Wednesday, February 23, 2011

Wedge reversals and W1P

The reason I take W1P almost every time and Wedges only when the signal bars are very well formed is simply that I have a lot more information about the strength and sustainability of the reversal. Today's entry forms the blue bottom left and top right corners of the nine transitions.

For example, b9 could have been a possible W (since there was no gap between yesterdays last bar and today's open bar, we can treat it like a continuation). However, by the time the possible W1P presented itself at b16, we already had many clues that this reversal attempt would fail:

  • the signal bar was weak since it was smaller in size compared to recent bars and had a 2t tail on top. 
  • A shaved entry bar or an entry bar with only 1t on at least one side strengthens the W. b10 had 2t on both sides.
  • A well formed W1P should not tick more than 1t below the entry bar b10. Price closed below it on a strong trend move.

This kind of W1P usually gives a scalp but is not advisable for a swing move. Another similar W occurred at b35. This was weak for several reasons.

  • the down/up reversal at b34,35 is a possible trading range and there may be sellers above it. Its best entered on a second entry or after a 2 legged pullback (2L W1P). 
  • Entry bar was small compared to recent bars
  • It closed several ticks below entry bar
The W at b46 however was very much the sign of extreme behavior and even though it wasn't bull bodied, it had a strong entry bar. 

A down/up bar must be of comparable size and should not give an entry far beyond both bars to be an up/down or down/up signal. So b29,21 for example was a good up/down signal but b47 is an entry bar. The pullback bar b49 or the inside bar b51 could be bought as a W1P.

W1Ps tend to move till their move is terminated into another W or until the first pullback in the move down to the W. So for example if the W began at b3, then you could expect W1P to move till b13 high. Sometimes they end in a W as we did today at b71.


  1. Another excellent post Cad. I have some ideas that I'd like to bounce off of you. Firstly b9 found support at the TCL from b47 & b72 the prior day.

    B15 & b16 reversed in the hang over from b9's tail at the LOD (support). However b16 was a poor looking bar to enter above.

    B20 & b21 formed a 2BR in the hang over from the tail of b13 and at the open. However I see that you took this trade anyway as an A22 & 1tf, well done!

    If I draw a TL across b b38 & b43 and extend it as a TCL from b35, b46 is an OS. Is this valid?

  2. @RF, TLs and TCLs from previous days can act on today and yes those would be valid reasons to enter. b16 had an upper tail but it was a small trend bar at the bottom of a larger trend bar and is usually an ok trade. But given the bear strength earlier, you should focus on the overall larger move so you can enter in the direction of the larger swing.

    TLs and TCLs validity is proportional to their length. So yes its a valid TL and its a valid overshoot but if you are looking for a major reversal, look for a larger TCL. A smaller TCL can indicate ends of pullbacks for example.