Trading Setup Tutorials : "Yum-Yum Continuation Pattern "

Yum-Yum Continuation Pattern

Yum-Yum continuation pattern is a delicious trading setup found in the Ultimate Trading Guide by John R.Hill, George Pruitt, and Lundy Hill. If we’re a book analyst, we would issue a “strong buy” for this book for its variety of sound price-based trading ideas.

Take a look at Yum-Yum and if you find it yummy, you might want to take a look at the book.

TRADING RULES – YUM-YUM CONTINUATION PATTERN

LONG TRADING SETUP

1.  Existing upwards trend

2.  Swing high broken with a wide-range bar that exceeds the 10-period average range

3.  Close is near the high of the bar and above the open

4.   Buy on breakout of wide range bar (within 1 to 3 bars)

SHORT TRADING SETUP

1.   Existing downwards trend

2.   Swing low broken with a wide-range bar that exceeds the 10-period average range

3.   Close is near the low of the bar and below the open

4.   Sell on breakout of wide range bar (within 1 to 3 bars)

YUM-YUM CONTINUATION TRADE EXAMPLES

WINNING TRADE

This is a 5-minute chart of the Russell 2000 E-mini futures. The lower panel shows the range of each bar with a 10-period simple moving average. This day had a strong bear trend and the Yum-Yum continuation pattern fed us half of it. Not bad.

1.   The day started with a bear trend, before stopping to rest in a triangle formation.

2.   A wide-range bar broke the low of the day after breaking out of the triangle. The lower panel highlights that the wide range of the bar, which is more than two times that of the 10-bar average.

3.  The next bar triggered our sell order. This shows urgency in the selling and confirms the legitimacy of the break-out.

LOSING TRADE

This is a daily chart of Wal-Mart which shows a failed Yum-Yum continuation pattern.

1.   There was an existing up trend, which was essential for a continuation trading setup.

2.   The range of the break-out bar exceeded the 10-bar average range. However, compared with the dozens of bars before it, its range was not especially high. Contrast this with the winning trade, where the expansion in bar range was much more remarkable.

3.   The next day triggered our buy order but there was not much follow-through. Prices moved sideways for two days before stopping us out with a rapid bear swing. An option for managing the position was to trail the stop to just below any bar that closed higher.

REVIEW – YUM-YUM CONTINUATION PATTERN TRADING SETUP

The Yum-Yum pattern is a trend continuation trading setup. Please do not overlook this. Always make sure that the market has a clear trend before searching for this trading setup.

There are two approaches for trading trend continuation.

The first is to pinpoint an entry during the pullback/throwback. This will give us an entry with a better reward-to-risk ratio. However, this approach has lower odds of success because we are trying to pick the top/bottom of a smaller trend.

The second method is to wait for a break-out of the last extreme of the trend. Because this approach waits for confirmation from the break-out, trend continuation is more likely. However, the entry point is worse and produces a lower reward-to-risk ratio.

The Yum-Yum continuation pattern uses the second method. Its improves a basic break-out trade in two ways.

It uses bar range expansion to confirm the break-out. Bar range tends to expand when moving along the path of least resistance and contracts when moving against it. So this addition is an effective filter of false break-outs. Another common filter for break-outs is volume analysis. which John Bollinger recommended for the Bollinger Squeeze trading setup.

The other improvement is the time limit for follow-through of the break-out bar. The entry order must be triggered within 1 to 3 bars. Valid break-outs should present a sense of market urgency and follow-through should come quickly. If there is no swift confirmation, we should abandon the trading setup.

As our signal bar is a wide-range bar, placing our stop-loss at the opposite end of the bar entails higher trade risk. We can lower the risk by trailing our stops behind bars that closed in our trade direction, as pointed out in the losing example above. In this case, active trade management can help us improve the reward-to-risk ratio.

We know some traders who are simply uncomfortable to buy high and sell low, which this strategy requires. Although this is a necessary trait of trend followers, you should only use trading strategies that you are comfortable with.

In conclusion, we find the Yum-Yum pattern tasty.


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