Peculiarities of M2 pattern’s formation and use
It is believed that Forex quotes move within price channels. The price channels are plotted through extremums. If the formation of extremums is accompanied with MACD divergence, traders may get prepared for an upcoming trend reversal. A series of conditions must be observed for buying what is cheap or selling what is expensive. One of the patterns that use a combination of price channels, extremums and divergence is M2.
The pattern works best on the H1 time frame. The obligatory conditions for M2’s formation in a bearish market are:
1. Two decreasing minimums, with the second one located below the previous one;
2. The minimums must form on different trading days;
3. The previous trend must be at least 2 times bigger that the pattern itself.
If the conditions are observed, we can plot a price channel using the two minimums and a corrective maximum. MACD divergence and the channel’s width serve as confirming signals. It is desirable that the channel should be larger than the previous trend.
M2 pattern in EUR/JPY chart
To buy EUR/JPY, pay attention to the bars closed above the upper limit of the key trading channel and to the retest of diagonal support with subsequent growth of quotes. A stop order should be placed at the level of the lower second minimum with a few points in reserve.
Opening a position based on M2 pattern
To exit a long position, the authors suggest using Fibonacci channels and a position management method, according to which a trader should fix a part of profits upon reaching a new target level. It’s usually 20-40% of a trade’s volume, that’s why the M2 pattern is often called “20-40”. In fact, new extremums and reversal patterns constantly appear in the market. They help determine correctly the moment when a target is reached.
Setting targets based on M2 pattern
As for our EUR/JPY example, on the H1 time frame there appeared signals to sell. They point to the end of the corrective movement and to the upcoming recovery of a downtrend. Is it possible to neglect the third obligatory condition that says the volume of a short-term trend should be at least 2 times bigger than the value of M2 pattern? It’s a trader who needs to make such a decision. And I think we may neglect that condition considering the sellers’ mass comeback.
When it comes to short positions, a stop loss is placed at the level of the last extremum too. In this case, I mean the level of the highest maximum with a few points in reserve. Price targets are set according to Fib channels. As the quotes of EUR/JPY move south, a trader fixes a part of profits.
Selling EUR/JPY based on M2 pattern
In my opinion, the M2 pattern is efficient, but it’s rather a variety of the Anti-Turtles pattern. It was used by Larry Williams, Linda Raschke (Turtle soup, “Turtle soup+1”), Victor Sperandeo (2B trading system “Bottom/top”) and other successful traders.
Let’s pay tribute to the authors of M2 pattern: working with price channels is good for swing trading. What’s more, the more entry points we have the higher chance that the pattern will be efficient for us. We are all different and finding a strategy that suits us is sometimes harder than learning to profit from it.
P.S. Did you like my article? Share it in social networks: it will be the best "thank you" :)
Useful links:
- I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.
- Use my promo code BLOG to get a 50% deposit bonus on the LiteFinance platform. Simply enter this code in the appropriate field when funding your trading account.
- Telegram chat for traders: https://t.me/litefinancebrokerchat. We are sharing the signals and trading experience.
- Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/litefinance
Price chart of EURJPY in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
