Adding Chart Formations to Your Setups


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Video Transcription:

Hello traders. Welcome to Pro Trading Course, and the eighth module, professional fx and CFD trading. In this lesson we are going to learn how to add chart formation to your setups. And the reason we are adding chart formations to your setups, is because, well for one, it’s going to validate your trade idea. And two, it’s going to help you hit your targets once it’s broken. Now we’re going to go back again to the charts, and as you remember, this is the crude oil setup that we had here at the previous weekly low. We went long, and we hit our target.

Now, this is the setup on a divergent side, the previous weekly low in confluence with the weekly support one. And targets at the previously weekly high in confluence with the monthly resistance one. The previous monthly high, and the weekly resistance one. Alright, this was our setup. Our setup developed right here, when the other side turned positive, and we hit our targets right here. This is a very good trade. We made money out of it. But what if we add a chart formation to it? And, just look at what we have here. We actually have price going and making lower highs. We made a high here, a lower high here, and a lower high here. And then we run all the way down, and we have our setup. And as you can see, we tested again this trend line right here. But not only that, if you take a parallel trend line from this low, you can see that we hit the lows here, we hit the low here, and then we moved up.

Adding Chart formations to your setups

Now, if we zoom in on the chart, you are going to see that this is in fact a bull flag. Not only we have a divergence trade at the previous weekly low with confluence with the weekly support one, but we have a bullish flag in our hands. This means that because we are in an up-move, price went all the way down here inside of a channel. And a retracement channel is called a flag. And right here, the flag broke to the upside, even though we were already long. When the flag breaks through the upside, it gives enough push to our trade to hit our targets. Because if we calculate the high to the low of the flag, you can see that we have 161 ticks. And if you calculate the breakout to our targets, well it’s 125 ticks. And if we go all the way to the true area of confluence, it’s 161 ticks.

Adding Chart formations to your setups1

So basically by adding these chart formation to our trade, well to our chart, we have an extra confirmation on our setup. And because our setup was based on levels, not the actual chart formation, we were able to get in before the actual breakout, and squeeze out more ticks out of the mark. And this works both in medium-term, long-term, and day trades.

Adding Chart formations to your setups2

Now, if we go to the Euro/US dollar short-trade that we had on the 50 paper trade day lesson, I’m going to show you what happens when we break with the chart formation. You can see clearly that we were in a very strong up-move. Now this is the actual trend line the price was respecting. And then, we started to make…Well, we still were making higher highs, but the height of, or the angle of the highs that we were making was shorter than the angle of the lows that we were making which made this a wedge formation. And what happened here is that, I think we got the okay to go short right here. And what happened here, after we got the short setup at the previous daily high, which confluents with, if I recall correctly the daily resistance one at that time. As you can see, now we are on another session, so my pivots have moved to today’s session. But we had the daily high right here…Oh I’m sorry the previous daily high in confluence with the daily resistance one. And we had that right here, the previous daily low in confluence with the daily support one. But what I’m going to show you is that when price breaks with the wedge formation, it gives enough bearish momentum to price to take out our targets, and actually field us on a profit.

Adding Chart formations to your setups3

So by adding chart formations to your trades, you are going to get not only the push you need in order for your targets to get filled, but you’re going to have the confirmation you need that your setup was actually correct. And remember that our setups are based on price-action and levels, not chart formation breakouts. The breakouts we use on our charts are only for confirmation that our trade idea is going in the correct direction.

Now, if we go back to the crude oil long trade that we had here, you can see that if price had actually rejected the flag’s resistance, and come down and take out its support. Then the entire trade idea will be invalid, one because price would go below the confluence levels of our entry, and because the flag would break to the downside. Meaning that this is no longer a bull flag, meaning that price is no longer looking to go up. And this move to the downside is not in fact a correction, but it’s actually a short-term reversal. So, these chart formations are going to help you to confirm your setups, but also to confirm their invalidation.

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