Liquidation wash followed by quick reclaim and resume of the prior trend
The idea behind this pattern is, that sometimes very quick wash (selloff) movements in markets are created as a result of cascades of stop losses. Or sometimes it might be just large participants reducing their long positions and flushing large chunks of size out. The reality is, in many cases the second comes before the first, meaning large participant flushes larger size first, which is followed by stops of other traders being hit, creating larger-extended washed-out price move. However, those quick-washed moves while in an overall up trend might be inverted quickly as large participant steps in again and starts to absorb lower prices (after initially initiating the selloff from higher).
When a strong wash hapens within a short time span and manages to reclaim the entire move or large bulk of it within a relatively short time, it might signal that market has changed its mind, or that the initial quick reaction move was the cause of some market or positioning mechanism which aren't going along with the bias of market and the direction that the participants are looking to achieve. Meaning that the speed of reclaim of initial aggressive selloff move might be a signal in itself, it tells that someone is willing to buy (and not be spooked by wash), fast.
The time ratios between how quickly the price washed out versus how long it took to reclaim and send the price to rally are quite different and tilted towards the side of the wash in terms of speed. This means ratios such as 1:2, 1:3, and 1:5 is what are common. It takes quickly to wash out the price but it takes longer to reclaim, this is normal and important to understand.
Once those initial decision flows are invalidated and price reclaims, the chances are quite good that the next resulting move might be in favor of that last reclaim direction.
In the case of the pattern outlined in an article this means: Down, up, and then further higher.
Psychological (decision making) component of who might be behind reclaimed action
It is important to understand the psychology behind this pattern and why it often reveals market maker might be behind buying and not retail "weak hands".
After aggressive surprising washes, many retail traders dont think of buying, if anything the opposite. The magnitude of fresh selling could discourage buying and trigger selling instead (many start thinking about cutting their prior long positions). If someone is actually strongly buying after those wash moves, it is more likely than not non-retail participant. This gives us insight that someone bigger is willing to defend asset, which is always more valuable insight than having 1000 scattered retailers giving us any insight on defense (noise effect).
The majority of behaviors are cyclical, which makes them difficult to track, and easier to not notice them
There are plenty of unusual and higher-edge extraction patterns in markets, but grasping the idea of why they happen and under which circumstances it is more likely for them to happen is a large pill to swallow. It takes not just a lot of research time, but plenty of live trading and market observing experience, to notice those two effects in play at once.
I have spent a lot of time researching larger cap assets such as Forex markets in my early years in mstkrzd, noticing a few interesting and very robust behaviors around which edges could be built, but all of those sooner or later shifted out of circulation leaving me stranded seeking for something else (due to too small playbook). It took a while to realize where the issue is and how cyclicality plays a role because particular behavior is very much tied to the larger picture and the whole market's momentum.
If the X behavior is a small picture, for it to appear large picture has to be set just within the right conditions to create the pretext for a small picture. If the large picture is not present, then whatever behavior we seek (and a pattern) is most likely not going to happen, or if it does it might fail to deliver what is expected of it.
However it gets even more complicated, it's not that the large picture can be just segregated into a bullish or bearish trend. For example, if bear trend=YES, particular behavior=ON. It doesn't work as simple as that. Many behaviors won't just be connected to bigger picture trends, but also to something specific about that trend. The strength, the context of where the trend began (prior movements), fundamental aspects, and the consistency of the media story behind the trend, there is a lot that has to be set just right for some behaviors to appear. Or at least those that from my research were quite more consistent in their deliveries than let's say a common idealistic price pattern such as wedges which you might read about in many books. There are many more patterns in markets that get low coverage yet their deliveries can be much better than a wedge or any other "mainstream" price patterns.
This means the difficult part isn't on finding behavior or pattern, but on understanding of its cyclicality and when to stop seeking for it, because at some point either the pattern goes out of circulation or its follow-trough (success) rate drops largely. The bigger picture plays major role.
