Trading plan: Trading Range day

Since most trading days are trading range days, its essential to have a plan to trade them well. Identifying a trading range day is a lot easier: If its not a trend day, it's very likely to be a trading range day. Rather than go with the default, I use a simpler heuristic. After the first two up and down moves (including any gaps), if you are back where you started from, its likely to be a trading range day. For example, today the first move up was the gap and the bull trend bar b1 and the second move down was b8. At this point, you are back where you started, so this is likely to be a trading range day with b1-b8 as the opening range.

   On a trading range day, the first few bars are likely to have a lot of overlaps and tails, preventing a clear signal bar. One way around this is to trade a smaller timeframe such as the 3m chart as shown here. The entries are mid-bar on the 5m chart and do not really make much sense but are much clearer on the 3m chart. Once the first hour or so is complete, you should no longer look at the 3m chart since the setups there are likely to be of lower probability of success.

Trading range days often have two legged moves in each direction followed by two legged moves in another without really moving too far from the range. Most swing entries are likely to fail and your breakeven stop is likely to be hit. So a valid plan is to take every two legged move and exit on the second push. For example, if you sold 3m b2 on the chart shown to the left, you would exit when the second push ended either on strength at the close of 3m b9 or when a bar ticks beyond a prior bar (above 3m b14).

However, I avoid trading this way, simply because I prefer larger moves. A viable plan is to buy near the low of the range and sell near the high of the range. Simply stated, trade the failed breakouts of the range and try to hold it till the other end of the range is tested. So for example, the 5m b32 gave a failed breakout of the HOD b1. The right approach is to short this and try to hold it till b9 low is tested.

To constrain yourself to truly taking trades only near the ends of the trading range, divide the opening range into three parts and mark out the central part. Take only buy signals below it and sell signals above it. Hold it till the price crosses to the other side (b27) or attempts to bounce back a second time (b50). Ignore all entries that would take place in the center. This should allow you to swing even on a trading range day and avoid most of the choppy entries. When a new lod or hod (b30) extends the range, adjust your box accordingly.

Using this system, you would have only taken the long above b17 and the shorts below b32 and b56. These also happen to be the best swingable trades today. Note that this may not work on TTR days, when the range of the day is 5 points or less. TTR days are best not traded at all, since any trade is low probability.

Just as you stop trading trends when the trend terminates into a trading range, you need to stop trading a range when it breaks into a trend. Take the first plausible pullback and ride the new trend and avoid trying to insist it to turn back into the trading range.

Along with the Trading plan: Trend days, you have 90% of the days covered. The remaining trends are hard trends, soft trends, Spike and channel and TTRs. Recognizing these and trading them correctly is the key to successful trading.

Anticipating late trend breaks.

On a large gap day where the open is beyond the range of the prior day, the likelihood of trending is high. If the first bar does not lead to a hard trend, there is a very good chance it will at least attempt to pullback to the ema and then break into a trend in either direction.

Once the day has stalled into a trading range, any trend break is likely to happen from the other end of the range, i.e, bull trend breakout from the bottom of the range and bear trend from the top of the range. This is why you should only buy low and sell high in a trading range.

A 1tf such as the one on b24 could lead to a trend but when the range is small, the likelihood is lower. A trading range typically tries to widen before it breaks into a trend. A common way to expand the range is to take out repeatedly both ends of the range until the range is wide enough. This is an expanding triangle breakout and any sharp breakouts can be faded until an upside break and 2L HL or a downside break and 2L LH.

The second option is to give a breakout pullback. b36 was a strong breakout of the trading range and gave a LH 3 push pullback to b53, which was also a DP. These are usually trend generators and should be taken.

Entering mid-range such as the entry at b28 should be avoided unless you have reason to believe you are in a trend (LL and LH) or you are entering on a BP. In general your best swing entries are near the ends of the trading range after the trading range has been made sufficiently wide by prior failed breakouts.

Determining trend day versus Trading range day

Trend days and trading range days require different kinds of trading and being able to recognize them early is essential for successful trading. On a trading range day, the range could be small like today and any swing entries are likely to be taken out.

