Monday, August 13, 2012
The hard road to consistency VII – No good signal bars
One of the most frustrating things for a trader is the lack of a good signal bar in a trend. A good signal bar is any signal bar with a shaved or 1t tail on the entry side and at least a 2t body. Ideally, the signal bar is neither too small or too large compared to recent bars.
I always recommend entering on good signal bars for a couple of reasons. When the market is not ready to trend your way, a strong signal bar is unlikely to trigger (b12, b66). This will protect you from many poor trades. A second important feature of good signal bars is that they are likely to respect a fixed stop (5t/6t for ES) for any given instrument.
However, on some days, there simply is no good signal bar in the direction of the trend (b10,16,20,38,50,73) but the reverse direction will often give great looking signal bars (b12,27,30,44,53,66,76).
This is typical of channel type price action. A trader who insists on great signal bars is likely to take very few trades on a channel day – which is not necessarily a bad thing, since channels are very hard to trade for most traders.
One way around this is to valuate the strengths of a signal by 3 criteria: location, pattern and signal bar. If location and pattern are strong, take a poor signal bar with-trend. For our purposes, location is a support such as HLC of prior day, ema, trendline, breakout point (as in BT) etc. Pattern is any two or three legged pullback.
Therefore, take any two or three legged pullback to a support even on a weak bar. This enables us to take b50, b56 long for example. Note that this can only be done if the signal bar is small and you can use a price action stop (beyond signal bar) rather than a fixed stop.