A weak move off the first pullback may indicate first reversal ahead

The first pullback, especially a deep one is often your best bet for a swing trade since by then everyone who has missed the early move will jump in for the ride. First pullbacks after the first reversals are usually the best, since the initial move gives traders a better price to enter.

Today's first pullback at b9 broke above the previous swing high, but the breakout bar was weak and overshot a trend channel line. Normally, this only means a 2 or 3 legged pullback and sometimes the second leg stops near the ema giving a gap bar. However, if it ticks below the entry bar by more than one tick, especially if it does it a second time (b17,b22), there is a good chance you just missed the first reversal. You should always exit your swing portion and look to enter short.

The weak A2 entry bar at b29 further confirmed more weakness to come and b40 provided a later entry on the short side.

First pullbacks without a first reversal and often even after first reversals are usually reversible trades. The idea behind a first pullback is that everyone by now has recognized the direction has turned and wants to get in the new direction. The move needs to be clear and strong. Any weakness indicates you have read it incorrectly and you should look to exit.

Expecting pullbacks

Knowing where to expect pullbacks has two benefits. One is that you may choose to lighten your holdings and take some profit. The second is to be able to add on or enter late if you missed the original entry.

When the price takes out the high of a bear trend bar or takes out the low of a bull trend bar, it may pullback a bit. The reason for this is simple. Traders who originally entered there are willing to enter again. Another way to look at this is that when the price has turned around from a bear move back upwards, the entire pullback is like a trading range and trend bars are like mini-trading ranges. They are traded in a similar way, you can fail their breakout or enter on a breakout pullback depending on how good or bad the failure signal is.

For example, with b32, it was a poor 1tick doji signal and effectively an inside bar. Sellers below were trapped and the price moved up. An aggressive trader would buy the low of that bar with a stop 1 or 2t below b31.

This is especially true for entry bars since traders like to add on at the original price. For example, b75 took out the low of entry bar b56 off a poor short signal and an aggressive trader could buy this with a stop below b44, another entry bar.

In general, this approach is best for entering with trend as in the first half of today or fading trading range breakouts as showed in the second half.

Inside bars

I've often mentioned how outside bars are trading ranges and you should always watch for failures or take second entries of their breakouts. Inside bars form an overlapping region and are therefore like a small trading range. Generally inside bars should only be taken as with trend entries. A counter trend break of an inside bar is likely to fail and trap you as in the short side breakout of b9.

When the body of a bar is inside the body of the preceding bar as in b4, it often acts as an inside bar even if it pokes slightly (but not a lot) outside the preceding bar.

Some down/up reversals are effectively inside bars if their sizes are not comparable as in b33. Their breakout can fail as well.

The chances of success of a trade off an inside bar is stronger if the inside bar is a small trend bar at the end of a large bar. In these cases, you could trade the breakout of the inside bar and not worry about taking an entry off the outside bar as in b25 and b35.

Inside bars that have both bars of the same color can be treated as a pullback and be entered with trend as in b59. Double bottom at the ema is also another acceptable entry as in b65.

Inside-inside bars as in b30 have a much higher chance of success than single inside bars, especially with trend. In this case, it works as a breakout pullback trade.

In summary, inside bars are best entered with trend or to fade large bars. It is simpler to understand when you look at inside bars as basically pullbacks. If you don't believe the trend has reversed, you can restrict your entries to higher probability trades.

Wedge reversals and W1P

The reason I take W1P almost every time and Wedges only when the signal bars are very well formed is simply that I have a lot more information about the strength and sustainability of the reversal. Today's entry forms the blue bottom left and top right corners of the nine transitions.

For example, b9 could have been a possible W (since there was no gap between yesterdays last bar and today's open bar, we can treat it like a continuation). However, by the time the possible W1P presented itself at b16, we already had many clues that this reversal attempt would fail:

• the signal bar was weak since it was smaller in size compared to recent bars and had a 2t tail on top. 
• A shaved entry bar or an entry bar with only 1t on at least one side strengthens the W. b10 had 2t on both sides.
• A well formed W1P should not tick more than 1t below the entry bar b10. Price closed below it on a strong trend move.