The easiest way to differentiate between them is to take a step back and look at the chart after the first few bars. if the price hasn't moved a large distance from the opening bar, you are likely to encounter trading range action. If the price has moved 3 or more points beyond the first bar (even if it has subsequently turned around), its likely to give you some trending action.

On a trending day, you can enter a swing entry on the first pullback and ride it till the trend terminates. You could also enter on A2 or other continuation setups and most trades are likely to succeed with trend.

On a trading range day, you are essentially going to encounter a series of failures. Occasionally, a trend will breakout from a trading range but predicting breakouts is hard even for experienced traders and most breakouts fail (every breakout today failed).

When the price tries to breakout beyond the trading range, you could enter with the second failure. This has a good chance of working if the signal bar has a strong close such as b8 and b26. When signal bars are poor or overlapping such as b52 ii or b58, you should trade lighter and take smaller profits.

A fBO entry needs to be very strong to qualify for a swing move and while second failures tend to test the other extreme of the range, there is some chance it does not go that far. Most of your targets should be modest. If it does breakout strong and then gives a pullback, its a possible trend generator and you can enter with the new trend.

To summarize: Trend days give swings and continuations; Trading range days may only give fBOs. fBO are riskier, lower percentage trades that should only be entered on strong setups for smaller targets. 

Trend breaks and trend births

The first thing a price action trader learns is that the market is either trending or in a trading range. If its in a trend, take only with trend trades. If its in a trading range, fade breakouts, i.e., take counter-trend trades.

Of course, many traders find themselves in trouble when they find they are trying to trade with trend but the trend has already ended or they are trying to fade a breakout into a new trend. Therefore, its vital to know when a trend has ended and when a trend is erupting from a trading range.

Many trend terminations are fairly obvious because they end in Wedges or overshoots and then reverse. However, often trends end in a consolidation. The definitive sign a trend has ended is if the trend line is broken. A broken trendline is clear and obvious if the price moves below the previous swing low in a one legged move as it did today from b37 to b40. The fact that it did so after a failed breakout from a horizontal final flag adds credibility to the end of trend. At this point the market is in a trading range bounded by the recent swing high of b37 and the swing low of b40. Any move to the edges of this range may be faded. If the range size is small as it was today, there could be insufficient room to give a scalp profit using price action entries. Limit traders can fade the first approach with confidence knowing that the first attempt is likely to fail and they have a reasonable stop a tick or two above the recent swing points.

Trends usually birth after a breakout failure of one of the bounds of the range. Today, we got two attempts to break above the range at b51 and b65 and this gave a DP (double top/bottom and pullback) at b75. DPs are often trend generators and work best in the direction of the previous trend.

Today's move had a breakout below the range but it failed at a measured move of half the trading range. The failure resulted in a breakout attempt on the opposite side of the range and gave a breakout pullback long entry (essentially a pause bar on b80). A failed breakout on one end of the trading range usually gives a breakout pullback on the other side of the range esp if the test on the second end is a one legged move. These are also very strong trend generators.

Trading tight trading range days

For most traders, the best way to trade a tight trading range is to not trade at all. If you do want to trade, the best setups are to fade the breakouts high and low of the day.

This approach raises the following questions:
1. how do you know its a tight trading range day?
2. what if there is a large breakout?

The answers are simple. When the size of bars falls under 4 ticks for many bars and the range of the day is small, its very likely to be a tight trading range day. Trading mid-range is extremely dangerous, since there is a very high chance of the trade failing even before it reaches the other end of the range for example by forming a higher double bottom. To maximize your chances of success, you should fade weak breakouts of the range or failed breakout patterns such as DP. You should never worry about missing strong breakouts out of a tight trading range. A tight trading range rarely breaks into a trend right away. The bar size may increase to above 4 ticks sustained for a few bars and the price may also break out of both sides of the range forming an expanding triangle breakout.

