Forex Education: Have You Tried the Papa's Moustache Pattern?
Have You Tried the Papa's Moustache Pattern?
Hello traders! I'm sure many of you have seen or heard or even traded some of the popular patterns or setups out there. I'm referring to things like head and shoulders, double tops, double bottoms, triangles, etc., etc. What about the latest moving average crossover? How about the 3 ema crossing the 8 ema when the 34 is trending in the same direction? Many of these different entry/exit techniques have been around for a long time, but just get regurgitated by some new guru promising fantastic riches if you follow this new scheme.
The bottom-line that we teach at Online Trading Academy is that supply/demand imbalances give you the highest probability, lowest risk and highest reward trades out there. When considering a new strategy, does it take into account the supply and demand imbalances, or is it just another late to the party trend following technique? While the patterns that we all have read about in many trading articles, websites and trading books can work, without the proper application of supply and demand, you are just guessing in the marketplace. In the following chart, I've identified a simple head and shoulders pattern. Most trading "textbooks" will refer to the pattern itself, with its characteristic identifiers and the measured move. Measured move is also referred to as a measured objective, profit target, etc. Basically it means "Where will this pattern take us, so I can exit the trade where everybody else does?" If you do what everybody else does, do you really have an edge? That would be a no.
Figure 1
The textbook measured move on our head and shoulders bearish reversal pattern is as follows: The distance from the top of the "head" to the "neckline" is applied to the neckline for our exit target. In this chart, that measured move is at the blue arrow. This pattern worked perfectly! In fact, when the measured move lines up with a previous supply or demand level, the probability of at least a pause at this level increases dramatically.
Now, look a bit lower on the chart. Notice the obvious demand zone in yellow that has been identified. There are a couple of decent demand zones near the measured move, but the yellow highlighted area would be a more distinct target for the Online Trading Academy student. While the measured moves can be helpful in determining profit objectives, our supply and demand zones should be more effective.
How many different chart patterns are there? That would be dozens, if not hundreds of variations of some of the common patterns out there! At last count, I was aware of 7 different types of double bottoms. Seven! How many different ways do you need to measure a retest of a previous demand level? Do you need to know seven? I hope not!
So, the question leads to why is it that traders relentlessly search the internet for the Holy Grail in trading? Is the Holy Grail a newly discovered pattern or trading setup combination? Perhaps it is the all-but unheard of Papa's Moustache, the newest style of inverse head and shoulders? Yes, that pattern is fictional - thanks Matt G. for the hilarious name. I believe the reason people search tirelessly for this Holy Grail is the fact that many people don't want to take their small losses in trading. This is a fundamental truth in successful trading - you must take the small losses on your own, or the market will eventually make you take large losses where you will have no choice in the matter! A mantra that is repeated at Online Trading Academy is that small losses are a part of the business. If you can't accept that fact, I wish you the best of luck in your next career - trading will only be a hobby for you.
As I have stated in previous Lessons from the Pros newsletters, the Holy Grail in trading is risk management. Take the small losses and let your winners run. Buy in demand zones and sell in supply zones, paying attention to the overall trend of the time frame you trade. Is that so difficult? Stop wasting your time looking for the Papa's Moustache, and concentrate on your own trading discipline. This is what will make you more successful.
Until next time, Rick Wright
About Rick Wright
Rick studied economics and psychology at Iowa State University, and entered into the brokerage business in 1992. He earned the NASD Series 4,7,9,10,24,55,63, and 65 licenses. He helped grow an online brokerage business which was eventually sold off. Rick has also held positions as broker, branch manager, and several VP positions in the brokerage business.Rick began trading equities in 1997, and was introduced to the Forex market in 2002. Currently trading from home in Dallas, Rick is also a frequent contributor to various TV and business talk radio shows.Rick's goal in class is to accelerate your learning curve of trading, instead of figuring things out with your own money. He will show you several examples of trading mistakes that he and others have made, which cost thousands of dollars in the past so you won't make the same mistakes.You will learn how to recognize the differences between long and short term trends, where to enter trades, and where to exit based on previous price action.
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