The simpler a strategy, the higher efficiency
Never try to catch falling knives. Wait until they go into the floor and shake a little, and then pull them out safely. The desire to buy at a lower price is praiseworthy, but you should understand what you’re doing when the safety of your deposit is at stake. You can’t play the roulette in the market as it doesn’t develop with a wave of a magic wand. A bear trend ends when there are no sellers and a bull trend ends when there are no buyers. If you understand that a reversal occurs once the “predominant party” is no longer able to set a new extremum, you’ll save both your money and your nerves.
As soon as in a bull trend there’s a bar whose maximum is lower than the previous one, a trader should get alerted. If with the next bar the price drops below the current bar’s low, it’s a sign of the buyers’ weakness. Larry Williams, the author of “Long-term secrets to short-term trading”, detected the following regularity after many years of observing the market: if a big bar closes at the level of the maximum, the market is very likely to form a new peak. The same applies to a bearish market: if a big bar closes at the level of the minimum, the market is very likely to form a new trough.
Important extremums in GBP/USD chart
In May, there appeared a bar in GBP/USD’s daily chart whose closing level corresponded to the maximum’s level. At first sight, the bulls were predominant in the market because the difference between the closing level and the minimum (”bulls’ strength”, according to Larry Williams) was much bigger than the one between the closing level and the minimum (“bears’ strength”). However, the author of “Long-term secrets to short-term trading” has one more principle to follow: the closer the closing level is to an extremum, the more likely a reversal is. If they are almost the same, there’s a reason for thinking “why?”.
The behaviour of GBP/USD in May, July, and August confirms the ideas of the great trader. Once the key bar formed, both the bulls and the bears weren’t able to continue their attacks. What’s more, the fall of the quotes below the next bar’s minimum in May and the rise above the next bars’ maximums in July and August were a signal to open positions. Stop orders needed to be placed near the extremums in all those examples.
Strategy of work using the extremum bar system in the GBP/USD chart
True, long positions didn’t yield profits in July, but traders could earn good money in the last two cases. The closeness of a closing price to extremums is quite a strong signal of an upcoming peak or trough. However, falling knives should be given some time for shaking. A position should be opened only if current extremums haven’t been broken or they have been, but the predominant trend has been exhausted. There are some more examples.
Strategy of work using the extremum bar system in the USD/CAD chart
In December there was a bar closed near the maximum in the USD/CAD weekly chart. The extremum was broken with the next bar, but the bulls didn’t manage to go further “north”. That was a sign of their weakness and allowed forming a short position at the breakout of the bar coming after the key bar.
The same happened in a bear market in July and traders opened long positions: there was a bar closed near the minimum, the sellers’ failure to update it and the quotes’ pullback to the maximum of the next bar. In that example, there simply weren’t any new sellers in the market. In the previous example, there weren’t any new buyers. It predetermined the reversals.
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Price chart of GBPUSD in real time mode
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