Opening range: 1Rev vs 1PB vs fBO

It is important to know the definitions of 1PB, 1Rev and fBO to correctly trade the opening range:

• 1PB is the first pullback after a strong or successful trend attempt
• 1Rev is a strong reversal after a weak or moderate trend attempt 
• fBO is a failure to create a trend breakout of the opening range

If we look at b1 today, its clearly a trading range bar. There is no trend yet. Some traders will buy the low of b1 hoping for an fBO. However, this is dangerous since b2 can be a large trend bar that continues the downward move.

b2 attempted to break into a bear trend and failed. At this point, we have a fBO. However, its not tradable since the signal bar is weak and we would be forced to buy mid-range. Note that this is not a 1Rev, since only trends can reverse and there are no reversals within a trading range.

b3 is a trend bar, but since it did not breach the trading range, its not a successful BO. b3 is not a 1PB since there is no trend and its a bar of the wrong color in any case. If b3 was very high and a bear bar, you would be selling near the high of the trading range and you could argue its a 1PB even though b2 was a weak breakout bar.

b4,5 again is an fBO but the signal bar is a weak overlapped doji and is not worth trading. If a trading range is at least 4 points and the other end is at least 2 points away, often the signal will work for about half of it (1 point in this case), but often its just a distraction because a clearer setup is usually just a couple of bars away.

b6,7 is an inside bar and a LH after a LH and LL, so a possible trend. However, it would be a very shallow 1 legged pullback after a weak reversal bar b5. You don't really want to sell near the low of a trading range unless its at least a 2L pb.

b9,10 is a W reversal and since we have a weak down trend, this can be labeled a 1Rev. Since the reversal was not near HLC of prior day, its not an OR; therefore it is labeled XOD (extreme of the day).

Optimal trading of breakouts and failed breakouts

Most breakouts fail and lead to a test of the other side of a trading range. Occasionally, the breakout succeeds and you need to enter it with trend on a pullback.

The following factors increase the likelihood of a successful breakout:

• Large breakout bar
• No overshoot of a trend channel line on the breakout
• Previous failed breakout on other end of the range
• A 2 legged pullback after breakout

A successful breakout is likely to move to twice the size of the range. For example, b63 broke above the afternoon trading range and gave a breakout pullback A2 bar b71 which moved to twice the range at b76.

A failed breakout on the other hand is likely to move to the other end of the trading range. For example, the failed breakout below b1 at b24 caused the market to turn up and test the high of b7.

So the correct way to trade a breakout is as follows:

If the trading range is small, as in the afternoon chop between b46 and b58, there is a very good chance the first breakout will fail. Scalp and reverse on the failure. If the range is very small, you may not even be able to scalp so just stay out till the range widens.

If the trading range is large such as the open move from b1 to b7, then you can enter on the failure if the failure signal is a bar of reasonable size such as b76. If the failure bar is large, enter on the first pullback as in b13 short or b29 long. You could scalp part and hold the rest until a breakout or test of the other end of the range.

Occasionally, the market will break a trendline and turn into a TTR as it did at b50. When this happens, its safe to get out near the top of the recent swing and wait for more price action. This is because a failed Breakout can quickly turn into a breakout and a deep pullback and you dont want all those profits to evaporate.

Trading ranges: breakouts, fBO, BP and TT (trend terminations)

Trading range days can be traded well with some price action analysis. If the first few bars are taily and overlapping, there's a good chance you have a trading range day.

The trick to analyzing trading range action is to look at them as series of failed breakouts and breakout pullbacks. The very first bar was a trading range bar. The second bar ticked below the first bar, then ticked above giving two fBO of b1. b3,7,10 were also failed breakouts. Failed breakouts of a trading range can only be expected to test the other end of the trading range and sometimes they may not reach the other end but give a breakout pullback.

If the signal bars are well formed, you can trade a second attempt to fail the breakout (b13 is a second attempt to fail the breakout below b4, the recent low of the day), but you should only expect it to go to the other end of the range (b7 high, reached at b19). When the other end of the range is reached, you may get a  breakout pullback. This is a high probability trade and should be expected to go to a measured move of the prior range (b44).

Trends terminate when you have highs and lows sideways rather than HHs and HLs. So at b62, we have two lows and two highs that are no longer in a trend. Often, this will breakout into a new trend in a breakout pullback pattern again. Often, its in the direction of the prior trend but if the price action has been marginal, it may break down as it did today. Regardless of whether b74 is an A2 or BP, its basically the same trade. The price tried to move twice in one direction and failed, so it tries to test the other end.

