Monday, November 14, 2011
The first two legged pullback
On many days, the open may constitute an opening range made up of erratic moves (b1-25) that finally break into a trend (b26-b38). Some traders may get repeatedly stopped out on the initial range and their later trades will barely make up for their initial loss.
The trick to avoiding being chopped up on the opening TR is to wait for a trend attempt and take a clear pullback on a strong signal bar. This is essentially the philosophy of the 1PB trade.
Determining if a leg is a trend attempt is a bit tricky. Any two or three trend bars are a possible trend attempt. One bar does not usually make a trend (unless its very large). Once a trend is attempted, it will either reverse and a new trend is attempted in the opposite direction or a pullback gives a possible continuation of the orignal leg. A strong reversal attempt is 1Rev. A pullback is 1PB.
Today, there was a trend attempt from b3 to b5 and a weak reversal attempt on b5. Then possibly a second trend attempt from b6 to b9. Note that this bar is made up of weaker bars and is unlikely to succeed, especially in the absence of prior bull strength.
b16 represents the first two legged pullback of the day and is a possible 1PB long entry of the long trend attempt. However, the signal bar was a doji and the reversal was fairly weak. However, this is still a viable long entry. When the long entry failed to take out the old high, it turned into a first 2 legged LH, turning into a 1PB short at b20 of the original short trend attempt.
Another way to read this is that b2 and b9 represent two failed attempts to close the gap leading to a bear trend. Even though many traders may have correctly read b9 as a possible 1PB short, waiting for a strong signal bar (b26) is usually the right thing to do for a profitable entry. This is because shorting below a bull bar is always subject to failure, regardless of the correct read of the market direction, especially on a choppy open.