose -20x4 = -80 pips (on both lots), when we achieve target we get +5 x 6 = +30. We expect the second lot to be stopped at breakeven and sometime run into some bigger profits, therefore 50 pips loss can be covered (hopefully). If we increase number of lots and expect to dump more on the first target than fortune will turn even more in our favor....
But it is still a little bit shaky, as you can see.

To be continued…

 

[egro1egro]

...continuing...

2) We put initial catastrophic stop under #3 bar. Within the next bar (which opens our position on TTE) we watch for a "local extremum" and move S/L to it as soon as possible. In plain English, the price hits our entry and retraces a little (it always does) then it either goes back or straight to hit our initial catastrophic stop. In many cases it will retrace a little and then go back. As soon as it does we move S/L immediately under this retracement and even to a breakeven if possible. Either the price goes our way second time or not at all.
So, from 40% of failed pattern we can still reduce our losses when possible. But we are not talking here about some closely located mental stop - we just don't have them. Our first mental stop will be a little under the first retracement.
This tactic doesn't imply that we watch every tick necessarily. If 10 min chart is used, then yes - every tick. If 4 hours chart - then we just descend to 1 hour chart of 30 min to watch for the retracement.
But! Beware! Retracement in this case can be confused with congestion on a lower time frame and we might be forced to exit prematurely. And that means quite the contrary, increasing our losses by stopping in some of the 60% winning patterns.
I would suggest to qualify the retracement as finished only when it moves back to our entry. If it produces a congestion or a ledge before it reaches our entry we have to widen our stops in order to enclose the congestion rectangle into it. The price would then breakout of the congestion and when it happens – we are either winners or losers, but with smaller losses. On the other hand, false breakouts etc. can make you change your mind…
Of course, you wouldn’t look for congestion patterns on a tick-chart – it is ridiculous. But for 4 hours chart descending into 15 min chart this approach is quite suitable.
As you can see there are merits and disadvantages in this approach too. I also tend to think that Joe Ross would advise something similar to it.

To be continued...

 

[egro1egro]

3) We can devise many additional filters to get 100% (or 95%) of success in terms of achieving the smallest target. The rest is what nobody cares about. If the remaining contract gets stopped on a breakeven 99 times out of 100 we still get a little profit rather than big losses. And I think that this is what Joe Ross advises too!!! He says that he trades many-many different markets. If there isn’t perfect set-up on one, we go to another. If the price breaks out and goes in our way but we missed it – who cares?
Joe Ross watches closely at the price bars rather than at any indicators. He notices several things that can alert him – gaps, very big bars, dodjis, congestions, ledges etc. All this things prevent him from entering in the first place. TTE on 1-2-3 is also risky, so he often tells to practice TTE on Ross Hooks in an established trend, after the breakout from congestion and so on. He also uses 3-bars moving average, as he mentioned it in TLC.
I suggest you to take a lot of charts on different timeframes with any of your favorite indicators, may be candlestick charts or whatsoever. Go through them bar by bar making your bets on 1-2-3 formations or RHs as they turn up and creating a list of filters or a set of rules at the same time. Soon enough you will probably be able to foresee most of the failed patterns and be able to avoid them in your real trade.
Joe Ross does have a set of such rules definitely! And his rules have to be pretty simple.

I have kind of created such a list for myself and can share it with anybody in later posts. This letter is getting bigger. And I am going to show one more trick, which is probably of no much secret to other traders. It is regarding an ambiguity in going long/short. Some time ago one member asked what to do if you can see 1-2-3 in both directions at the same time. This simple trick is also related to initial S/L placement. Here is a little picture of what I mean:

#1 (short)
\ #3 (short)
\ /\
\ / - enter here (short)
\/
#2 (short)

After we have entered we get the following:

#1 (short)
\ #3 (short) #2 (long)
\ /\
\ / \
\/
#2 (short) #1 (long)

The last bar can turn out to be #3 for long. We transfer our initial S/L on top of it. If it is broken – we can reverse and go long (but watch out for congestions!!! So, probably, can just stop at this point). Our smallest target is not yet achieved but we already reduced our risk!
It is similar to pp. 2 but we are not going to a lower timeframe.

