The KYM Method: Retest of Previous Swings

Screen Shot 2014-06-17 at 11.12.19

Video Transcription:

Hello traders! Welcome to the Price Action Course and the sixth module, ‘Price Action Strategies.’ In this lesson I’m going to teach you how to trade the KYM method or the Kiss Your Momo, which is the retest of previous strengths. Now this method is going to be very, very useful for all you traders who are trading breakouts and want to capitalize on the longer move but not on the immediate momentum. Now the thing about this strategy is that you have to be patient enough to let price retest the previous swing for you to get the best risk-to-reward scenario possible. I mean we have already learned how to trade breakouts and the profit for immediate momo. Now we are going to learn how to trade breakouts, but instead of just profiting from the initial momentum we are going to profit from the entire move, and we are going to get the best risk-to-reward ratio that we can. Now let’s start by defining the strategy, okay?

Screen Shot 2015-02-25 at 10.37.31

The KYM method for trading setups is quite simple and only requires patience from the trader. It’s based on the premise that a broken level will be retested before a continuation happens. Its name comes from the price action behind the setup. Price breaks a level or trend line, then comes back to kiss it before it continues. And this is where we are going to get the best risk-to-reward scenario possible. Let’s say the price breaks with the level of resistance, and you are trying to get on that breakout during the big momentum that follows the breakout. If you are not fast enough and if you don’t spot the correct setup for a momo breakout, you are going to get in and your stops are going to be too wide making your risk very big, vis a vis your reward. But if you wait and you wait for a KYM setup, you are going to get a better risk-to-reward scenario because your stops will be very tight.

Now this happens because after the breakout, the momo traders take profit and those buy orders thin out. And sellers take advantage of this and ride price down to previous levels where true buyers are positioned. And of course this is an example of a resistance level being broken. It’s all about timing and correctly reading price action and order flow to position yourselves for the big move instead of trying to profit from short term momentum. And this is why we call this method of trading, position trading because we are positioning ourself where the big bucks or the big money or the smart money is positioned. We are not going to try to take a few pips from a breakout momo. But we are going to try to get in on the entire move and ride it out. Now the KYM setup will work as long as you read rejection of previous levels correctly now. And this is very important, when price comes and hits back or kisses back the broken levels, you have to read your candles and you have to read rejection of those levels for you to be able to trade them. Because like everything in trading, not everything is 100% accurate. You have to read candles, and you have to read price action as confirmation of your trading idea.

Kiss Your Momma Trading Example

Now let’s go through a couple of KYM examples. This is the first one. Let’s say that here we have a level of resistance and we have a breakout. This is where the momo traders get in the market and just profit from the short-term momentum until they make this high and they take profit. And then when they start taking profit, of course, price is going to start riding down until it hits the previous broken level. And here is where the true buyers are positioned and where you are going to try and look for a long setup for you to be able to get into a trade and ride it to the next key level. And of course it also works on a down move. When a breakout happens to the downside, we have bearish momo traders that take profit after the initial momentum. So price starts to slowly move back up until it tests back the level of support as resistance. And this is where the true sellers are positioned. And this is where you are going to sell also this instrument. And you are going to start riding the downtrend at a very good risk-to-reward scenario.

Just take a look at this, if you wait for price to test the previous broken level, your stop loss is going to be a few ticks or a few pips above the level because if price breaks with this level, the KYM setup is invalidated. But if you try to get it in on a momo setup, perhaps you are going to get… if you are not fast enough, I am saying, you are going to take a short position right here at the middle of the momo. And if you are trying to ride the entire breakout to the next level, of course you are going to start to see your position go against you because this level has to be tested before price continues to the downside. And again sometimes breakouts are so strong that the KYM setup will not happen. And this is where your abilities as a price action trader and as a price action reader come into play. If you see the breakout is very strong, you are just going to be taking the momo position. But if you see that price is starting to slow down or the breakout has started to move up, you are going to wait for the KYM setup. And of course it also works on triangles, wedges, and rectangle formations. When price breaks we have the momo traders then price is going to retest the level before it continues to the upside of course in this example.