If you already had a low that was close to the prior low(b53 near b40) and you get a two legged move to a LH (B62) or DT, its best to exit since the next move up may not go above this point.

So to summarize, BP are trend generators, fBO are fades, TT are exit (but not reversal) signals

A simple Trading Range day trading plan

About 80% of the days are trading range days and its important to be able to trade them profitably. The first order of business is to identify a trading range day. My criteria is this: Wait for two up and two down pushes (b13 today). After this, if the price is very close to the open, there is a very good chance its a trading range day. Strong up and down bars early in the day (b2, b4) increase the chances of larger scalps (+2 to +4) between the moves. Naturally, trading range days can indeed break into trends but in most cases they will simply make two or three legged moves to the day's extremes.

Once a trading range day is identified, simply fade any two or three legged move to any extreme of the day. If the move is very channel like, you may choose to skip it since it may act as one leg. If a two legged move only reaches mid-range, it could give another push up to form a wedge so you could skip that one and take the wedge or enter on a second attempt (b66).

Occasionally, a strong signal such as a DT (b44) may develop that can result in a hard trend. If you suspect a hard trend may be developing ( shaved trend bars, no strong CT bars, no tick above prior bars), you can also enter on any small trend bar (b53) since a sharp trend could bring large profits.

Buying below and selling above overlaps on a TR day.

Trading strong trend days is not necessarily easy but certainly simple. You can basically take every reasonable with-trend entry and chances of success are high unless you are near the end of the trend. On a trading range day, things become much more uncertain and swing entries will be stopped out all the time.

A simple heuristic to deal with trading range days is to buy below overlaps and sell above them. For our purposes, an overlap is any trading range bar such as the outside bar b7, any bars that overlap such as b54,55 or any horizontal range such as b69-72. The only restriction is that the overlap be large enough for a scalp profit, say 4 points. A trend bar such as b48 should not be faded in this manner since there is a very good chance it could turn into a spike and channel or otherwise turn into a BP.

Once the overlap is in place, resolve to sell above it and buy below it. On a trading range day, there is a very good chance of a failure of any breakout beyond these overlaps and a very good chance it will at least take out the other end of the overlap.

Conversely, an overlap whose breakout fails and successfully takes out the other end on a trend day such as the BO above b7 which consequently took out b7 low, transforms the day into a trading range day and you should only trade at the ends of the range.

Trend termination (TT)

Recognizing a potential trend is generally easy on a day like this: A large gap followed by two or three bars that close in the direction of the gap is a very strong trend attempt and taking the 1PB (b5) and holding it to swing termination or reversal is an easy decision.

Not all trends reverse and many of them simply terminate into a trading range. Determining the end of a trend requires some experience. There are primarily three ways a trend can terminate and today, we were lucky to have all three.

The first is a TTR made up of small overlapping bars made of mostly dojis. Given this criteria, we should already know around b22 that the trend has terminated.

The second is an extended trendline break. A move beyond the trendline for many bars and many points is a trendline break. The more number of bars it stays beyond the trendline, the fewer the points that need to be beyond the trendline to constitute a break. This means that a single bar thats sufficiently large can break the trend or a large horizontal or slightly sloping movement for about 20 bars (b21-39) can break the trendline without dipping too far below it.

The last is a failed reversal followed by a failed continuation. b22 was a poorly formed W and FF that was followed by a WP at b39 which was unable to take out the reversal bar.


Once you realize the trend has terminated, you should no longer be looking for with trend trades. Your best option is to wait for a new trend to break and enter on its first pullback. If the trading range following the TT is small, its best not to enter into anymore trades at all.  If the trading range is wide (8+ points), you can consider fading the extremes of the new trading range. Note that in general, you should cannot expect any entry in a trading range to make a large move. In general, you should expect a move that's roughly half the size of the trading range.

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.

Four trades off nine transitions

Update: A setup chart is now in its own page.

The market could be moving in only three directions at any time: up, down or flat. From there, it could transition to any other or have a continuation in the existing direction. Therefore there are nine possible transitions the price could take.