 

[Mr.Black]

For all you 1,2,3 formations and Ross Hooks fans

 

[charliechan]

ergo - some valid point, but i think the conclusion for this is no different from any other trading plan: namely sound trade management, and putting the odds of winning firmly in your favour. context (of any pattern) is king i feel, explaining why ross may apear to contradict himself in your examples. perhaps he is just being flexible and trading according to the situational requirement rather than rigidly following a plan like a robot. the set-up is frankly not as important as some think. i guess joe ross knows this - being the reason he gives the set-ups away for free because quite frankly, they are as worthless as a setup some people will pay $$$$$ to learn on some course, unless you know what to do with it. knowing how to manage the trade is where the value lies if trading from charts imo.

you mention some possibilities on how to manage the trade - if you work on these, i am sure you will come up with something (if you havent done so already), while also learning when to take these (or any other) pattern and when to avoid it. a lot of this will depend on your comfort level. whats right for you may not be right for me etc.

 

[egro1egro]

Still need some rules

Thanks for the first feedback. I understand that everyone has to derive his/her own rules to feel comfortable psychologically. And I undertsand that pure mechanical system very rarely works. It is still doesn't mean that there aren't any rigid rules.
The rules/system might be flexible and humane but it shouldn't be ambiguous!!! Otherwise my fear and greed will find their way to exploit it.
A system should be described in some definitions and parameters. I hate fixed parameters, like "taking only bars of size 4" or "use only MACD with 63, 10 , 63" - these parameters don't reflect anything real. But it doesn't mean that there shouldn't be any parameters. The parameters I would prefer are: length of the last bar (whatever it currently is) - it is precise but not absolute and not ambiguos.

As for the topic of current thread, I don't understand all these talks about taking the setup, interpreting it as you wish and rely on some bogus 65% success of the pattern. That doesn't make anybody profitable, as I showed in my example with two lots! Than why bother using it at all? Or we have to give a little bit more unambiguous definitions. That is what I was trying to do.

Personally, I found feel comfortable with any system that trades well on a paper and shows consistent profits (consistent across months, timeframes, lot sizes, low drawdowns etc.). If I see it on a paper than I can withstand temporary losses.

 

[ZDO]

egro,

Edited my post above to remove the word "fail" - it's bad subliminals, etc.
Same basic point remains though - ANYTHING can happen after a perfect setup and entry.

CharlieChan makes same points above. Entries are stupid. All the well timed and primed, elegant, high percentage, complicated, low heat, filtered, optimized to context, backtested, forwardtested, and highly adaptable entry setups are still just plain STUPID.

123's setup possible new trends - period. Hooks setup possible momentum surge - period. Joe Ross basically teaches if an entry is not working GET OUT! And he wants it to show whether it's working or not, pretty quickly ...

Also, please be careful advising noobies to put on and mangle multiple contracts. For a large percentage of beginners, it's bad advice because they are simply not 'neurologically' ready. A few are - but most aren't.

All the best,

zdo

 

[egro1egro]

That is exactly my point

How do you see that it fails before it hits #3 bottom and wipes out our position? That is the most important question! And nobody wants to bother giving any conclusive answer. If you cannot exit before #3 bottom is hit than you cannot simply make the idea work at all. If there is any point to exit before - than where is it? or how to find it? Select one of my answers or give yours.

I understand about multiple contracts. But that is the only way TTE works. Otherwise it is useless. Do you suggest entreing with just one contract and scalp 5 pips of profit each time and nothing more? Certainly, for beginners trading 10 contracts, exiting 7 of them half-way and so on is very difficult psychologically. But there should be at least 2 to make the TTE/RH/123 work.

As I said before, in case you are wrong you loose on two contracts the difference between entry point and #3 bottom (or even #1 bottom as Joe Ross suggests in some places). In case you are right, you gain a tiny profit on one contract only. And in some cases only you get something on the second contract as well. It can work only if you can cut losses on 2 contracts significantly (without hurting potential profits) or if you find a high-probabily pattern for at least 5 pips of profit each time before bumping into S/L.

 

[ZDO]

egro,

re:

How do you see that it fails before it hits #3 bottom and wipes out our position? That is the most important question! And nobody wants to bother giving any conclusive answer. If you cannot exit before #3 bottom is hit than you cannot simply make the idea work at all. If there is any point to exit before - than where is it? or how to find it? Select one of my answers or give yours..

By the 'book', breaking 1's nullifies the count. But in real life, it's about time and movement. Joe is scanning for situations that are going to quickly make higher highs (and higher lows) and get on by the 2 (ex. is for the buy side) and actually 'impulse' / trend. Hence my original comments about 'context' and the overall situation. So if a TTE entry starts just sitting there mucking about, it's not working - so get out! It's balanced (bid/ask,etc), and from 'balance' comes near 50 50 which way it will 'chao out' - not what we're looking for. Positions in these patterns should work quickly or be abandoned... give them a blinking time stop if you can't discern whether to stay or not by dropping to short timeframes... or if you don't know whether or not it's working, then that's a clear indication to get out as soon as possible.

