The graphical pattern "Three Indians" - three steps to profit
Opponents of harmonic trading argue that market symmetry is far-fetched, and the movements of market quotes cannot fit into a predetermined scheme. However, the methods of this direction of technical analysis continue to work, allowing the trader to determine important support and resistance levels, as well as to identify potential market reversal points.
The "Three Steps" graphical pattern is the way to the "Three Indians" pattern
Let the graphical configurations using Fibonacci dependencies occur not so often, nevertheless, their effectiveness is time-tested.
Today we will talk about this variation of the famous Three Indians graphic model described by Linda Raschke and Lawrence Connors in their best-selling book "Secrets of the Exchange."as the "Three Steps" pattern. No matter how detailed the authors approach the identification of the graphical configuration, nevertheless, traders still have many questions. In particular, how can one identify the location of the last Indian? What filters should be used to increase the effectiveness of the strategies used? At what level should a position be closed? Does it make sense to redraw the "Three Indians" chart pattern if the pattern has not worked? And many others.
It is not possible to answer all of them within the framework of one material, so I will try to pay attention to the first two.
How do you find the last "Indian"?
The modern approach to the "Three Indians" pattern implies the construction of an additional line passing through two previous extrema in order to identify the last maximum (minimum). However, in the real market quotes may never touch this line, as a result of which the deal will be missed.
The graphical Three Step Model based on the measurement of the corrective movement allows you to determine the level of the third extremum mathematically.
On the 4-hour chart of NMLK shares it is well seen that the quotes never reached the level marked by the line drawn through the first two maximums. At the same time, the correction after each Indian was in the area of 78.6% from the previous wave, which fully corresponds to the conditions of formation of the Three Steps harmonic trading pattern.
At a given pullback level (50-78.6%), the trader has an opportunity to determine the location of the third top using the following mathematical formula:
E3 = E1 +/- 1,272*/E1-E2/,
where E1, E2, E3 are sequentially occurring extremes.
In the above example, the difference between the second and the first Indian, adjusted by the Fibonacci ascending coefficient, was added to the value of the first maximum. As a result, when returning to the calculated level, the trader had an opportunity to open a position without waiting for testing the technical line.
Using "Three Indians" pattern in trading on climaxes
The use of the pattern "Three Indians" is also possible in climax trading. In particular, the return of the market to the calculated level allows not only to open a position, but also to competently place an order limiting the risks.
On the 4-hour chart futures an ideal pattern of harmonic trading was formed on aluminum: correction after each new low is 61.8%. After the market returned to the estimated price, it was necessary to open longs. At the same time, it is recommended to place a stop loss just below the level of the previously formed extremum - the "third Indian".
It should be noted that in this example the entry point of the "Three Steps" model approximately corresponds to the classical strategy of the "Three Indians" chart pattern, which allows to provide the trader with greater confidence when making a deal.
Today we got acquainted with one of the varieties of the well-known "Three Indians" chart pattern, based on the formation of several consecutive extrema. The described pattern allows not only to avoid unfavorable trades with the help of correction filters, but also not to miss them. Despite the relative rarity of its formation, the "Three Indians" chart pattern can form the basis of a rather effective trading strategy. To do this, the trader should think about what should be the range of the correction? How to exit the trade? Is it worth to use trials or to focus on the climax trade? You should find the answers to these questions on your own, but I will still leave some recommendations in my subsequent articles.