An up to up after a failed down or horizontal move is a  trend continuation, an up to down is a trend reversal, the flat to up is a breakout and so on. There is a kind of trade you can enter at each transition, if you could spot it in time.

The complete set would look something like this:

As you can see, when a trending market flattens out, you need to exit your positions and stay out. Many traders make the mistake of also reversing their positions, but that can only be done when the reversal is clear such as a wedge reversal or a failed breakout of the previous extreme after a trend line break.

This means there are only four kinds of trades: Reversals, continuations, breakouts and failed breakouts. If you can master detecting and trading these transitions, you are already on your way to success.

Continuations: Most trending days have two or more continuations. Most continuations are A2, which is a 2 legged pullback to the ema. The simplest way to look at an A2 is the second attempt to end the pullback. As long as any of the bars that make up the pullback are near the ema giving an entry slightly above or below it, you can consider it an A2. Another way to define this is two failed attempts to reverse the trend, i.e. failed L2. Note that if your A2 entry is very far from the ema, you may get a 3rd push which turns into a W pullback to the ema. These should be taken just like they were an A2. In a strong trend, you may have H1s and L1s that work, but new traders should just stick to A2.

Reversals: Obvious reversals are rarer on a given day, but the Wedge reversal is likely to be the most successful. The most important requirement of a Wedge reversal is an obvious overshoot (more than 2t) and especially a second overshoot. It takes some experience to correctly read a good Wedge reversal, but the following signs increase the probability of a W reversal:

1. A second overshoot 
2. A strong reversal bar or a up/down bar that has no overlap with previous bars or overlap with the previous swing point
3. A strong entry bar (shaved or small tailed trend bar)
4. The entry bar low is not taken out by more than 1t
5. A one legged move to ema. (A close above the ema may end up giving an A2 long or short instead of W1P)

If at least three of the above are present, you can take the first higher low for bullish W or first lower high for bear W since that becomes a W1P. If the reversal bar was weak or W entry or W1P signal looks suspicious for example because its a doji or an overlap or large bar, sometimes you get a two legged W1P.

The following decrease the chances of a successful W1P.

1. Overshoot is small (a tick or two) and there is only a single overshoot
2. There is an overshoot but it does not look like extreme behavior (W are extreme behaviors)
3. W signal and entry bars are weak

The above signs of weakness may imply trend termination into trading range or a pullback and resumption.

Breakouts and failed Breakouts: Breakouts from a trading range are complex and are the hardest to read correctly, especially because most breakouts fail. However, there are certain signs of impending breakouts:

1. A double bottom pullback at the bottom of the range generally means the market may breakout at the top of the range. Similarly a DP at the top implies market will breakout at the bottom.
2. A breakout failure at one end of the trading range may breakout into a trend on the other end of the range, often giving a breakout pullback on the other end.
3. A W move and breakout to one end of the trading range may give a failed breakout, which in turn  breaks out from the other end of the range.

In general, its best to trade a breakout pullback after the breakout is successful.  If a breakout does not fail after two or three bars then its more likely to give a breakout pullback.

If you are a new trader, I suggest concentrating only on A2 till you have mastered it then move to W1P and then to breakouts and failed breakouts.

An exhaustive description of all the above require their own blog posts and I hope to put them here soon.

Breaking Bad

The precise determination of the direction and entry of breakouts is one of the hardest aspects of trading. Even when you can get the direction right, many traders often get stopped out before the market has the eventual big breakout.

If you can get in correctly, you stand to gain the best risk to reward ratio. This has led so many traders and algorithmic programs to concentrate their efforts on correctly detecting and entering a breakout. Today's entry represents the fBO or center square in the nine transitions.

Many traders concentrate on entering on breakouts and many others on fading breakouts since most of them fail. The truth is that breakouts in a trend usually succeed and breakouts in trading ranges usually fail. Even then, occasionally breakouts do succeed from a trading range and thus trends are born.

