Wednesday, August 31, 2011
5tf, 9tf and 1tf
When traders take a with-trend setup, they expect to take profits at certain discrete number of points. The most popular targets are +1, +2, +4, +8, +10. Counter-trend traders know these locations and will place counter-trend entries at these locations, hoping the additional trades will cause a mini-pop that will allow them to take a profit.
When the number of contracts placed by counter-trend traders far exceeds the with-trend contracts, the price will refuse to tick beyond it. For example, breakout traders below b24 sold at 1218.25 and expected to cover at 1217.25. Counter-trend traders know this price point and will place their buys at the same price. If the price refuses to tick below 1217.25, then it is a good indication that many of the buys did not get filled. That includes the bears who shorted and the bulls who wanted to buy below the low of the day. So when the bar closes strong as in b31, both bulls and bears who did not get filled will place buy orders right away. This is clear from b32 which did not tick below its open. Such a failure is called a 5 tick failure or 5tf. A similar failure can be seen on b27 since the buy above b24 also turned into a 5tf.
Analogous to a 5tf is the 9tf for targets of 2 points as can be seen at b70 for the short below b65. 9tfs often occur near large bars since larger signal bars cause traders to expect larger targets.
Unlike 5tf and 9tf, a 1tf is caused by traders buying the bottom of a bar in a bull move or selling the top of a bar in a bear move. For example, when the price refuses to tick below b6 on what is so far a strong day, traders will treat the overlap b5-7 as a trading range and place buy orders at the low of b7. This causes the price to pop above the bar after ticking below the prior bar giving a 1tf. 1tf is usually the result of a counter-trend trade especially the first attempt before a trendline break.