If you have to be in the market at all times, either long or short, this is whatever your current position is (always-in long or always-in short). If at any time you are forced to decide between initiating a long or a short trade and are confident in your choice, then the market is in always-in mode at that moment. Almost all of these trades require a spike in the direction of the trend before traders will have confidence.
A trading range of three or more bars that largely overlap and one or more is a doji. It is a type of tight trading range with prominent tails and often relatively large bars. Beginners should stop trading until there is a clear breakout. Experienced traders will sometimes buy below bars and sell above bars.
In an upswing, a bar pullback is a bar with a low below the low of the prior bar. In a downswing, it is a bar with a high above that of the prior bar.
A minor reversal up in a bear trend. Traders expect the bear trend to resume. It can be as brief as one sideways bar or it can retrace most of the most recent leg down. As long as traders believe the market is still Always In Short, the rally is still more likely to be a bear flag than a successful trend reversal up.
A change in trend from up to down (a bear trend).
body gap (formerly negative gap)
When there is a pullback that tests a breakout point, the tails overlap, but the bodies do not. For example, think about a bull breakout and then there is a pullback 5 – 10 bars later. If the low of the pullback bar falls below the high of the breakout point’s bar, the pullback closes the gap. However, if the low of the body of the pullback bar stays above the high of the body of the breakout point’s bar, there is a gap between the 2 bodies. That is a Body Gap. While not as strong as an actual gap, it is a sign of strength and it often is still a measuring gap.
An account in which your losses have fallen below the minimum margin requirements set by your broker, and you will not be allowed to place a trade unless you deposit more money.
The high or low of the current bar extends beyond some prior price of significance such as a swing high or low, the high or low of any prior bar, a trend line, or a trend channel. If the close is beyond the high or low of the prior bar, the breakout is stronger and the distance between the close and the high or low of the prior bar often becomes a measuring gap.
breakout bar (or bar breakout)
A bar that creates a breakout. It is usually a strong trend bar.
A setup where a breakout in either direction should have follow-through.
A small pullback of one to about five bars that occurs within a few bars after a breakout. Since you see it as a pullback, you are expecting the breakout to resume, and the pullback is a setup for that resumption. If instead you thought that the breakout would fail, you would not use the term pullback and instead would see the pullback as the start of a failed breakout and a reversal. For example, if there was a five-bar breakout above a bear trend line, but you believed that the bear trend would resume, you would be considering shorting this and you would be seeing it as a bear flag. You would not be looking to buy a pullback immediately after the market broke out to the downside.
A breakout pullback that comes close to the original entry price to test a breakeven stop. It may overshoot it or undershoot it by a few ticks. It can occur within a bar or two of entry or after an extended move or even 20 or more bars later.
A minor reversal down in a bull trend. Traders expect the bull trend to resume. It can be as brief as one sideways bar or it can retrace most of the most recent leg up. As long as traders believe the market is still Always In Long, the selloff is still more likely to be a bull flag than a successful trend reversal down.
A change in trend from a downtrend to an uptrend (a bull trend).
Buy The Close bull trend
A series of 2 or more bull trend bars closing near their highs. If the context is good for a rally, many bulls will buy the closes of the bars or above their highs.
Strong bulls are asserting themselves and their buying is creating bull trend bars, bars with tails at the bottoms, and two-bar bull reversals. The effect is cumulative and usually is eventually followed by higher prices.
A chart representation of price action in which the body is the area between the open and the close. If the close is above the open, it is a bull candle and is shown as white. If it is below, it is a bear candle and is black. The lines above and below are called tails (some technicians call them wicks or shadows).
A line, bar, candle, volume, tick, or other type of chart.
A move that has gone too far too fast and has now reversed direction to either a trading range or an opposite trend. Most climaxes end with trend channel overshoots and reversals, but most of time, a reversal results in trading ranges and not an opposite trend.
All of the bars to the left showing buying and selling pressure, support and resistance. The circumstances that support or oppose the execution of a trade setup, or its trade management.
