Buy above bull bars, sell below bear bars

Buying above bull bars and selling below bear bars and avoiding any other bar is a critical component of price action trading. If you get eager and enter on marginal bars, you will reduce your success rate.

If you shorted only bear bars after a move up or bought only bull bars after a move down and hold for at least one point, you will  make money on most days. Of course, on soft trend days or hard trend days you wouldn't want to do this but on the other 80% of the days this should leave you in the black at the end of the day.

In the chart above, successful buys are indicated by blue dots and failed buys are indicated by red dots. Blue diamonds signify successful shorts and red diamonds indicate failed shorts.

For example, even though today was an overall bear day, the only buy above a bull bars that failed were inside bars b5 and b70. These are not buys per price action principles and you wouldn't be buying them. Similarly the only bear bar that would fail was b17, an inside bar variant you wouldn't be shorting.

If you only took the longs on non-inside bull bars for 1 point you would have +5. Shorting below non-inside bear bars at a swing move would give you an additional +8.

Just don't forget the inside bar and doji exclusion rule. While they sometimes work, knowing when its appropriate to trade these exceptions takes quite a bit of experience.

Double top and double bottoms

Double tops and double bottoms are important trend terminators and are the easiest to identify. Once the price forms a trend terminator, a transition from a trend to a trading range is complete and you should no longer be thinking in terms of trend continuation, but rather trend breakout. On a trend day, you usually find at most one of these. Trading range days can have two or even three.

Any overshoot of a trend channel line by the bars that form the DP increases the chances of a deep pullback and a wide trading range, allowing a possible trade off the double top or bottom.

On a trading range day, any 2 legged move to the other end of the trading range can still be traded as if they were an A2 (b31 and b46) even though they are strictly not trend continuation. Once a trend has terminated in one direction, the next breakout could be in either direction, so its a good idea to enter every 2 legged move if its sufficiently well formed.

Any pullback close upto midway of the bars forming the double top/bottom can be treated as a DP and shorted for a swing. An inside bar such as b59 serves as a pullback after a DB or DT so you could treat it as a DP signal.

Trading strong bear days

 Trading strong bear days is one of the hardest things a trader can do for various reasons. The major challenge is that the price moves very quickly and pullbacks are equally violent. Shorting mid bar or below a large bar is extremely dangerous, as sellers near the lows of b19 and b58 were rudely  reminded.  Note that before b58 there were 3 other bars that would be considered large and only look small in comparison to the huge bars near b58 and 59.

When bars form on days like these, they wiggle a lot and will usually take out your breakeven stops so a better strategy is to take longer scalps and use slightly larger stops. When a trend is in motion, MTL breaks can be used to enter with the move. Almost every bar in the down move had a bottom tail or an inside bar following it. These are sharp intra-bar pullbacks, making it hard to enter a swing position and forcing the trader to scalp a point or two and look for the next entry.

If you are an agile trader, you could probably trade a faster chart such as the 1minute chart. The intra-bar wiggles and sharp pullbacks form normal sized signals and can be traded for more entries. Tick charts and range charts can also be used, but price action varies slightly on such charts and its not something you would be trading on a day like this without a lot of practice.

Wide range days

The first time a huge gap down appears in a down move, there is a very good chance it will be bought and turn into a bull day. Bear moves bring large range days and one needs to exercise great care when trading these, especially the first few bars.

One option is to trade a shorter timeframe, but you need to be more agile and your failure rate could be higher. The second option is to trade fewer contracts, which is not usually an option for traders who are already trading small size. The best option therefore is to only enter on small bars and even on big days you will eventually get such a set up.

When there is a strong trend move at the open, you should always take a 1st pullback and hold it till you encounter signs of trend termination. If you get a windfall because of a couple of large bars, its ok to exit and wait for the next trade or end your session.

On a FOMC day, its best to wait for a breakout bar and go with its failure. Today we had a strong bar b58 whose low did not trigger and the price broke above the trading range. a BP long trade at b62 gave a measured move of the trading range between b36 and b58.

Traders who held till the end of day or sold at the 3rd push of the spike and channel from b59 to b76 profited 30 points or so and this is something you can often see in wide range days of bear moves.

Breakout pullbacks vs failed Breakouts.

When there is a breakout you need to decide if you want to trade the breakout's failure (fBO) or if you want to trade a breakout pullback (BP), which essentially is a failure of the fBO.

In general, there are a couple of guidelines to help you make the decision. If the breakout bar was a strong trend bar that is halfway out of the previous range (or TL or ema) such as b13, there is a good chance you will get a breakout pullback entry that will take you to at least a measured move of the previous range. You should always wait for a pullback before entering if the breakout bar is large (say 3+ points). The second hint is the strength of the prevailing trend. If it looks like there is any sort of steep trendline, there is a good chance the breakout will succeed. If the trendline is very shallow, it does not contribute to the success of the breakout.

If the breakout bar is small (1 to 2 points) with a shaved close, you can enter right at the close or a tick beyond. This is especially true if the breakout is counter to the previous large move and closes beyond the ema.

If the breakout bar is medium size (2 to 3 points) or has a tail on the close wait for a breakout failure. If two attempts to fail the breakout are unsuccessful, you can enter in the direction of the original breakout.

Weak breakout bars often result in failed breakouts, especially a second attempt, which worked like an outside bar at b42. Note that to trade in the direction counter to the previous trend, the previous trend should have terminated (via TTR or overshoot or trendline break)

Triangle breakouts

Triangle consolidations can be easy to identify such as the obvious one from b4 to b22 but their breakouts are tricky to predict. Although they could go either way, the relative strengths of bars will usually give an indication of which way they will break. The strong trend bars making the up moves while taily bars making the down moves such as today usually imply and upward break.

Triangle breakouts lead to very strong trends, and you should always take them, especially if you get a breakout pullback signal such as b25.

The biggest risk trading triangles is they often turn into expanding triangles. That is to say after the breakout at b26, it could have easily broken below b9 and then back up again. This is why you always need to take some profit on a strong breakout out of the triangle. If the pullback is not strong enough to turn into an expanding triangle, it often gives a 2 legged pullback such as the A2 at b46. This is usually an excellent trade if its deep since the ones who missed the breakout will enter with you.

Failed breakouts

Today's entry represents the center square of the nine transitions. The trick to trading failed breakouts is to only trade them in trading ranges and when previous strength in your trade direction is proven. Trying to trade fBO in trends is disastrous, wait for overshoot or trendline break first.

Today's open bar was large and any large bar (3+ points where an average bar is around 2 pts) and large bars near the open are trading ranges regardless of the size of the opening gap. Since b1 is a trading range, it can be traded as a trading range. You can sell a breakout pullback of b1 by selling below b5 or buy b14 as a second attempt to fail the breakout. Note that if we did not have the strength of b4 and b11, this would be a low probability trade.

The move to b43 can be seen as a trend move from b14 to b31, its trendline break on the move to b37 and a move to a nominal higher high. This is a trend termination and possible reversal. b46 was a second attempt to fail the breakout after b44 and therefore a high probability trade.

A first attempt can be taken if the signal bar is very well formed such as a reversal bar on overshoot. If not, its very likely a poorly formed first attempt will fail and possibly stop you out. A cursory glance at today's action will illustrate the importance of taking only well formed signal bars. Shorts below b16,20,24,27 all failed because they were essentially doji bars. Shorts below b31,b46 and b63 fared much better since they were trend bars. Lower bar quality is tolerable for the first hour and second attempts as illustrated by b14 and b73.

In summary, to correctly trade a failed breakout, you need at least two of prior strength, a great signal bar, an overshoot and second entry.