Wednesday, October 12, 2011

Inside bar reversals

Inside bars reversals are pretty hard to read accurately. Why did the breakout below b11 fail but b15 give a scalp profit? Why did b44 take out the stop beyond the entry bar (b44) before giving a scalp profit making it a poor signal while b62 turned into a great swing trade?

All these bars had strong closes yet two failed and two succeeded. Using a little bit of common sense, we can reduce our chances of taking an unprofitable inside bar entry. b12 is the first attempt to break the trend and failure is expected. B15 was the second attempt and an overshoot, so it should give at least a pullback.

Similarly b44 was the first attempt to fail a strong breakout (b41 was 50%+ beyond prior HOD) and was unlikely to work. b62 on the other hand was a third push up after a trendline break (TL b4-b25) and a TCL overshoot.

Swing moves often end with inside bars and these are usually great with trend entries. For example, b19 ii indicated a possible swing end as did b54.

To Summarize:

  • Inside bars are excellent signal bars for failed breakouts but not for any arbitrary reversal. It can be argued that b15 and b62 were breakout failures while b11 and b42 were not.
  • Inside bars make good signals when there is a TL or TCL violation
  • Inside bars are good signals with-trend or at the end of swings 

1 comment:

  1. Hi Cad, Thanks for your comprehensive post.
    B15 could be seen as a 2BR maybe that´s why it succeeded.
    I there a fast hard rule to distinguish between a inside bar a 2BR and a RVB, where the body is largely inside the previous bar?