If you look at the chart from today, b3 was a possible first reversal and b8 was a possible first pullback. It was a tough trade to take since the signal bar was a one tick bodied inside bar with a large tail forcing you to buy in the middle of the range. A second entry for the first pullback at b21 was a much more decent entry but at this point, the trader finds himself in a trading range. At this point, the correct thing to do is assume every breakout will fail as we saw today:

• b37 attempted breakout of b21 swing low failed
• b50 attempted breakout above BW failed
• b52 attempted breakout below BW failed
• b65 broke above 3 swing highs, but eventually failed
• b74 breakout below triple bottom failed.

Many successful breakouts are a result of a failed breakout on one side of the trading range or a double bottom pullback on one end of the trading range. Today we had a marginal double bottom pullback at b52. What made the setup deficient was that the pullback after the double bottom was not sufficiently deep. This entry forced a buy in the middle of the range 3t higher than the double bottom entry and certainly closer to a recent swing high. A successful DP usually gives an entry close to the original double bottom entry and dips nearer to the double bottom. Another important clue that this DB was likely to fail was that the breakout happened on the third push with an overshoot. Normally for a breakout, this is OK if there is follow through. If not, its time to exit or reverse your positions.

The hardest thing about trading breakouts is that they mentally condition you to expect a certain type of move and you end up taking a marginal entry. For example, after the double bottom at b37, I was expecting a DP, and correctly read the failures of b47 break up from BW and b51 break below ema but ended up taking b52, despite it being marginal.

Trading failures on the other hand is far simpler. You could have traded every failed breakout in the list above and done very well today. And if for some reason the failure fails, you could always reverse and go with the breakout pullback.

Price Action Basics IV: Trading ranges, Trends, fBOs and BPs

A breakout from a trading range is an attempt to create a trend and its failure is a move back into the trading range. A successful breakout leads to a trend. Similarly, a successful failure to resume the trend leads to a trading range. Today, b15 and b28 were failures to resume the trend and b67 was a successful resumption of the trend.

After every breakout, the trader needs to decide if he will fade the breakout or enter with the breakout on a pullback. In general, when in a trading range, a trade on the failure of the breakout is more likely to succeed and certain important signs are needed to trade with the breakout.

The signs are:

1. Breakout is strong (i.e., half or more of the breakout bar is beyond the break point)
2. Strong close
3. Second attempt to breakout
4. Poor attempt to fail the breakout

Lets look at these one by one:

1. Strong breakout: b27 and b67 were both very strong breakout bars, but b67 was more than halfway above the break point. Even though b27 was less than halfway out, there was a good chance that a 2 or 3 legged pullback could give a second attempt up. On the other hand b10 was a weak breakout with weak close.
2. Strong close: A strong close beyond the breakout point indicates that there were insufficient fade orders at the break point. A weak close followed by a deep pullback (such as b29-46) indicates possible failure of the breakout. A weak close such as b10 indicates fade orders were waiting and a failed second attempt (b15) is likely to seek the other end of the range.
3. Second attempt: Second attempts are stronger than first attempts and second attempts of strong closes usually are very successful. An fBO (b28) that fails to take out the other end of the range (b15 low) should be treated like a deep pullback and is a possible trend break (HL after HH). This is especially true after a fL2 such as the one at b50.
4. Poor attempt to fail the breakout: b11 and b15 are strong attempts to fail the breakout. Usually, when the first failure is pronounced (b11,12), the second will usually go much further (b15-b27). If the bar after the breakout bar is a reversal or inside bar with a strong close such as b28, there is a high probability of at least 2 legs down, possibly deep. If the attempt to fail the breakout is poor such as b67, and it does not trigger, the chances are very high that the price will seek a measured move of the prior range (b28-45 met at b79).

The first bar: Trend bar

The first bar, regardless of appearance should be considered to be a 1 bar trading range. Most traders would agree that two opposing trend bars make a trading range. This is true everywhere and when there is only one bar, you dont have information about the second bar to assume it would be continuing trend bar.

When the second bar is an opposing bar, regardless of appearance, chances are very high that what you have is a trading range. A buy above b2 would therefore be a buy mid-trading range, which is a low-probability trade. You need to buy near the low of b1 for a higher probability setup.

