Trading Price Action Reversals by Al Brooks

Author:Al Brooks
Language: eng
Format: epub, mobi, pdf
ISBN: 9781118172308
Publisher: John Wiley & Sons, Ltd.
Published: 2011-12-19T05:00:00+00:00

As shown in Figure 9.12, the sell-offs to bar 2 and to bar 6 broke major trend lines, so, in each case, a two-legged test of the prior high should set up a good short. The bar 3 low 2 short was successful, either by shorting below bar 3 or by taking the second entry two bars later.

The bar 8 short was less certain because the test was a large bull trend bar (almost an outside bar, since it had the same low as the prior bar). The traditional way to enter after an outside bar is on a stop at one tick beyond both extremes, getting filled in the direction of the breakout. However, outside bars are basically one-bar trading ranges, and most trading range breakout entries fail. You should only rarely enter on a breakout of an outside bar because the risk is too great (to the opposite side of the bar, which is large). Since this was a two-bar reversal, the safest entry was below the lower of the two bars, which was the large bull trend bar, because very often the market goes below the bear bar, but not below both bars, and that happened here.

If you shorted at the bar 8 breakout of the inside bar, you would have been nervous by the bar’s close (a doji bar, indicating no conviction). However, most traders would not have taken that short, because three or more sideways bars, at least one of which is a doji, usually creates too much uncertainty (barbwire). The two small bars before the outside bar were small enough to act like dojis, so it was best to wait for more price action. However, if you did not short on bar 8, you would have to believe that many did and the doji close of their entry bar made these traders feel uncomfortable with their positions. They would have been quick to exit, thereby becoming trapped. They would likely have bought back their shorts at one tick above the bar 8 entry bar and then be reluctant to sell again until they saw better price action. With the shorts out of the market and with them buying back their positions, going long exactly where they were exiting (bar 9, one tick above the short entry bar) should have been good for a scalp and likely two legs up. A trader could have bought either at one tick above bar 9 or above the bar after bar 9, relying on bar 9 being a bull trend bar and therefore a good long signal bar.

FIGURE 9.13 Five-Tick Failure

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