Have a look at below chart pattern:
A = Strong trend
B = Shallow retracement
C = Continuation breakout
Below is a chart image showing this pattern:
We have talked about Super pattern, T20 etc patterns which was an attempt to make this observation objective and scannable.
For example, a strong trend followed by less than 4-box retracement is a Super pattern that provides affordable trade opportunity.
But from price pattern perspective, strong trend followed by shallow retracement and breakout is a strong price action.
Shallow retracement restricting to absolute number such as 4-box or 8-box may not help always. Have a look at patterns X, Y and Z in below chart.
The length of retracement is different in terms of number of boxes. But size of retracement is less compared to length of previous column of X. All these patterns qualify for:
Bullish breakout and strong trend->Shallow retracement->Follow-through breakout
Keeping this in mind, ARF pattern is designed.
A=Anchor trend
R=Retracement
F = Follow-through
Pattern:
1 – Breakout
Bullish Breakout = Double-top buy
Length of column is important there. Let us keep it 9 keeping lower time frame in mind. Length of column of X is 9.
2- Retracement
Let us calculate retracement in percentage terms for this pattern.
In above example, length of previous column of ‘X’ is 9 boxes. There are 3 boxes in current retracement column of ‘O’.
Therefore, Retracement percentage = 33.33% (3 / 9).
3 – Follow-through breakout
Follow-through = Immediate Double-top buy
You will be asked for below mentioned information in dialogue box of ARF pattern
CL is Column length.
Default parameters are 9 and 40. Length of breakout column is 9 –meaning, all columns having 9 or more boxes will be qualified. Retracement percentage is 40 – meaning, retracement move of 40% or less will be qualified.
Vice versa for Bearish ARF.
If column length is 80 boxes and retracement percentage is 40% Follow-through breakout after 32-box or less retracement will be qualified for the pattern.
9 and 40 parameters are decided based on lot of data analysis that we did at our end on different time frames and instruments. Of course, you should experiment.
Understanding the logic behind the pattern is more important.