Large inside bar on 1W

Inside bars are tricky and often require judgement to trade correctly. In general, large inside bars are overlaps and therefore a mini trading range. It is generally best to wait for the trade to trigger and take a pullback.

An outside bar that traps traders who did not see the reversal and entered (b23) makes an excellent signal bar if its not too large. If it does not trigger any small trend bar after it (b24) should work.

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

Setup	Name	Trade type	Price Action Type
GRb1	Gap reversal b1	X -- Beta	Open
ib2	Inside bar b2	X -- Beta	Open
1Fb1	1st failure of b1	X	Open
2Fb1	2nd failure of b1	X	Open
1P	1st pullback	X	Open
1FBO	1st fbo of OR	X	Open
2FBO	2nd fbo of OR	X	Open		G	Gap
1W	1st Wedge of day	X	Open		R	Reversal
1TL	1st close at TL	X	Channel		T	trend
1CBO	1st channel BO	X	Channel		b	bar
1ib	1st inside bar	X	Channel		b1	bar 1
CBP	channel BP	X	Channel		P	pullback
CXT	channel XT	X	Channel		1P	1st Pullback
SD	shallow+deep	X	Channel		S	small/shallow
fL2	failed L2	X -- Beta	Channel		OR	Opening Range
fL2	failed L2	X	Soft Trend		TL	Trend Line
STb	small Trend bar	X	Hard Trend		BO	breakout
Tb1	Trend from b1	X	Hard Trend		BP	breakout+P
2_1tF	2nd 1TF	X	Hard Trend		P	pullback
2SP	2nd shallow P	X	Hard Trend		XT	expanding TRI
1TAIL	1st Tail	X -- Beta	Hard Trend		TRI	Triangle
WP	Wedge pullback	X	Trend		BW	Barb Wire
TLP	P at TL	X	Trend		1TF	one tick failure
W	Wedge Reversal	X Rev	Trend
Rfx2	Reversal+fx2	X Rev	Trend
W1P	W + 1st pullback	X Rev	Trend
FBOFx2	FBO + FX2	X fBO	Trading Range
WFBO, DP	Wedge FBO	X fBO	Trading Range
TRI BP	Triangle BP	X BO	Trading Range
XT	Expanding Triangle	X BO	Trading Range
BWBO	Breakout from BW	X BO	BW

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.

The openers: 1W

Its a common suggestion to trade with the trend whenever possible and while its a good idea, often it takes a while for a trend to be obvious. Often the big moves occur early in the day when the trend is indeterminate. Some days such as today, the big move may lead to a sustained trend. Once a trend is obvious, say b40 or so, its a simple matter of waiting for a deep pullback to the trendline (around b57) and then finding the right place to enter.

On most days however, it pays to be on the right side of big moves early in the day, since that may be your only opportunity to take a sizable profit.

Even the open has some repeat patterns that signify potential large moves and studying them enables you to be on the right side of a large move.

The overall idea is that the first bar or the first few bars represent either a trend or a trading range and the way price moves beyond it will enable you to determine the pivotal move of the day.

Openers fall into various classes based on how the first few bars relate to each other. A large first bar usually signifies high volatility and potentially a large day.

The simplest opener is 1W (first wedge of the day). This represents a 3 push move in one direction that turns into a reversal. Sometimes the 1W can be a 3 push pullback after a large move in one direction.

1W usually results in a sustained move for the rest of the day (or at least the next couple of hours). 1W that are also WfBO adds strength to the pattern and are usually good for at least the other end of the range.

In general, its beneficial to take the higher low (b21) rather than take a bad bar (b15). When the move takes out the other end of the W in one leg (did not happen today), its usually a sign that the price will move a measured move in the same direction (which did occur).

ProTip: Any weak move from the open could 1W and turn around.

Multi-targets

Optimizing exits is something I've been working on for a while and its one of the hardest things to do in trading. There is a conflict between a clean exit and catching a large run.

For example, in today's first trade, I had a MFE of 1.2 and the second had an MFE of 1.5 for three contracts. Catching the top tick is magical and no sane trader should aspire to do it every time. However, if I had chosen to exit all three contracts on both trades today, my take would be .20*6 = 1.2

Another potential optimization is to exit on the close or beyond the first bar that does not have a strong close. In today's example, that would net me .90 + 1.8 = 2.7

Translated to per contract, it would take my winning from just under .30/contract to about .90/contract almost 3x better.