Now let’s go through some charts, and let’s try to look at some real KYM setups. Okay, so this is the Euro/Yen four-hour chart, and you can see we are in a very strong down move, so we are going to draw a line to have a better visual or a better representation of the actual structure in the market now. We are going to draw a line from this high to this high, okay? And as you can see, right here we have the momo traders. And here is the breakout and here you can see a big candle to the upside. And here is what the initial momentum looks like, okay? Just a big candle to the upside after the breakout, okay? And this is a four-hour candle for 50 pips, so you can see that after this four-hour candle closes, you have an indecision candle and then price starts to trade normally, okay? A little bit to the upside but then it quickly breaks to the downside. And right here we have a test of this previous level, okay? And now after the test of this previous levels, you are going to go long with a stop loss below the low.

Screen Shot 2015-02-25 at 10.38.14

Well, in this case we got stopped out on the first try of a KYM setup. Right here you have the retest and the lows of the retest are your stop losses. So as I was saying after the retest we got stopped out for about 47 pips and then we have a retest of the lows. And you can see that after the second test of the lows we have another setup with a stop loss of 72 pips. When we have the actual… the close of this candle right here, we have the setup, and we can go long. And we can take our profits at this levels which will mean that we will be making 149 or 150 pips on a 70 pips stop loss and this means we have a 1:2 risk-to-reward ratio in our hands.

Now we can continue and we can look for another retest of previously broken levels. Okay, so here is a very good example of how retest of previous broken swings work. You can see that we are in a very strong uptrend and right here we make a high. Okay, which means that this is a strong resistance level. You can see that we have a huge rejection candle right here and then price comes to retest this previously tested level, okay? Then we break with this level and you have the momentum traders. You can see that we have a huge candle to the upside, which means that buyers started to come up when this small wedge structure broke, and then they tested this previously broken resistance level and now tested it as support. Here is where you are going to position yourself as a buyer, okay? You are going to take a long position here for a very small 43 pip stop loss, and you are going to be looking for a previous swing high, okay? Which means that you are going to try to take profit at this high right here, okay? And because we are trading and trying to take long positions in the sense of… longer in time, not long positions in the sense of buying position, we are going to take half of our position here. If we see any sign of reversal at this level, we are going to take the rest of our position. But you can see that now price completely breaks with this swing high and then retests this back, okay? You can see that we have a rejection candle at this level of resistance right here, okay? And then price comes back and retests these levels.

Now, right here we have another setup to go long. When price retests these previously retested levels as resistance now as support, we have another shot at a long setup and you can add to your position right here, which means that you will be risking around 47 pips again, and you will be trying to make on this side of the trade around 150 pips. And if you are still long from this position right here, the first broken swing high, you will be already 260 pips in the money when price breaks with this level. And this retest of the level… I mean, is just one candle that retests the level, but if you are reading price action correctly, you can still add to your position right here with a nice 67 pip stop loss and of course if you were on this position, you could have made 247 pips extra. But because we don’t have any levels to work with on the final stage of this long position, we have to work based on candlesticks. And after this pin bar forms, you should pay close attention to price action and if a red candle had printed after this pin bar, I would have closed the trade. But because we still went to and broke with the previous highs, you can still ride it up.

This is actually how you are going to be using the KYM setup for long position on swing highs. And the same goes for short positions on swing lows. For instance, right here we have a very clear KYM setup. When price breaks with this low, you can see that we have a base right here, then we encounter some buyers at these levels, but then sellers aggressively sold off the market and we have a momentum breakout. And you can see that the momentum breakout finishes up when price action starts to slow down right here and slowly starts to move up just to test the previously broken level. And right here is where you price action reading abilities come into play. You can see that we have a bearish engulfing candle right here, which means that this level was tested as resistance, but was rejected as resistance as well. So we have a very good setup for a very tight 70 pip stop loss and a possible 459 pip win. So you can see that these setups are very simple, but are completely based on price action itself. You are not using any indicators. You are using levels, you are using price action, and you are using your reading abilities as confirmation for yourselves. And you can use these of course on broken support, broken resistance, and look for the KYM setup on big triangles, wedges, and rectangles.

Comments are closed.