When two bars overlap, they may form an up/down short or down/up long signal. For brevity, they may be denoted as 2 bar reversal or 2BR. 2BRs are typically reversal bars on larger timeframes like b4 on 10m chart shown on the left.Sometimes, the bars form a trading range bar such as a bar with large tails on both ends or even a doji. Its not practical to have multiple charts open all the time to verify the strength of the 2BR, so the ability to read them correctly off your primary chart (5m above) is important.
The first requirement of a 2BR is that the 2nd bar is shaved. The second requirement is that the first bar dip at least two ticks beyond the prior bar. These two requirements ensure you are not just buying above a flag and that once triggered, the move will have follow through. Occasionally, you can allow 1t on the second bar if you are otherwise confident of the signal.
The third requirement is that the second bar and the first bar are nearly the same size and are not misaligned by more than a tick or two. (5m b8,9 were the same size and misaligned by 2t).
In the beginning, you may benefit by comparing the bars on a 10m chart. But this is best done at the end of the trading session since most traders would impair their trading performance when watching more than one chart.
Hi Cad, what about b4/5 as a 2BR?
ReplyDeleteIn his new books Al does not like the second bar closing beyond the first for a 2BR. He says entry is then too far away from swing extreme.
ReplyDeleteBars 7/8 2BR overlapped 50% of bar 6. Is this only just o.k.?
The same applies for bars 4/5 2BR (overlap with bar 3 50%).
TD, there are a lot of factors that strengthen and weaken a signal. In my experience, a difference of 1t or 2t is perfectly fine if the 2nd bar is shaved or has only a 1t tail.
ReplyDeleteYou're right. A strong 2nd bar is a key requirement. Al has also a lot of setups in his book/daily comments, that have 2nd bars with weaker closes (two or more ticks entry side tails), which might work in the right context.
ReplyDeleteWould you consider bars, that overlap more than 50% of the previous bar?