How to use ERL in Trading:
Let’s say that we are in a pre-existing Uptrend and we have a clear cut breakout above our Pivot High, we have our ERL. We know that once this breakout closes at a visual distance from the ERL our ERL will be activated / operational.
Now, if the price collapses and the Bar closes below our ERL, we call it a Rejection.
Hence, Rejection is nothing but when a Bar closes below ERL (in case of uptrend) or above ERL (in case of downtrend). And we reverse our position above or below the Rejection Bar High (Low) +- F as the trend may be.This becomes more Potent if the Rejection forms a Pivot above the ERL.(If Trade is not Hit with filter above / below the rejection bar that bar will become the pivot).
Failure is nothing but the bar that breaks the pivot and goes away at a good visual distance but eventually the same bar falls back and closes below the non-operational ERL line (body of pivot).
When we don’t look at the ERL?
1. The Pivot has to be from the same Trend for ERL
Assume we are in a downtrend, our SAR is at the latest Pivot High. Now, if the latest PH is broken we reverse our position to Long. That PH cannot be considered now for ERL in case of our new uptrend as it is from a Previous Trend. ERLs are early reversal signals and should be based on the price action in the current trend, not the previous one. Hence, in the new uptrend, wait for the price to form a new higher PL and then let it take out the previous Visual Pivot High at a visual distance for it to be considered as an ERL.
2. Ignore the ERL in Sideways Market
There may be many ERLs formed within the Sideways but we ignore them altogether. The ERL play will resume once the Sideways is taken out and Up / Down trend resumes.
The Visual Distance is just a bar closing over a potential ERL that is obvious Visually.............There is no percentage or mathematical calculation to it........Visually,a breakout bar over a potential ERL and a visual close outside of this potential line activates it.
The concept of ERL::