However, this is a reasonable thing to do only when you expect a trading range type behavior. On days when a trend is obvious -- which is quite hard before it sets up -- it may be better to hold on for the large move.

In the coming days you will see me move to a hybrid exit instead of fixed exits for 2nd and 3rd contract.

Building blocks

Price action trading has so many angles and components that it can be overwhelming. An average trader is unlikely to be able to recall every single aspect of price action and make the correct call most of the time. In contrast to simpler indicator based approach where everything boils down to a buy/sell, price action concepts reflect the complexity of the market and the trader needs to weigh opposing readings and make the right call.

To be able to absorb and build up one's knowledge and expertise and then practice and apply it in daily trading is no simple matter. To do it with every single bit of price action knowledge is next to impossible.

I believe that the layers of knowledge and expertise need to be built up one by one. The first and foremost is directional correctness. The next is the right entry and the last is a target estimate.

Directional Correctness: A new trader should trade not with profit in mind but with the desire to hone his directional correctness. If a trader is able to take trades that eventually move in the direction of your trade, then they could theoretically be profitable with larger stops. A simple way to do this is to not bet on any reversal attempts. Instead let the reversal attempt actually succeed (take out a swing point) and then take the next pullback. With-trend entries enable directional correctness. The market needs to be trending  (higher highs/lows or lower lows/highs) and not in a chop. A simple way to ensure that you are entering with-trend is to always draw a trendline and ensure there has never been a trendline break (a sustained move beyond the trendline) or the trend has otherwise terminated (no HH/HL or LL/LH).

The right entry: A second requirement is to only enter at support. A test of the trendline or ema or HLC of the prior day are usually good choices for entry. A good location ensures that many more traders enter with you increasing the probability of success.  Two or three legged pullbacks have higher probability than a one legged pullback. The earlier the pullback, the weaker it can be, i.e., the first pullback can be one-legged with a poor bar if its deep. The second and subsequent pullbacks should be two legs and deep and should preferably have a good signal bar. Do not be tempted by one-legged shallow pullbacks after the first pullback. They are likely to fail and give a two-legged deep pullback. If you find that you are often stopped out and the price eventually moves in your direction, you need to develop patience and let the market develop better entries. Once you have mastered this for normal trends, you can make adjustment for hard and soft-trends. You would still need to be cautious after an extended move or third pushes since a retrace would need to be two or three legs.

A good way to distill the points above is to reduce them to location, pattern and bar. A good location is a pullback to a support in a trend move. A good pattern is a deep pullback, preferably two or three legged. A good bar is a strong close, non-overlapped signal bar (with adjustments for 2BR, oio, etc., where you would treat the entire pattern as one bar).

Estimating targets: Once you have mastered directional correctness and are generally successful taking the right entries, you can work on maximizing your profits. The most obvious choices are measured moves of a trading range and overshoot of TCL on third push. You should also look to exit near the recent extreme once a trend is broken.

Remember the order of mastery and take them up one by one. Until you have mastered directional correctness, your mind does not have the bandwidth to absorb the intricacies of the right pattern and entry. Until you can confidently take the right entry without fear of being stopped out, you will have no conviction to hold until your estimated target.

Once you have all the three, you have developed a framework into which other observations of the market fall naturally into place. After this point, your trading style develops sophistication and absorbs information from the market and other participants naturally.

Targets and turning points

A large first bar is usually an opening range, especially if it has large tails on both ends. Any breakout beyond it is likely to fail (b2, b5) and test the other end of the trading range. On tight trading days, price could bounce between two ends for the entire trading session but occasionally, a breakout will succeed and such breakouts usually lead to a measured move of the opening range (b14).

Trading the fBO of the opening range should be attempted with caution since the profit potential, defined by the range size needs to be large enough to justify the risk. A weak bar such as b2 or b7 are not very high probability entries and your chances of a successful trade are lower compared to a strong signal bar for an fBO setup.

A successful BO that leads to a measured move may turn and retrace most of the breakout (b24) or even most or all of the opening range (b49). Sometimes breakouts continue to trend up for the rest of the session, but a strong prior move (b3-5) suggest a turn at the measured move is likely.

