Rule 1

Using a scientifically verified governing pattern, it is possible to determine the direction the market is going to go in the next 12 months. This will determine which of the five phases the market is in right now.
This step feeds into rule №1. There are 5 possible phases in the market.

Up, Down, Sideways, Reversing-up, and Reversing-down.

In order to assess the phase or the condition of the market, we need to establish which direction the market is going now. Gutierrez and Kelley, 2008 demonstrated that the market can continue is an uptrend for up to 1 year after a reversal.

Rule 2

Once you’ve identified the phase of the market, you need to locate a historical precedent – also known as a pattern – within the phase. You can even combine a number of patterns on one chart.

If a market is in phase 4 or phase 5, then a reversal must have happened. This reversal becomes the governing pattern. If the reversal is heading up, then you are more likely to make a profitable trade if you take it in the direction of the phase (Friesen et al. 2009).

The patterns that happen within that phase will confirm the direction of the market, and when price is ready to break out, you’ll have momentum on your side. Foltice & Langer (2015) studied how momentum effected returns. According to them:  “We find that the strategy can indeed work for individual investors with initial investment amounts of $5,000.”

When it comes to the patterns themselves, there are lots of studies that show proof they work. A small list of scientific studies has been provided below.

Rule 3

Once you have the governing pattern, and the intermediate pattern, you need to look for an insurance bar. This will tell you exactly where to enter the trade. It will assess whether or not the momentum is ready to explode based on the close of the bar, relative to the high and low. A study by Dunis et al. (2011) found that open and close chart prices “generate a significant α and their returns cannot be solely explained by the factors derived from Fama and French (1993)”.

In other words. By using the open, high, low, and close of the bar to determine your entry, you can generate significantly higher profits using technical analysis “which cannot be explained by market factors.”

One year later, Ślepaczuk et al. (2012) released a study showing how Forex and Futures markets are especially well suited to this type of trading. Specifically... inside bars and reversal bars have been defined and tested by Caginalp & Laurent (1998). They found that: “The results were significant for both the buy and the sell signals, with the buy signal resulting in a tripling of the initial investment during a one-year period (with costs taken into account).”

Their study was later backed up by Shui & Lu (2011). In fact, since the 1998 study, there have been over 130 other research papers either relying on or confirming the results from Caginalp & Laurent.

Rule 3

Now that you have the patterns and the insurance bar, you will place a resting order (also known as a pending order).

The best way to confirm that your decision is correct, is to let the market confirm it. Besides making intuitive sense, there is an incredible amount of scientific evidence to back this up.

Grundy (2001) and Hirshleifer (1998) all document how profit increases when market momentum is automatically confirmed with a limit order.

The latter study has been confirmed and cited hundreds of times. For example, Shantha et al. (2019), Brasiano et al (2017), and Alti et al. (2019).