As I've previously posted, a trend first bar is just a trading range. However, a strong bear close that overshoots a bull channel TCL from the prior day is a sign of a move down. If a trader chooses to sell below b1 instead of waiting for a breakout pullback of b1, he may follow standard price action principles and move his stop above b2. Since b2 is had a strong close, he may simply decide to reverse where he is being stopped out. This is an unplanned trade and is a form of revenge trade.
This is caused by the trader having a plan for success, but not a plan for failure. He has very carefully visualized his setup, entry and targets. He may have chosen his stop, but being so sure of his trade, does not really expect it to be hit. After all, the setup is just too beautiful. How could it ever fail?
The failure of a beautiful setup usually means you are still in a choppy trading range and there is a very good chance that any setups near this area are likely to fail regardless of direction. The right thing to do is to wait out two swings or until the price moves some distance away from choppy action.
Since I had taken b7 and was stopped out, my plan required me to stay out for two swings or until the price moved some distance away from this setup, both of which meant I would enter on the 1st PB after the reversal at b15.
While some traders can retain clarity of thought after a loss, many just wont be able to. For example, if an experienced trader shorted below b71 after reading it as an A2 short (since b69 is an L1 variant) and was stopped out, he may retain the clarity of mind to correctly short b74 as a W pullback. (but he could probably never do so if he reversed and went long during b73.)
However, under most circumstances its best to wait out two swings. A short below b50 DT was stopped out at b55. Naturally, a short after 7 bull bars is likely to fail even if this was not BW. After waiting two swings, i.e., close of b63, chances of a successful trade increase. The price has also moved the size of a recent bar or two away from the original price and has also given the trader some time to regain composure.
In summary, when you encounter a loss, always avoid getting back in right away. Have some criteria for re-entry. The chances of you reacting emotionally and urgently right after a loss is very high and puts you at severe disadvantage. In this state you are unlikely to be reading the market at your finest skill level. Let the market go for now and wait for better price action. Entering on strong bars is a great way to filter poor price action areas. Strong setup bars failing actually gives you a lot more information about the market since poor bars could fail anywhere but strong bars only fail in trading ranges/channels.
Hi Cad,
ReplyDeletethe 1PB at bar 18 has no very clear signal bar (I suppose the inside bar is the best one), therefore I didn't trust that the move would go very far (so I didn't swing it).
Are there any implications of the strength of the signal bar for a 1PB or does it not matter very much?
Maybe it is better to look at the strength of the move before the 1PB (in this case it did look like quite a powerful reversal)?
Thanks a lot!!
A strong reversal bar after a trend attempt is a very good signal, especially if it reverses the HLC of prior day. Often 1PB early in the day have poor signal bars but as long as other signs are strong, you should take them.
DeleteIs bar 6 as a 1pb far too big? It looked like a strong bar but got stopped out by 1 tick (1.5pt stop). The markets first wave was down, looked like we should test the ema and attempt to fill gap.
ReplyDeleteThanks
1PB should never force you to take an entry at the LOD. Your entry price should be at least one tick better than HOD/LOD.
DeleteWhen a bar is large or overlapped, a 6t stop is insufficient. You may want to consider a 2pt stop.
DeleteHi Cad:
ReplyDeleteI acknowledge that the reversal at b15 was robust, with strong follow thru on b16, but with the strength and persistence of the b1-b14 move down, isn't it reasonable to expect some kind of meaningful pullback toward the b15 low, or even a full on test of the low?
This kind of V reversal usually confuses me. It's hard for me to imagine that after all that selling that it's all over without some kind of testing process.
Other than the reversal setup, was there anything else that tipped you off to the fact that the selling was over at b15?
There was a measured move to the tick from b1 high to b7 low -- a MM of a failed mW. However, I'm pretty sure I would have taken it in any case. AM reversals are often abrupt, i.e., V reversals and the strength of the prior day meant a chance of upward attempt was very high.
DeleteHi Cad, if b1 is considered a TR, is b2 (a fBO) and are following bars widen the TR as long as there is no LH and LL?
ReplyDeleteb2 is an fBO attempt. Since the range is very small and it is the first attempt, it should be expected to fail.
DeleteTrading ranges grow with every fbo. Eventually, there is a decent BP that could lead to a trend. Some days, there will be no trend at all. Occasionally such as today, they fbos from b1 form a channel. Channels are often Wedges (hence the b7 buy).
Hi Cad. I'm often hesitant to trade V bottoms, expecting the market will give a W, and consequently missing opportunities like this one. Any thoughts on how to overcome that? Thanks. -- John
ReplyDeleteYour approach is very conservative, which is not bad. I'd rather miss a great trade I'm not sure of than to get in a poor trade. You can always choose to buy the first HL or fL1 no matter how flimsy the bar is (b18) as long as the reversal and follow through were strong
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