Friday, March 9, 2012

Anticipating DP setups

A prolonged horizontal move breaks a trend, but you dont need to wait that long to detect a trend termination. Any poor reversal (b66) followed by a poor A2 (b71) is sufficient criteria. Any cluster of dojis after a pullback starts (b15-b23) is usually also sufficient to declare a trend termination.

At this point, you are in a trading range and no longer in a trend. Any A2 or other continuation trade is likely to result in failure. Even if you missed reading the termination, entering only on strong signal bars would protect you from poor setups. For example, b26 did not trigger, b32 was a bear doji, b38 had a doji before it, b52 is an iii in BW. None of the buy setups were acceptable, so you wouldn't be buying them.

Sell signals were pretty poor as well, most triggering off bull bars or had dojis preceding them. The first acceptable sell was b55 inside bar and the next attempt was b63. A simple filter of not selling before a 1 legged close below the ema (b47) would have also kept you out of trouble.

At some point you would figure out that the trend has ended, regardless of your method of determination. At that point, you are waiting for BP or fBO. A DP is a kind of fBO that results from two failed attempts (b46,55) to break a barrier (b22 high) and a third attempt (b63) that falls short of the prior two attempts.

So while the DP at b63 is clear, its important to note that b32,38,51 is not a DP long. The reasons is that DPs only fade trading ranges and never extend them. So if the TR is narrow such as the horizontal move today, there's a very good chance that any DP like setup to go long will fail. A DP to go short however is more likely to succeed since the move up simply has brought us to the top of a trading range.


  1. Cad,

    I traded poorly today. I just have a couple questions if you don't mind...

    Why isn't b5 the fBO of opening range set up? and why isn't b16 the 1st Reversal? (both are up down signal bars)

    thanks very much for your time,

    1. A pattern by itself is an insufficient condition to trade. b5 is an fBO of the OR but it gave an entry in the middle of the range and right above ema support.

      b15 is the 1st reversal pattern-wise and note the price never went above it. Its just that the trend terminated right away. 1Revl signals after the first hour are often more likely to fail.

    2. Cad,

      I thought that b1 AND b2 made up the opening range in this particular case and b5 entry was at a good location. Isn't b2 part of the opening range also, since its a bar of opposing color?. On march 5, 2012, you said...

      "When the second bar is an opposing bar, regardless of appearance, chances are very high that what you have is a trading range."

      Thanks a lot for explaining the b15 1Rev

    3. Yes, but your entry would have been 1pt above ema where support is likely to be found (which is exactly what happened). If the same range were below the ema, you entry would be stronger.

      Again, your read of the pattern itself is correct. But a setup needs location, pattern and signal bar. The 2 bar reversal had a bit of overlap with prior bars and was right above ema.

    4. Cad, thanks for taking the time to answer. I now understand why you didn't take the fBO at b5 but then I don't know why you took fBO trade on 1/20/12 at b9 or the 1PB on 2/17/12 at b12.

    5. The 2/27 was a 1PB trade, a trend was already established. As you can see, the 1/20 trade failed. I do not remember what was my reasoning on that day; I can't really justify every trade I ever took and I do make mistakes like any trader.

    6. I understand the fBO set up a lot better now, thanks for explaining cad

  2. Hi Cad, could you trade a b6 or b7 as a first pb ?? In my opinión the b4 was a BOf of OR that after failed in b6, therefore it could be a BP of OR. Also it was a A2. What do you think ?

    Thanks very much.

    1. b6/7 is an excellent 1PB. If you consider the gap from prior day as a bull bar, then it would also work like an A2. Excellent read, martin.

    2. Thanks Cad, I did not take it because in mi opinion it did not have two legs, I did not sense so, and after I toke b10 as a L2f.