In order to make sure I am following my rules and know when I am breaking them, it is important to clearly document the guidelines. Note: this does not follow the guidelines outlined by the typical False Bar Stochastic, AGET setup.
False Bar setup on 987T (on the ES)
- Chart Setup:
- Use 987T chart
- Use GET Stoch(14,3,1)
- %D set to the same color as %K
- Bands: 75, 25
- Add a line at 50%
- Entry:
- Wait for a False Bar to form
- Wait for stochastic to move 50%-60% toward OB/OS area
- Look at approximate size of current pullback and the most recent pullback of similar or greater size.
- Take a 1.272 Fib Extension of that previous wave to determine entry point
- Round and front-run entry by a tick
- Stop:
- Outside of 1.618 level by two ticks.
- Round, then add two ticks. For example, a short play, stop above 942.19 > 942.25 +0.50 = 942.75
- If price comes right to the 1.618 level (but not stopping us out), consider taking a contract off at break even. Then exit completely at the first target.
- Once first target hit, stops to BE or slightly beneath entry, depending on size of first target
- If entry is very good, consider putting stop 1T above/below 1.272 level (after 1st target hit). Often price may return to that level, so you don't want to be stopped.
- Targets:
- First Target: 50% retracement of pullback, front-run by a tick
- Using 3 contracts, consider exiting 2 contracts at first target and letting the final contract run
- If 1st target is greater than 8T (2pts), default to 8T. This implies the stop is large, so we want to reduce the risk as soon as possible.
- Second Target: 100% retracement of pullback
- Third Target: 1.272 fib extension of pullback. Consider making this your final target.
- Fourth Target: 1.618 fib extension of pullback.
- Tip: Always try and be conservative and round and front-run by a tick or two (depending on move size). For example, if you are capturing a 10 point move, front-running by 2T won't eat into your profits much. If you're capturing a 6T move, then 2T is a large percentage, so consider just rounding.
- Tip: For the first trade of the day, consider being more conservative. A typical stop is 8T-10T (2-2.5pts, per C), so consider making the first trade of the day a winner and large enough to cover a full stop out if the next one fails. This higher chance win will set your midset right for the day and you will have the market's money to cover the next trade (if it's a failure).
- Risk / Reward:
- By definition, our targets are 50%, 100%, and 127.2% of "X", where "X" is the size of the pullback.
- Since the stop is based on a percentage of "X", the stop will always be approximately 1.85:1 to 2.1:1 (depending on rounding) no mater how large the pullback.
- Since there is a greater chance of hitting a first target and utilizing good money management, the chance of having a winning (or break even) trade increases.
EXAMPLE #1 (LONG):
A. First we wait for the False bar to form and wait till the stochastic is over 50% of the way toward the oversold area. The vertical line shows the current bar and the current location of the stochastic. The light gray line is the 50% level of the stochastic.
B. Next, we look at the previous wave that is about the same (or more, but not less) of the current wave (see left, blue arrow). We take a 1.272 fibonacci extension of this wave (see right, blue arrow). This is our entry point. In this case, we round to 917, then front-run by a tick making 917.25.
C. Here, price hits our entry point and we are in. The stop is a two ticks below the 1.618 level. In this case at 913.50.
D. Next, we determine our targets. First target is the 50% retracement of the wave down to our entry (922). Second target is a full retracement (927.50 (front-run by a tick)). Third target (usually final target) is the 1.272 extension of the pullback (930.75). These are the three blue arrows. The two red arrows illustrate how the 1.272 is calculated. The right, red arrow is 127.2% of the left, red arrow.
E. If we are looking for a fourth target, the 1.618 extension (934.50 in this case) would be the next target.
EXAMPLE #2 (SHORT):
A. In this example, we have the False Bar saying down, we look to the previous wave (left, blue arrow) to give us our 1.272 Fib Extension entry (right, blue arrow). 944.75, in this case. Our stop is above the 1.618 level (946.75). Our entry wasn't optimal (went 1.5 points against), but clearly didn't hit our stop.
B. Price does not care where our entry is, so we measure the first target (50% retracement) from the whole move. Thus, our first target is 943 (front-run a tick).
C. The second target is a full retracement (939.50, in this case). The third target is a 1.272 extension of the pullback (937.50, in this case). You can see price stopped cold at that area.
EXAMPLE #3 (FAILED):
A. In this example, we have a False Bar Long, then enter on the 1.272 fib extension (943, right, blue arrow).
B. After entry, we hit the first target at 944.75 (1.75 points), then get stopped out at break even on the 2nd contract (or rest of the contracts). Even though this failed to ultimately hit targets two, three, etc, we still make a profit and protected our capital.
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