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Large bars could turn into spike and channel.

The bar b49 can be read in many ways. Its possibly an entry bar below b48, which was an A2 short second entry (with b45 as first). Its possibly a failed H2 with b44 as H1. In any case, its a trap bar that results in acceleration of the trend.

When a disproportionately large bar pops from nowhere as is the case with news related events, there is a very good chance it will turn into a spike and channel type of move. The exception is if it was a trend bar that triggered off a 2-legged pullback and has follow through.

Once the spike is determined, wait for a pullback and trade only in the direction of the channel. The channel (b58-69) will be in the same direction as the spike (b49) unless the pullback also had a large spike in the opposite direction.

Channels typically but not always consist of three pushes and will give a W termination (b70) and will test the begin of the channel (b75). They will then go to the mid-range of the channel (b81).

There is a good chance you missed out on the spike but the pullback and channel often go to a measured move of the spike.


Extremely strong trends

Soft trends and hard trends are two types of extremely strong trends. These should never be traded counter-trend. When you see a large up gap on the open and the first bar has a 1tf giving a fade entry near the low of the bar, there is already a very good chance it will turn into a soft-trend day.

When the second pullback is also a 1tf (b5), its a sign of a very strong trend. This essentially means bulls are buying the low of every short signal.

A well formed two legged pullback that does not quite reach the ema at b17 is another indication of strength. Often the first deep pullback is your best bet for a day long swing on a day such as this. However, any deep pullback such as b52 or b77 could be swung.

Folks who missed entering the first deep pullback can fade every L2. A soft-trend is the easiest to trade and you should take every deep 2 legged pullback even if you are conservative.

Avoiding counter-trend trading is very important. The first successful counter-trend trade was off b48. You should normally skip the first one and take the second one (b64 or b67). In general never attempt counter-trend trades until you see a one-legged move to ema such as b48-51


The most recent reversal determines direction of 1PB

Everytime there is an opening reversal (OR) after a trend move (b3-b5, b6-b7), you should expect a 1PB in the direction of the latest reversal. This is because 1PB is the first pullback in a trend and when the trend reverses, the expected direction also changes.

1PB is usually reversible. This means that if your 1PB entry immediately gives a signal counter to your entry, you entered incorrectly and should probably reverse your position. For example, if you missed the inside bar reversal at b8 and took a 1PB long at b10, you should reverse short at the 1PB short on b12. This way, your 1PB entry is usually self-correcting.


5tf, 9tf and 1tf

When traders take a with-trend setup, they expect to take profits at certain discrete number of points. The most popular targets are +1, +2, +4, +8, +10. Counter-trend traders know these locations and will place counter-trend entries at these locations, hoping the additional trades will cause a mini-pop that will allow them to take a profit.

When the number of contracts placed by counter-trend traders far exceeds the with-trend contracts, the price will refuse to tick beyond it. For example, breakout traders below b24 sold at 1218.25 and expected to cover at 1217.25. Counter-trend traders know this price point and will place their buys at the same price. If the price refuses to tick below 1217.25, then it is a good indication that many of the buys did not get filled. That includes the bears who shorted and the bulls who wanted to buy below the low of the day. So when the bar closes strong as in b31, both bulls and bears who did not get filled will place buy orders right away. This is clear from b32 which did not tick below its open. Such a failure is called a 5 tick failure or 5tf. A similar failure can be seen on b27 since the buy above b24 also turned into a 5tf.

Analogous to a 5tf is the 9tf for targets of 2 points as can be seen at b70 for the short below b65. 9tfs often occur near large bars since larger signal bars cause traders to expect larger targets.

Unlike 5tf and 9tf, a 1tf is caused by traders buying the bottom of a bar in a bull move or selling the top of a bar in a bear move. For example, when the price refuses to tick below b6 on what is so far a strong day, traders will treat the overlap b5-7 as a trading range and place buy orders at the low of b7. This causes the price to pop above the bar after ticking below the prior bar giving a 1tf. 1tf is usually the result of a counter-trend trade especially the first attempt before a trendline break.


Rationale of the first reversal

From the chart, its clear that today's bar is a doji on the daily chart. There were swings up and down and the price closed close to the open. Although this is a typical trading range day, it has a sort of upward primary trend. Lets call this the primary move.

The first reversal trade in general attempts to get the most of the primary move. When the market attempts to make a trend move in a direction and reverses, there is a very good chance on a trading range day that it will attempt to go about twice this range (as it did today) and then move back near the open.

In real time, you never know if the move from b1 to b4 will reverse and lead to the primary move down or another reversal below will take it all the way up. This is why any decent reversal signal in the first hour or so is a great setup. The larger the initial move, the larger the doji range and therefore, the larger the primary move.

