Today's post addresses the second row of the nine transitions.
The easiest type of pattern to read in real time is a continuation and the hardest type of pattern to read is the breakout and for a variety of reasons. The most obvious reason is that most continuations succeed and most breakouts fail. Breakouts can fail multiple times before they eventually succeed as was the case today.
Before you can read breakouts, you need to be able to detect when a trend has terminated into a trading range. The simplest and the easiest way is to look at the two recent highs and lows. If they are sideways, the trend has ended. Trends terminations (TT) usually have weak reversal signals that not many will take such as the poor oio reversal at b35-37 and give a weak continuation signal such as the bull bar A2 short at b44 that very few took. Trends can also terminate into TTRs or by eventually breaking a trendline. Although the trendline broke at b66, the trader should already expect a trend termination at the poor oio at b37 and confirmation by the weak A2 at b44 and the two legged failed breakout at b57.
The expanding triangle (XT) breakout is comparatively the easiest to detect and trade. An expanding triangle is simply a series of fBOs, each enlarging the range after trend failure. The trading range after trend termination begins with the reversal or climax pattern itself (b35 high to b37 low) and every move is just an attempt to expand the range. Once both ends of this pattern are taken out, you can take trades and expect them to move to the other end until you get both a HH and HL for a bull breakout or LH and LL for bear breakout into trend. Note that the breakout could be either up or down regardless of the direction of the previous trend. The HL or LH will usually be a two legged move and today the doji bar b70 separated the two legs down.
This point is the first pullback in the new trend and is the best swing entry for the rest of the trend.
Cadaver, why you did not consider b2 and 3 as a 1st reversal? Also, why did u consider b7 a 1PB even though there is a lot of overlap?
ReplyDeleteGabriel, the first reversal is quite complex to read and I hope to create a post that explains various intricacies with it. Normally unless its obvious, I skip the first reversal and take the first pullback.
ReplyDeleteIn the chart above to be a first reversal, b2 has several problems. First of all, there was no prior bull strength such as a large gap up or bull trend bar. Also b2 gave an entry mid b1. This is hardly a reversal since there wasn't even close below b1. A reversal bar thats large and only 1t body would be ok if it occurred after a large move (say +3 or more below b1) or if it had an overshoot. All in all b2 is a low probability entry.
If you mean b3,4 down up reversal, note that when the tail is short and the bar sizes are not comparable, b4 is effectively an inside bar and the actual entry would be at hod. This is a poor trade and no one took it.
b5 on the other hand was a poor ii and its failed break up gives a lower high and two failed attempts up. This makes it a pullback. Granted, the overlap makes it a bit riskier, but its a shaved bar at the ema after 2 failed pushes up and a failed ii breakout. As long as the entry for 1st pullback is not too far away from b1 and your entry is at least 1t away from lod, this trade should be taken.