Therefore targets such as the other end of the range such as b1L for b2 short, b2H for b7 long and MM target of b1 at b14H are potential turning points and you should watch carefully for signal bars. A strong signal(b15) bar may mean good chances of a reversal or retrace.

Trading narrow ranges

If you love trading trends and fading large trading ranges, the kryptonite for you is a tight trading range. Scalpers and faders however, can do well in such a market.

When you sense the market may be trending, i.e., higher highs and higher lows or lower highs and lower lows(b15-29, b29-35), you can attempt to trade with the trend. However, if the bars suddenly turn into dojis (b36-38) or turn into overlapping sideways bars (b43-60), you should stop trading.

A versatile trader can switch between trend trading and fading and trade any such day but such a trader has to first master both techniques individually before attempting to interleave them in the same trading day.

Small and large targets

Many traders enter a trade with no idea of targets. They enter purely on the setup strength and lots of hope. One of the consequences of setup strength trading is that you need to take a fixed target or scalp exit most of the time.

My trading style has evolved over time from pure setup strength to keeping track of potential targets as the price action unfolds. This ensures that unless I have a decent target in view, I sometimes do not take trades even on good looking setups.

Some large targets are obvious. For example, a strong breakout beyond a trading range is likely to fill a target thats a measured move of the size of the trading range itself. A weak breakout on the other hand is likely to test the other end of the trading range. This means that a breakout attempt out of a trading range is likely to give a reasonably accurate large target.

Smaller targets are simpler to estimate. In a trend move, a deep pullback is likely to take out at least the prior swing. So if the pullback is greater than your stop size, its usually an ok setup to take.

Some targets are indefinitely large. For example, the first pullback on an early trend start may continue indefinitely into the end of the day or at least until the trend is exhausted or otherwise terminated.

For example, today if you took b2 long, your target is the other end of b1 (a large bar is a TR). If you sold anywhere above b1 your target would be the low of b1 filled at b41. A deep pullback to b62 would give a target of the prior swing point b41 low.

Creating a trading system VIII - Fading overlaps in chop

Fading Overlaps

As we saw in a recent post, with-trend trades work a lot better than counter-trend trades or trades when there is no trend. If the counter-trend trades and trades in chop are likely to fail, can we just simply fade those trades? Instead of buying a breakout of a bull bar in a down move, can we not just sell its close?

Such a system would simply fade overlaps as illustrated in today's trading. The win-rate in fading overlaps is usually a lot worse than scalping bars with-trend. The reason is simple. You never know how far exactly the price will move before the overlap pulls back.

Lets survey the trades we took today and their results:

Trade 1: b4 is a bull bar in a down move and an overlap. Sell its close (loss -11t due to 1t slippage)

Trade 2: Sell the high of b1 since a move above it would overlap a range. (-10t)

Trade 3: Sell the high of the bar (b7) that overlapped the range (+20t)

Trade 4: Sell the close of b15 since it overlapped a range (and few bars) (+15t)

Trade 5: Buy the low of b15, the OL (-10t)

Trade 6: Sell the high of b20, a counter-trend OL (+13t)

Although we did end the day up, its simply because our wins were larger than our stop. If our targets were smaller than our stops, this would be a negative day. The first lesson is determining stops and targets is that your target should always be larger than your stop for you to be profitable even with a modest win rate.

The second lesson we learn is that a trend can breakout and foil your fades. A trend development may be subtle enough that you dont notice it. Note that at trade 5, there was no obvious trend down, and once a trend sets in, only with-trend trades are likely to succeed.

The most important point about fading overlaps is that you need to be an extremely highly skilled trader to consistently extract value from the market. This is because unlike a bar scalp, your expected profit is smaller and your win rate is lower.

In hindsight, it would seem obvious that you could easily fade every bar from b47 to b55 but in real time, there is no way of telling how long the overlapping pattern would last. The skill needed to correctly infer a fade of b54 but not b56 would take years to master.

Channel Theory I - Defining channels

Channels are heavily overlapped regions of price action that drift up or down in a chart. If the region did not drift, it would simply be BW. Channels are important because unlike BW which can only be scalped for a few ticks or a couple of points, channels do trend and can be traded for enough points to justify the risks of entering a trade. The goal is to trade channels with a fixed size stop such that the potential profit is larger than the risk taken with a high probability of success.