A trade or setup that is in the opposite direction from the current trend (the current always-in direction). This is a losing strategy for most traders since the risk is usually at least as large as the reward and the probability is rarely high enough to make the trader’s equation favorable.
A trade taken in the belief that there is more to go in the trend, but that a small pullback is due. A trader enters countertrend to capture a small profit as that small pullback is forming. This is usually a mistake and should be avoided.
A trade where the intent is to exit on the day of entry.
The probability that the market will move either up or down any number of ticks before it reaches a certain number of ticks in the opposite direction. If you are looking at an equidistant move up and down, it hovers around 50 percent most of the time, which means that there is a 50–50 chance that the market will move up by X ticks before it moves down X ticks, and a 50–50 chance that it will move down X ticks before it moves up X ticks.
If there is a Buy The Close bull trend, a bear bar is a Disappointment Bar. Traders often take profits below its low. When there is a Sell The Close bear trend, a bull bar is a Disappointment Bar. Bears often take profits above its high.
A candle with a small body or no body at all. On a 5 minute chart, the body would be only one or two ticks; but on a daily chart, the body might be 10 or more ticks and still appear almost nonexistent. Neither the bulls nor the bears control the bar. All bars are either trend bars or nontrend bars, and those nontrend bars are called dojis.
A Dominant Feature is a huge Surprise Bar. It tends to dominate the rest of the day. For example, if there is a huge bull bar, the day will usually be in a bull trend or trading range for the remainder of the day. Its affect sometimes lasts for many days.
A chart formation in which the low of the current bar is about the same as the low of a prior swing low. That prior low can be just one bar earlier or 20 or more bars earlier. It does not have to be at the low of the day, and it commonly forms in bull flags (a double bottom bull flag).
double bottom bull flag
A pause or bull flag in a bull trend that has two spikes down to around the same price and then reverses back into a bull trend.
double bottom pullback
A buy setup composed of a double bottom followed by a deep pullback that forms a higher low.
A chart formation in which the high of the current bar is about the same as the high of a prior swing high. That prior high can be just one bar earlier or 20 or more bars earlier. It does not have to be at the high of the day, and it commonly forms in bear flags (a double top bear flag).
double top bear flag
A pause or bear flag in a bear trend that has two spikes up to around the same price and then reverses back into a bear trend.
double top pullback
A sell setup composed of a double top followed by a deep pullback that forms a lower high.
Traders who buy as a bull signal bar is forming rather than waiting for it to close and then entering on a buy stop at one tick above its high.
Traders who sell as a bear signal bar is forming rather than waiting for it to close and then entering on a sell stop at one tick below its low.
See exponential moving average (EMA).
The bar during which a trade is entered.
exponential moving average (EMA)
The charts in the videos and books use a 20-bar exponential moving average, but any moving average can be useful.
exhaustion gap in bear trend
Unusually big bear bar or bars late in a bear trend. This usually attracts profit taking and creates at least a minor reversal up. The gap is the close of the final bar to the low of the breakout point or even to the high of the sell climax bars.
exhaustion gap in bull trend
Unusually big bull bar or bars late in a bull trend. This usually attracts profit taking and creates at least a minor reversal down. The gap is the close of the final bar to the high of the breakout point or even to the low of the buy climax bars.
To place a trade in the opposite direction of the trend (for example, selling a bull breakout that you expect to fail and reverse downward).
A failure that fails, resuming in the direction of the original breakout, and therefore a breakout pullback. Since it is a second signal, it is more reliable. For example, if there is a breakout above a trading range and the bar after the breakout is a bear reversal bar, if the market trades below that bar, the breakout has failed. If the market then trades above the high of a prior bar within the next few bars, the failed breakout has failed and now the breakout is resuming. This means that the failed breakout became a small bull flag and just a pullback from the breakout.
failure (a failed move)
A move where the protective stop is hit before a scalper’s profit is secured or before the trader’s objective is reached, usually leading to a move in the opposite direction as trapped traders are forced to exit at a loss. Currently, a scalper’s target in the Emini of four ticks usually requires a six-tick move, and a target in the QQQ of 10 ticks usually requires a move of 12 cents.