Being selective, and knowing when to expect or execute on particular behavior is very important. This is the typical context that many in the industry will miss, forcing the same expectation, across random and any time trough the year, day in day out.
Quick-wash-reclaim, the rationale behind the pattern
If we take the general idea behind the pattern, and why it typically happens in very strong bullish momentum markets, (especially those that have strong market makers' exposure positioned on the same side and are very liquid), we might get some answers that might help us clarify when to trade this pattern and when not to.
If the asset has long-term fundamental exposure with upwards momentum, and market makers have to reprice that asset into upside over not just a few days, but perhaps a few weeks or in some cases even a few months, then the trade might be crowded on that same directional exposure. Large players on same side of the trade-crowded. And by crowded I do not mean just retailers, but rather market makers and institutions primarily.
If that were to be the case, then it would make sense that any strong dips that happen very quickly might be bought back up, by any market maker that gets the first chance to absorb the offers and push their own size into a dip opportunity. This especially happens in bullish markets because that is where typically not just one or few market makers will be participating and lifting the asset, but multiple of them. It is why this pattern gets a higher chance of follow-through in the first place under such conditions. Basically, the concept of "fight over the best price".
Think of it this way from a tape perspective and order flow. When the price washes out quickly typically the offers will get very thin after the wash is completed, which makes it easier for larger players to push the price back up quicker as the offer side of liquidity is thinned out. And especially if the asset already has by default very strong bid positioning long side, it will be by default more stacked on bids than the offers. So any quick and deep wash might be a great opportunity for market makers or larger traders to step in and push the longs.
Volume and size of wash candle
Traders or market participants should focus especially on high-volume washes (relative to avg per candle volume in past), not just any washes. That way you reduce the chances of observing non-relevant patterns with lower chances of the following trough.
The size of the move as well is important, the entire wash candle should be significantly bigger than the average candle in the entire visible chart. It needs to be a proper liquidation wash where a single entity player is driving the actions.
Both of those conditions should be met at any point, to avoid focusing on too small less relevant patterns which might not have a significant follow-trough of expected direction in price.
Therefore: Size+volume on wash.
To tie the points above together there is an example on ticker KITT:
Required speed threshold of "quick reclaim"
Typically the ratio should be within 1:5 in my view. Meaning if the wash is 1 candle in length because it will typically be a fast one, then the reclaim move should not last more than 5 times that. For 1 wash candle, the price has to reclaim 50-70% of that within the next 5 candles, if it was to fit 1:5 ratio. But keep in mind this is just an average ratio, anything such as 1:1, 1:3 or 1:5 is acceptable. Ratios above 1:10 should be more questionable, however. The idea behind is, if buyers are really aggressive in absorbing the large bulk of selling volume, they need to show that in response of price and time as fast as possible.
Liquidity will impact the speed threshold you should use. The higher liquid the asset the less time should be needed for the asset to respond and create the reclaim. The less liquid the asset is, the more time it might be needed, hence the ratio on low liquid assets should be higher closer to 1:10 rather than 1:3. It is just typical positioning of tape on liquid vs non-liquid assets, on high liquid assets the offers and bids will quickly reposition allowing the large player to quickly start absorbing orderflow, which might not be possible on a low liquid asset where more time will be needed for all the intended market participants to show up and position. Time threshold scales inverse with liquidity.
Example of medium liquid ticker GRFX with 3 quick wash reclaims of ratio 1:3. Each time there was smaller push following after that didn't manage to squeeze past wash candle highs. But the key for this example under is to show ratio examples.
High liquidity gets priority:
A good rule often is, the faster the reclaim on a high liquid ticker the more valid the signal is. This is because on low liquid tickers by default the consistency of the signal is weaker. It is more trustworthy to validate rotation flows on highly liquid tickers because it takes a lot more dollar-capital to eat trough a strong rotation of order flow.
This is important as it validates the emptiness of offers or the imbalance to the long side of order flow on assets. If it takes too long to reclaim then perhaps something is off, however, there are exceptions based on the magnitude of the wash where it is acceptable to take longer to reclaim.
