Reversal Patterns and Price Benchmarks

In in this webinar we discussed combining reversal patterns with objective price benchmarks. The benchmarks are located using our session tools whereas the reversal patterns are found using Auction Bars. A recording of the event can be found here:

Price Benchmarks:

Why use price benchmarks? Because there‘s no room for subjective opinion when using them. The overnight highs and lows are objective. So are the the prior days regular session highs, lows and close. Same for the volume weighted average of the contracts traded during the daily session (VWAP).

These are areas where traders react psychologically and emotionally on the same information. When you’re getting in on setups that are based on these levels, there’s no doubt as to why you’re doing what you’re doing. They are what define the collective reasoning in the markets.

Reversal Patterns:

Likewise, reversal patterns, can be used to read human behavior in the markets. A lot of our decision making can be traced to the lizard brain. It is responsible for triggering primitive survival instincts, i.e. “fight or flight” type of thinking. This type of triggering is why history has a tendency to repeat itself. Not perfectly of course, but chart patterns of the past can certainly predict what type of price movement to expect next. This is because the psychological aspect of trading remains the same year after year. Our emotional response just doesn’t change that much. We remain fearful, greedy, confident, or terrified.

Conclusion: 

Even if we increasingly employ automated tools to create and execute on trading systems, they’re still programmed by, and based on human observations. Or in the case of artificial intelligence and machine learning; someone is ultimately charged with the decision as to leave a system on or off (based on the higher timeframe perspective).

Therefore, humans are still the driving force behind everything that goes on in the markets. And because human nature hasn’t changed much, the basic rules that applied a hundred years ago, are still in place today. By combining objective price benchmarks and reversal patterns, you may define trading setups where the higher timeframe aligns with short term opportunities.