The right approach to trading two opposing bars would be to treat it exactly like any other trading range. Fade a weak breakout or enter in the same direction on a breakout pullback. So if b4 had a strong close near the low of b1, it would make a nice second attempt to fade b1.

Fading two legged moves in a Trading range

When the day opens within the range of the prior day, especially if there is no gap between the first bar of today and the last bar of the previous day, there is a very good chance the day will turn into a trading range day. That's not really surprising, since most days are indeed trading range days.

A trend day was still possible at the 1PB at b15 but the deep sell-off from the second leg at b24 is an indication of a trading range day. At this point any 2L PB can be taken in both directions until there is a breakout of the HOD b20 or LOD b1.

Similarly, a failed breakout also indicates changes to your trading pattern. A double bottom above the LOD (or DT below HOD) is technically the second failure to create a new extreme and is a form of a fBO. A DP is the first pullback after it and usually indicates a move to the other extreme of the range.

b47 buyers therefore should only trade long until a test of the HOD. A success and pullback is a BP trend generator and a failure is an fBO trade.  

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.

Hard trend identification and trading

Hard trends are trends that begin strong and carry strong for many bars. This means minimal pullbacks and large moves. Such days are hard to trade for a few reasons. The first is they are comparatively rare, so the trader has no experience with it. Second, 2 legged pullbacks and pullbacks to ema are rare, and due to the large distance to the ema, a pullback to the ema is strong enough to appear to be a mini trend, possibly a reversal. The third and most important reason is that hard trends rarely reverse. They may break and go into a trading range or turn into a channel but reversals are rare and they almost always require a couple of hours in a trading range or TTR first.

The first clue that its a hard trend day is a large gap and an open beyond the range of the previous day. The second clue is a strong 1st bar. The first bar cannot be very large (2 to 3 points is ideal) or it could act as a trading range or turn into a spike and channel. The last clue is that any attempt to create a pullback turns into a doji or inside bar. So by b4, you should have identified a hard trend.

Trading hard trends is very simple yet hard to do. You can short below any bar that has a shaved or a 1t tail with a stop above that bar. So other than large bars like b8 (which give poor risk/reward), very few strong closes would disappoint.

When a hard trend is broken such as by the move from b16-25, the trend has ended and will either enter a trading range or channel. Today, we channelled (b28-50) and then had a BO attempt that failed and gave a second hard leg down. Often the hard trend break will simply channel till the end of the day, without any easy swing entries. This is why its important to enter early in the AM and swing some as far as possible.

Price Action Basics VI - The first bar

According to Al Brooks, the first bar represents the day in a nutshell on most days. As you can see, today that was not true. My modification is that the first one or two bars represents the AM movement. If the first couple of bars are strong trend bars in the same direction, there is a good chance of a trend move (either with or against the first two bars). If the first bar is a trading range type of bar or the first two bars are opposite colored and overlap (even though they are trend bars), then the market is forming an opening range rather than an opening trend.

The first bar is special, because it is the only bar thats guaranteed to give both a new HOD and LOD. From this point on, you can trade fBOs and BP of b1 and continue with every new HOD and LOD. A bar with tails such as b1 today should be considered a small trading range. Such an opening often leads to an expanding triangle open, which essentially is a series of fBO of every new high and low until one of them gives a two or three legged LH (such as b30) or HL and begins a trend move.

Trend bars on open show energy and will often lead to an AM trend. Those trends will often reverse and lead to a prolonged trend that could last all day.

A reversal bar on open will often give a sharp move that will turn around and take out the other end of b1. This is especially true if the reversal bar is in the wrong place, i.e., mid-range or a bull reversal bar above a small gap, etc.

Doji b1 can give a small fBO on one end of the bar followed by a prolonged move when the other side of the bar breaks out. But it can also lead to BW open.

Regardless, the size and form of b1 is only a guide and should not be relied upon religiously. There are various edge cases that are too numerous to list and can only be mastered with experience. The right way to approach b1 is as if its a trading range and trade it as if its a small trading range. That is to say, if there is a strong breakout, enter on a pullback and if there is a weak breakout, fade the breakout. Remember that fBO of small ranges is usually not worth the trouble and that applies to b1 as well.