Channels generally have the following characteristics:

Multi-bar overlap: It is common for a bar to be overlapped by many following bars. For example, on the day on the right, b7 was overlapped by every bar except b1 and b19 until it finally broke out of the channel.

Tails: You are likely to encounter bars with tails on both sides, regardless of color. These tails look like a trend is just about to break when watched mid-bar and then the bar will close with the opposing color, leading to poor mid-bar decisions. Never make mid-bar decisions, especially in a channel.

Alternating bar colors: True channels have alternating colored bars with some dojis thrown in. Channels without opposing colored bars are Trend Channels (TC) and are actually simply trends. You can trade with-trend on the close of any small bar in TC but in a true channel you are likely to be stopped out if you use a fixed size stop. True channels that form a leg are leg channels (LC). Sometimes  a channel is so wide that it looks like a sloping trading range. These are trading range channels (TRC).

Unpredictable behavior: Channels may reverse (b19), break out (b30), may turn into any other type price action and are generally hard to predict.

The primary goal of trading channels is to determine the following:

1. Origin: Detect PA turning into a channel and determine direction.
2. Reversal: Channel may reverse direction while remaining a channel.
3. Breakout: Channel breaks into a steep trend move. This is the most important.

While even simple detection of a channel is valuable because it enables you to avoid getting chopped up, detecting breakouts and sharp moves intra-channel allow you to maximize your profits if you wish to trade channels. In the coming days, we shall see how each of these may be achieved.

The road ahead

My frequency of posting has reduced in the past few months but rest assured, with the generous help from my small research team, I'm actively working on bringing several important facets of trading to light.

A small selection of currently active research areas are listed below:

Trading Channels:
One of the most important problems in price action trading is to trade channels using a small fixed stop without resorting to scaling-in or other poor habits. Since channels are common, this is a top research priority.

Predict tight days that aren't worth trading: Some days are extremely tight and on a day with a four point range with choppy overlapped price action, trading is dangerous. Predicting such a day early enables us to stay out and skip trading.

Predict choppy opens that are likely to result in stopped out trades:

Opens that otherwise look like potential setups may never generate a profit and may stop you out or enter a chop zone. Correctly detecting this enables you to skip trading until price action becomes more amenable to trading. This chart is the AM of the FOMC day that eventually led to a huge rally.

Predicting Breakouts:
One of the hardest problems in price action is predicting which bar would lead to a successful break-out. For example in this chart, b57 short led to a breakout while every other signal prior to it failed. A high probability prediction of a breakout enables us to judiciously enter a profitable swing trade.



And more: I'm also working on exiting losing trades for breakeven or a few ticks loss by detecting trade failure early. The setups 1Rev and 1PB have been further broken down into a small set of distinct setups that enable the trader to anticipate and trade them bar-by-bar. As soon as these setups complete the requirements of rigorous testing, they will be published here in a series of blog posts.

The hard road to consistency VIII - The tyranny of psychology

Many traders and other professionals in the trading world tell us that poor trading is mostly a psychological issue. While there's some truth in this statement, its incomplete and inaccurate. Otherwise, all psychologists should be fantastic traders.

The reality of trading is a bit more complicated. Obviously, you first need a system and understanding of the mechanics of trading. You need good risk management and trade management practices because having the best psychological state of mind is no substitute for stops.

I have searched far and wide for psychological articles regarding trading and found many books, articles and webinars, some with deep insight. However, most psychologists are not traders and their treatment of psychological issues is academic. Most of the material is generalized rather than actionable. For example: "Its more important to enhance well being than to reduce stress while trading" or "ask yourself before taking any action, am I doing whats in my best interest?"

Most of these observations are not actionable or otherwise useful. Benefits of prescriptions not related to actual trading such as marking off your trading area, feng shui, etc. may provide marginal benefits but should be viewed as borderline superstitions.

The entire development of a trader is two stages:

1. Develop or learn a proven winning system
2. Strengthen the discipline to follow it

Developing a winning system is complicated, tedious and time consuming. You are usually better off finding a mentor and learn a proven system and adjust it to fit your personality.

Once you have a system, discipline is what enables you to follow it closely. What is discipline? Discipline is simply the ability to resist short-term temptations in favor of long-term goals. Discipline is actionable. Just follow your system's rules and nothing else!