A trade in the Emini that reaches five ticks beyond the signal bar and then reverses. For example, a breakout of a bull flag runs five ticks, and once the bar closes, the next bar has a low that is lower. Most limit orders to take a one-point profit would fail to get filled since a move usually has to go one tick beyond the order before it is filled. It is often a setup for a trade in the opposite direction.
Refers to a trader who is not currently holding any positions.
After the initial move, like a breakout, it is one or more bars that extend the move. Traders like to see follow-through on the next bar and on the several bars after that, hoping for a trend where they stand to make more profit. For example, if there is a trading range and then a bull trend bar closes above the high of the trading range, the next bar is the follow-through bar. Bulls want it to have a bull body, which increases the chances of higher prices. Bears want a bear body, which increases the chances that the breakout will fail and reverse down.
A bar that creates follow-through after the entry bar; it is usually the next bar, but sometimes forms a couple of bars later.
A space between any two price bars on the chart. An opening gap is a common occurrence and is present if the open of the first bar of today is beyond the high or low of the prior bar (the last bar of yesterday) or of the entire day. A moving average gap is present when the low of a bar is above a flat or falling moving average, or the high of a bar is below a flat or rising moving average.
See moving average gap bar.
A formation in which the current bar extends one tick beyond the prior bar back into the gap. For example, if there is a gap up open and the second bar of the day trades one tick below the low of the first bar, this is a gap reversal.
See high-frequency trading (HFT).
A swing high that is higher than a previous swing high.
A swing low that is higher than a previous swing low.
higher time frame (HTF)
A chart with each bar representing more time or trades than the bars on the current chart (e.g., a 60 minute chart is a higher time frame for all charts that have bars of 59 minutes or less). A monthly chart is the highest time frame that most traders follow.
high-frequency trading (HFT)
A type of program trading where firms place millions of orders a day in thousands of stocks to scalp profits as small as a penny, and the trading is based on statistical analysis rather than fundamentals.
high/low 1 or 2
Either a high 1 or 2 or a low 1 or 2.
high 1, 2, 3, or 4
A high 1 is a bar with a high above the prior bar in a bull flag or near the bottom of a trading range. If there is then a bar with a lower high (it can occur one or several bars later), the next bar in this correction whose high is above the prior bar’s high is a high 2. Third and fourth occurrences are a high 3 and 4. A high 3 is a wedge bull flag variant.
See higher time frame (HTF).
Consecutive inside bars, where the second is inside the first. At the end of a leg, it is a breakout mode setup and can become a flag or a reversal setup. A less reliable version is a “bodies-only ii,” where you ignore the tails. Here, the second body is inside the first body, which is inside the body before it.
Three inside bars in a row, and a somewhat more reliable pattern than an ii.
A bar with a high that is at or below the high of the prior bar and a low that is at or above the low of the prior bar.
Also called the smart money, it can be a pension fund, hedge fund, insurance company, bank, broker, large individual trader, or any other entity that trades enough volume to impact the market. Market movement is the cumulative effect of many institutions placing trades, and a single institution alone usually cannot move a major market for very long. Traditional institutions place trades based on fundamentals, and they used to be the sole determinant of the market’s direction. However, high-frequency trading (HFT) firms now have a significant influence on the day’s movement since their trading currently generates most of the day’s volume. HFT firms are a special type of institutional firm, and their trading is based on statistics and not fundamentals. Traditional institutions determine the direction and target, but mathematicians determine the path that the market takes to get there.
Inside-outside-inside—three consecutive bars where the second bar is an outside bar and the third bar is an inside bar. It is often a breakout mode setup where a trader looks to buy above the inside bar or sell below it.
A bull ledge is a small trading range with a bottom created by two or more bars with identical lows; a bear ledge is a small trading range with a top created by two or more bars with identical highs.
A small trend that breaks a trend line of any size; the term is used only where there are at least two legs on the chart. It is any smaller trend that is part of a larger trend and it can be a pullback (a countertrend move), a swing in a trend or in a sideways market, or a with-trend move in a trend that occurs between any two pullbacks within the trend.
