Snapback Forex Trading Strategy

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Video Transcription:

Hey, traders. Welcome to video 16 of the Advanced Forex Strategies course. This is Cory Mitchell. In this video we are looking at the snap back strategy, as well some additional insights into overall trading. This strategy can be used on all time frames, brought to you by invest

So trend trading is where the money is. The snap back is a reversal strategy. It shows the trend has likely reversed, so we’re going to trade the next wave in the new trend. As always, our risk is going to be lower than our potential reward. In this case, substantially so. We’re going to try to get our risk down to a very small level and our potential reward quite big.

So this is going to be one of the insights that we look at where a lot of traders look for a lot of confirmation in their trading and they end up with not very good risk/reward ratios. This is one where we can really… we’re going to allow ourselves to be wrong a bit more often, but we’re going to be able to profit on our trades that are winners quite a bit more.

It can be used on all time frames. We’ll introduce some new elements on this one. This is an advanced course, so these entries are going to become more advanced and we can still use the entries covered in prior videos if you’re more comfortable with it, but this is I guess taking it to the next level, you could say.

Trade in the direction of the trend which is the snap back strategy. With this strategy we can set and forget. Once we have our entry you can allow it to hit your target. This pattern is similar to a pennant except we are viewing this as a trend reversal, so it has a different context. With a pennant we are going to trade a breakout in either direction, typically expecting it to continue in prior direction. But this has a different context.

We are looking for a reversal of the prior trend. Also we are going to trust the reversal more, which means by trusting that reversal, that the trend is reversing is going to continue in the snap back direction, which I’ll tell you about in a minute, we can get a better entry price.

So if the trend is up, a snap back occurs when a sharp move lower occurs which is powerful enough to take out the former swing low and uptrend. So this is very similar to what we discussed in the cup and handle video which was video 12, except that in this case we need to have a sharp reversal. So we’re moving up, the price is trending up, moving in waves and then we have a sharp pullback which takes out or negates that last wave of the uptrend.

This move is sharp. We don’t want to see rounded bottoms. It can be a bit rounded at the bottom, but the move back, the snap back has to be sharp. And we call this a snap back lower because the price was moving up and it snaps back to the downside. If the trend is down, a snap back occurs when a sharp move higher is powerful enough to take out the former swing high in an uptrend. So basically it’s negating the last wave of the downtrend, and we call this a snap back higher.

Once we have the snap back, we only need a two bar pause. So this is a bit different than the pennant as well. The pennant we were looking for more of a pause. With this one we’re expecting that momentum to continue. Once we have two bars, we’re looking for our entry. For the snap back lower we place an entry near the high of the last two bars, of that two bar pause. For a snap back higher we place the entry near the low of those bars.

We place a stop about two or three pips outside the respective high or low. Three for most pairs. Like we said, we’re going to keep the risk on this very small. If you’re trading on a more volatile pair such as the British pound/Yen, you may want to use five pips but really three is about all we need. We’re going to keep our risk very small on this. Typically we’re looking at about a five to ten pip risk. On a bit more volatile pair, maybe 8 to 12. So risk, really small.

We can take bigger positions because our risk is small. Still we’re only going to risk 1% though, but since the stop is small we can take a bigger position and we’re going to try to collect more on this than most of our other strategies. If not filled on those entries… so we’re placing it, once I go though a few examples it will become a bit more clear… if we’re not filled on those entries we can just use a breakout strategy where we have that pause and we just wait for the breakout, but we only take it in the snap back direction.

So target is the height of the snap back subtracted from the top of a pause if we have a snap back lower, or added to the bottom of a pause if the snap back is higher. And once again, don’t use extremes in price. We only measure the sharp moves, and don’t measure slowdowns before the consolidation.

At a three-to-one risk/reward, and this is pretty typical for this strategy, you only need to be right three times out of ten to make money. So that is very powerful. Remember that. I’ll show you a few. This is a strategy. It’s probably about a 50/50.

If you get good at isolating them and introduce a few filter criteria you might get as high as six or seven out of ten, and at a three-to-one ratio that is an extraordinary return, because at three-to-one you’ll have seven that are losers, so that would be equivalent to losing $7, but on the three that you make you’re making $3. That would be $9. So you’re making more on three winners than on seven losers. So keep that in mind. This is a pretty powerful strategy, especially once you start to practice and get better at isolating good signals.

So risk must be kept below 1% on each trade and we are making an assumption about the new trend which allows us to get a very good price. So as mentioned, we can afford to be wrong quite often simply because our reward is going to be much greater than our risk.

