Tuesday, October 25, 2011
Huge open bars
Large bars on open are rare, but when they happen, your best bet is to enter early. One method to enter is on a 5t move from the open and only in the direction of the gap. So for today, you would short when the price hits the purple line shown above. On most days with large gaps, the price will not take out a breakeven stop at this point for the rest of the day or until there is a W or other reversal.
Large bars represent trading ranges and large bars on open are no different. A sequence of large bars is invariably followed by a pullback and a test of the extreme regardless of how deep the pullback is.
This is because the large bars represent a spike and with trend spikes are usually tested. A large range in one or two bars (b1,2) often sets up a narrowing triangle (LH,HL,LH,HL...) as the market tries to find a balance between the two ends of the range.
The safest way to trade a triangle is a triangle BP. Basically, wait for 2 HL or 2 LH to be taken out (b41,23 taken out at b62) and then take the next pullback. If the pullback is 2 legged as in b68, its usually an excellent setup.
Until the triangle breaks out however, you can take with-prior-trend entries only and best if they violate a trendline. Trading a triangle against the prior trend is dangerous and should be avoided. Watch the poor entry bars and pullbacks for buyers above b8, b23 and b58.