For example, intraday moves on a 1-minute chart should follow the above example of a 1:5 ratio clearly, because it is easier to reclaim small order flow imbalances. Meanwhile, on macro time frames such as 1 hourly or 4 hourly charts, it is more acceptable that price steps outside of the 1:5 ratio towards 1:10 or 1:15 because it might take sometimes more to reclaim larger washes, due to the market being caught off by surprise on a large scale basis. One such example on USDJPY in September:
1:5 is a good rule to follow, but this does not mean reclaiming the entire wash candle within that ratio but instead only half of it approximately. Half to 70% of it. Why? Because of the edge structure we need to go long before the price reclaims the entire wash move, as the edge will start to decrease after that point. The idea is to join the long after 50-70% reclaim of the entire wash candle, as the upside moves are not always particularly strong beyond the whole washed move. The stats suggest that figuring price direction after the entire wash has been reclaimed becomes noisier than it is when the price has still yet to reclaim it when the pattern appears.
Edge extraction primarily:
In which markets this pattern is the most frequent?
There is no prioritization by a large degree, it is highly cyclical and depends on the overall macro environment or market momentum currently present for patterns chances of appearance. Meaning the pattern can be present in any market, but it can go out of circulation completely for a few months or even longer if the momentum conditions do not favor the one side "ganged up" type of market.
The stronger/bullish that market is, the more likely the pattern to appear. The less liquid and neutral or slightly bearish the market might be the less likely for this pattern to appear.
For the reasons above, personally my focus on trading this pattern is:
-Small caps:
When the strong bull cycle is present. There is no particular ticker I can bring as an example obviously because smallcap tickers have expiration dates shorter than a carton of milk. This means different assets all the time, with 2 weeks time exposure no more, whatever is in play under that current lasting strong cycle. Picking high volume and trending small-cap tickers is the way to focus on seeking this pattern, multiday runners on high liquidity or day1 tickers with strongly manipulated action often fit the case.
-Crypto:
In an obvious bull market, focusing on the strongest trending and high-volume currencies. Those with a lot of media exposure and tons of present market-making activities. there is no other asset that fits that bill in 2020/21 Better than BNBUSD in my view, Binance coin.
-FX currencies:
When some huge fundamental drive is leading one particular currency in X direction. This fundamental reason has to be long-lasting (several months or longer). USDJPY recently in 2022 is such example, where the yen is under major energy-based devaluation and the dollar is under major risk-off flows appreciation, therefore, creating a perfect strong bull trend environment for USDJPY, which might still last for long while.
Remember the idea behind this pattern is, you need to select the trading vehicle under strong and obvious bullish exposure where many market makers might be willing to play on the long side and be aggressive about it. This is an environment where the pattern has a higher chance of follow-through.
Ideally, the pattern should appear near clearout (liquidity clearing) levels
If the pattern appears right next to key liquidation levels, it adds to its credibility, as there might be the intent of institutions or larger participants to inverse the price move after the key stop losses were taken out. Prior context of price structure is for that reason important to always observe as it adds to removes a portion of validity for the pattern.
Examples of wash-reclaim patterns in USDJPY 2022 near key lows that were cleared out after price washed quickly trough them:
Something to remember, even though the charts above have a limited view, they are all under the backdrop of an uptrend on a higher time frame. It's just not visible in the pictures above. This pattern should ideally be always set within the uptrend backdrop to have a higher chance of follow-through, so keep this in mind that most references of charts do have that, even if not clearly visible on all examples (some charts look more neutral). To highlight this concept of "uptrend backdrop":
Rigged (manipulated) tickers in smallcaps
In small caps one should be on the look for this pattern with rigged tickers. If there is manipulated activity present on the ticker with highly controlled price action, the chances for this pattern to appear and as well to have projected behavior as per the pattern outlined in this article is higher. Focusing on those tickers especially is important because there is a good reason why they might happen more frequently in highly market maker driver assets as opposed to more casual broad/soft market-driven assets.
