Sometimes Ross hooks are 1–2–3 patterns that occur subsequent to the initial 1–2–3 formations that cccur at lows and highs. Indeed, many of them are formed at the intermediate and minor lows and highs that occur in trending markets. But to call them all 1–2–3's would be to present an erroneous picture. Not all Ross hooks are identifiable as 1–2–3's.
1–2–3 patterns are the direct result of certain market forces at work. Ross hooks are the result of a different market phenomenon. Then, too, there are Reverse Ross hooks which are a bit more difficult to see, identify, and trade. The number two point shown next is a reverse Ross hook.
You should know how to identify and trade Ross hooks, reverse Ross hooks, double bottom Ross hooks, and double top Ross hooks. But at first I need to show you what these hooks look like, and also show you how they relate to, and often derive from, the basic and fundamental 1–2–3 formation. Later, I will show you how I utilize some of the trading tools such as identifying a trend, knowing what constituted a 1–2–3 high or low, identifying congestion.
The following chart shows a 1–2–3, and then the subsequent Ross hook.
First, you see that the market topped out at the number 1 point. That's when prices were higher than what any additional buyers were willing to pay. At this point, there is too much supply and not enough demand.
Longs taking profits drive the price down to the number 2 point. They are aided and abetted by bears seeking to establish a short position.
Shorts take profits by buying. Renewed buying comes into the market by virtue of bullish traders who treat the pull-back as a bull market correction. This creates the number three point on the chart.
There are not enough traders willing to buy at the high prices, so the attempt to continue the upward trend fails. The market takes out the number two point, and a new downtrend is established.
After prices move down for awhile, a correction takes place. This correction is caused by shorts taking profits. To cover their positions, they buy, thereby causing the market to rally. At this point, other buying may come into the market by those who think the down move is about over. They may feel that prices are at support. Buying may also come in to the market by technical traders and retracement traders who think „this is the time to buy.“
The rally leaves behind a minor or intermediate low which I have called the point of the Ross hook. The shaft of the hook is the down trend. The hook itself, the remainder of the formation, consists of the rally also known as a correction or reaction. It is this correction, the move opposite to the trend, that leaves behind a „pointy“ place on the chart. The correction can be from one to three bars in length. At times it can occur in a much more subtle way by having the correction and low occur in the same bar. Other nuances can occur and will be shown as we progress. For now, the important thing is to understand what a hook is and how it looks. It is the breakout of the hook that сзп earn us a great deal of money.
The preceding chart began with a 1–2–3 high, a breakout of the number 2 point, and the establishment of a trend which led to a hook and ultimately to a continuation of the downtrend.
Next, let's look at a series that begins with a 1–2–3 low.
In the following graph we see an end to selling, which was the low at point 1. As prices started to rise intraday, shorts began to cover in order to take profits. Their buying, aided and abetted by the entry of longs who think this is the bottom, causes prices to rise to the number 2 point. Some longs, looking for a quick profit, begin to sell. They are joined by traders who feel that what they are seeing is a bear market rally. Prices head back down to the number 3 point.
However, there is simply not enough supply at these low prices to warrant continued selfing. Prices refuse to go as low as, or even to take out the number 1 point. Instead, demand takes over the market and bargain hunters, who are afraid that prices will move even higher, begin to buy. The demand is strong enough to overcome the number 2 point and thereby establish a new upward trend.
As prices rise, selling comes into the market as some longs liquidate all or part of their position. This selling, joined by those who feel it's time to get short, drives prices back down in what is viewed as a pull-back, a retracement, or a correction, take your pick. Prices move down in reaction to this selling.
But demand is still greater than supply, and prices are not yet too high to keep buyers away. The market moves up, taking out the point I've labeled as Rh. This process is repeated several more times, untif eventually we see what may prove to be a market top.
The Ross hooks made subsequent to the initial breakout of the 1–2–3 low are a frequently occurring event. Yet they are often not easily categorized as 1–2–3 patterns. Sometimes the distance between what might be labeled as a number 1 point and what might be labeled as a number 2 point is considerable. My early discipline dictated that if I couldn't label a 1–2–3, I couldn't trade these „pointy“ places on the chart. I was missing a lot of good trades. Then I noticed that the only thing missing was that there was not necessarily a number 1 point. The number 2 and number 3 points were always there.
It didn't matter where the number 1 point might be. The important thing was that the formation occurred in a trending market. Within reason, the stronger the trend the better, but not always so. There were also times when caution overruled all other considerations.
The next step was for me to thoroughly test the idea of trading these hooks and to simultaneously work out a managerial scheme that would enable me to cash in on their potential.
What I liked best about the concept of trading the hooks was that they represented truth in the market. A breakout represents a truth in the market. Once prices have broken through the point of the hook, they have broken out. Even if the breakout should prove to be a false breakout, the immutable fact is that prices have broken out — generally with sufficient force to afford the opportunity to at least cover costs and allow the remaining time in the fade to be „free.“
