Video 08D: Candles, Setups, and Signal Bars

What is a setup?

1. Setup has: Signal Bar and Context

A strong candlestick is NOT enough to take a signal
In the chart, Traders see a good Buy Signal Bars, but it context is at the top of Trading Range. Context is NOT good.
In a Trading Range, you want to buy at low, NOT top.
If the Market goes above the TTR, but ONLY one Bar or two. It will be back to the Trading Range.

2. Trading Range: Bad Context for Swing Trades

Buy Low Sell High Scalp.
Don't Buy near Top, or Sell near Bottom.
Most 80% Breakout attempts fail. Even if the leg is strong. It is STILL a low probability.
No matter how strong and convinsing, the market will reverse back into the Trading Range.

3. Strong Signal Bar: Wait if bad Context

If the Context is Bad, a single Signal Bar, is NOT enough to take a trade.
Strong Signal Bar are at top of a Small TTR, and also top of a Larger TTR. Buy, then fail.
In a Tight Bear Channel, Bull Buy Signal Bars also fail to reverse the Bear Trend.

4. Strong Bull: Only Buy

Tight Bull Channel, pullbacks are only 1 -- 2 Bear Bars.
It shows a strong Bull Trend. It's a bad context for Bears.
Do NOT sell even if there is a good Sell Signal Bar.
Even if there's a Three Pushes Up, the Trend is still likely to be sideways, rather than reverse to Bear Trend. So still, DO NOT Sell.
Even if the Buy Signals are weak bars, (e.g. doji bars), but still a Buy Signal Bar. There's no chance for Bears.

5. Strong Bear Trend: Bad context for Reversal Trades

Strong Bear Channel pullbacks are only 1 -- 2 Bull Bars.
It's OK to sell, but DO NOT buy.
Sell Signal Bar are weak bars, but still sell below the Bear Signal Bar.

Weak setup, need more

1. Weak Buy Setup and Context: wait for higher Probability

If there's a weak setup, traders usually need to wait more to enter a trade.

There is a Bull Trend.
But the Buy Signal is weak:
- There is ONLY one double bottom, but not having a Breakout to new high.

Traders should wait, or advanced trader will buy stop with wide stops, and scale in when market comes lower.

2. Weak Sell Setup: wait

Sell Signal Bar is weak.
Context is also weak.

Wait for more information.

You can wait for II Pattern with a Bear Bar at the 3rd. It is 2nd Sell Signal Bar with higher probability. Sell limit at the bottom.
OR you can wait for the Strong Bear Signal Bar (the bear breakout), a true Bear Breakout. and Sell at close.
OR you can sell at close of the Bear Follow-through Bar, beause now it's Always In Short.
OR you can sell at pullback (but could be NO pullback).

You Stop Loss will always be placed at the top of the bull trend.

The argue here could be, it's a bad R/R. But higher probability will always sacrifice a good R/R.

3. Strong Bull Breakout and Follow-Through: expect more trend

Strong Bull Breakout, and follow-through is also a Strong Bull Breakout, now it is a Always In Long.
Always In Long: Buy for ANY reason.
- Buy bull close, betting the trend will be further up.
- Buy reverse close, betting the reversal will fail.

4. Weak Buy Signal Bar and Weak Context: Low Probability

Here is a Bear Trend, it's a micro channel, no pullback. Pretty strong Bear Trend.
Even though there's a signal bar, close above midpoint, but it's a Bear Signal Bar, no one wants to buy above a Bear Bar.
The follow-through is a Doji Bar, also not a good follow through.

If you want to enter a Buy Trade, you need to see a strong breakout, then you can confirm it is a success reversal.

5. Weak Signal Bar and Weak Context: Wait for BO

There is a Strong Bull Breakout:
- 2 Big Bull Bars, close at its high.
- Doji bar as follow-through, but still bull bar.
- A gap in two Big Bull Bars.
- All Bull Bars closes above its midpoint.
This is a good reversal up. Even if we pullback again, the market probably can hold up.

So, NOW it's time to buy.

6. Strong Bull: Buy for ANY Reason

It becomes to a Always In Long bull trend.
Usually it will be a 2nd Leg Up.
So you can buy for any reason.
You can buy bull close, you can buy pullback close, you can buy market.

7. Weak Sell Signal Bar and Weak Context: Wait to Sell

Very weak sell signal bar.
Very strong consecutive 14 bull bars in a trend. No Pullback.
It can go down, but you need higher probability.

8. Bear Breakout and Follow-Through: Always In Short

The bear breakout is breakout the TTR on the top.
There Bear Breakout Bar is a strong Sell Signal.
And it has a good Follow-through, for selling.
Consecutive Bear Bars close below midpoint.