Think about this concept from the angle of the final price destination of where the rigger/MM wants to send the price at the end of the day (which in strong cycles is often a short squeeze with high close) and how those quick washes with reclaims intraday might serve that market maker to achieve the agenda.
The agenda is, shake out as much long liquidity from the ticker as possible before the price is sent into a squeeze, in order to reduce the supply effect at higher prices. Those quick washes are made to shake in-the-money longs out of positions and scare them out. Meanwhile, as the selling takes place the MM will absorb those offers, and hence quick 50% reclaim happens of that entire wash often quite quickly. If the market repeats this action several times throughout the day this achieves the agenda of shaking a good amount of ITM long liquidity out of positions before the price is sent into squeeze in later hours. For someone who understands how this pattern works, it can actually provide a good edge as well to be on the right side of the trade.
A conceptual example of rigged ticker in small-caps in strong cycle with sustained manipulations across entire day until it is finally sent into squeeze at later hours. This shows how the quick-wash-reclaim pattern ties into the whole picture to complete the agenda for MMs:
Example of rigged ticker in multiday-running trend and plenty of manipulated action over those days on ticker PEGGY and its wash-reclaim patterns:
Another example of wash-reclaim followed by a squeeze on ticker FNGR. This wash-reclaim pattern is sometimes sub-compotent of type4 for those familiar with that pattern from my past articles:
On the image below is an example of rigged ticker BEAT where two back-to-back wash reclaims patterns are present, followed by a decent squeeze. Mind that squeezes don't always respond well with timing, it might take a while for the price to finalize the required squeeze before doing some dip movements first.
The pattern is location irrelevant for failure chances
Sometimes traders are "scared" of longing into previous resistance areas, with anticipation of price rejecting the current area once again, making it a higher risk and lower probability trade on the long side. One thing about this pattern in itself is that the location of where it happens does not impact highly its follow-through rate, and there is a good reason for it.
If the asset has reason to be strongly bidded, with further upside to come across the duration of the day, then it's only a matter of time before another leg higher happens on the asset, theoretically at least. This means any resistance levels or a good chunk of them will be broken at some point. It doesn't pay good value to focus on prior resistance levels too much in anticipation of the failure of this pattern, in fact, quite the opposite.
This pattern is actually good indication for the resistance level to break to the upside if it happens near the resistance. It is a good indication for a short seller to get out of a short position because chances are the price to head higher. All this is taken into account that there are the right conditions present on the ticker in the first place, ensuring strong bullish momentum is there for a pattern to perform well.
But the above point is very critical and has a great contribution to having better read on tickers, along with stopping out shorts earlier. If you notice this quick-wash-reclaim behavior on relatively strong assets and if this behavior is present around supply levels there is actually a very good chance the resistance level will get breached to the upside. It doesn't ensure price will go into the rally after a breach, but it at least increases the chance for at least to test and break the resistance in the first place. If you notice this behavior near the supply level it is often best to avoid shorting, especially true in stronger market/cycle conditions.
Use this pattern as a resistance/supply breach indication. It isn't high but it certainly is good enough to add a valid additional reason for the ticker to move higher if you already have some doubts about the ticker.
Here are some examples of this pattern appearing near the resistance level where price breached higher after that:
Fake breakouts and quick-wash-reclaim behavior
Another example of how quick-wash-reclaim type of behavior can be combined with providing a directional view of the asset is when it happens after the fake breakout.
If a fake breakout candle (if on strong wash) gets quickly reclaimed it isn't rare at all to see follow-up move higher after that. If one is trading fake breakouts as part of shorting edge, understanding how this behavior invalidates the short reasons after the fake breakout is an important component.
Example of fake breakout on NVTA followed by strong wash and then reclaim of that wash within 10 minutes. The result of this combination of the pattern was the price getting higher.