I can hear it now - but then I'll be missing a bunch of good moves that ultimately break my way after mucking around... ... the word 'break' is the BIG word in this whole deal...

Same with hooks. Imo, the instrument should already have good momentum into the hook. The hook is a pause to help build (not really) more ensuing momentum in the same direction. Just my opinion... and please don't infer that one can't do well with mundane hooks. It's just that there are bunches of mundane techniques and only a small percentage of traders are going to be 'compatible' with watching for routine 123's, RH's, etc all up in the middle or late part of a move...

Is that conclusive enough???

zdo

 

[BroadSword]

Is that conclusive enough???
zdo

Yes, it is...Good post!

 

[egro1egro]

Good answer indeed.

I think that is one of my cases (see previous posts). Thank you for the attention.

 

[Splitlink]

Thanks for the first feedback. I understand that everyone has to derive his/her own rules to feel comfortable psychologically. And I undertsand that pure mechanical system very rarely works. It is still doesn't mean that there aren't any rigid rules.
The rules/system might be flexible and humane but it shouldn't be ambiguous!!! Otherwise my fear and greed will find their way to exploit it.
A system should be described in some definitions and parameters. I hate fixed parameters, like "taking only bars of size 4" or "use only MACD with 63, 10 , 63" - these parameters don't reflect anything real. But it doesn't mean that there shouldn't be any parameters. The parameters I would prefer are: length of the last bar (whatever it currently is) - it is precise but not absolute and not ambiguos.

As for the topic of current thread, I don't understand all these talks about taking the setup, interpreting it as you wish and rely on some bogus 65% success of the pattern. That doesn't make anybody profitable, as I showed in my example with two lots! Than why bother using it at all? Or we have to give a little bit more unambiguous definitions. That is what I was trying to do.

Personally, I found feel comfortable with any system that trades well on a paper and shows consistent profits (consistent across months, timeframes, lot sizes, low drawdowns etc.). If I see it on a paper than I can withstand temporary losses.

I agree with what you say, here. The reason I use the previous bar is to detect a pullback in my trend and, then, to use the other end of the same bar to confirm before entering the trade. The bottom end of the bar(if we are long) becomes the stop. Therefore, a bar that is too long and going to give me a stop too far away is unacceptable to me. There seems to be a lot of mathematical mumbo jumbo about something that is, really, something that the eye will tell you, at once.

I'm not sure whether Ross hooks are what I use, or whether it is just a simple pullback method. I used to go straight into a trade as soon as I got a pullback but found that I had too many failures, so I go for the additional breakout at the top, now, to confirm. With hindsight, there is still seems to be plenty of profit to be made.

Split

 

[egro1egro]

What Joe Ross originaly meant

by TTE with 1-2-3 is two things:
1) 1-2-3 is a beginnig of a trend and not necessarily it is a good idea to use TTE on it. Just trade the breakout of it and then use TTE with ross hooks along the way. Also, a new trend doesn't necessarily starts with 1-2-3. Breakout of a range would do, breakout of a congestion - as well.

2) However, Joe Ross can use TTE even with 1-2-3, as he said himself at the beginning of this thread. The main idea was to use the momentum that is created by contrived moves in order to snatch someone's stop-orders and pullback if no more activity in the market. He didn't advise to go to a lower time-frame in order to see whether TTE failed or not as early as possible. Instead he would put initial catasrophic stop-loss under #1 (which is uncomfortably far away). Then wait for the first small target to be achieved no matter what it takes. If we have a retracement after #2 as one-two-three bars with consequitive lower highs then buy stop order should be placed above third bar. Fourth bar might happen to be an outside bar just because price makes further correction before triggering your entry. It can also trigger your entry first and then make further correction - there is nothing wrong with it either. But looking at the chart you will not see the difference. All you see is an outside bar. This outside bar shouldn't have its low lower than #1 (bottom of the formation). Otherwise, 1-2-3 is nullified and we have a big loss.
Also, instead of hitting' #1 bottom the price can enter into congestion. Then we exit with a relatively big loss too.
This is an aggressive entry. Yes. But there is a reason to suffer such losses. And the reason is the broker behavior.
At all significant levels brokers or market makers see a lot of bunched orders. When the price corrects or in a congestion "big hands" start hunting for these orders. There are usually plenty of buy orders near #2 - all awaiting for a breakout or they are stopp losses for those who trade from outside to inside of a trading range. If the price starts moving in their direction than it will most likely reach this level at least to snatch the orders. If we have enough room between TTE entry point and this level then we will be most likely successfull in cashing in the first part of our position. After that the remaining part stop-loss is transferred immediately to breakeven. That is it. This hgh probability of the small first target is what makes things work.
In all multiple contract sistems we need a setup with high probability of a small target. Otherwise, single contract should be used.