At least 60 percent certain.
A person who buys a position in a market or the actual position itself.
The smallest position size that can be traded in a market. It is a share when referring to stocks and a contract when referring to Eminis or other futures.
A swing high that is lower than a previous swing high.
A swing low that is lower than a previous swing low.
low 1, 2, 3, or 4
A low 1 is a bar with a low below the prior bar in a bear flag or near the top of a trading range. If there is then a bar with a higher low (it can occur one or several bars later), the next bar in this correction whose low is below the prior bar’s low is a low 2. Third and fourth occurrences are a low 3 and 4. A low 3 is a wedge bear flag variant.
major trend line
Any trend line that contains most of the price action on the screen and is typically drawn using bars that are at least 10 bars apart.
major trend reversal
A reversal from a bull to a bear trend or from a bear trend to a bull trend. The setup must include a break out of the channel (below the bull trend line in a bull trend or above the bear trend line in a bear trend). In addition, the reversal begins with a test of the old trend extreme. All major trend reversal tops are variations of double tops, and all major trend reversal bottoms are types of double bottoms.
A breakout that leads to a measured move. A breakout is a trend bar. The gap is from the close of the breakout bar to the breakout point. For example, the top or bottom of a trading range. Usually the move is about equal to the height of the trading range or pattern that preceded the breakout. For example, a bull breakout above a wedge or trading range often rallies to about as many points up as there were in the wedge or trading range.
measured move in bear trend
a leg down that is about equal in size to something earlier in the trend. For example, the leg might be the same size as an earlier leg down or the height of a trading range.
measured move in bull trend
a leg up that is about equal in size to something earlier in the trend. For example, the leg might be the same size as an earlier leg up or the height of a trading range.
A sell-off in a bear spike or a tight bear channel without significant pullbacks and that extends further than the fundamentals would dictate.
A rally in a bull spike or a tight bull channel without significant pullbacks and that extends further than the fundamentals would dictate.
Any traditional pattern can form over one to about five bars and still be valid, although easily overlooked. When it forms, it is a micro version of the pattern.
A very tight channel where most of the bars have their highs and lows touching the trend line and, often, also the trend channel line. It is the most extreme form of a tight channel, and it has no pullbacks or only one or two small pullbacks.
micro double bottom
Consecutive or nearly consecutive bars with lows that are near the same price. It is a one-bar bear flag if it forms in a bear spike, but it can be a reversal setup at the end of a bull flag.
micro double top
Consecutive or nearly consecutive bars with highs that are near the same price. It is a one-bar bull flag if it forms in a bull spike, but it can be a reversal setup at the end of a bear flag.
micro measuring gap
When the bar before and the bar after a strong trend bar do not overlap, this is a sign of strength and often leads to a measured move. For example, if there is a strong bull trend bar and the low of the bar after it is at or above the high of the bar before it, the midpoint between that low and that high is the micro measuring gap.
micro trend channel line
A trend channel line drawn across the highs or lows of three to five consecutive bars.
micro trend line breakout
A trend line on any time frame that is drawn across from two to about 10 bars where most of the bars touch or are close to the trend line, and then one of the bars has a false breakout through the trend line. This false breakout sets up a with-trend entry. If it fails within a bar or two, then there is usually a countertrend trade.
minor trend reversal
Any small reversal in a trend or trading range. A minor reversal in a trend usually becomes a pullback, which means it will soon end and the trend will resume. A pullback is called a bull flag in a bull trend or a bear flag in a bear trend. Alternatively, instead of the trend resuming, the pullback can keep adding bars and be followed by other minor reversals up and down. After about 20 bars, it will have evolved into a trading range. This means the influence of the trend has mostly or completely ended. The market is about equally likely to break into trend up or down. When that happens, the minor reversal led to a leg in what became a trading range. About 20% of the time, a minor reversal grows into an opposite trend. When it does, although it initially was likely to be minor, it turned out to be a major trend reversal.
A stop based on a fixed dollar amount or number of points, like two points in the Eminis or a dollar in a stock.
