Barb Wire

Any three overlapping bars where one is a doji can be called barb wire such as b1-b3, b20-b24, b29-b32. There is no real way to trade barb wire except to fade it. This is because barbwire is a trading range and most trading range breakouts fail.

There are two possible ways to fade barbwire. One is to fade any trend close. A trend close in a barbwire is likely to breakout on the other end. So you could sell the high or close a bull trend bar or you could buy the low or close of a bear bar. However, this is dangerous since there could be a breakout that takes your stop out.

A simpler strategy is to wait for a trend bar breakout thats more than two ticks beyond the barbwire and fade it. The longer the barbwire runs and the stronger the breakout, the higher the chances of success.

If the barb wire is made of tiny bars ( smaller than 4t ) there is a good chance that you will get a failed breakout multiple times, essentially forming an expanding triangle breakout. You need at least 6 to 8t to the other end of the barb wire to be able to fade the breakout.

A barbwire after an extended move at an extreme of the day (b21-b24) often causes a reversal and you can swing some portion of your trade.

Chop: Barb wire

The most dangerous kind of price action is Barb wire. Barb wire is any three overlapping bars where at least one of them is a doji. This definition pretty much makes most of b20-b60 BW. Many traders lose their AM points trying to trade the lunchtime BW.

The correct way to trade BW is to not trade it. There were four failed trades in the region from b55 to b67. The first was a possible A2 short below b57. The second was a possible A2 long and failed A2 short above b61. b65 was a possible 2L pb after a breakout above a swing point. b66 was a possible second leg down from b62.

While they all would normally be OK trades, being in barb wire disqualifies them. Any setup can fail if its in barb wire, so you shouldn't get excited no matter what happens. The only time to enter a trade is when the BW stops being barby. At b70, we no longer had dojis and we had 3 pushes down to a failed breakout so its a possible failed breakout long. If b68 was a doji, then this would also have been a poor entry.

Trading barb wire

While its normally excellent practice to avoid barb wire, experienced traders can and do trade it profitably. On the occasions I do enter on barb wire, its often because I have missed an earlier entry in a trend and the barbwire is another opportunity for me to enter with the trend. I usually avoid barb wire mid-range.

For example, today's BW between b24-28 had a trend breakout to the ema and it bounced off and gave an fBO entry that is also a fL2 entry (b27L1, b29L2) for anyone who missed buying above b22. This sort of BP usually produces very short BW lasting 4 to 6 bars. A similar BP occurred at b66. AStrong breakout at b62 was followed by two feeble attempts to reverse the breakout (b63 is a feeble attempt to create a reversal bar).

b73 was a similar is a barbwire A2 in a trend that should be read as a fH2 and therefore two failed attempts to reverse the trend. (If you expect the bar to trigger, its quite ok to short the close on limit as was done here)

The last but somewhat rare scenario is that BW can be shorted when it repeatedly fails to run stops as in b45-60. How many attempts equate to repeated? That's yet unknown, but two failed attempts to break out up after at least one successful attempt to break down should suffice.

BW midrange

A mid-range barb wire (BW) pattern is a very common occurrence on Trading Range days. Most traders get chopped up trying to trade these such as the ones between b22-29 and b41-53 today.

Facts you need to know about barb wire:

1. They almost always break away from the ema rather than thru the ema.
2. A strong breakout bar from BW(b31,54), no matter how strong it may appear, is likely to fail and turn around to go through the BW. This is especially true on trading range days since you expect moves to ends of the range to reverse.
3. 2 failed attempts to break through the ema(b25,27) can be traded as if it were a minor A2 if additional indications are seen (TL touch, 5tf, shaved signal bar b28). This should be done with care since taking the fBO is always the better trade and you dont want to miss it by being on the wrong side.
4. A BW fBO late in the day is likely to give a much stronger move than one mid-day.

Note that hard H1/L1 entries in a hard trend (b74,b78) do not constitute BW. This is because trending dojis are a trend and BW needs to be somewhat horizontal.

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.

Trading TTR breakouts

Breakouts are the hardest to predict and trade correctly and most people are better off simply taking the first pullback after the breakout. However, its possible to correctly read and trade breakouts in some cases such as today's extended TTR between bars 28 and 46.

The first clue was a channel move to the ema and three successful closes above it after three pushes down.  The market then tried to sell off three times and failed. The first signal was an oio at b30, the second was an A2 variant at b34 and the last was an A2 at b43. True, they were all poor signals, but given the tenor of today's open and early move there was a good chance one of them should have at least given a scalp.

