Studying the peculiarities of the pattern formation and building trading strategies based on it
Tell me who your friend is, and I'll tell you who you are. Supporters of trend trading make the trend their ally. However, to start a friendship, you need to know the person, i.e. you need to know in which direction the quotes of currency pairs are moving. Some traders use analytical lines for this, others prefer moving averages, indicators or other technical analysis tools. However, the simplest rule is that a bullish trend is a combination of rising extremes, and the bearish one is a combination of declining extremes. Thus, in order to identify a downward trend, at least two successively formed highs and lows must be in place. The third high may be key to building a trading strategy.
Trend identification in the USD/CAD chart
In the 4-hour USD/CAD chart, until the moment when the quotes touched line 1-2 drawn through two falling highs, there were at least two signs of a reversal of the earlier bullish trend. First, there was a break in the trend line. Secondly, the lows began to fall synchronously together with the highs. As a result, point 3 was formed and a graphical configuration called Three Touches was completed.
The appearance of the pattern is the initial link of the trading system. On its basis, you need to to design a strategy. For greater confidence, it would be nice to have confirmation signals that are called filters. Price action tools and other areas of technical analysis can be used to this end. As shown by our previous studies, the correction is not bad for the 1-2-3, Anti-Turtles and Three Little Indians. In the case of the USD/CAD, the emergence of the last pattern served as the basis for concluding the transaction. Return of quotations to the lowest bar of the second Indian signaled the possibility of entering short positions. The protective stop-loss order was set at the rollback high plus several points, which allowed to hold a short position after a small increase in the US dollar against its counterpart from Canada.
Strategy based on the Three Touches in the USD/CAD chart
The position is closed using the Shark harmonious trade pattern that we have discussed in previous materials. Its target at 88.6% is two figures below the entry point, which allows us to talk about a significant excess of potential profits over losses. In this example, the profit factor is 4 to 1.
Thus, the Three Touches pattern allows us to identify the convergence area and is a necessary condition for building a trading system, however, as a rule, for many traders this is not enough to make a trade. Additional signals should be used, including previously studied patterns or indicators. For example, the divergence and exit of the stochastic indicator from the overbought area will significantly increase the trader's confidence in the above strategy working out.
Three Touches and the Stochastic indicator
In my opinion, Three Touches is a simple and intuitive pattern for trend trading. It can be identified in any type of chart, i.e. it is built not only by extremes, but also by closing quotes (in the case of a linear chart). However, the trader must first determine where exactly they will look for the pattern and which filter system will be useful for this. Otherwise, it is very difficult to try to find a graphic configuration where it does not actually exist.
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Price chart of USDCAD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.