This kind of W1P usually gives a scalp but is not advisable for a swing move. Another similar W occurred at b35. This was weak for several reasons.

• the down/up reversal at b34,35 is a possible trading range and there may be sellers above it. Its best entered on a second entry or after a 2 legged pullback (2L W1P). 
• Entry bar was small compared to recent bars
• It closed several ticks below entry bar

The W at b46 however was very much the sign of extreme behavior and even though it wasn't bull bodied, it had a strong entry bar. 

A down/up bar must be of comparable size and should not give an entry far beyond both bars to be an up/down or down/up signal. So b29,21 for example was a good up/down signal but b47 is an entry bar. The pullback bar b49 or the inside bar b51 could be bought as a W1P.

W1Ps tend to move till their move is terminated into another W or until the first pullback in the move down to the W. So for example if the W began at b3, then you could expect W1P to move till b13 high. Sometimes they end in a W as we did today at b71.

On vacation

I'm on vacation till Wednesday, Feb 23rd and will not be posting updates. Good time to browse old posts :)

Managing trades that go bad

Sometimes we read the market incorrectly or in the heat of a big move, place orders before identifying a pattern correctly. Sometimes we get into trades due to bad habits or the trades we enter into just fail. How you manage your trade after you get into it plays very strongly into your trading success.

The ideal situation is to very rarely get into bad trades. A simple way to do this is to never buy above or sell below overlaps, especially if in BW. Folks who bought above b16, a doji bar or above b26 or sold below b58 lost. The second rule is if your signal bar has a large tail on the entry side, its usually better to wait for a second signal. Also avoid large inside bars since they often act as trading ranges.

The best and first course is to scratch the trade by exiting at a small profit or breakeven if your entry bar is anything but a trend bar. The next option is to move your stop below your entry bar no matter how crappy it looks and let the market take you out. An alternative is to trail 5t from your entry and let the market take you out.

If you choose your entries correctly, your entry bar should be a nice long trend bar with small tails. The setups I choose typically have such entry bars and if they end up looking like anything else, I look to bail. For example, b9, b20 and b61. A bar with a single small tail is ok, as long as the close is strong such as b20 and b36.

Any bar that has larger tails is higher risk of failure such as b27, b70. At the very least, exit most of your position at a smaller target.

Bars that end up in a doji or whose close is against your position are very likely to be failures, possibly after a bit more move in your direction such as b5, b17, b22, b64 etc. You should exit right away and look to reverse your position.

My standard trades of A2, W1P, DP and fBO should not need more than 4t or 5t stop and often go to +2. Once your scalp of +1 is filled, you should right away move your stop to breakeven. After that, you can move the stop after every HL or LH. An alternative is to trail it by 5t and let the market take you out.

If you trade this way, your maximum loss is 4t/trade (or 5t in the first hour). and your expected gain is about 6t average (+1 and +2/+0). This inversion from 4t target and 6t stop to 6t target and 4t stop means your accuracy only needs to be slightly greater than 50% instead of the 70% for breakeven. 

Weak wedges

Narrow range days usually have overlapping bars and one or two weak wedges. Some of these wedges are traps and others pull back a few points but may not actually result in a reversal. The reason is that wedges need to be extreme moves and have a clear signal bar for with trend traders to switch sides.

Today we had a W4,8,11 from the open but we did not actually get a reversal bar. The closest readable entry was the W1P at b14, but even that is a bit risky. The strong overlap at the open would act as a magnet, pulling the price back in so its a scalp at best.

There was a possible W23,31,35 which gave a inside bar signal that never triggered. This is usually an indication of unwillingness of traders to short and hence, more up. The right thing to do is to buy a 2L PB to ema, possibly on limit at say b44 or so.

A third W35,67,76 gave a better signal that had a strong entry bar and the W1P at b79 was a good entry and could be taken for a swing if it wasn't at the end of day.

Weak wedges also occur in pullbacks and they are usually excellent with trend entries. For example, W48,51,57 was possibly a weak W pullback and buying above the next bull bar is acceptable as long as you are okay holding through pullbacks since your signal bar had lots of overlap.

In summary, the trick to trading wedges is the same as trading every other signal. When the signal is clear and strong, go with it. Otherwise, fade it.