Buying limits

I rarely buy limit, because I have no idea where the price will turn if at all and where to place a stop. Also, buying mid bar has the risk that the bar may end up quite differently than you imagined. Sometimes however, there are compelling reasons to enter on limit. The principal reason for me is a hard value at which I believe buyers will come in. This allows me to enter at a precise price as opposed to eyeballing the chart for an entry and secondly, a precise stop, making it quite like entering on stops above a signal bar. Today presented some of those occasions.

The first condition for me to enter on limit is that there must be an overshoot. This will ensure that even if I'm wrong and the bar moves 4 or 5 ticks against me, there is some chance the market will withdraw and allow me to exit at breakeven.

The second condition is a price point below me where buyers will be compelled to enter for example because its low of a major reversal or first touch of ema after 20 bars.

The third condition is that the sell from which the move originated must be from a poor signal.

For example, the market presented a first reversal at b7 but forced a buy above a big flag forcing a stop of over 2 points. Although the entry bar b8 was strong, there was a good chance its low would be taken out. when b9 presented a poor sell signal (again due to overlap), an order to buy the low of the entry bar b8 becomes viable. The overshoot of b7 and the ema and b7 low are compelling reasons to buy and becomes a reasonable alternative to buying above the first pullback above b11. Note that when you buy above b11, the first pullback is real but when you were buying the low of b8, the first pullback only exists in your hopes.

A second example is buying a tick above the low of b19 when the market made a 2 legged approach to the ema at b26. Here there were a host of reasons to buy such as: the overshoot of the bear pullback trendline, more than 20 gap bars from a rising ema, a bull trend line, etc. Even conservative traders probably bought this on limit. The low of b19 is likely to be bought, given the move was so strong and the low or a tick above it is a good entry price.

For those who passed up the limit trade, the technical entry forced a buy above b26 but some traders would buy above b27 and the entry bar b28 was likely to fail. The overlap and breakout below bull bar b30 was likely to fail, so a limit buy at b28 low with stop below b27 was a good entry.

Today there was a late trend breakout to the downside that occurred after 4 failed attempts to breakout. The L4 below b42 was a typical double trap. b43 ticked below b42 trapping bears in, ticked above trapping them out and trapping bulls in and then broke below making b43 both a W and W1P and a DT and a DP.

There were 2 large bars down followed by an A2 and due to the size of b45, there was some chance of buying below it, so an exit at the low of b45 was probably warranted.

Large open bar is a trading range.

Today opened with a medium sized gap but the opening bar was large. When the first bar is too large, it can act as a trading range. So its breakout on both sides can be faded on a good signal bar. Todays first breakout was above and gave the biggest move of the day. A rare outside-inside-outside reversal at b6,7,8 turned the price around and presented the first pullback at b11. However, given the entry was at the top of the flag, it was understandable to pass it up.

An exhaustion bar at b13 followed by an ii short turned around and presented an A2 long at b26. However this was hard to read and given the prior final flag and dojis was a low probability entry.

The first channel break at b35 was a risky forced a buy at the top of the range. Given the double top at 32, it was best to pass it up.

The market moved above the double top at b38 and tried to fail twice at b42 and b46. This was also a 3 push move in a channel and would act as a wedge. If this triggered and failed, there was a chance of a measured move of 5 points up. However, the price moved against the buyers twice, and an exit below b53 was apropos. b56 presented an A2 long and this was the last reasonable trade of the day. b73/74 was a possible FF or DT but given the mood of the day, its best to pass up such trades near the end of the trading session.

Trading with trend

An unfortunate consequence of focusing on oscillators, pivots and support and resistance levels is that the trader is forced to focus on counter-trend trading, which is usually low probability. The second consequence is that the trader typically focuses on small moves, netting +1 or +2 points when they should be focusing on getting a large slice of the move.

The third consequence of trading this way is it forces you to use limit orders, which are inherently counter-trend. While consistent traders can use limit orders quite successfully, for most traders, they are counter productive since it forces you to focus on getting the best price rather than focusing on the best probability trades that can be held for the maximum points.

Until the trader can begin to read trend breakouts and reversals perfectly, its best to let a trend establish itself and then take every continuation trade. For example, today's bar 2 was a possible first reversal and even if you didn't take it, you could easily take the first pullback at b14, which is usually the best swing entry for the day. If you missed it, you could still get in at the first A2 at b35.

By b46, the trendline is broken after the W at b41, you would no longer be looking at short trades. You could easily take the first A2 at b57.

In addition to A2, W1P (the first pullback after a W reversal) and the first reversal of the day are very good trades once you can read them correctly.

Traders who focused on buying the low of what they expected to be a major reversal due to it being a pivot or fibonacci or other proprietary support or resistance zone possibly made a couple of points or lost a couple of points.

For example in the chart above, traders who bought the pivot mid bar 4 or mid bar 15 lost. The ones who bought S1 on b20 and S2 on b25 did make 2 and 3 points but they are missing the much larger move down if they would have entered with trend instead of focusing on some notion of imminent reversal. They would have completely missed the actual reversal at b41 since they would still be waiting at S3 or worse yet shorting b47 assuming that the price will now move to S3.

