How can I use this trading template? Today I will share a template that may be really helpful to understand some key concepts:
First concept: Only look for setups IF the price has reached a major level.
In this example, we can see a bearish movement that has reached a weekly level. Why is this relevant? Because if we are working with relevant levels that had worked in the past, we increase the chances of being right regarding an expected movement. Alright, does this mean that I should buy there? ABSOLUTELY NOT; let's go to the second concept
Second concept: Once the price has reached a major level, wait for confirmations.
Waiting for confirmations means that we have other levels to pay attention to that may provide us solid insights regarding what the price may do next; in this case, we have a descending trendline. A bearish trendline tells us this: Below the line, assume the bearish trend continues; above the line, assume that a possible change in direction may happen. Cool, now is time to buy, right? ABSOLUTELY NOT; let's go to the third concept
Third concept: After the breakout of a major structure, WAIT for a correction
Most of the time, we will tend to observe a correction after a big structure breakout. That type of behavior can be understood on this template after the breakout. There is a correction happening that we will generally be able to define inner waves; in this case, we have an ABC pattern. Corrections are our final confirmation before engaging with a setup. The position where we tend to observe corrections are in the following places: On the edge of the broken structure / Above the broken structure / On the first minor level after the breakout. Great information! Can I trade now? Yes, now we can define our setup, which takes us to the next concept.
Fourth concept: After waiting for several confirmations, we can think about developing setups on the breakout of the corrective pattern (entering above B tends to be an excellent entry-level). Stop loss should always go BELOW C or, in other words, below the last local support zone. Take profit levels can be defined using the next relevant level we may have; these are not the minor levels; I'm speaking the next resistance zone with the same hierarchy as the support we started thinking on bullish opportunities.
Fifth concept: This is a template mainly for Swing traders; that's why I wanted to show what to expect in the process between our execution and the take profit level. We may see one or multiple corrections on the way, most of them happening on minor levels. Of course, real trading is much more complex than this, but templates are a good way of understanding concepts and seeing how we can apply this to real market conditions. Another important item I want to highlight is that this type of system tends to have a win rate of around 50%. If we only engage with setups that provide a risk to reward ratio higher or equal than 2, then that's all you need to become profitable.
Thanks for reading; if you have any doubts, drop them in the comments, and feel free to share your opinion on this.
