Monday, February 14, 2011

Weak wedges

Narrow range days usually have overlapping bars and one or two weak wedges. Some of these wedges are traps and others pull back a few points but may not actually result in a reversal. The reason is that wedges need to be extreme moves and have a clear signal bar for with trend traders to switch sides.

Today we had a W4,8,11 from the open but we did not actually get a reversal bar. The closest readable entry was the W1P at b14, but even that is a bit risky. The strong overlap at the open would act as a magnet, pulling the price back in so its a scalp at best.

There was a possible W23,31,35 which gave a inside bar signal that never triggered. This is usually an indication of unwillingness of traders to short and hence, more up. The right thing to do is to buy a 2L PB to ema, possibly on limit at say b44 or so.

A third W35,67,76 gave a better signal that had a strong entry bar and the W1P at b79 was a good entry and could be taken for a swing if it wasn't at the end of day.

Weak wedges also occur in pullbacks and they are usually excellent with trend entries. For example, W48,51,57 was possibly a weak W pullback and buying above the next bull bar is acceptable as long as you are okay holding through pullbacks since your signal bar had lots of overlap.

In summary, the trick to trading wedges is the same as trading every other signal. When the signal is clear and strong, go with it. Otherwise, fade it. 

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