The gapless open

Getting on the correct side of the initial move is hardest when the first bar has a small or no gap from yesterday's last bar but the first bar closes strong. Generally, its best to treat it as a trading range and fade its breakouts. The next best option is to wait for a breakout and get in with trend on the first pullback.

These days generally become trading ranges or trending trading ranges but sometimes do break into trend from first bar but the odds are with a trading range.

Given todays first two strong bars, its not surprising many traders went with shorting the first pullback at b5. However, b3 was a possible first reversal and the entry bar b6 could have easily given a higher low and a long entry so not trading it was the correct option.

A second attempt to break below failed at b9 and b10 presented a long entry at the bottom of the trading range. This was an easy long trade to take. However sometimes the breakout on the other side does not give a breakout pullback and simply fails spectacularly. The signs were there but hard to read. There was a 2 bar final flag at b13 and an overshoot from yesterday's trendline and the bear strength earlier. However I missed the big move and probably so did others. As expected the market stopped at a measured move from the size of the trading range and gave a reversal bar or a down up two bar reversal. The entry bar was strong and due to the overlap, once could expect the low of the entry bar to be bought. This was tested 3 times at b27,32 and 38.

The A2 and DB at b38 and the DP at b46 were fairly easy to read. The W move to b55 gave a doji candle, so it was ok to pass it on and enter below the W1P at b60.

First pullbacks and breakout tests

Often buying above the first bar is risky. A weak reversal bar near the ema on a small gap such as today often breaks above and fails. This is especially true if the body is small and the entire bar is within yesterday's range as it was today.

Since its important to catch a big move early on, its best to pass on the first bar if its weak and wait for a strong breakout and enter on the first pullback. Sometimes the second bar forms an inside bar of the same color as the first bar. This can serve as the first pullback. A doji such as today is acceptable but weaker.

Cautious traders can pass on b2 and buy above b6. Limit buyers can place a limit order at the original entry once the low of a bar closes above it (b5). This would trigger today at the low of b7. There is some risk associated with buying limit early in the day since a first reversal can be severe. The best entry therefore is the first A2 at b14. Although technically the entry was above b13, practically all traders would have bought above b14 since it was a small bull bar at ema.

b19 was a breakout test that stopped a tick above the previous signal. When a breakout tests happens to have its low exactly at the ema, its a very good sign to add on a bit more if the bar is not too large.

Once the move hit +10 points from the low, most traders are looking to get out and all trades are essentially scalps. Hence the quality of trades drop therefore you should skip any questionable trade.

Trend from first bar

A great trend bar as the first bar of the day is not to be missed, since it is likely to go quite a long way. An ideal first trend bar is around two points long with no more than 1t tail on each end. 3 points or longer and it could act as a trading range causing a rush to buy below it or sell above it. A couple of ticks smaller and the next bar may trigger and reverse the move before giving a scalp profit, thus establishing a trading range. One way to ensure you are entering correctly is to wait for a small pullback before or after the bar triggers. This ensures buyers had a chance to reverse the trend bar and failed.

You should be able to hold the trade until you start seeing bars with tails as we saw around bar 7. When this happens, its usually prudent to exit and re-enter on the next signal. Today, we got an A2 short at b15. Normally, its a bad idea to sell below a flag, but b14 was a failed H2, which should give at least 2 pushes down.

When the price hit the ema in a clear 2 legged move at b27, it gave a very clear A2 signal that was good for a swing. b34 was a possible final flag that triggered and reversed at b40.

The one legged move to close above ema and clear break of trendline meant there was no more short trades left in the move. An A2 entry at b55 and b70 gave long trades reversing quite a bit of the bear move.

A2 as a reversible trade

Today was a very clear trend from first bar, with the second bar giving an inside bar buy signal. Buyers above bar 1 could hold until a trendline break or trend channel line overshoot or other obvious trend termination signals.

The first sign came today at b19 ii possible final flag signal. However, it failed to trigger on b20 which led to a 2 legged breakout of the flag that terminated in a possible climax bar on b26 (large bar size with large volume after an extended run). This in turn gave another ii signal. This one did trigger and most longs would have gotten out by now.

Next we got a double top at b36 that did not trigger, followed by a double top pullback at b40. Many days when you have a trend from the first bar, various reversal signals will simply create a shallow pullback only to race up again. since we did not have a clear trendline break yet, none of these short signals are tradeable. The trendline broke decisively when the price dropped below b29 at b42. From this point, we had an H1 at b45 followed by a weak doji A2 signal bar at b50. On many strong trend days, the signal bars are terrible, so you need to take them anyway. Especially A2 as a continuation trade on a strong trend day is usually a good trade.

However, if the A2 fails, i.e, goes below the entry or signal bars, it often turns into an A2 short signal. Today the move from b42 low to b55 high was a 2 legged move that was a clear A2 short setup the moment it went above the high of b45. Until price fell below b50, the A2 long has not yet failed. Once it did fail at b57, failing the double bottom, its a clear short. The breakout pullback at b59 was the best entry for the shorts. b77 was another possible A2 and second entry short (same entry as b74, with strong b74 signal and b75 entry bars). Since this was near end of session, most traders would choose to exit their shorts rather than re-enter into new positions.

The breakout below the trading range should go to at least the size of the range. Today it did and despite a strong 3 point reaction at the measured move, it continued further down.

In summary, A2s are good trades to take since when they fail, they are usually reversible to the other side.