By Mike Wilt
I am writing this blog article in the spirit of sharing my insights. These are my thoughts and opinions and it is how I see the patterns. I would encourage others to both comment to this blog posting and to share your thoughts, observations and successes in the room. I look forward to hearing from many new voices.
This article is about the Railroad Track formation (RRT). Vadim first posted about it on Sept. 30, 2014. Here is the link: http://oiltradingroom.com/keeping-the-streak-going.
In this link there are charts of several continuation patterns, many of which are NOT RRTs. But what stood out to me was how symmetrically they appeared in the middle of big runners. There are many good charts in this posting. Since that time of Vadim’s posting Rob has added the background color change which changes when the order flow of the last 1-3 bars is supportive of the respective direction. This new enhancement put the RRT near the top of the list for set ups that I use.
Let’s first define a RRT. It is 2 consecutive opposing 10 tick reversal bars. In the example above, 2 and 3 are RRTs. #1 is not since the green bar is not a 10 tick reversal bar. I am not saying do not trade set up 1 (yikes it is right at the Half Back, the TL and closed with a red background), I am just saying it is not a RRT.
RRT is a continuation pattern. That means to me that it should not be traded right at the beginning of a swing move (unless there are other compelling reasons to take the trade) and should always be taken with the current trend/cycle. I also avoid taking them when the trend has already moved a large number of ticks (end of trend). That means it is traded in the direction consistent with the color of the Trend Line or in the middle of a cycle (HH/HL or LH/LL) on the MB chart. The last and most important filter is that the opposing 10 tick candle, which appears in the middle of an established cycle, must close with the background opposing the color of this candle. In the example above, # 2 is a RRT but since the green opposing candle appeared with a green background, I would either not take the trade or enter it very conservatively (to be covered later). It ended up being profitable here but it is not the highest probability setup for me. There must be other compelling reasons to take this trade in addition to the RRT setup. Example 3 is a setup I would trade aggressively since the background remained red, the direction I intend to trade in and price had closed below the Open (magenta line) and was acting as resistance.
The entry for this set up can vary, depending on how aggressive/confident you are with the trading environment. What this pattern is saying to me is that despite the fact that an opposing candle just printed (green in this case #3) the order flow supports shorts (background remains red). An aggressive entry would be at the open (top) of the next candle. My stop would be 6-7 ticks above the open and I would close it when a green 5 tick continuation candle printed (and presumable a background change to green). A more conservative approach would be to enter at the close of the 10 tick red candle. My stop would be 1-2 ticks above the open of the red bar adjacent to the green 10 tick bar. For me when entering aggressively, I wait a little while to ensure that the next candle isn’t going to race higher and stop me out immediately (I hate when that happens). By trying to enter into the upper range of the green bar, I am reducing my risk while trading in an environment that supports my trade (red background and trend direction).
Here is a list of my thoughts about RRTs, pardon the repetition:
- Always trade in the direction of the current cycle or trend and avoid taking these setups either at the very beginning or end of a swing.
- This is not a standalone system; make sure there are other reasons to enter the trade.
- The background must remain the color of the direction you intend to trade in. Be careful when there is RRTs where the first opposing candle also has a background change identical to this candle (example 2 above). I always use the conservative entry on these.
- I use these patterns to mark legs in the trend. In the example above, the green opposing candle s mark the end of leg 1, leg 2 and leg 3. Oftentimes we are looking for 2 legs against the existing trend before re-entering with the trend. Try counting the opposing candles.
- I like the setup because it forces you to trade with the prevailing trend or cycle which for me improves the likelihood of success and reduces the chance of drawdown.
- This pattern happens many times during the trading day. Most days it works as designed while other days you will continuously get opposing candles with background changes (as in example 2) which might be telling you that this is an unusual trading environment. I pay attention to how the pattern appears early in the day because they tend to act similarly throughout the day.
Here are other examples of RRTs along with my narrative thoughts.
- Right at pit open. This is in an established down cycle. Aggressive entry at open of bar after green bar.
- Again, aggressive entry unless you were concerned that the move had gone its course so you might pass.
- I would use the red reversal bars to count the 2 legs UP into the trendline. I would not take this trade since it is counter trend.
- Aggressive entry short with down cycle, red background and new leg down.
- I would use the red 10 tick bars again to count the legs against the down trend. No long here into trendline.
- Best trade of the day. Red background, strong AB move and expect continuation out of this RRT. The trendline is fairly flat. Aggressive entry.
- Would not make this trade but use the red reversal bars to count the legs against the trend.
- This setup occurred during the noon time with a flat TL. No trade.
- Same as 8 above
- Late in the day, would not trade
Again, these set ups happen many times during the day and many times you will not take the trade because of some other reason. These setups work best when other influences also favor your trade direction. By learning to anticipate a RRT in advance, you can avoid taking a trade in the wrong direction and ready your mind for entering mid trend which is often hard to do. This is a continuation pattern so it should be used to supplement your arsenal of trade entries.
I would like to hear your thoughts. Good trading.