 

[One Eyed Shark]

Egro

I often find that it is very easy to read other things into trading a 123, perfectly formed 123 on a 5 min chart will rarely get you into trouble, however perfect 123's are few and far between.

Not only do I look for for a clear pattern but the #3 of a 123 top must close in the lower 50 % of the bar.

Trading the shorter timeframes I find it very difficult ( and unneccesary ) to trade 123, trading solely the pullback (RH) off 2 and 3 min charts running simutaneously will provide a significant number of high probability trades.

Money management is the absolute key, for me if it is right to take off one contract then everything should be out, most moves you will get two hooks ( unless trading 6E when there will be more ) adding first contract batch at hook #1 and second ( same number ) at hook #2 works, I know because that is how I trade, if it is right to take one off then I will take all contracts out..

If a third hook is offered I will take it but pull my stop for all contracts to the stop for hook #3.

P.S. excellent earlier post

 

[egro1egro]

How do people trade 1-2-3 on 5 min chart?

Egro

I often find that it is very easy to read other things into trading a 123, perfectly formed 123 on a 5 min chart will rarely get you into trouble, however perfect 123's are few and far between.

Not only do I look for for a clear pattern but the #3 of a 123 top must close in the lower 50 % of the bar.

Trading the shorter timeframes I find it very difficult ( and unneccesary ) to trade 123, trading solely the pullback (RH) off 2 and 3 min charts running simutaneously will provide a significant number of high probability trades.

Money management is the absolute key, for me if it is right to take off one contract then everything should be out, most moves you will get two hooks ( unless trading 6E when there will be more ) adding first contract batch at hook #1 and second ( same number ) at hook #2 works, I know because that is how I trade, if it is right to take one off then I will take all contracts out..

If a third hook is offered I will take it but pull my stop for all contracts to the stop for hook #3.

P.S. excellent earlier post

Thanks, shark.

Which of my posts do you call "earlier"? The last one or the ones before?
But that's not the thing I was going to ask.
What market where you talking about? On forex with 2-3-5-15 min charts there is just not enough room between #3 and #2 to make profit. And even after breakout of #2 it doesn't go sufficiently far enough to hit at least the smallest target (like 5-10 pips). I find that all the moves on 5 and even 15 min charts are short-lived and what people call "market noise". This noise doesn't mean anything except running stops for the forex broker's profit. The broker makes the price break #2 by one pip then pulls your buy stop order and sends the price back to your tight stop/loss. And it happens most of the time on short time-frames.
You have sufficiently large moves on 1 hr and above. But the stop/losses will have to be quite loose (~50 pips). And if you open a position on 1 hr chart you expect it to be open for several hours, perhaps. During this time some stupid news cause an outside bar to appear and blur the whole setup, triggering your entry together with stop/loss withing a couple of seconds.
Therefore, even if you have enough room for profits on 1 hr charts, you don't have enough time, as you will have to close before news, open after etc.

If you were nat talking about forex then about what? or how often do you find your "perfect 1-2-3" during a day on 5-min chart?

I would be very grateful if anybody submits a chart showing a profitable day or an hour on 5 min forex chart stating exactly where the stop/losses were? Or may be I don't catch some small detail about your trading. Thank you a lot in advance!

 

[One Eyed Shark]

Egro

I was refering to the first post ( long one ), as traders we will never continue to develop unless we constantly look at what we are doing, and my understanding was that you were looking at the validity/success of a pattern.

I do not trade fx, I trade the Euro FX contract (6E) and the Russell (ER2) solely at the mo, but have dabbled with mini gold and will trade the E miNY oil (QM) when it is back on Globex.

My point is that we do not need to trade the 123's the RH will constantly provide winning trades, you need to look at the market you are trading find the shortest timeframe where the pattern prints cleanly, whether that is 2,5,10 etc mins, secondly you must be totally comfortable with the stoploss, there is no point trading a market if the money management is going to take you out so work out your max risk per trade in advance before you start to look at charts, so you can discount markets as soon have you have found the shortest time frame you can trade.