So let’s look at one example here. This is a reversal strategy. So in order to have a signal we need to have a clear downtrend. So here we have a move lower, and then this move. This, some might consider a snap back. It is not, simply because at this point the trend is already in question. We’re no longer in a confirmed downtrend because we have this higher low. So this is one I would ignore.

If we wanted to trade this we would simply look for another method of entry that we’ve covered in other videos. At this point this really fails to go higher, so if we were trading this long it would have failed no matter what. But this is not a snap back strategy, simply because the downtrend is in question and therefore, by the time this signal occurs it’s not a reversal.

On the other hand, down here we have confirmed a move to the downside, making a slightly new low here, just barely, and then make a move higher. So this is much more of a confirm still in the downtrend, and we have a sharp move back higher. So it needs to retrace that last wave which it does here. It pulls back into where the last down wave started.

Preferably we do not want the rounded bottom. But that’s okay. This occurred overnight. That’s somewhat to be expected. And we have this sharp move back up. So this is what we’re really looking for, is a lot of conviction on the part of the buyers to match that former down move which we have here.

So as soon as we have a two bar pause, which is these two bars right here, we have this red one and a green one, we put out an order near the bottom of that pause. Right in here. There is no hard and fast rule, putting it one pip away from the low or two pips away from the low. It’s basically we’re going to draw a little area like this and based on your spread as well, where do you think you can get filled? So this pulls back to this low, we would have been filled there. And basically if this pauses, we’re looking at trying to get the absolute best entry point we can for this next wave up which occurs shortly after.

Now this is where I guess the insight of the video comes in, because this is a very big shift in the traditional way of thinking. By doing this and looking for the best entry point we can have, you’re sometimes not going to get filled. Other times it’s going to drop right through you. This is a shift to think of things in terms of mathematics, where you can be wrong a lot and still make money. So by waiting for this entry point, your reward is going to be a lot larger than your risk simply because by getting filled down here, you can put a stop right below that bar that you based this area on.

So we’d put a stop right about there. Like we said, about three pips below. So that’s about a pip and a half, so we’ll just move it a bit lower.

So if we’re filled in this box, even if we’re filled right at the top we’ll say, we are looking at about a seven pip risk. So at seven pips it is very easy to make 21 pips, or three-to-one. How we’re going to establish our reward is similar to the pennant pattern. We are going to isolate the most probable areas of the wave up. So once again, we’re not going to count extremes and we’re not going to count this very bottom part where it was consolidated. We’re only going to count where it really started to move up which is right about there. That is then added to the bottom of our pattern, so our target would have been right there.

Once again, if we entered right at the top of that box we are looking at a nearly 24 pip gain for 7 pips of risk. So almost four-to-one, or three and a half-to-one. A very good risk/reward ratio. I typically won’t even take a trade beyond that. We will occasionally see it. If we do get the target up there, we will take it. But at a three and a half-to-one or four-to- one, you can be wrong a lot and still make money.

So this is a very different strategy. A lot of traders have this mindset that they have to win all the time in order to be a profitable trader. Yet, taking a trade like this where you have a two bar low after a strong move and you’re just trying to get back in or put an order out at that two bar low, so in that case here, gives you a very small stop. In this case we’re talking about seven pips on an hourly chart, and on an hourly chart you can have some huge moves to capture. We’re talking about a very small risk to capture some big gains.

Let’s move to this one. This one would’ve been a loser, but if we do the math on it it’s quite extraordinary the amount that you could have made. So here we have a two bar pullback. This once again would have been a little bit questionable too here, simply because we had this up move here, but I just want to show you the math of it.

So this is the pattern we are looking for. Typically we’d want to see it an overall downtrend though. So we don’t want to see this move higher before it. Post sharp move down, equally strong move up. We have this two bar pause here. We would have placed an order at the bottom of that two bar pause. Five pips we might have been stopped out on this bar, but if not we still would have been eventually stopped out because it did not continue to the upside.

But let’s say we were looking to enter right about there. Yeah, that was right about five pips below so we would’ve been stopped out right about there and that’s fine. Looking at about ten pips of risk on that one just because we had a bit more movement. But our target, from the start of the strong move which was that first green bar, from the low of the pattern would have been up here and we’re looking at 53 pips for 10 pips of risk. So that one would have been a five-to-one had it worked out.