Its most important to note that many systems work only during specific kinds of price action and you should not trade if preconditions are not met. For example, my system works very well on trending and large range days and works poorly on small range days.  Fading systems work very well on trading range days and fail on trending days. Tick and bar scalpers can trade almost any price action but their win / trade is low and therefore they would need to lease a seat on the exchange to be profitable.

The ability to sit out during price action not fit for your system is discipline. The ability to stick to your stops and your daily stop loss is discipline. The ability to resist poor behavior (chasing trades, adding to losers, shorting all the way to the top, etc) are discipline.

When you chase a trade for example, you have overruled your judgement regarding passing up the preceding signal. You can never develop confidence in your market reading if you are easily swayed by a single bar. Accept that your system cannot detect every setup and at best you can catch a high percentage of moves. For example, do not buy b22 if you passed up b21 as a poor signal. Instead, add the observation to your list of things to investigate. Given enough samples, you will be able to pick on such moves eventually. You should have always anticipated a move, not react to it in urgency.

Over time, these observations will add to your system and make it richer and you will grow as a trader.

The hard road to consistency VI - Your equity curve as a price chart.

If you plot your winning days as green bars and losing days as red bars, you get a chart of your account size that looks similar to the price chart such as the one shown above. What makes a price chart go up and down also makes your trading account balance go up and down. When your trading is in an uptrend, you have mostly winning days with occasional losing days. The fewer and smaller your losing days, the faster your account grows.

Therefore a winning trader's account shows a cumulative graph like that of b1-17. A breakeven trader is likely to have alternating winning and losing days, todays gains lost the next day such as the range between b45-59. A losing trader is likely to lose a few times (b18-25) and go on tilt (b26-29) and then stop trading or change his style.

Its obvious that for your account to grow, you need to have fewer and smaller losing days and larger and greater number of winning days. While you may not be able to control the number of winning days versus losing days in the beginning, you certainly have the power to control how large a losing day is. Limiting your maximum loss per day prevents days where you go on tilt, effectively reducing days that look like b27 to a small bear bar, meaning much faster recovery on days where price action is more suited to your style and skill level of trading.

The first thing a big losing trader needs to do is be a smaller losing trader and then change to a breakeven trader. If you take trades where your wins are twice as large as your losses, there are very few ways you can be a losing trader, for example by going on tilt and taking questionable trades. At worst you should be a breakeven trader with alternating winning and losing days.

Once you are a breakeven trader, you can stay in the game indefinitely and hone your trading skills until you slowly start seeing profit. A breakeven trader can keep detailed logs regarding setups tried, stop sizes used, win rates, confidence in the read, etc. and narrow choices to a small set of setups that work for him. Continuous focus on this small set of setups over time will slowly flip these setups from net breakeven to net wins.

The hard road to consistency V - Poor price action days

In the post Off days, I spoke about the trader not being upto his game despite the price action being conducive to his type of trading. The flip side is when the trader is focused and ready but the price action is extremely poor. Today was such a day on ES.

Of course what constitutes poor price action varies based on trading strategy. For someone who takes very few trades and swings them to the max, a small range day with overlapped TTR action on most of the day is probably the worst kind of price action. On the other hand, a tick scalper would probably love a day like this.

There was no clear signal that worked the entire day and the biggest moves on b1 and b74 arguably were not off clear signals. New traders may get chopped up losing entire weeks worth of earnings on a day like this. This is mainly due to focusing on patterns and ignoring market context.

The risk management strategy to deal with such a day is exactly the same as the off day. You need to stop trading after two losses. Occasionally, you could look for an additional PM setup if a good one sets up (it did not today).

Expert and agile traders (I'm not one) may be able to switch context and switch to fading entry bars to get 10t on quite a few trades (for example, fading the second push down by selling close of b23 or buying close of b31 with 4t risk and 8t target)

Remember that every day does not have to be a winning day. Some days are simply not meant for swinging style trading. Since I choose to not trade unless my potential reward is 2x the risk, I prefer to stay out and reduce my exposure than to take smaller rewards (There were a few 1:1 setups).

