Big players like creating an illusion of control to empty their rivals’ pockets
When conducting technical analysis, it’s important to understand how strong the market is and if it’s vulnerable. If it is, you should try to profit from this vulnerability. At first sight, a bar with a wide range closed on the opposite side of the opening may be considered to be a sign of a strong market. If the price was growing or falling, indeed, throughout the whole day, it meant the situation was controlled by the bulls or the bears. In fact, it could be an illusion of control created for emptying wallets. How not to fall for the bait of big players and earn from it? The combination of price action and VSA will help.
Linda Raschke, the author of the best-seller “Street Smarts: High Probability Short-Term Trading Strategies” has a simple pattern 80-20 in her arsenal. It consists of the combination of 2 bars: the first one is characterized by a large spread and an opening in the lower (higher) 20% of its trading range. The second one updates the extremum of the previous one and closes on the opposite side.
Pattern 80-20
Raschke thinks an appearance of a bar with a large spread signals that the market may be overbought (oversold), which boosts correction risks and provides for the opportunity to open positions when returning to the extremum. A protective stop order shall be placed at the maximum (minimum) of the second bar. If it works, one can open a short (long) position again. When using the 80-20 pattern combined with trade volumes, one can increase the efficiency of their trading. Its appearance under normal conditions (middle volumes) or under low volumes may point to the pros’ desire to create an illusion of price growth (fall). The euphoria of the crowd that buys and thus makes the price grow is quickly replaced with fear, which pushes the prices in an opposite direction.
Pattern 80-20 on EUR/USD daily chart
Thus, bars with a wide range were formed under consolidation in the EUR/USD daily chart. In the second pattern, the bulls even tried bringing the quotes out of the trading range of 1.1265-1.1485. Both patterns 80-20 were characterized with the volumes below medium ones, which pointed to a trap for plankton. Finally, that’s the way the things went: having updated the extremums, EUR/USD moved in the opposite direction. Being familiar with Linda Raschke’s strategy, one could have formed long positions (1st case) and short positions (2nd case) at the returning to the minimum (maximum) of the bar №1. A protective stop order could have been placed near the extremums of the bar №2.
Strategy of work under pattern 80-20
What should you fear? High volumes! They show that a big player wants to take active actions. Especially when it comes to a break of the trading range or a trend start in general. Certainly, every rule has exceptions that confirm the rule. An appearance of a 80-20 bar under big volumes at the top of the bullish market or at the bottom of the bearish market may point to vulnerability and lead to a reversal. However, in the middle of a trend, such a bar would signal market strength, as a rule. As a result, the use of this strategy can end up in losses. We should always try being in the same boat with the pros, not with the crowd.
Pattern 80-20 under big volumes
Thus, we’ve examined quite a simple trading system using the example of price/action pattern and VSA analysis. It allows us to understand market events deeper and not to become similar to trading robots. I’ll try developing this subject in my next articles.
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Price chart of EURUSD in real time mode
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