Winning Trading Patterns

ERRATA: In Open-Gap Trading Setup, I wrote:

“The open-gap must be at least mean +1 ATR of the current structure. If you are unfamiliar with Barros Swings, use a 40-day ATR”.

Sorry folks, I had a rush of blood to the head when I wrote that. What I meant to say was:

“The open-gap must be at least 1/2 standard deviation of the current structure’s ATR. If you are unfamiliar with Barros Swings, use a 40-day ATR”.

My apologies.

Turning to two questions and patterns that I use -

Brendan Dornan asked about the Open-Gap Trading Setup: “back to your thoughtful post, just wondering what you are looking for from market delta at tops, ie, a shift from positive to negative, volume drying up, volume capitulating, etc. thanks for any feedback”

There are a number of patterns I look at. The most common ones:

1. A 5-minute range that attains at least 2/3 ATR of the 5-minute range.
2. The Market Delta Volume Top Formation we see in Figure 1. Market Delta automatically colour codes volume as being light, normal and strong buy/sell volume.

Why 2/3 of the 5-minute ATR? You will recall that after the volume top, I look firstly for a breach of the low of the first 5 minute range. In Figure 1, this would be breach of 843.25. And then I look for a rally to sell at resistance.

If the first 5 minutes forms high of the opening range, and it does less than 2/3 of ATR, often we see the high of the first five minutes breached.

FIGURE 1 Market Delta

Walter Choy asks (about Barros Swings Change in Trend Patterns):

‘I have following the re-labeling process that mention in your book. In my case, sometime after several relabeling of B leg, I have a AB that is larger than the XA…Is it normal or the pattern become invalid’?

In Nature of Trends, I explain that I use three types of filters:

1. Time - The Whole Point Count (most important)
2. Momentum - The Line Change Count
3. Price - Maximum Extension

(I took [1] and [2] from Joseph’s Hart ‘Trend Dynamics’). In this case, I assume Walter is referring to an extension below B’s maximum extension without forming a Whole Point Count.

Figure 2

There are two points Walter is forgetting:

1. Anytime the beginning of the most recent swing is breached, the trend is deemed to have changed. And even more important,
2. A line change in the first higher time frame signals a probable change in the trader’s time frame. Thus if the 13-week (quarterly trend) line turns from up to down, there is a high probability that the 18-day (monthly trend) trend has changed from up to down. I assume that the trend has changed unless there is strong evidence to the contrary.