Risks of fBO

An fBO trade requires the highest amount of skill to swing and the least amount of skill to scalp. The reason is that fBOs are expected to give two legs but that's all. There is no expectation of a target. There is no expectation that the other end of the trading range would even be tested.

Since legs can be fairly complex and contain mini-legs, the end of an fBO move is highly subject to a trader's experience and judgement.

For example, the fbo trade below b37 today was expected to give two legs down and it did go sharply to b54. At this point, a trader needs to assess if there would be one more leg to the low of the day or a turn right here.

If the trader correctly guesses the price would turn and buy b54 or the HL at b60, then at b63, the question becomes: will this move end here or was this just a minor pullback in the larger trend down and is likely to result in another move down.

The complexity can be dealt with by assuming that every second push against the traders position forces an exit. For example, b37 sellers would exit above b54. b54 buyers would exit below b63 and so on. Such a strategy requires the trading range to be wide to be profitable. The trading range needs to be roughly the size of a day's move (8-10 points).

An opposing strategy is to trade every fBO as a trend and exit when the price takes out a stop beyond a swing point. This means b54 buyers would hold until their stops below b74 are taken out at b79. None of these are easy and fBO trades certainly need a scalp target since the potential for large swings is undefined.

Exiting early

Although I prefer to swing most of my trades till a trend terminates, sometimes its prudent to exit early. In general when the market is in a trading range, you cannot expect most trades to really break into a very strong trend and you may need to look to exit early.

A classic application of this rule is an fBO trade. Since fBO can only be expected to give two legs and the two legs may or may not take out any target (i.e. recent swing points or H/LOD), its often prudent to take a large open profit.


For example, today's fBO setup at b31 popped very high for a second leg up at b48. The theoretical swing stop is below the prior swing (b43) and when the price moves close to a potential target (b17H), it makes sense to exit early and re-enter on the expected deep pullback (eventually occurred at b65).  


One option is to exit on strength (inset image) or exit on the next tick against you (eventually below b51).  I prefer to exit on strength when a potential FF type setup shows up (inside bar b49 could act like FF).


Even on trend days, when the market makes a disproportionally strong move, you should expect an extended pullback, which could be either a quick deep pullback or an prolonged shallow pullback. If your swing stop and the price are very far (4+ points) its usually best to take an early profit rather than sit through what could be an prolonged, deep or complex pullback.  


A notable exception to this rule is the late trend, which rarely pulls back.

Channel Types

Channels occur very often and trading them profitably is presently an area of research. In general, there are three kinds of channels and they are traded similarly from a higher level view but the specifics are different.

Trading Range Channel (TRC): A TRC is a shallow sloped wide-range (3+ points between swings) channel made of large bars (2+ points). The move from the open to about b31 today is a classic TRC. For most traders, TRCs are the most dangerous form of price action. This is because they always appear to be just about to reverse and most of these attempts fail. A new trader may be trapped trying to trade today's AM several times: fBO b5, 2L reversal b9, HL after strong reversal b14, W b19. Note that most of these bars were fairly decent and patterns looked clear. a TRC will trick and frustrate traders over and over. These are dangerous to trade because the stops required are large.

Leg Channel (LC): A leg channel has a slightly steeper slope and usually smaller bars. Most bars are however overlapped and there are many bars with tails. The move from b47-59 is a good example. These are fairly easier to trade since the stops required are smaller. You can enter after any pullback or small bar as long as its near the channel trendline. For example, b50, b55 but not b52 since it was away from the trendline. A small poke beyond a prior bar sets up a 1st channel breakout setup (1CBO). The first BO against the channel is a high probability failure so you should take a trade in the direction of its expected failure. You can also fade the close of the first opposing trend bar (b54).

Trend Channel (TC): A trend channel is actually a regular trend move with very small bars. They appear to overlap but each bar dips only a tick or two below the prior bar implying traders entering aggressively on the close of the prior bar. b59-b64 is a very good example. These can be traded like any strong trend. Enter on the first pullback (b63) or the first opposing strong close (b67) or the first tail in the direction of the move (for example if b64 had a 1t bull body).

Channels types are all related to each other. A TRC is a LC on a higher timeframe, which is a TC on a higher timeframe. TCs in turn are regular trends (such as b65-73) on a yet higher timeframe. Therefore trend strength from weakest to strongest is TRC->LC->TC->Trend.

