There are about 20 variations of this pattern. For example you could have a look at the "Turtle Soup" pattern of Linda B. Raschke as well. The pattern just describes a failed breakout to a new high or low. The trade is entered, when the stops of the breakout traders are hit. This is usually enough fuel to chase back price to the swing low or high preceding the new high or low.
- Prior to the failed breakout you would want to see a decisive trendline break
- The breakout to the new high should occur on lower volume than the previous swing
A variation of this method would split targets between the SMA(20) as a first target and the prior swing low or high as a second target.
So this is no indicator, but it is actually a trading strategy, including a setup (breakout on low volume after trendline break), a trigger or signal bar (trade is triggered when price hits the stops of the breakout traders), a stop-loss (above the new high or below the new low) and one or two targets (SMA(20) or end of prior swing leg).
On intraday charts you will often find this after news announcements. Good news are used by professionals to "sell the fact", i.e. to liquidate their positions into strength. Bad news can be used for accumulation by transferring positions from weak into strong hands.
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2B and 1-2-3 are quite different patterns. The 2B pattern suggests an entry after a new high or a new low has been made and then failed. The 2B pattern is therefore a failed breakout that has trapped a number of traders. You enter the position, because you know that the trapped bunch has to exit their positions.
The 1-2-3 breakout is an entry after a lower high (not higher high) or higher low (not lower low). This pattern does not feed on trapped traders, but on weakness to continue the old established trend.
The term 2B pattern has been coined by Victor Sperandeo, 2 stands for a second top, B for a new high or low.
I cite from his his book "Trader Vic 2": "If you practice evaluating charts using 1-2-3 and 2B criteria dilignetly, you will soon reach the point, where drawing the trend line and the associated horizontal lines is unnecessary"
Our brain is capable of completing these patterns, so if we give it some training, it will automatically add trend line and S/R lines. Note that this sentence underlines the importance of the trend line break for both patterns.
Similar - but not identical pattern - which feeds on the failed breakout, are the Turtle Soup and Turtle Soup Plus One pattern, which are described in the book "Street Smarts" by Laurence A. Connors and Linda B. Raschke.
The Turtle Soup pattern feeds on a one day reversal. This is the setup: A new 20 period high (low) followed by a retracement that takes at least 4 bars. If a new then a new high(low) is made and price falls(rises) immediately below(above) the prior high(low), you will enter a position a few ticks below(above) the old high(low). If price action carries through you have entered on a one-day reversal bar. The stop-loss is set above the new high (below the new low) and is trailed.
If I compare a short setup for 2B with Turtle Soup: Turtle Soup requires a one day reversal and enters just below the prior high (a bit similar to the Wolfe Wave Pattern). A 2B failure may take several days, and you will not enter immediately below the prior high, but a couple of ticks below the breakout bar.
Both patterns have a moderate/low win rate, but an extremely favourable win/loss ratio, which can easily attain 5:1. If you look at the chart below, it shows both a 2B and a Turtle Soup pattern. Both examples show excellent win/loss ratios. This means that the pattern is not easy to trade, as you will be often stopped out andyou need to let your profits run. Both V.B. Sperandeo and L.B.Raschke recommend to trail the stops, which is in line with the high win/loss ratio.
Did you ever try turtle soup? I don't like the taste of the meat. The name of the setup is a reverence(?) for the Turtles, who used Donchian channels to trade breakouts.
Last edited by Fat Tails; June 2nd, 2010 at 04:13 PM.
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Fat tails - You are really great in explaining and clarifying things which only few people can do . I haven't checked turtle soup but will do.
what I saw is these reversals occur more in Range bars than min bars, like CL 8-10 Range reverses so fast these days
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