This is especially common behavior in small-caps and something trader should be aware of. The theme of recent fake breakouts has to be present across other tickers and stronger cycle flows to ensure this pattern has a good chance of happening or having a follow-through. It is quite a frequent pattern and has often strong contribution to edge or read on the asset's directional movements, highly under-utilized in smallcap trading field.
Intraday moves versus catalyst moves
Two types of order flow impact the creation of this pattern, one being intraday order flow, and another is particular catalysts against the overall backdrop of broader/higher time frame trends.
Intraday pattern:
This one does not need too much introduction. It is just order flow positioning and sudden rug pull of selling that causes the wash. The reclaim happens because one or many market makers might be positioned at the same time willing to absorb any dip they can and quickly push the price into reclaiming that wash. Those moves can happen randomly at any time of the day and it is difficult to time them ahead. But since the edge is not in timing it ahead, but rather spotting it in the middle of formation it doesn't play too much of an impact.
Catalyst-induced pattern:
A more interesting and typically much bigger version of this pattern will be on fundamental catalysts, such as news releases where the strong wash and reclaim will happen when catalysts results are against the broader trend direction.
For example, if a higher time frame trend is on the upside, but the catalyst/news release is negative and that causes a wash in price, it might get quickly reclaimed and price getting brought back up because markets sentiment might be so strong that negative news is just eaten up and absorbed as "nothing to see here". This kind of behavior is especially seen in strong positive markets on relatively softer bearish catalysts and provides good long opportunities.
In some cases it might be also the inverse, where the broad trend is down, the catalyst is priced in, the catalyst releases, price washes and then there is a full reversal due to the catalyst being priced ahead to a good extent. This is a different backdrop context but the pattern is the same and provides possible long opportunities.
Example of catalyst-induced heavy wash and reclaim move on SPY index after CPI inflation news. This example shows that not just those full reversal moves can happen on the obvious catalyst, but the rules of reclaim can serve often good to cut losses if short earlier and avoid being confused on where to exit such short if shorting down below.
Sub-versions of behaviors for this pattern
To trade any pattern successfully it is important to research all the different versions of completed and failed examples in past. A common mistake is researchers will just find behavior that might have an edge around it, focus on a few winning examples of patterns, and start formulating a whole trading strategy based on that. This is the road to creating surprising problematic situations in the future because all the side behaviors were not researched in-depth enough. Splitting research should be done therefore into:
-winning patterns
-losing patterns
-differentiation of versions of winning and losing patterns under which sub-version (A,B,C...) is more prone to completing or failing before reaching the target.
For example, some subversion once they happen is more likely signaling the pattern will fail to deliver us what we want or vice versa. Having at least 2 or 3 differentiations is helpful. In sub-versions things can be included such as :
-shorter time ratios,
-faster reclaims,
-bigger washes,
-number of times pattern has appeared on current asset today, etc.
All of those can refine data better into specific sub-versions.
There are three common sub-versions of behaviors on this pattern that one should be aware of, as they impact the timing of trades or where to cut positions:
1. Direct quick squeeze (ideal) after reclaim confirmation
2. Dip after initial reclaim and then squeeze higher 3. Consolidation for a while before pushing higher
Don't mix oranges with apples
Please keep in mind this is not just a bullish pin bar long pattern. Or a morning star-long candlestick pattern. Stripping out the necessary context that has to be present on the ticker for the pattern above outlined will lead to oversimplification and no edge. The "morning star" patterns have no edge and are a complete waste of time to trade on (regardless of 100s of beginners' videos showing otherwise on Youtube) because there is no context identification, and it is just too easy to be true if that was to be the case. Identifying the right market conditions, therefore, is a huge component and very important for the above pattern to appear frequently and to be edge-tradeable.
