In trading, we can analyze accurately based on higher timeframe technical patterns or based on fundamental news, etc., but it’s difficult to open a trade with a proper stop loss because before taking a reversal, the market makes such patterns that cause the stop loss to hit multiple times. Then the market takes a long-term reversal by eliminating all the retail traders from the market.
So what if we know these patterns and we can master them, so whenever the price is going to take a trend reversal, we always remain prepared for different market scenarios to protect our stop loss?
In this post, I will teach you three market scenarios which you can use in Gold or XAUUSD trading. These scenarios will help you predict exact market reversals and also help you to protect your trade from a stop loss.
Remember that it does not mean that you will get a 100% winning ratio after learning these patterns because no strategy is 100% accurate, but these are market scenarios, so you will get a high winning ratio with few stop losses. So, by using risk management, you can become a profitable Gold trader.
Read the post fully without skipping any step so you don’t miss any important points in the article.
What are the three Gold trading patterns?
In the gold trading market, the price always makes three main reversal patterns. There is no other pattern except these. So if you master these by practicing many times, then it will become very easy for you to predict a market reversal and then place a safe stop loss level.
I have also passed through this stage where when I add a stop loss, the market hits the stop loss but stays almost near that level. Again, on the second trade, it still hits the stop loss by a few pips. Then the third time, when I don’t add a trade, the price goes in my predicted direction, and this behavior of the market heavily disturbs the psychology of a trader. And it’s difficult to go through these stages.
Also sometimes, price just hit your stoploss and the goes exact in the direction that you predicted.
So if you learn the three main gold trading patterns, then you will be able to add a safe stop loss and stay away from market tactics.
Pattern 1: Inward consolidation
In gold trading, one of the most usual patterns the market makes before a reversal is inward consolidation. It simply means that the price paused for a while, and inward consolidation showed that market makers were in an indecisive phase. Then, after the break of the inward consolidation, a reversal takes place in the direction of the breakout.
In the example below, I predicted that after a bearish retracement, the price will make a bullish trend. So it means the price will usually reverse from the Fibonacci golden zone or at a demand zone, etc. But if we take a buy trade here blindly, then we will have to face many consequences.
Instead, we will wait here for the formation of a confirmation or reversal market pattern. As you can see, the price made an inward consolidation at the end of the bearish retracement and then broke the consolidation in a bullish direction, confirming that the price has now made a decision and the trend will be bullish.
Now at this point, we can place a trade and a stop loss level with peace of mind.
Remember that in inward consolidation, each successive price wave will be smaller than the previous wave, so it’s easy to identify.
Pattern 2: Outward consolidation
Outward consolidation is one of the major stop-loss hunting patterns that market makers use to eliminate retail traders from the market.
Let’s suppose the same scenario as we did in the inward consolidation example. At the time of reversal, we should also expect the formation of an outward consolidation pattern before a major reversal to a bullish trend.
In outward consolidation, each price wave will be larger than the previous. It’s the opposite of inward consolidation.
Usually, the price takes a reversal on the 5th wave, so you can open a trade after the 5th wave.
Remember, this is the most widely used stop-loss hunting pattern used by market makers in which they keep on hitting the previous highs and lows, because retail traders always place a stop loss at a swing high or low.
Pattern 3: Inward and outward consolidation
In the market, during a trend reversal, you will always see an inward or outward consolidation pattern. You will not find any other scenario except these two, but sometimes both can form at the same time. For example, if an inward consolidation pattern is formed, then after the break, the price can also make an outward consolidation pattern. Then the price will reverse on the 5th wave. So we should always be prepared for any scenario from these three so you can keep your trade safe from losses that are caused due to market noise.
Where to add a stop loss?
After the pattern completion, you will have to add the stop loss above or below these patterns based on the trend reversal direction and main trade forecast.
If you want to go deeper into it for more precision, then you should also learn about flag limits from our blog. You can place your stop loss below the flag limit which is holding the reversal price pattern. It’s more accurate and a bit complex for beginner traders.
The bottom line
In reality, losses are also part of trading. You cannot always be a winning trader. That’s why we use risk management tools, psychology, and technical analysis to stay profitable in the long run.
But market noise can easily turn your winning trades into losses.
For example, you learned technical analysis accurately and your analysis was also good, but market noise can hit the stop loss levels easily by very few pips and then go in the predicted direction, keeping you in a loss even though your analysis was right. And when your analysis goes wrong in reality, then you still lose. So these things add a lot to losses.
So we can avoid this market noise in gold trading by following these three major market scenarios as confirmation patterns, so you can avoid unnecessary losses.
I hope you have learned what I am trying to tell you.
If you have any questions related to these market patterns, then don’t forget to ask in the comments, and I will try my best to answer.