The charts in the videos and books use a 20-bar exponential moving average, but any moving average can be useful.
moving average gap bar (gap bar)
A bar that does not touch the moving average. The space between the bar and the moving average is the gap. The first pullback in a strong trend that results in a moving average gap bar is usually followed by a test of the trend’s extreme. For example, when there is a strong bull trend and there is a pullback that finally has a bar with a high below the moving average, this is often a buy setup for a test of the high of the trend.
See body gap
Useless information generated by the media for the sole purpose of selling advertising and making money for the media company. It is unrelated to trading, is impossible to evaluate, and should always be ignored.
Outside-inside-outside, an outside bar followed by an inside bar, followed by an outside bar.
Outside-outside, an outside bar followed by a larger outside bar.
A reversal in the first hour or so of the day.
A bar with a high that is above or at the high of the prior bar and a low that is below the low of the prior bar, or a bar with a low that is below or at the low of the prior bar and a high that is above the high of the prior bar.
outside down bar
An outside bar with a close below its open.
outside up bar
An outside bar with a close above its open.
The market surpasses a prior price of significance like a swing point or a trend line.
A bar that does not extend the trend. In a bull trend, a pause bar has a high that is at or below the prior bar, or a small bar with a high that is only a tick or so higher than the previous bar when the previous bar is a strong bull trend bar. It is a type of pullback.
A perfect trade has a high probability of a reward that is big compared to the risk. It cannot exist because no institution would ever take the other side where there was a low probability of success and the reward was small compared to the risk.
A tick in the foreign exchange (forex) market. However, some data vendors provide quotes with an extra decimal place, which should be ignored.
Any change in price on any chart type or time frame.
The chance of success. For example, if a trader looks back at the most recent 100 times a certain setup led to a trade and finds that it led to a profitable trade 60 times, then that would indicate that the setup has about a 60 percent probability of success. There are many variables that can never be fully tested, so probabilities are only approximations and at times can be very misleading.
At least 60 percent certain.
A temporary pause or countertrend move that is part of a trend, swing, or leg and does not retrace beyond the start of the trend, swing, or leg. It is a small trading range where traders expect the trend to resume soon. For example, a bear pullback is a sideways to upward move in a bear trend, swing, or leg that will be followed by at least a test of the prior low. It can be as small as a one-tick move above the high of the prior bar or it can even be a pause, like an inside bar.
A bar the reverses the prior bar by at least one tick. In an uptrend, it is a bar with a low below that of the prior bar.
A change to an opposite type of behavior. Most technicians use the term to mean a change from a bull trend to a bear trend or from a bear trend to a bull trend. However, trading range behavior is opposite to trending behavior, so when a trend becomes a trading range, this is also a reversal. When a trading range becomes a trend, it is a reversal but is usually called a breakout.
A trend bar in the opposite direction of the trend. When a bear leg is reversing up, a bull reversal bar is a bull trend bar, and the classic description includes a tail at the bottom and a close above the open and near the top. A bear reversal bar is a bear trend bar in a bull leg, and the traditional description includes a tail at the top and a close below the open and near the bottom.
The number of ticks that a trader expects to make from a trade. For example, if the trader exits with a limit order at a profit target, it is the number of ticks between the entry price and the profit target.
The number of ticks from a trader’s entry price to a protective stop. It is the minimum that the trader will lose if a trade goes against him (slippage and other factors can make the actual risk greater than the theoretical risk).
When traders think that the stock market is strong, they are willing to take more risks and invest in stocks that tend to rise faster than the overall market, and invest in more volatile currencies, like the Australian dollar or the Swedish krona.
When traders think that the stock market will fall, they become risk averse, sell out of volatile stocks and currencies, and transition into safe-haven investments, like Johnson & Johnson (JNJ), Altria Group (MO), Procter & Gamble (PG), the U.S. dollar, and the Swiss franc.
When the trader’s equation is unclear or barely favorable for a trade. It can also mean that the probability of success for a trade is 50 percent or less, regardless of the risk and potential reward.