Confirming it's always in short. Sell ANY time, ANY reason.

9. Bear Breakout and Follow-Through: Sell for ANY Reason

2nd signal

Sometimes the context is good enough for a trade, but the signal bar is weak, or the context is not quite good enough also. In that case, traders usually should wait for 2nd Signal.

1. Weak Setup: wait for 2nd signal

A bull trend, decent follow-through.
Little bear bar appears in the Tight Bull Channel.
3 Pushes Wedge, with a Bull Breakout above the Wedge.

There is a good Sell Signal Bar on the top. Do you want to sell limit below this bar? No.

The chances are it may fail to breakout. But it's not good enough for Sell.

Once the 2nd Sell Signal Bar appears, you can see

a Double Top.
Bulls are trying to get Break Even, but failed.
Followed by a Bear Bar, closes at low. (probably go lower)
Bulls are giving up.

After that Parabolic Bear Wedge,

the 1st bull signal bar (Bull Bar close above the midpoint) is not convincing enough to take a buy trade.
Until see the Bears trying to push back down, and resume the Bear Trend (followed by the Bear Bar), but it closes above the midpoint
And followed by another Bull Bar immediately, means the bulls buy it up immediately, and closes above the Bear Bar's open.

Now, the 2nd Bull Bar is a 2nd Buy Signal Bar, and buy stop above the close, is the Entry Bar.

2. Buy Signal Bar and Context is Not Clear: Wait for 2nd Signal

Near the bottom of the Trading Range. (Double Bottom with a Higher Low)
But it's a Tight Bear Channel.
You can argue there is a micro double bottom, but the Signal Bar is a doji bar.
The Doji Signal Bar followed by a Bull Bar, looks quite strong, but Bears attempt to sell again.
Until see an immediate Bull Bar after the bear bars.
- No upper tail
- Close at the top.
It is a good Bull Signal Bar, so the Entry Bar above its close.

3. Sell Signal Bar Weak, Context Good: Most will wait

There was a Bull Trend, not much selling pressure.
Until see a 3 top wedge, but during the wedge, still not many Bear Bars.
1st Sell Signal Bar is a doji bar, with a bear body. Not strong enough, even though the context is good enough. So still wait.
Bears attempt to reverse the trend, and we can see a micro Double Top. It has higher probability to sell. But still NOT so great to sell. Because it is a Doji Bar still.

Until we see a Strong Bear Breakout, so we can sell at the Bear Bar's close.
The follow through is quite good, so it's Always In Short, we can sell bull close, sell bear below, sell any reason.

4. Sell Signal Bar Weak and Context Good: OK to Sell

Context is a Lower High Major Trend Reversal. But Sell Signal Bar is quite weak.

You can sell at top, and SL is quite small. But at the same time, your probability is also quite low.
You can either increase your SL above for scale in, or wait for 2nd Signal for higher probability.

5. Weak Buy Setup: Low probability

The Bear Trend is Strong. There is a large Bear Bar.
Even though there is a Bull Bar after it, but the Signal Bar is very weak. Probably will be a 2nd Leg Down.
After 2nd Leg Down, the Buy Signal Bar is also weak, it has tail on the top, small body.
After it, there's a 3rd Buy Signal Bar, but it is a Doji Bar. It has High Low, but not much buy pressure here yet.
So we wait for another Buy Signal Bar, a Bull Bar with little top tail. Wait to buy above the Strong Bull Signal Bar.

Countertrend needs strong signal bar

Whenever you trading AGAINST a trend. You must see a Strong Signal Bar.

1. Countertrend: Need Strong Signal Bar

Double Bottom, 1st Signal Bar is weak.
2nd Signal Bar, IOI Pattern ends with a bull bar, it is a Strong Buy Signal Bar.

2. Weak Sell Setup: Low probability

IF you are in doubt, DO NOT sell below weak Sell Signal Bars.

This signal bar is doji, not enough selling pressure.

The best we can get is either Sideways,
OR get another Leg Up.

Then there is a good looking Bear Bar at the 3 push wedge top.

The bear bar closed near its low. It has higher probaility.

Also the Strong Bear Bar is a Inside Bar (IB), at the late bull trend. Possible it is a Final Flag.

3. Countertrend: Weak Signal Bar means low probability trade

It's a Bear Trend in a Tight Trading Range.
A Tight Trading Range appears late in a Bear Trend. (Often becomes a final bear flag)
There are a lot Bull Reversal Bars. (Buying pressures)

It increases the chances the Bear Breakout will fail.