Wednesday, October 5, 2011
Price Action Basics X - More than bars
As I've posted many times before, you can trade very well by focusing on good bars and common sense. However, bars do not always tell you the full story. The context of each bar and the market's current place in the nine transitions is very important to distinguish between a strong and a weak bar.
For example, b13 and b72 were overlapped bars and the indicator filtered them out. However, b8-13 represented a 2 legged pullback after a strong breakout and should work like a breakout pullback. Similarly, b72 was a second HL after a second HH and is a trend break. Both bars worked very well for swing entries.
On the other hand, b19 despite being a strong inside bar on a W move up gave a pullback that took out break-even stops while b30, despite being a doji bar let the swing position advance unmolested to +8 points. The reason is simple. At b19, we were still in a bull trend and b22 was seen as a deep pullback and attracted buyers. b30 on the other hand was 3 pushes to a LH after the TL break (b19-22) and attracted sellers.
b51 was a decent inside bar, but it came after a 3 push breakout of the trading range. Although the trade worked on this instance, its a low probability trade since a 3 push BO of the trading range is likely to fail and seek the other end of the trading range.
While bars filter out bad entries, if your aim is to take very few trades that swing for a lot of points, you need to be able to read the nine transitions fluently to make the optimal decisions. Never swing trades because you don't want to be left out of a large move based on just one bar. When in doubt, take only deep pullbacks near support such as ema, trendline or prior swings.