Monday, March 5, 2012
The first bar: Trend bar
The first bar, regardless of appearance should be considered to be a 1 bar trading range. Most traders would agree that two opposing trend bars make a trading range. This is true everywhere and when there is only one bar, you dont have information about the second bar to assume it would be continuing trend bar.
When the second bar is an opposing bar, regardless of appearance, chances are very high that what you have is a trading range. A buy above b2 would therefore be a buy mid-trading range, which is a low-probability trade. You need to buy near the low of b1 for a higher probability setup.
The right approach to trading two opposing bars would be to treat it exactly like any other trading range. Fade a weak breakout or enter in the same direction on a breakout pullback. So if b4 had a strong close near the low of b1, it would make a nice second attempt to fade b1.