An extended TTR breaks the trendline even if the price had not done so explicitly at b24 today. b46 completed 2 legs down to a higher low. After multiple failures to continue in the previous trend, the price is likely to breakout and move upwards for at least two legs.

b46 was a weak bar if you judge it on its own but in the overall market context, it was a double bottom (with b25), a failed breakout (fBO) of the prior swing low and an A2 since its a two legged HL after a possible reversal (3 pushes down to a reversal bar at b20). Cautious traders can buy the next bull bar (b47) as long as its not too large.

Note that this is a specific case of TTR trend break and reversal after an extended move (b1-b20) and not to be applied anywhere you see barb wire. For most BW, you are better off fading a trend bar break out of the BW.

Getting into the right side of a breakout requires lots of experience and most traders can simply take the BP at b56 or b61 (which was also an A2)

There is one shortcut you can take if you recognize an extended TTR break of a trend. You can simply buy above any swing high (b47 or b42 depending on how liberal your read is) with a stop below the recent swing low (b46). You should move the stop below the entry bar (b49 or b51) as soon as it closes.

Failed trades reveal market information

When a trade fails, it should give you some information that you can use in subsequent trades. If a failure does not give you any information, you should avoid trading it. Most of my setups give certain definite information about market structure when they fail.

For example, b9 today was a possible 1PB setup. Its a poor bar, being essentially a red bar, the pattern is a 1 legged deep pullback and the location is a double bottom with a strong trend bar. Even though I never usually buy 4 red bars, during 1PB I relax my rules a bit not because the trade is higher probability but if it works, the risk to reward ratio is usually worth it.

When b9 triggered and took me into a trade, if it works I expect a large bull day and given the recent deep pullback on the daily chart, it could be a 10 point or larger move. However when the gap open is large, there is always the risk of it being too expensive for fresh buyers and the trade could fail. The trade did fail when b13 stopped me out.

The failure gave me new information: Today would not be a trend day but rather a trading range day bounded by the AM spike (b1-b5). The only acceptable trades now are buys in the lower third of this range (b22, b41) and sells in the upper third until a breakout and BP sets up (b73). A marginal setup such as b50 can be passed up since its not high enough in the range and in barb wire.

Channel Theory V - 1st Channel breakouts usually fail

Channels with small trend bodies such as b21-25 obviously constitute a larger trend bar in a higher timeframe and you can often buy above any small bar with a strong close with a stop below that bar. Such channels are called Trend channels (TC) and often are the easiest to trade. In particular, a small trend bar with a strong close that touches a trendline or a micro-trendline is likely to give a large trend bar after it and makes an excellent swing entry (b34).

On the other hand, bars with tails on both ends such as b2-5 and b45-49 should be viewed as sloping barbwire or barb wire channels (BWC). These should be traded just like BW. The first break against the channel is likely to fail and can be taken for a second leg down (b60) unless its against support such as ema or close of prior day (b8).

A second attempt to break is often successful (b15) and a HL after a successful reversal (b18,b68) are often the safest entries.

Trading range as a series of fBO

If trends can be seen as a series of breakout pullback, then trading ranges are a series of failed breakouts. I normally avoid trading fBO unless the range is wide enough to net an acceptable profit. In general that means if you like a profit of about 2 points, you want the range to be twice as much, i.e. 4 points.

The reason is that many fBO trades will fail to go to the other end of the range (b33,b40). Thus narrow trading ranges cannot be profitably traded using stop entries with consistency. Even weak wedges such as b40 are usually not worth trading.

The quality of signal bars is very important in entering any trade as it is directly correlated to success rate. The quality of the bars around the signal bars is equally important. On a chart with mostly well formed bars, you can take any decent signal bar but on a barb wire chart you cannot expect a move large enough to justify a trade.

But eventually, the market will move out of the tight range and create bars that become tradable (b75-81). If this occurs with sufficient time before the close unlike today, you can look for high probability trades.

The most dangerous Price action

The most dangerous price action bar pattern is barb wire (BW) but the most dangerous larger price action pattern is a wide slightly sloping channel.

BW is fairly easy to recognize and avoid, for example, not many traders would short b40. A narrow channel such as b60-71 is also simple to trade: You can just buy near the low of the channel. However a wide slightly sloping channel such as b7-b43 tricks traders into thinking that a reversal is just around the corner and will force them to buy every new low. Typically, the counter-trend signals (b9,16,28,34,43) look far better than the with-trend signal bars (b6,13,24,31,40) trapping traders on the wrong side every time.

There is no easy way to trade such a channel. The simplest trend trading requirement of buying only higher lows and selling only lower highs would have protected you from every poor signal except b8. The first higher low at b43 actually did work if you used a price action or money stop of 2 points.

