Friday, March 18, 2011

Buy above bull bars, sell below bear bars

Buying above bull bars and selling below bear bars and avoiding any other bar is a critical component of price action trading. If you get eager and enter on marginal bars, you will reduce your success rate.

If you shorted only bear bars after a move up or bought only bull bars after a move down and hold for at least one point, you will  make money on most days. Of course, on soft trend days or hard trend days you wouldn't want to do this but on the other 80% of the days this should leave you in the black at the end of the day.

In the chart above, successful buys are indicated by blue dots and failed buys are indicated by red dots. Blue diamonds signify successful shorts and red diamonds indicate failed shorts.

For example, even though today was an overall bear day, the only buy above a bull bars that failed were inside bars b5 and b70. These are not buys per price action principles and you wouldn't be buying them. Similarly the only bear bar that would fail was b17, an inside bar variant you wouldn't be shorting.

If you only took the longs on non-inside bull bars for 1 point you would have +5. Shorting below non-inside bear bars at a swing move would give you an additional +8.

Just don't forget the inside bar and doji exclusion rule. While they sometimes work, knowing when its appropriate to trade these exceptions takes quite a bit of experience.

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