A trade that is exited with a small profit, usually before there are any pullbacks. In the Emini, when the average range is about 10 to 15 points, a scalp trade is usually any trade where the goal is less than four points. For the SPY or stocks, it might be 10 to 30 cents. For more expensive stocks, it can be $1 to $2. Since the profit is often smaller than the risk, a trader has to win at least 70 percent of the time, which is an unrealistic goal for most traders. Traders should take trades only where the potential reward is at least as great as the risk unless they are extremely skilled.
A trader who primarily scalps for small profits, usually using a tight stop.
A typical amount of profit that a scalper would be targeting.
A trade that is close to breakeven with either a small profit or a loss.
The second time within a few bars of the first entry where there is an entry bar based on the same logic as the first entry. For example, if a breakout above a wedge bull flag fails and pulls back to a double bottom bull flag, this pullback sets up a second buy signal for the wedge bull flag.
second moving average gap bar setup
If there is a first moving average gap bar and a reversal toward the moving average does not reach the moving average, and instead the move away from the moving average continues, it is the next reversal in the direction of the moving average.
The second time within a few bars of the first signal where there is a setup based on the same logic as the first signal.
Sell The Close bear trend
A series of 2 or more bear trend bars closing near their lows. If the context is good for a selloff, many bears will sell the close of the bars or above their highs.
Strong bears are asserting themselves and their selling is creating bear trend bars, bars with tails at the tops, and two-bar bear reversals. The effect is cumulative and usually is eventually followed by lower prices.
A pattern of one or more bars used by traders as the basis to place entry orders. It is composed of context, which is all of the bars to the left, and a signal bar. If an entry order is filled, the last bar of the setup becomes the signal bar.
A candle with no tail at one or both ends. A shaved top has no tail at the top and a shaved bottom has no tail at the bottom.
As a verb, to sell a stock or futures contract to initiate a new position (not to exit a prior purchase). As a noun, a person who sells something short, or the actual position itself.
A stairs pattern where the most recent breakout is smaller than the previous one. It is a series of three or more trending highs in a bull trend or lows in a bear trend where each breakout to a new extreme is by fewer ticks than the prior breakout, indicating waning momentum. It can be a three-push pattern, but it does not have to resemble a wedge and can be any series of broad swings in a trend.
The bar immediately before the bar in which an entry order is filled (the entry bar). It is the final bar of a setup.
smaller time frame (STF)
A time frame that has more bars per hour than the current chart. If the chart is based on time, each bar contains less time (e.g., a 3 minute chart is a smaller time frame for all charts that have bars of four minutes or longer). A tick chart with each bar being only a single tick is the smallest time frame.
Small Pullback Bear Trend
Strong bear trend where pullbacks (bounces) are small and brief (1 – 3 bars up). Sometimes a pullback can be a tight trading range and last more than 10 bars as long as it does not bounce high (it does not pull back much).
Small Pullback Bull Trend
Strong bull trend where pullbacks are small and brief (1 – 3 bars down). Sometimes a pullback can be a tight trading range and last more than 10 bars as long as it does not drop far (it does not pull back much).
Consistently profitable traders who are usually trading large positions and are generally on the right side of the market.
spike and channel
A breakout into a trend in which the follow-through is in the form of a channel where the momentum is less and there is two-sided trading taking place.
A push to a new extreme in a trending trading range trend or a broad channel trend where there is a series of three or more trending swings that resembles a sloping trading range and is roughly contained in a channel. After the breakout, there is a breakout pullback that retraces at least slightly into the prior trading range, which is not a requirement of other trending trading ranges. Two-way trading is taking place but one side is in slightly more control, accounting for the slope.
See smaller time frame (STF).
strong bulls and bears
Institutional traders and their cumulative buying and selling determine the direction of the market.
Refers to traders achieving their objective. Their profit target was reached before their protective stop was hit.
A surprisingly big trend bar. It usually leads to at least a small 2nd leg. It is a minor pattern that typically affects only the next 5 – 20 bars. A Dominant Feature is a huge Surprise Bar. It tends to dominate the rest of the day. For example, if there is a huge bull bar, the day will usually be in a bull trend or trading range for the remainder of the day. Its affect sometimes lasts for many days.
