Hello dear students, time is flying by and we are already in the third week of Steemit Crypto Academy season 4.

As teachers, I believe it is our responsibility to you, students, to equip you with certain tools that you can use in your real trading operations, for this reason, I want to teach you a wonderful tool that I hope you can appreciate.

It is a trading strategy that works through the observation of price action behavior. This tool is what I call Contractile Diagonals.

_{Image edited by me in Powerpoint}

What is a Contractile Diagonal?

Contractile Diagonals is the exact translation of the Spanish term "Diagonales Contractiles". Although in English they may also come to be known as wedges. Whatever you call them, this term refers to a structure in price action that is characterized by candlestick contraction in a bullish or bearish direction, following a 1-2-3-4-5 wave pattern.

The formation of these Waves is similar to that observed in Elliot Waves, where waves 1, 3, and 5 are impulses in the direction of the main trend, and waves 2 and 4 correspond to corrections in the price.

The importance of this pattern is that the formation of these structures often precedes a change in trend which is confirmed upon the breakout of one of the diagonal lines.

_{Image taken from Tradingview ^Source}

Diagonal lines are drawn joining the peaks of the contraction structure and represent a kind of supports and resistance that limit the movement of the waves.

Operating Criteria

As I said, Contractile Diagonals usually precede a trend reversal, so what is expected is that at the end of the contraction period the price will finally explode in the opposite direction to the direction of the diagonals.

So, if for example, we have a bullish contraction, the price is expected to break the structure downwards and therefore a short entry can be made.

_{Image taken from Tradingview ^Source}

If on the other hand, we have a bearish contraction, it is expected that the price will break the structure upwards and therefore a long entry can be made.

This behavior reminds me of the effect of spring when it is compressed. Its body absorbs as much energy as possible until it eventually expels it in the opposite direction very violently.

Requirements of a Contractile Diagonal structure

The formation of a diagonal structure is not enough to claim that it represents a reliable indicator... not without first complying with certain rules.

For Contractile Diagonals to be legitimately tradable and functional they must meet certain requirements in the length of their waves. Which are:

• 1- Wave 1 must be greater than wave 3.

• 2- Wave 3 must be larger than wave 5.

• 3- Wave 2 must be larger than wave 4.

• 4- The trace of the first diagonal must join points 1 - 3. As a general rule, point 5 should also coincide with this line, although there are cases where this pattern is not met.

• 5- The trace of the second diagonal must join the point 2 - 4.

• 6-Finally, both diagonal lines should converge and be able to cross at some nearby point.

If all these requirements are not met in their entirety, we should discard the pattern and look for a new one, since there is no guarantee that it can serve us for our operation.

_{Image taken from Tradingview ^Source}

In this case, we can clearly see that wave 3 is much longer than wave 1, therefore it does not meet the first requirement. The result we can see, the price breakout movement occurs in the opposite direction than expected

I should also mention, that these diagonals represent areas of liquidity, therefore the endpoints of the waves are not always going to perfectly match the diagonal lines, but rather be positioned within an area very close to the diagonals.

These diagonals also represent trend lines where the price reacts and pulls back. When the two zones meet, the price finds no choice but to get ejected in the opposite direction of the pattern's trend.

How to operate a Contractile Diagonal

Initially, we should watch for the price to begin to show a compression pattern, which can occur in a price impulse or correction during a major trend.

Then we must corroborate that our pattern meets all criteria mentioned in the previous part.

If all conditions are met we proceed to trade as follows.

ENTRY:

Along with diagonal 2-4, the breakout of the structure will occur. The price should explode and break the diagonal line, this will be our entry signal. However, we will not make the entry right at the breakout as this may be a false signal.

At this point, we should wait until the next strong candle that moves away from the Diagonal Contractile pattern and place our entry right there.

If you consider yourself a very cautious trader, you can wait for a retest of the price above the diagonal line, although they don't always happen.

Remember, if the Diagonal Contractile is bullish, you should expect a bearish reversal and therefore make a sell entry.

If, on the other hand, the Diagonal Contractile is bearish, you should wait for a bullish reversal and therefore make a buy entry.

EXIT:

This is where you will see the importance of your Diagonal Contractile meeting the wavelength criteria, as it will be the points at the end of each wave that will indicate stop loss and take profit levels.

With this in mind, The stop loss will be positioned a little below (in the case of a buy) or a little above (in the case of a sell) point 5. In other words, point 5 will mark the stop loss level.

On the other hand, the take profit will be positioned at point 2.