A patient with-trend trader would only take a long trade at b60 after the channel trend line was broken at b50 or so.

My trading philosophy

Over the years, I have tried many different trading systems and have absorbed the best from the techniques I have encountered and ultimately ended up developing my own system. It is inevitable that you will do the same, even if you use my system as the foundation.

The key drivers of my trading goals were:

• Getting most of the big moves of the day
• The ability to sit through a trade, without panicking when it goes against me
• Predictable losses that I can control
• Few good trades vs many marginal trades

I arrived at the above after being burnt using alternate philosophies such as:

• Trying to get all moves: Low win rate, small profits
• Momentum trading: Needs large stops, hard to sit through.
• Dollar cost Averaging: Unpredictable big losses
• Scalping for a few ticks: Good for my broker, not me.

One of the key things that I learnt was that the mind's ability to focus attention wanes over time and judgement suffers. Your first two or three trades are when your judgement is finest. At the end of the day, especially if you have suffered losses already, you will probably make terrible mistakes and have days that will wipe out weeks of profit.

Trading every possible swing is fatiguing to the mind and is not something you can do day after day. Therefore, I chose to focus only on the big moves. That way, one to four trades a day were sufficient for success.

On entering a trade, I learnt that often I would be shaken out when the trade went against me. I deduced that this is because my body reacted viscerally to the open loss during a pullback. I realized that to be able to sit through a trade, I would need to trade with a fixed stop. Over time, the body gets de-sensitized to a fixed loss and you will stop reacting to it and you will be able to execute without emotion.

These observations led me to focus on the open as a source of good trades since many large moves are at the open. Trading the open also has the benefit that I can choose to trade only an hour or two and quit for the day.

Its a viable trading plan to only trade the opening setups. If the open ends up being some sort of trend, it may be worthwhile taking with-trend trades. I generally avoid trading trading ranges or barb-wire. They are notoriously difficult to read correctly.

In future posts, I will describe my setups and trading reports in detail.

Horizontal Tight trading range (TTR) or Dojistan

A prolonged horizontal barb wire pattern is nearly impossible to trade and can be labeled dojistan. Attempting to trade dojistan using stop entries will invariably lead to failures.

Anticipating dojistan is simple. The moment you see bars getting smaller than 1 point and when many of them are dojis, you should be cautious. Bars that are two ticks tall such as b55 are early warnings that indicate possible dojistan. Note that any bar thats 4t or smaller should be treated like a doji while in dojistan and is usually not a setup bar (b59, 62).

The only possible approach to trading the dojistan is to fade trend bar breakouts. By definition, dojistan is a tight trading range. Since most breakouts of trading ranges fail, you could simply sell the close of a trend breakout bar with a stop 1t beyond it. So for example, you could short b61 close and b74 close on limit.

The best approach however, is to do nothing. The one or two points you could make in a dojistan are not usually worth the risk and the energy you would need to put into it. Better price action is coming shortly, so just wait for it.

A 2 legged pullback after breakout is a good indication of a reversal

A trend break followed by a test of the prior extreme is a major reversal. Sometimes the break is so strong that the test is very shallow. For example, b26 broke a trend line and stopped short at the ema and went into barb wire. Often one bar breakouts fail and sell off rapidly but when it gave a 2 legged pullback (b28 and b32 found sellers) and the buyers were able to take out the prior swing high (b40 took out b28 high), a new trend was in effect (2 Higher highs and two higher lows).

So the next 2 legged pullback at b46 found lots of buyers and so did every pullback into the close.

First Channel breakouts

First channel breakouts are a high probability entry if you can correctly identify them. I usually end up not taking them, because I'm already in a position due to a prior entry and have just exited my scalp portion a few ticks ago. It does not make sense to re-enter unless the price action has shifted significantly.

The correct way to enter a first channel breakout long is if the price triggers above the bar that broke the micro-trendline. Therefore for the channel from b34 to b42, since the bar b43 dipped below the prior bar, an entry above it is a high probability entry.

On the other hand for the channel from b20 to b25, the channel was broken by b27, but a long above it was not triggered. A second bar that dips below the prior bar is more likely to be a 2 or 3 legged pullback or barb wire and you should not be buying above b28.

The move eventually gave two failed extremely poor sell signals, a doji reversal at b29 and a 1t ii short at b32 both of which failed and turned into an A2 long. Although technically the b32 ii is a possible long signal and would make it an A2, its such a poor signal that very few traders took it. If you did take a poor signal, you need a money stop of 8 ticks (which was not hit).