In today’s day trading tutorial we will discuss one of the easiest and most profitable price-reversal patterns you can find on any market around the world, the Pipe Pattern.
The Pipe Pattern looks for ‘exhaustion’ at the highs or the lows of the current daily trading-range and is used to find trading opportunities that go against the trend at the highs or lows of the day.
This pattern is very easy to find on any market and any chart timeframe, here are the steps you will take to find the Pipe Pattern.
Example: Looking for a Bearish Pipe Pattern to enter SHORT on a 5-minute chart.
Step 1: Find the ‘New-High Candle’ on the Chart
The key to this new high-of-day is that it must exceed the highs by more than 10-ticks.
We don’t want to use just a small push to new highs; we want the new highs to be taken out by more than 10-ticks.
Furthermore, this new high must be created with only 1 candlestick, rather than taking multiple candlesticks to reach the 10-tick new high.
Step 2: Look for a “Reversal-Candle” in the Opposite direction
The next candlestick will reverse direction, moving lower, and close below the lows of the candlestick that made the new high-of-day.
Furthermore, this reversal must be achieved with only 1 candlestick, just like the new high candlestick.
Step 3: Find the Entry Trigger on the Pipe Pattern:
Enter short using the Pipe Pattern when the ‘Reversal Candle’ closes below the ‘New High Candle.’
The most important aspect of this entry trigger is the close of the candle; it must be below the lowest point of the candle that made the new high-of-day.
Step 4: Place your Stop-loss to protect capital against losses
We always use a protective stop-loss, and the stop-loss is placed 3-ticks above the highs of the first candlestick, which we call the ‘New High Candle.’
Remember, this stop-loss should never be risking more than 5% of your account on any single trade. Less is more, so risk less than 5% if possible.
Step 5: Place your profit-targets to lock in profits on the trade
We use specific profit-targets for each trade we take to ensure we lock-in profits at the correct time on the trade.
Profit-targets for the Pipe Pattern use the same range from the ‘New High Candle’ to achieve the proper risk-reward-ratio on the trade.
· Profit-target #1 is placed at the 100% extension of the ‘New High Candle’, which means the first target is the same distance as your stop-loss on the trade.
· Profit-target #2 is placed at the 200% extension of the ‘New High Candle’, which means the second target is DOUBLE the distance as your stop-loss on the trade.
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