_{Image taken from Tradingview ^Source}

Risk/Reward Criteria on contractile diagonals

If you are observant you will notice that we do not use the typical 1:1 Risk/Reward ratio here, so the confidence or reliability of the R/R ratio depends entirely on us and our ability to know how to identify Contractile Diagonal patterns correctly.

As a general rule, NEVER allow yourself to enter a trade where you have an adverse R/R ratio, or put another way, where you have to risk more than you can ever earn.

A good trader controls risk and will never risk more than he can earn. When we risk we do so with the thought that it will pay off in terms of profit.

If we look at the example in the previous point we will see that our take profit margin is greater than our stop-loss margin.

_{Image taken from Tradingview ^Source}

On the other hand, if we look at this other example, first of all, we will observe a seemingly normal structure.

_{Image taken from Tradingview ^Source}

However, if we detail, we will see that the stop-loss margin is greater by more than 1% than the take profit margin, therefore it is an adverse R/R ratio and very risky for a trade.

_{Image taken from Tradingview ^Source}

Perhaps this particular plot showed good performance despite the adverse R/R ratio, however, we know that now, after time has elapsed. In real life, we don't know, so it is preferable to discard this type of pattern before risking too much.

Finally, as you can see, the trading criteria for Contractile Diagonals is closely tied to the location of points 2 and 5 and the wave structure within the diagonals, as it is these points that serve as a guide for stop loss and take profit levels.

CONCLUSION

As we can see, the study of these Contractile Diagonal patterns works in a way that we can almost predict the beginning of a new trend. This is always helpful as we can use it to our advantage to prepare entries that can benefit us greatly.

The key point to keep in mind is always to observe the price and the waves that occur within the diagonal structure. It is obvious, but even so, I must clarify that if the price comes to break the diagonals at points 3,4, or 5, the pattern is invalidated and you must look for a new one.

Regarding temporality, you can use any, since these waves as well as Elliot waves behave as fractals, which are geometric figures that repeat at different scales, therefore this strategy is good to be used both in 1D, 1H, or 15min temporalities.

That was all for this week my Crypto Gears, I hope you not only liked the class but that it motivated you to continue learning a bit more about Contractile Diagonal and do your own research on it.

Before I say goodbye I would like to remind the use of the new title format that is being used since last week, which for our case is:

Trading with Contractile Diagonals - Crypto Academy / S4W3 - Homework Post for @allbert.

Homework Task (Season 4/Week-3)

Before starting your answers this week, make sure you have read this publication at least twice and make your own research to understand the concepts.

1- Define in your own words what a contractile diagonal is and why it is important to study it. Explain what happens in the market for this chart pattern to occur. (screenshot required / Bitcoin not allowed)

2- Give an example of a Contractile Diagonal that meets the criteria of operability and an example of a Contractile Diagonal that does NOT meet the criteria. (screenshot required / Bitcoin not allowed)

3- Through your Verified exchange account, perform one REAL buy operation (15 USD minimum), through the Contractile Diagonal method. Explain the process and demonstrate the results and graphical analysis through screenshots. Your purchase data must match your analysis data: such as cryptocurrency and entry price.

4- Through a DEMO account, perform one sell operation, through the Contractile Diagonal method. Explain the process and demonstrate the results and graphical analysis through screenshots. Bitcoin is not allowed.

5- Explain and develop why not all contractile diagonals are operative from a practical point of view. (screenshot required / Bitcoin not allowed)

Guidelines

• Make sure you post in the Steemit Crypto Academy community.

• Be Original!!! Refrain from copy any else posts and ideas. Be creative. The content is certainly the same, but the way of presenting it is unique.

• Your article should be at least 400 words.

• Refrain from spam/plagiarism. Plagiarism of any kind won't be tolerated.

• This task requires screenshot(s) of your own experience, add a watermark on it with your username. Also, use images from copyright-free sources and showcase the source, if any.

• This homework task will run from 00:00 September 19th to 23:59 September 25th, Time UTC. (7:59 pm hora Venezuela)

• Users having a reputation of 60 or above, and having a minimum SP of 400 (excluding any delegated-in SP) are eligible to partake in this Task. (Must not be powering it down)

• Add tag #allbert-s4week3 #cryptoacademy among the first five tags in this order. You can also use other relevant tags like your country tag. Also, tag me as @allbert in any part of your post.

• Please use the tags correctly, do not write them down but rather copy them directly from this publication. If you use the tags incorrectly or make a typographical error we will not be able to locate your assignment.

• Please don’t leave your homework link on the comment section unless your post hasn’t been graded within 48 hours.

• If you have any doubts about Homework Task, feel free to join the comment section

Cc:-

@steemitblog

@steemcurator01

@steemcurator02