A smaller trend that breaks a trend line of any size; the term is used only when there are at least two on the chart. They can occur within a larger trend or in a sideways market.
A bar that looks like a spike up on the chart and extends up beyond the neighboring bars. Its high is at or above that of the bar before it and that of the bar after it.
Either a swing high or a swing low.
A bar that looks like a spike down on the chart and extends down beyond the neighboring bars. Its low is at or below that of the bar before it and that of the bar after it.
Either a swing high or a swing low.
For a day trader using a short-term intraday chart like the 5 minute, it is any trade that lasts longer than a scalp and that the trader will hold through one or more pullbacks. For a trader using higher time frame charts, it is a trade that lasts for hours to several days. Typically, at least part of the trade is held without a profit target, since the trader is hoping for an extended move. The potential reward is usually at least twice as large as the risk, and the probability is usually only 40 – 50%. In strong breakouts, the probability is often 60% or more, but then the risk is usually large, and traders often take profits once the reward has grown as large as the risk. Small swing trades are called scalps by many traders. In the Emini, when the average range is about 10 to 15 points, a swing trade is usually any trade where the goal is four or more points.
When the market approaches a prior price of significance and can overshoot or undershoot the target. The term failed test is used to mean opposite things by different traders. Most traders believe that if the market then reverses, the test was successful, and if it does not and the move continues beyond the test area, the test failed and a breakout has occurred.
Three swing highs where each swing high is usually higher or three swing lows where each swing low is usually lower. It trades the same as a wedge and should be considered a variant. When it is part of a flag, the move can be mostly horizontal and each push does not have to extend beyond the prior one. For example, in a wedge bull flag or any other type of triangle, the second push down can be at, above, or below the first, and the third push down can be at, above, or below either the second or the first, or both.
The smallest unit of price movement. For most stocks, it is one penny; for 10-Year U.S. Treasury Note Futures, it is 1/64 of a point; and for Eminis, it is 0.25 points. On tick charts and on time and sales tables, a tick is every trade that takes place no matter the size and even if there is no price change. If you look at a time and sales table, every trade is counted as one tick when TradeStation charting software creates a tick chart.
A channel where the trend line and trend channel line are close together, and the pullbacks are small and last for only one to three bars.
tight trading range
A trading range of two or more bars with lots of overlap in the bars and in which most reversals are too small to trade profitably with stop entries. The bulls and bears are in balance.
The length of time contained in one bar on the chart (a 5 minute time frame is made of bars that close every five minutes). It can also refer to bars not based on time, such as those based on volume or the number of ticks traded.
A setup that you believe has a reasonable chance of leading to at least a scalper’s profit.
To take a trade, you must believe that the probability of success times the potential reward is greater than the probability of failure times the risk. You set the reward and risk because the potential reward is the distance to your profit target and the risk is the distance to your stop. The difficulty in solving the equation is assigning a value to the probability, which can never be known with certainty. As a guideline, if you are uncertain, assume that you have a 40 – 50% chance of winning, and go for a reward that is at least 2x as large as your risk. If instead you are confident of your trade, assume that you have a 60% chance of winning, and you can then take profits at 1x risk (set a profit target that is as far as your protective stop). Since perfect trades cannot exit, all trades have at least one bad variable…either a low probability, or a reward that is small compared to the risk.
The minimum requirement is a single bar with a range that is largely overlapped by the bar before it. It is sideways movement and neither the bull nor the bears are in control, although one side is often stronger. It is often a pullback in a trend where the pullback has lasted long enough to lose most of its certainty. In other words, traders have become uncertain about the direction of the breakout in the short term, and the market will have repeated breakout attempts up and down that will fail. It will usually ultimately break out in the direction of the trend, and is a pullback on a higher time frame chart.
trailing a stop
As the trade becomes increasing profitable, traders will often move, or trail, the protective stop to protect more of their open profit. For example, if they are long in a bull trend, every time the market moves to a new high, they might raise the protective stop to just below the most recent higher low.