So don’t get caught up in the fact like oh, this is a losing strategy. If you win two or three of these at four-to-one or five-to-one, you’re going to end up being a profitable trader. So get rid of that notion that you have to be right on every trade. I use the term, I don’t want to say gambling or that you’re betting on something, because that gives the wrong perception or the wrong interpretation, but all we’re looking for is the most advantageous spot we can get and that occurs in this type of strategy where we have this slight pause and we just try to get in at the bottom.

So once again here, this is not one, this move and the move back simply because we already have some evidence that that trend was reversing, so some of the buying pressure here has already been absorbed. These looked like ones but they are not, simply because the overall trend is up. So when we have this sharp move up, that is the trending move already. We don’t expect it to keep jumping relentlessly. Here again this is a move back in the trending direction, so it is not. We want a counter-trend move.

This is a very powerful one. We have a sharp move up, little pullback, move to a new high. So this is the overall uptrend continuing. We have a sharp reversal here down to this former start of the last wave, so that is one there.

The question is down here, do we have a pause? This bar is technically a pause. It retraces. This bar is a pause. Whether we would get in on this bar, definitely debatable depending on where you placed it above. If you had placed it just above that and close to this high you may have gotten it, but this definitely would have been a close one because it just barely got into the high of those two bars.

But if you had gotten it we’re talking about a huge potential because this was a major reversal as we can see. We were in a long term uptrend, which is then very aggressively reversed by some news. A little pause there. We were looking to enter right at the top of that pause, and get that downside momentum. So this is what we call a major shift. I wouldn’t use this whole thing. From the top, and target down here, and the stop would have been just above, about five pips above where we set our high.

So we are going to get stopped out on quite a few of these. I think, the reasonable from when I first started trading these, it was about 50%, the win ratio. But because you’re making so much on your winners it creates a very profitable strategy, and then over time you’ll get a bit better at determining where to place your entries in here after the two bars. And it is I have mentioned somewhat subjective.

You’ll need to get into a demo account and really try this out. It’s a very powerful strategy. But since we are getting advanced… the rules, when you become an advanced trader, the rules turn to guidelines where you realize the market is dynamic and rules aren’t always the best application.

We want to look for guidelines. So it’s more we’re just looking for the pause and to get in near the highs of those, but it’s not exactly go two pips from here, three pips from there. The rules get thrown out and everything becomes more about guidelines, which means a lot more practice but the payoff becomes much better because you’re going to get these super high-reward entries as opposed to some of the other ones we’ve talked about which are still very good strategies and I use them all the time, but you’re not just getting quite as good a price as this.

Because if you trade the breakout, which is another thing we have to discuss, if you don’t get that entry you can still trade the breakout of the pause which would have been… so you can see a nice little shelf here that forms, and then this bar is the breakout. So you can still trade that breakout, but you can notice there’s a big difference in price between getting in here and getting in here. So just a little bit shift in thinking can get you that little bit better entry price. So that’s the focus today. When you have that pause, assume the next direction. We had a sharp move down, pause, assume the next direction, get in near the top of that.

Every trade has a stop and target. Put those out when you place the trade. Risk is less than 1% to your account. These take a lot of practice to spot. We’re talking about moving from rules to more guidelines as you become a better trader. So it does take a lot more practice but they payoff becomes much bigger. They look easy, but they’re lots of similar patterns with lower probabilities. Make sure that you have a good risk/reward ratio if you’re going to trade these.

And the snap back has to offset the prior trending wave. So we want to see a sharp move against a current trend. The bigger the trend and the sharper the pullback, the better the trade’s going to be. Trade in the snap back direction. Place a stop just outside the pause. Target is based on the height of the snap back. Be conservative. The reward will typically be very large compared to risk. We can afford to be wrong a few times, but not get greedy.

This, optional I include in most of the videos. The 1.6, if you just want to get out a bit of your money to lock in a profit. In this case I would probably not recommend it simply because we know that we’re going to be wrong probably 50% of the time at first with this strategy, so there’s no reason to get some out. Instead you want to capitalize as much as you can on the ones that do pay off. So instead of getting it out, wait for that five-to-one or six-to-one target where you’re going to recoup all those losses and make all those losses from the losing trades and make a profit.

Trading involves substantial risk of loss. Only trade with capital you can afford to lose. Test out strategies before using them and make sure you are actually able implement them and that they work for you. Very important with this because it is becoming a little bit more subjective and more guideline-based.

So get in there, practice this. If you can master this, you’re going to become a very good trader because it’s a big shift in the psychology of how most traders think. Until next time.


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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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