Tuesday, September 8, 2015

Market types and setups

The price action that defines markets can be divided into several types and each type has setups that typically work for it. Trending markets for example, facilitate with trend trades and usually cause reversal setups to fail with high probability. Trading ranges on the other hand, facilitate fading breakouts with high probability.

I divide the market price action into the following categories:

Trend (or elastic trend): There is an obvious trending in the market. Bars in the direction of the trend are small, close strong and there are multiple bars in any given trend-side push. Bars against the trend are fewer, usually larger and if there is more than a single bar, closes are usually weaker.

Hard Trend: This is a kind of trend where there are very few bars in the counter-trend direction. With-trend bars can be large or small, pullbacks are usually just a bar or two. This is a very strong trend.

Soft-trend: Bars are very small both trend-side and counter-trend-side. Very shallow pullbacks and pushes.

Channels: Channels look like Soft-trends but with one big difference. Unlike the trends above, a pullback in a channel often overlaps into the previous signal bar.

Trading Range: There is no discernible trend. Erratic movements usually lasting two or three pushes in one direction followed by pushes in the opposing direction. A move in one direction may or may not reach the other side before reversing, therefore hard to gauge profit target.

Barb Wire: A special kind of Trading range where the price action is confined to a narrow range made of small bars, many of which are dojis

The Open: Markets that have "Regular Trading Hours" have opens and closes for the day and the open of a given day has often behavior that may look entirely unlike the previous day. When the market opens and the first bar begins to form, the market is not in any of the above states yet and is considered to be in the open state. This lasts for about 10 bars or so.

The Setups
Each price action type has its own list of setups. A setup that works very well for hard-trend will fail for a channel and vice-versa. These 30 setups cover every possible large move from any type of price action. If you master these, you can trade any market.

There is a small number of setups per price action type and you can focus on a much smaller set of patterns. Setups marked beta are sustained observations but I'm unsure if they can be traded profitably in all kinds of markets. I may drop them in the future.

Setup List
SetupNameTrade typePrice Action Type
GRb1Gap reversal b1X -- BetaOpen
ib2Inside bar b2X -- BetaOpen
1Fb11st failure of b1XOpen
2Fb12nd failure of b1XOpen
1P1st pullbackXOpen
1FBO1st fbo of ORXOpen
2FBO2nd fbo of ORXOpenGGap
1W1st Wedge of dayXOpenRReversal
1TL1st close at TLXChannelTtrend
1CBO1st channel BOXChannelbbar
1ib1st inside barXChannelb1bar 1
CBPchannel BPXChannelPpullback
CXTchannel XTXChannel1P1st Pullback
fL2failed L2X -- BetaChannelOROpening Range
fL2failed L2XSoft TrendTLTrend Line
STbsmall Trend barXHard TrendBObreakout
Tb1Trend from b1XHard TrendBPbreakout+P
2_1tF2nd 1TFXHard TrendPpullback
2SP2nd shallow PXHard TrendXTexpanding TRI
1TAIL1st TailX -- BetaHard TrendTRITriangle
WPWedge pullbackX TrendBWBarb Wire
TLPP at TLXTrend1TFone tick failure
WWedge ReversalX RevTrend
Rfx2Reversal+fx2X RevTrend
W1PW + 1st pullbackX RevTrend
FBOFx2FBO + FX2X fBOTrading Range
WFBO, DPWedge FBOX fBOTrading Range
TRI BPTriangle BPX BOTrading Range
XTExpanding TriangleX BOTrading Range
BWBOBreakout from BWX BOBW

Setups not listed above such 1Rev, A2, BO, etc are obsolete due to various reasons such as being incorporated into the list above, me not using EMA anymore and inconsistent profits.


  1. Hey Cad you are back!!!!!, This is really great, great news.

    Saludos from Spain.

  2. Much needed chart on PA setups. Thanks, CD !