Trend termination (TT): Failed Reversal followed by failed A2

There are primarily three kinds of trend terminations that turn strong trends into trading ranges (rather than reverse the trend direction). The first one is a TTR, where the bars gradually become tiny and dojiish. This is rather easy to identify and is usually seen in bull trends. The second is a double top or double bottom that triggers but does not result in a breakout on the other side. The last one is a failed reversal followed by a failed A2. This is usually the case with the termination of a bear trend.

b22 was an inside bar signal following three pushes down (and a slight TCL overshoot). However, since it wasn't a bull reversal bar, a shaved inside bar near the bottom of b21 or a second entry, its a poor signal and unlikely to attract many bulls. This was followed by two sideways legs and the second attempt to sell off at b27 was off a poor signal bar (a 3t bull doji) in the middle of the range. This is unlikely to attract a lot of bears. This is the earliest indication of a terminated trend.

The 1t nominal new low (1tf) at b29 is caused by the remaining bears exiting at the low of b21 and confirms the end of the trend. From b30 to the end of the day is a trading range composed of small trend legs like all trading ranges. As expected almost all signal bars were very poor and there were no large moves.

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).

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.

Microtrendlines (MTL)

Microtrendlines are trendlines that are drawn on adjacent bars rather than adjacent swings as shown from b7-b9. An MTL right after a potential reversal is often found before a very strong trend. To correctly identify a strong trend from an MTL, the bars forming the MTL should have strong closes. Dojis, bars against the trend, etc. greatly reduce the strength of the MTL and could easily turn into a HL.

A failed violation of an MTL (b10) is an excellent entry. Often this is the few places where you could enter mid-bar on an outside bar (if b10 took out low of b9 for example). However, when it does not, you could still enter below the bar if it has a sufficient sized body and strong close.

If the MTL signal bar is a doji such as b10, you can opt to wait for the next entry such as the small trend bar b12 after a breakout bar.

While technically, you could draw an MTL from b13 to b16, these bars are not all made up of trend bars with strong closes so an entry of the MTL violation (below b18) is not a good entry. Neither is the bull MTL from b73 to b76 worth trading purely on being an MTL.

Trading large and outside bars

Outside bars often trap traders on both sides and since they have buyers below and sellers above, they are effectively a 1 bar trading range. Large bars are very similar. Any bar thats much larger than surrounding bars should be treated as a 1 bar trading range.

The correct way to trade such a bar is to look for a fBO or BP of the bar. When the outside bar's breakout is relatively strong, you should look for a breakout pullback. If the breakout is weak, look for a failed breakout.

b7 was an outside bar with a strong bull close. Its also a possible mW, so its a good candidate for a BP (b14). b37, which is a large bar also had a strong close but its BO was weak(b38) and could be shorted. However, it right away gave a BP (b40).

The context of the outside bar is also important. You want to buy low (b14) or sell high (b38). b62 is a poor short since its a sell low and also because you are expecting another leg up or at least a test of b54 after the strong move up.

Signs of counter-trend strength in a gap open

Large gaps tend to widen rather than close, since something fundamental would have changed to cause the large gap. However sometimes a large gap will attempt to close and will trend for the rest of the day, often closing at its high.

The first bar after open (b1) closing opposite to the large gap is usually the first sign of strength. If its an average size trend bar or a reversal bar, its a very strong sign. (If the gap is small, the bar could simply act like a pullback and should not be considered).

A b2 triggers such a b1 and closes strong is a second good sign. If b2 attempts to widen the gap and fails giving an fBO (b3) its also a good sign.

1tfs (b7,9) and 5tfs on attempts to widen the gap are the next signs to look for.

Strong trends will usually have shallow pullbacks and average sized bars instead of deep pullbacks and large bars.

Reading weak reversal signals

When a reversal signal looks weak, whether its an oio (b8-10, b32-34) or a regular reversal bar, if the entry bar has a strong close (shaved or 1t) like b11, then there is a very good chance it will act like a reversal bar with a strong close. Often, such a bar is a strong reversal bar on a higher timeframe when combined with the strong entry bar as the 30m chart on the left illustrates the opening reversal at b8-10.

2BR (b76,77) can be considered strong as long as the second bar takes out the first bar with a strong close and are of comparable size and not misaligned by more than 1t or 2t if shaved.

When a reversal signal that is poor has a poor entry bar (b28, b70), there is a good chance of continuation.

When the signal indicates a major change in direction (b11,b35), usually its a far safer option to take the first pullback in the new direction (b17,b43). When a signal is ambiguous, the chances of a pullback very soon after the reversal are high.