On trend days, the opposite is true. The initial move is small and the reversal leads to a protracted trend.

Poor 1PB setups on soft-trend days

1PB is usually the best opportunity for a swing trade on a trend day and I normally take it even if it looks poor. A great example of a poor setup was this day. b6 and b8 are not really 1PBs because at that point, we are probably in what appears to be a trading range. 1PB is a setup in a new trend and it will usually fail in a trading range.

However on a large gap day and a strong b1, there is still some chance its going to trend (as it eventually ended up doing) and what could possibly be a 1PB may be worth the risk/reward.

A deeper pullback to the ema at b21 or 25 is a far better entry since its at a support, 2 legged and below the trading range.

The second feature of a large up gap followed by a large b1 is that there is a very good chance it will turn into a soft trend. This means any fL2 such as b38 and b43 are valid setups. However, I often will only scalp them or pass them up and wait for a deep pullback such as b54. This is because a deep pullback is more likely to allow my swing stop at my entry price unmolested while it grinds higher.


Managing risk on days with huge bars

When bars are huge, I look to other options than the 5m chart. I have discussed volume charts and tick charts previously. In the first hour I also look at 3m charts for clarity.

 On the 3m chart to the left, the 1Rev is very clear compared to the 5m chart. Also clear is the FF made up of alternating bull and bear trend bars (3m b6-9).

An entry above b13 with a stop below is a canonical entry and has about 7 point risk. Since you can move the stop below the entry bar after the entry bar closes, an entry above 3m b14 is a valid entry with a stop below.  This reduces your risk to 4.5 points.

On a day such as this, when you are looking at a potential 20 to 40 point move thats a reasonable risk.

Another option is to buy the close of b14 with a stop below its close. This reduces the risk to about 2 points. This is very reasonable given the potential upside. However, its hard to do given that its a potential 1tf. Conservative traders will probably want to buy above a bull bar with a strong close. Remember, all the above are effectively buying above b13, you are just managing your risk based on subsequent bars.

Yet another option is to buy on the 1-minute chart. It should be noted that trading reversals on the 1-minute chart should absolutely never be done since it is possibly the fastest way to blow your account. However, two failures to continue the trend after a potential reversal (above 1m b45 after 1m b38 reversal) is a valid entry. Note that is should only be taken after the 3m and 5m charts have already shown reversals. A 1m chart on its own can never be trusted for a reversal signal.

The 1m entry above b45 corresponds to buying at 1141, one point below the top of 3m b15 or 5m b9. As you can see, the 1m did not give the most optimal entry, the 3m did.

What the 1m does is allow you to pretend its a very fast moving 5m chart on a day with huge bars. Note that even on the 1m, bars were 2 to 4 points. It gives more entries and smaller risks. Fading 1m reversals in a very strong trend is also a very good play but only when the trend is super-strong such as this day.

The best option for most new traders is to only read the 3m chart for the first hour and then switch to the 5m chart and not even look at 1m chart until a potential signal sets up on the higher timeframe chart. Once bars start getting smaller or overlapped (b23-b27), you should no longer look at 3m or 1m chart or you are likely to lose due to many poor setups on a lower timeframe chart.

Don't forget that the 5m chart is your staple and you have much less experience with other timeframes. Your reads should consistently be off the 5m chart and use lower timeframes only for entries during extremely large bars and only in the early part of the day.


A failed 1Rev can be a 1PB

A 1Rev or OR needs to be at a place where a reversal would make sense. If not, it is likely to fail. Today, the opening 2 bar reversal probably was the first reversal, but if it wasn't, then b3 is an attempt to give a first reversal.

The three minute chart on the left shows this much more clearly. 3m b5 attempted to reverse the opening move but since it wasn't near any place where a reversal would make sense such as ema or the extremes of the prior day, it failed.

Given that it was the first attempt to reverse three bear trend bars with strong closes, this probably was expected but what's more important was that a failure is often a 1PB (3m b6) in the direction of the original move. The risk to taking this of course is that a second attempt and the ema are very close.

However, when the second attempt to reverse it at the ema (b7) did not trigger, it was a confirmation of the 1PB and traders who were quick could probably sell below b7.

On hard trend days, the correct entries go far and go quick and there is really no latitude for delays. This is why new traders are better off trading off a single chart and try to focus on the best entries.

Fortunately, today we did get an A2 (b24), which is comparatively rare in a hard trend. Given the bar sizes, counter-trend trading was permissible after the trendline break (b17-23). On a normal sized day, fBOs should only be taken in the direction of the hard trend, since any counter-move is likely to fail or be otherwise unprofitable.