Wednesday, January 12, 2011

First reversal vs first pullback vs first channel breakout

Day after day I post charts where the first reversal and pullback can be entered and held for a swing often till the end of the day. The first pullback is especially good for a profitable swing for at least the AM session. However, how do know which bar is the first reversal? Is it possible that b4 and b5 represent a first pullback that will continue to move to the bear side? Could it be a first channel breakout that has a high chance of resuming its down move?

Sometimes a reversal bar is obvious. Its almost the same size as previous bars and looks like a well formed reversal bar with at most one tick entry side tail (or 2t if bar is large). However many other days its not quite obvious. For example in today's chart is bar 4 not an obvious first reversal. However, any reversal that gives an entry beyond the first bar after giving a one point scalp should be taken. A second reversal can be taken if it is an obvious breakout failure of the other end of the first bar. If not, wait for a possible breakout pullback or hang on to your swing portion.

One strategy is not to take a questionable first reversal bar, but to then take the first pullback in either direction provided its a good setup. A trap in one direction such as b7 today also sets up an entry in the opposite direction. A good first reversal that ticks below a signal bar is usually good for another leg down (in essence turning into a first pullback trade) so reverse below the signal or even the entry bar. Typically if the first couple of bars are larger than 2 points (when average range is 10 points) or if the first two bars are up down or down up bars there is a good chance it will act as a trading range and you should look for either a failed breakout or breakout pullback when your first reversal tests the other extreme of the range as we saw yesterday.


  1. Hi cad,
    I'm enjoying reading your blog.

    One question, I found that at the end of a trend, after W and trendline break, a W1P signal and A2 signal may appear simultaneously (in this case W1P at b41 and A2 at 1tick above b43).
    How do we identify which signal to take?

  2. z.cui,
    once the trend has terminated, you should not take any entries in the direction of the old trend.