The advantage of this style of trading is that your max loss is identified before your order goes to market.

Even on a R:R of 1:1 I am sure that you can find at least 70 % winning trades using RH alone.

Sorry if I havent answered your question my head is a bit fried at the mo, probably much easier to post charts to get clarity.

 

[One Eyed Shark]

Marked up a chart of the Russell 5 min for today as if I was solely trading price action, proves more than ever that the money is in the hooks and that the 123's can be left well alone.

Out of three 123's two were losers, the hooks were money in the bank.

 

[egro1egro]

Good example

Tanks, Shark. The chart example was good. I didn't expect anyone to prepare a chart for me so soon.

I understand your point about 1-2-3. However, according to Joe Ross those 1-2-3 that you marked on your chart are not 1-2-3s. They are all congestions and trading ranges. Failed high situation is also congestion, in which case all trades have to be exited. It is very dangerous to try to identify 1-2-3 inside a congestion. Very often new trend starts in a congestion with 1-2-3 formation. But for that it should be cleaner. For example, congestions consists usually of alternating bars, outside and inside bars, dodjis etc. And then suddenly we see 3 HH and HL followed by a clean correction. As you pointed out a good correction would be at least 50% retracement etc.. One can find all sorts of conditions. Roos Hook appears after 1-2-3, after congestions and after trading ranges. And that is where it can and should be traded, as Joe suggests.
Yes, in some cases you have V-top with spiking volume, which almost always means immediate reversal. Anaware public keeps holding positions but there is noone to buy anymore. And prices definitely fall back. Then a retracement comes in during which some people believe that the trend continues. After that they capitulate and new downtrend resumes. in this model, we get clean 1-2-3 high without prior congestion. And of course it is ideal to trade it.

Nevertheless, I am still wondering how people trade RH with TTE on 5-10 min charts in Forex. Considering spread as commisions, the commisions seem to be very high to prevent anyone from making profits on 5 min charts. Average bar is 8-10 pips. TTE requires at least some rome to cover costs and losses from occasional complete failures. If RH fails on 5-10 min charts we don't get more than 1-2 pips as a profit. It means big nothing....

 

[frugi]

Aye a great chart OES. I like your high failure filter as well.

Egro it sounds like your broker may be charging an excessively high spread? FX futures such as cable and Euro and I believe one or two reputable forex brokers offer a 1 pip spread most of the time which is in my view almost essential for this quite intensive, high frequency style of trading unless you can zoom out to a higher TF such as 30 min and afford the wider stops required. Also you may be aware that with the majority of FX brokers you are not trading a fair centralised market, you are trading their artificial one and they will try and run your stops, delay quotes, slow executions etc. basically everything they can legitimately get away with to take your money. There are exceptions to this but as a rule beware forex "bucket shops" especially if you are trying to scalp. Indeed I believe some of them won't even let their clients scalp - how ridiculous is that? There is lots of info on this site about Forex brokers, including some of the few good ones if you do a search for them. Also there are some good traders on the Live Cable Trading thread who know their stuff in this direction.

However that said a typical RH trader on a small timeframe e.g 1, 2, 5 min is likely to have several breakeven / +1 / + 3 etc. trades on a typical day (well, one as unskilled as me anyway) and that is to be expected and not a problem at all as long as there are a few decent winners as well .As long as you keep the losses and costs small they are a necessary and not wholly unpleasant cost of business. But if you are paying a 3 or 4 pip spread to start with these harmless scratch trades will then become an unecessary cost that could turn your system negative. Sorry to sound so disparaging but lowering costs is a very important consideration for the short TF trader. Also forgive me if my assumptions are totally wrong or if I'm preaching to the choir - my head is a bit fried as well.

 

[One Eyed Shark]

Failed 123's do turm into a range, the opportunities to trade clean 123's as JR talks about, in these current day markets are few and far between.

The philisophy of using the TTE can also be used to trade inside patterns that JR does not talk about i.e. flags etc and also provides low risk entries into channels.

I am not a fx trader, but i would say that if I was trading off a 5 point spread in the markets I do, I would not be using these techniques.

The huge advantage you have, as Frugi points out is that you can go fishing and come out with a number of trades at +1 before you find the movers, if you are trading off a large spread some of those trades will never hit breakeven. ( ouch!)