Friday, April 29, 2011

The importance of good signal bars

Some traders feel that they can read the general direction of the market correctly, but they always get stopped out of their entries. Attempting to solve this problem using wider stops usually means larger potential losses.

When using signal bar boundaries for stop and entry, you should not need a stop larger than the other end of the signal bar if you choose your entry correctly. A poorly formed bar is usually the reason for being stopped out including two of my trades today.

For example in the chart above, b1 is a poor buy signal since its a doji and resulted in a 5tf. b4 on the other hand is a fade of the 5tf since it closed at its low, a much stronger signal. b13 is a poor signal bar for 1PB and the right thing to do is to pass it up since the entry would force you to sell the ema. b21 is a overlapped doji and therefore is a marginal WP and fBO trade (1t below hod).

b28 was a poor BP signal and b29 is a poor fBO signal since they are both small dojis. All tiny bars that gave H1 signals all the way to b47 are poor signals and only b32 buyers possibly managed to scalp out.
All tiny bars should be considered to be dojis regardless of their shape.

The only acceptable place to take a doji is a second entry and after a deep pullback or extreme of a TR. Even then your trade can fail when the general bar formation is poor. For example, b55 buyers scalped out while b60 buyers hit a 5tf.

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