If you are wondering if the above relatively simple pattern might be present with a pretty decent edge, how come more aren't talking about it? The answer is hidden above, for the majority of market participants figuring out when the market shifts from a bull cycle into a bear cycle with good timing accuracy is very challenging (not being too late-after the fact) and not many can do it right. Let alone identifying all the variables on why the bull trend is as strong as it currently is (underlying reasons). If that is difficult and takes few years of experience in each market of getting it done right, it explains why the above pattern is also so hidden from the general participants' eye, or if someone finds a clue they often see a pattern going out of circulation and wonder why that is happening. This should explain the background behind the pattern, and that it is not as easy as it might sound on the face surface.
Anyone willing to dig deeper into research and possibly trade this micro behavior should spend considerable time understanding the market cycles or assets with strong directional exposures in the first place. Remember whenever this pattern works well is all due to overall bigger picture reasons of strong momentum and many market makers being on the same side of directional exposure.
Long entries (suggestions only)
There are few behavioral variations on what could happen to successful patterns as outlined earlier in the article. It is up to the trader to figure out and select which approach where to position long and where to set risk if one wants to use the same approach all the time, or perhaps adjust it based on the situation a bit.
For example on Bitcoin where the wash candle reclaim delivered a quick squeeze but it also struggled to deliver a full move and dipped back down after a while, giving traders with two different entry approach both opportunity to join such trade. Mind that once the price passes 2X the size of the entire wash candle, the setup is done, and no re-entries should be considered or any primary entries.
It is best to study those patterns over a large sample base to figure out what kind of behavior the trader wants to extract for an edge. It's important to understand a big piece of the edge of trading any pattern in the market, is to decide what behavior or what resulting variation of pattern trader will aim as a winning example. Meaning a trader is making a conscious decision that the behavior variation A, B will always result in loss and is acceptable, while C will be considered the behavior he/she aims at as part of a winner. This has to be well established ahead of if one has a trading approach that remains relatively static and doesn't change too much.
Study past examples and figure out what behavior (or sub-behavior) you would like to aim at. For research purposes, you need to select the market under the right conditions, which is key. Don't look for those patterns in randomly selected asset classes at random moments.
Strong bull cycles should be your primary filter variable, along with some other ones.
Examples:
Let us list some examples from a few markets:
Demand wash swipe and fast 50% reclaim followed by the further squeeze on USDCNH. This was present all meanwhile in a (4 months long) environment where the dollar is/was very strong giving the additional reason for this pattern to work out.
Example of setup which I would avoid on the image below. It has a clean wash and bounces present, but the price closes too fast towards a too higher portion of upside reclaim of that wash candle (1:1 ratio), making it lower probability for long to join at those higher prices. Remember the focus should be positioning the entry closer towards the middle portion of the wash-bounce candle rather than too close to the upper portion because the move might already be done statistically speaking over a larger amount of samples. The example on Bitcoin was in a strong market environment, but the way how this example was set up was not ideal.
Example on SPY on the image below:
Another SPY (SP500) example:
Another SPY example:
Example of failed sample for smallcap ticker PEGY. Researching failed examples is just as important as researching successful ones.
Example of wash reclaims on ticker VEEE:
Another SPY example:
HTCR example of wash reclaim:
Conclusion
Hopefully, this was good enough for a quick overview of how to structure this pattern, where to focus on its research, and what expectations to form. The main use case comes from:
-extracting the long side of the edge by joining the middle portion of the reclaimed move,
-avoid shorting if this behavior is being spotted near the resistance/supply levels as it might indicate squeeze
Indication of this behavior (especially if happens a few times in a row and not just once) can often signal a stronger squeeze coming, which means that how many times in row this pattern appears also matters as it further validates chances of squeeze by some degree.
I do not believe much in trading with tools, where static tools (indicators especially) are applied on daily basis with the same expectations across random times of the year. This is the road to noise in performance. Instead studying behavior, and then understanding when the right market conditions are present for X behavior to appear, and knowing ahead how to capitalize on it is a much better way to reduce noise and increase accuracy. Sure it is more headache to track such a trading approach as one needs to be very adaptable and being more particular (focused instead of randomized research) on the research, but placing enough practice after a while and expanding the playbook with few behaviors to supplement the right market conditions makes it all worthy.