24th Jan: Smash & Grab on the Dax – Wallachi Fan – +1.8R

At the end of 2013 I was asked to create a simple, multi-asset, multi-time frame strategy that a relative new-comer could use and would also be good for trading both continuations and reversals. I developed the ‘Wallachi Fan’ which I’ve shared with a few clients and you’ll see the odd post about trades using this strategy.  My main operations still uses the STAM analysis that forms the core of my analysis and trading. I remain primarily a dominant trend trader of FX pairs, Indices & Gold. I would recommend to everyone that wherever possible buy strength, sell weakness and trade pullbacks in the dominant trend.The ‘Wallachi Fan’ is is a method that complements my normal trading style.

I educate and broadcast that most people should avoid trading reversals – though people rarely listen to me until it’s too late.  There’s just something in the human psyche and ego that loves trying to time or position a reversal.  When the trader gets it right and calls the top or a bottom in a market then the world and his wife gets to hear about the traders success.  The reality is that the trader keeps quiet about the other 5-6 losses they took trying to time reversals before that!  So reversals can be immensely profitable – but you need to know how to trade them properly and be ready to be wrong. Lots.  I believe that markets tend to under-shoot and over-shoot their levels and expectations. That means there can be lots of false signals as other players try to suck in the naive, the inexperienced and the greedy.

I’ve said it many times that the best trades will leap off the chart at you regardless of time or style.  At the end of last week both the FTSE and the DAX  gave nice reversal signals as per the Wallachie Fan method. Namely an Unequal Top or Bottom 123 (UTB123) pattern set-up.  I decided to trade a four-hour entry on the DAX:

I don’t trust reversals as you never really know whether it’s a mere retrace or a proper reversal so i tend to get in – get some profit and get out. i appreciate that it’s a weakness in my style – however I don’t trade reversals that often and I’m calm and patient enough to wait for the good opportunities. It really is a quick smash and grab.

For this trade my entry-level was confirmed at 9675 – and it was the candle before my entry that gave me confidence. I expected the price to retrace – what I wasnt expecting was the retrace to be so quick, violent and aggressive. My stop was at 9745 for 70 points of risk.

As mentioned above I don’t hang around with reversal trades, think of it more like a boxers jab than a knockout blow.  What people forget is that in hindsight this trade looks like a dead cert – but there really is no such thing. at that time despite the reversal signals the dominant trend was still up. Its only with ever-glorious 20:20 hindsight that we can see what a nice trade it was. Remember at the time you have no idea what will happen and I’ve been trading long enough to know that retraces can themselves quickly reverse.

My target was down at 9545 back into a previous zone of S&R. I was happy to step aside if price made my target. Price did that for +130 points (+1.8R) . And it kept on going.

Price eventually ended the day and week around 9345 – a good 200 points past my own exit. That would have made for a very handsome return. However that’s all ‘woulda, coulda, shoulda’ trading using ever glorious hindsight. As mentioned before no-one really knows how hard, fast and deep these reversal run so I’m always happy to get in, hit hard…..and then run away bravely. I planned my trade and traded my plan. I managed my risk and executed correctly. That’s whats important.

Lets watch and see how far these indices retrace. Could make for interesting (and anxious) times for traders!

Trade well!

Paul