Pattern of «Bow Tie»

Forex Pattern «Bow Tie» represents a nothing but the intersection of 3 moving averages, periods and styles that you’ll continue to review the strategy forex, in a certain order, and although the best option to use it showing the daily chart, but he also may be applicable for trade within the day.

As you know, trends in the forex never last forever, they often exhaust themselves and of themselves, and usually after that, a new trend, which is directed in the opposite direction of the previous one. But the well-established trends usually last very longer than many traders to predict.

But oddly enough, the market always gives us a signal to the trend begins to unfold, but before the new trend will continue, usually occur small corrective movement.

Patern "Bow-Tie" trend change

Figure 1. Trading on the forex conversions. Should wait for a trend change, and then enter the market at the first corrective movement, if the new trend will exercise their confirmation.

One very interesting transitional pattern is a pattern of «bow tie» (English — Bow Tie). This pattern of forex trading is based on a few simple and exponential moving averages to determine when a trend change in the market.

General rules of pattern «bow tie»:

To determine this pattern uses a 10-day simple moving average (SMA), 20-day exponential moving average (EMA), as well as the 30-day EMA. 10-day SMA, gives the trader a «true» average price over the past two weeks or 10 trading days.

For longer-term moving averages are usually used Exponential MA, since they «weigh» all the data. While they take into account the long-term trend by the market, but they are faster to keep up with changes in price, because a greater weight to give them the latest information.

Consider the basic rules for the transaction to buy (to get the rights to make a deal to sell just need to expand the «rules for purchase):

And so we use a simple SMA with period 10, the exponential EMA with a period of 20 and EMA with a period of 30 (these moving averages in the MT4 trading platform called Moving Averages):

1) These moving averages need to get off and re-disperse, changing the order with the order inherent in a downtrend (10-SMA <20-EMA <30-EMA) in order inherent in the rising price trend (10-SMA> 20-EMA> 30 — EMA). Ideally, the interval of time it should happen in 3-4 trading days. That’s right, and appears on the chart pattern bow tie, consisting of interlaced moving averages. How does it look like — look at Figure 2.

Forex patern bow tie graphical representation

Figure 2.

2) The price on the chart should form a lower low and lower high. In other words, the rollback should occur, at least one bar.

3) As soon as the conditions of paragraph 2 are satisfied — we open a trading position to buy when moving above the maximum, which was designated in paragraph 2. We place a pending order to buy over the current maximum, which is usually performed on the next trading day.

If the market is below 20EMA or 30EMA you need to overestimate the bargain (it is not about to cancel the trading order, but how to analyze the situation on the foreign exchange market: if the momentum is not lost). If the order is open, then we place a protective stop-loss — its size depends on the volatility of the chosen currency pair.

Ideally, it should be located far from the current price that will not work when recoils against a new trend, which tends to last up to several days, if the transition to a new trend from the old trend is not yet completed finally.

Take a look at some examples:

Graphic model of the forex "Bow-Tie Example 1
Figure 3.

On the chart in Figure 3 we observe the cross-rate New Zealand dollar against the Singapore dollar (NZDSGD). Cross-rate long been in an uptrend. All three moving averages used by us, which should form a pattern of «Tie — butterfly are in the correct order, which corresponds to the upward price trend: 10SMA> 20EMA> 30EMA.

After that, they all come together at 1, crossing the each other and a few trading days have formed a new order, which are peculiar to the downward price trend. That way, at the price chart and was born pattern forex «bow tie». The market has formed with much higher peak and a much higher minimum as required by paragraph 2 of our rules of trade pattern. After that the price crossed the minimum level at point 2, which led to fire sales to the input signal at point 3.

Patern forex "Bow-Tie" Example 2

Figure 4.

On the chart in Figure 4 we observe how the three moving averages of the index S & P 500 have formed our pattern of «bow tie» in August 2006, as order averages switched to the correct order of the rising price trend 10SMA> 20EMA> 30EMA. After that, the market suffered reversals, which resulted in the implementation of Condition 2. Entering the market was carried out as soon as the old was knocked maximum (3). After such a poor start the trend was so strong that the S & P moved in an upward trend during the remaining months of 2006 and early 2007.

A good example of the above, gives the schedule of shares Regeneron Pharmaceuticals (REGN) — Figure 5. Pay attention to the fact that in May 2007, the market share was formed small triple top, and then began to discard. Instead expect the formation of a pattern bow tie, you can enter the market and earlier, the first reaction. Thus, you can enter the market very earlier than the pattern emerge and get a little more profit.

Forx Patern "Bow-Tie" Example 3

Figure 5.

Best motion transitions occur after a long bull and bear trends. Once the market begins to unfold, most traders FOREX located on the wrong side of the market. That’s why patterns «bow tie» are formed after the foreign exchange market has formed a new primary maximum or minimum principal. Once this happens, your chances to catch a very strong emerging trend is increasing.

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