First bar: Outside bar

When the first bar overlaps the prior day's last bar completely, it should be treated as a trading range. This means you can fade its breakout or take a breakout pullback if the breakout is strong.

An outside first bar, especially if its a large bar (and indeed any large first bar) is a fade candidate. You should never trade its breakout and if you do, take a fixed (scalp) profit. A breakout pullback, especially a 2 legged BP of a large b1 could be taken, but unless your entry bar is large, you are likely to encounter a deep pullback.

When the large bar's BO is large and gives a successful HL, there is a decent chance of spike and channel developing is high. Often the channel will be a measured move of the spike.

First bar: Reversal bar

When the first bar is a reversal bar in a place where it does not make sense such as a bull bodied reversal bar above a gap or overlapping the prior day's range, there is a good chance it is a setup for failure. On the other hand, a bull reversal bar below a large gap will often begin a trend from the first bar.

When it fails to produce a trend from the first bar, chances are high that the day will turn into a trading range day. This means whenever there is a new breakout, you can look for a fBO trade is the range is large enough (4+points).

Occasionally, such a breakout gives a BP trade such as b26, which can be held often to the measured move of the opening range.

Webinar for Donors: Price Action Basics

Note: Not all webinars are recorded. Watch full screen if possible.

Video at youtube

Trading a broken trend

Once the price moves many bars beyond the trendline, the trend should be declared broken. When the market touches a live trendline, it reacts like it touched a live wire (b12,b15). When the market closes below the ema in one leg and stays below it and well beyond the trendline, the trend is likely over.

A broken trade is inherently hard to trade since its not really a reversal and its not really a pullback. When the original trend is strong, there is a possibility that the market will present a slow channel moving in the same direction as the original trend. Occasionally such as today, the channel may be in the opposite direction.

These channels are inherently hard to trade and most moves would take a really long time to give a 2 point profit. The right way to trade them is to realize that channels are wedges and wait for three pushes (b29,40,54) before trading against the channel. The best option is to wait for a test of the prior extreme or wait for a new breakout and enter on a pullback.

Fading a strong trend instead of trading with trend

One of the classic trader's error is to fall in love with their first position. If a trader bought b2 since he may be expecting gap closure or b5 as a possible second attempt to close the gap or 1PB, he may be surprised when the market stops him out and takes out the low of the day.

When he later sees b9, he may see a reversal bar. b12 may appear as a reversal bar after a possible 1 bar FF at b11.  b12,13 may appear to be a rather strong 2 bar reversal. The trader may end up buying every one of these and getting stopped out every time. (The alternative, adding on at every new signal is far more dangerous).

One of the reasons I prefer to trade on breakouts of signal bars rather than simply buy on close is that it prevents me from entering into many incorrect trades such as these.

The complementary situation  is the trader who was right about the initial direction but fails to see the trend break (b19-b27) and test (b49) and insists on shorting every move up. After a major reversal at b49, there are no more short trades and b58 therefore is not an A2 short. (A common reason for failed A2s is being in denial about trend termination or trend reversal).

A common reason for such behavior is the trader's bias about market direction. This bias may be a fundamental bias caused by reading too many economic blogs or watching TV or other inherent biases about the strength or weakness about the world economy that the trader wants to see reflected in the market today.

Traders who don't watch news are possibly subject to technical bias. They may have an inherent belief in some pattern or indicator and are expecting a strong reaction. It is correct to trade those and natural for some of them to fail. The trader however, should not repeatedly enter a trade in the same direction assuming he would eventually be proven right. This is the need for acceptance and is a strong human trait. You should not let it meddle with your trading since the market is too impersonal to either accept or reject you.

The trader needs to realize that all biases and opinions are always wrong regardless of their direction. Only the market is right and for a day trader, the strength and underpinnings of the economy are meaningless. Patterns and indicators are tools and they fail occasionally no matter how reliable they may have been.

The right way to trade is to accept only what the market presents and be aware that trends can break, trading ranges can breakout and nothing is guaranteed to run forever or reverse eventually.

Early strength indicates strength late in the day

When a day breaks into a trend (b18-62) and presents a reversal signal (b63), you need an assessment of the chances of success and a possible swing add-on. Will this attempt only go to the ema? Will it fail after a couple of weak attempts to go up and continue the slide down?

There are a few indications you can use to make such assessments. First of all, was there a trendline break? (b33-b54). If not, the chances of a successful reversal are probably low. The trend could terminate and move horizontally, but a trendline break greatly adds to the chances of a successful reversal.

The second thing you need is a Wedge (b33,57,63) with a strong signal bar (b63) or a successful test of the swing point that led to the trendline break (b33).

To swing your position, you need indications of strength early in the day (b5-10,b11-15). If there was no early strength, its unlikely that your move will get too far. (It does happen, but is rare).

Late entries in a channel

I normally avoid late entries since they are usually dangerous. However, if you have a reason to believe an extended channel is setting up, for example due to the spike b7-10 you could look for mid-channel entries.

First you need to recognize a channel is in effect. In general if prices are moving in the same direction but most bars are overlapped except for a tick or two, you are probably in a channel. Unlike the move from b7 to b10, the move from b16 was clearly a channel.

A classic mid-channel entry is to fade the 1st breakout of a channel or 1chbo. This occurred possibly at b20. If you missed it, you can always fade opposing trend bars in any channel, the first one is the best. Today, the closest we got to an opposing trend bar was b26.

A first tail in a channel in the direction of the channel (b21) works very similarly to the first opposing bar. Its represents a pullback in a channel and an opportunity to buy other than the worst price.

Occasionally, a 1tf (b27) sets up which is usually a high probability trade. Care must be taken not to enter too close to end of expected channel move, such as the measured move of the length of the spike or the third push (b19,26,31).

Often, a strong channel will continue after a trendline break as a much shallower channel (possibly b37 to b67) so you should exit your positions but never fade a strong channel until the trend breaks. A prolonged horizontal movement such as today, breaks a trend but you could probably already guess around b36 or so when you get a series of dojis that the move was probably over for a while. Even so, SC days are notorious for continuing to keep moving till end of the day on terrible signal bars so caution is to be exercised when trading counter-trend.