Thursday, January 20, 2011

Handling unclear signals

Often you get signals that should be good but the bars end up bad or slightly off. Normally, its best to let them go and wait for a second better signal. Signal bars can be bad for various reasons. First and foremost, they are not the right color. You need a bull bar to buy long and bear bar to short. The second reason is that  the risk is too high because of bar size. The first hour most reversals can work and some traders do trade any reasonable signal.

In the chart above, is b2 today a first reversal? Since the big bar b1 would act as a trading range, b2 could be breakout and a small pullback could lead to a breakout pullback stopping you out. If it had even a single tick bull body, it would probably be worth the risk.  Similarly b7 could give a breakout pullback since the actual breakout was on bar 6 an additional bar increases the chances of breakout pullback. b9 was indeed a first pullback with an entry above b8 for long or below for short. b12 was just a large doji and not a reversal bar. A second attempt to go below it may be taken as an A2 short.

b25,26 was a down up bar reversal and I missed it along with b27 W1P. Often W1Ps give a channel and its hard to get in until a first channel break as it did on b34. Although b34 was a doji bar and possibly an H1, it was a high probability trade because it was a breakout test of the swing high b21 and also at ema.

The A2 entry above b50 was questionable because it forced a buy above the flag and one point above the previous entry. If you'd rather not wait for a second entry that usually presents itself as b52 did here, you should use a 8t money stop instead of a price action stop.

W1Ps are usually good for at least a point but sometimes I dont take them. b66 is an example. There was no clear reversal bar near the FF around b64 and the entry bar b65 was weak. b66 forced a short below the flag and I passed up the trade.

b74 was an example of an otherwise excellent bar that many may not have taken. A Gap reversal bar after an overshoot of the pullback but demanded a 10t stop. The entry went to a 5t failure and took out the stops below the entry bar. 8t stops were respected however.

In summary, if the bar is the wrong color, pass up the trade. If the bar is the wrong size, use a money stop instead of a price action stop. If the bar is a doji, take the trade if there are supporting reasons such as breakout test, ema, trendline support, channel overshoot, etc.

1 comment:

  1. Hi Cadaver, Thanks for the great post, it's really useful. Just for clarification:

    Was there an acceptable A2 short at bar 9? Or would you not short with that much bull MO?

    Where is the wedge that gives the W1P at b27? Is it connecting b8,13,21 on the top?

    I have difficulties identifying FF, how can I recognize the one at 62?

    Where is the wedge that gives the W1P at 68?

    I'm still pretty inexperienced, so if you could provide any insight it would be appreciated. Thank you.