An entry that immediately reverses to the opposite direction before a scalper’s profit target is reached, trapping traders in their new position and ultimately forcing them to cover at a loss. It can also scare traders out of a good trade.
trapped in a trade
A trader with an open loss on a trade that did not result in a scalper’s profit, and if there is a pullback beyond the entry or signal bars, the trader will likely exit with a loss.
trapped out of a trade
A pullback that scares a trader into exiting a trade, but then the pullback fails. The move quickly resumes in the direction of the trade, making it difficult emotionally for the trader to get back in at the worse price that is now available. The trader will have to chase the market.
A series of price changes that are either mostly up (a bull trend) or down (a bear trend). There are three loosely defined smaller versions: swings, legs, and pullbacks. A chart will show only one or two major trends. If there are more, one of the other terms is more appropriate.
A bar with a body, which means that the close was above or below the open, indicating that there is at least a minor price movement.
trend channel line
A line in the direction of the trend but drawn on the opposite side of the bars compared to a trend line. A bull trend channel line is above the highs and rising to the right, and a bear trend channel line is below the lows and falling to the right.
trend channel line overshoot
One or more bars penetrating a trend channel line.
trend channel line undershoot
A bar approaches a trend channel line but the market reverses away from the line without reaching or penetrating it.
trend from the open
A trend that begins at the first or one of the first bars of the day and extends for many bars without a pullback, and the start of the trend remains as one of the extremes of the day for much if not all of the day.
Three or more bars where the closes are trending. In a bull trend, each close is above the prior close, and in a bear trend, each close is lower. If the pattern extends for many bars, there can be one or two bars where the closes are not trending.
trending highs or lows
The same as trending closes except based on the highs or lows of the bars.
Three or more swings where the swing highs and lows are both higher than the prior swing highs and lows (trending bull swings), or both lower (trending bear swings).
trending trading ranges
Two or more trading ranges separated by a breakout.
A line drawn in the direction of the trend; it is sloped up and is below the bars in a bull trend, and it is sloped down and is above the bars in a bear trend. Most often, it is constructed from either swing highs or swing lows but can be based on linear regression or just a best fit (eyeballing).
A trend change from up to down or down to up, or from a trend to a trading range.
20 moving average gap bars
Twenty or more consecutive bars that have not touched the moving average. Once the market finally touches the moving average, it usually creates a setup for a test of the trend’s extreme.
The market approaches but does not reach a prior price of significance like a swing point or a trend line.
At most 40 percent certain.
At least 60 percent certain.
A buy vacuum occurs when the strong bears believe that the price will soon be higher so they wait to short until it reaches some magnet above the market. The result is that there is a vacuum that sucks the market quickly up to the magnet in the form of one or more bull trend bars. Once there, the strong bears sell aggressively and turn the market down. A sell vacuum occurs when the strong bulls believe that the market will soon be lower so they wait to buy until it falls to some magnet below the market. The result is that there is a vacuum that sucks the market down quickly to the magnet in the form of one or more bear trend bars. Once there, strong bulls buy aggressively and turn the market back up.
Traditionally, a three-push move with each push extending further and the trend line and trend channel line at least minimally convergent, creating a rising or descending triangle with a wedge shape. For a trader, the wedge shape increases the chances of a successful trade, but any three-push pattern trades like a wedge and can be considered one. A wedge can be a reversal pattern or a pullback in a trend (a bull or bear flag).
A wedge-shaped or three-push pullback in a trend, such as a high 3 in a bull trend (a type of bull flag) or a low 3 in a bear trend (a type of bear flag). Since it is a with-trend setup, enter on the first signal.
A wedge that is reversing a bull trend into a bear trend or a bear trend into a bull trend. Since it is countertrend, unless it is very strong, it is better to take a second signal. For example, if there is a bear trend and then a descending wedge, wait for a breakout above this potential wedge bottom and then try to buy a pullback to a higher low.
Refers to a trade or a setup that is in the direction of the prevailing trend. In general, the direction of the most recent 5 minute chart signal should be assumed to be the trend’s direction. Also, if most of the past 10 or 20 bars are above the moving average, trend setups and trades are likely on the buy side.