Thursday, September 15, 2011
Price action Basics III - 1st Reversal or Opening Reversal
When the day opens, one option is to treat the first bar as a trading range and watch for fBO and BP of b1. If the BO or fBO looks compelling, it may lead to a trend and you should take a strong signal bar such as b8 or b19. The larger the distance to the other extreme of the day, the higher the chances of a trend developing. Therefore, its perfectly fine to ignore something like b3 and wait for a break above the HOD (b1 at this point) and wait for a failure or BP.
When the move is possibly a trend move (b8-b19), no matter how small, its reversal is a 1Rev and is likely to lead to the primary move of the day.
Since 1Revs can fail, conservative traders can take a 1PB if the fBO or BO succeeds. In other words buy only the HL after a bullish reversal and a LH after a bearish reversal. Today's 1PB would be b24, which is not well formed, so its acceptable to skip it and wait for the next setup. You should only take with-primary trend setups until the other extreme of the day is taken out.
This strategy works for almost any day except tight trading ranges with tiny bars. On those days, very few things work and price action entries have a high failure rate, so its best to skip trading if the range of the first hour or two is very small, especially if there was no gap on open.