As you see the price action change from one type to another, it may be an advance notice that a trend is likely to breakout as today or when it moves in the opposite sequence, it may indicate that the trend is about to terminate into a trading range.

Wierd old trick for estimating targets

One of the most challenging and error-prone tasks a swing trader needs to perform is to estimate his target. Over-estimation forces you to give up a lot of your gains waiting for your magic number to hit. Under-estimation is slightly better since you can always look for a fresh entry.

For strongly trending days, this is a fairly easy task. On most strong days, you can often swing till the end of the day.

At the very least, you can swing till you meet a sustained trendline break and then exit near the prior high.

For example today we had a very strong trend move up from b5. The sustained trendline break b45-57 was obvious even without drawing a trendline. Therefore, the trader should expect to exit near the prior high (b63H).

Trading range days are harder and your ability to judge the moves are far more important since the trend break is likely to break all the way and take out the other end of the day. One trick is to use the observation that trading range days are usually proportional in range to the first bar of the day. If b1 is 2 points then the daily range could be expected to be around 10 points. Therefore you can simply exit when the range comes close to the expected boundary. For example, today's b1 was 2.25 points. Since the low of the day was at 1317.25, you should expect the high of the day to be around 1317.25 + 2.25*5 = 1328.50, which was indeed the actual high of the day.

Note that this is a guideline and not some magic formula that is infallible. Very large and very small first bars are obvious exceptions to this rule. Even so, you should always exit a partial position when you have a decent profit and your swing stop is very far.

Correctly reading a breakout test

Price action can be arbitrarily defined a set of breakouts and breakout failures. There are breakouts beyond bars, swings, high and low of the prior and current day, the trendline and popular indicator values such as emas, collectively called barriers.

Breakouts in a trend in the direction of the trend are likely to succeed until the trend breaks. Breakouts in a trading range are likely to fail until a trend is birthed. This is true for any barrier, but some are easier to see and more reliable than others.

For example, the three push pullback (b24-44) after a strong move up (b15-23) gave an attempt to BO into a trend at b45. The market tried to reverse this breakout but found buyers exactly at the old entry price (b57). Such a setup is called a breakout test (BT).

BT can also occur at the breakout of swing points such as b17 testing the BO above b12. This is possibly also a BT of the ema.

A breakout test is one of the few places where a doji signal bar should be considered strong as long as its close is near the entry and not overlapped (i.e, it can be treated as a 2BR).

The way to anticipate a BT is to note any strong BO bar and if necessary mark its breakout points. For the BO bar(s) b15,16 since there was no buy signal bar, there is only one breakout point, the swing high of b12. For the breakout bar b45, both the swing point b40H and signal bar b44H are BT points. Limit traders can simply place a limit order to enter at this price with a 3t or 4t stop. Stop entry traders should enter on the breakout of the bar that touches but does not dip below the breakout point. Missing the breakout point by a tick or two is preferable to a pullback beyond it.

Once a trend is established, it does not make sense to call every pullback a BT since a trend is expected to continue, its just a regular pullback and not anything special. That is, there is no point in calling b71 a BT since its basically just a 2L pb in a trend.

Note that a trend can develop without any breakout tests and therefore BT are not a requirement for trending price action.

Adding to a losing position

Among all the trading sins, none is venial as adding to a losing position for a better average price. On trading range days, adding-on may work eventually although a trader would end up trading way beyond his comfort level before he sees a price better than his average price. On many days, he may only get away with a scratch.

On trend days such as today, counter-trend traders are likely to get killed if they add on anytime the trade moves against them. For example, a trader may short b10 as a first attempt to reverse (which is profitable on many days), but when the trade moves against him, instead of letting the market stop him out, he may decide to move the stop way up and add on where he would be stopped out or on the next signal.

The psychological issue at hand is the desire to pick the exact high or low of the move to get the best possible price. This combined with a wrong sense of direction will destroy the trader's account rapidly.

The way to deal with this issue is to resolve to never trade reversals. A trader should always wait for the reversal to succeed and establish a successful trend in the opposite direction and enter on its first pullback. Unless a reversal is obvious, it is likely to fail.

On a day such as today, a trader looking to short would do much better if he waited for the short trend (b41-47) to establish and then enter on b50 than to short every bear bar on the way up from b1 trying to pick the exact turn.