Monday, October 10, 2011

Traps III - Poor signal bars

The hardest kinds of traps to avoid are ones that give good patterns but poor signal bars. Unfortunately, these poor bars work a sufficient fraction of the time that they are hard to resist.

For example, b22 was a poor looking buy bar but worked for a small scalp. b35 on the other hand failed despite being closer to the ema. b42 was a bar with a entry side tail and yet it worked. b61 was a doji but worked very well.

How then, is a trader to distinguish between signal bars when they could work or fail with equal probability? On many strong days, especially soft-trend days, good signal bars are rare. Is sitting out of most of the trading day the only option? It certainly is the safe option and for most traders, possibly the best option but there are some heuristics that allow you to select your entries with higher chances of success.

Overlapped signal bars such as b35 and one legged pullbacks such as b22 are weak. You should never buy a poor bar at the top of a flag. Combined signals such as b61 DT and G are strong. With-trend signals such as b72 G2 are strong. Counter-trend signals such as b16 and b57 are marginal and only CT signals after a clear break of the trend such as b48 should be traded.

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