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Hello People,
As per AL MTR's are trading ranges and most reversal patterns are trading ranges. When I look at this chart above I see a trading range behaviour and it can also be considered a MTR setup.
As AL has mentioned in his videos, in trading ranges the market races to the top (big bull bars) and then it races to the bottom(big bear bars). It seems like it will break out but it doesn't. 80% of BO attempts fail in TR.
AL also explains in his MTR videos that first a trend line has to break and then the prior high or low extreme needs to be tested with weak bull or bear bars and there is a 40% chance of a reversal. And, if the prior extreme is tested with strong bull or bear bars the chances are the trend will continue in the same direction and MTR failure will take place.
Confusion - If I consider the above chart as a trading range it makes sense to buy at the last bar as the market has raced down to the bottom of a trading range and we might test the other end of the trading range. 80% chance that the BO will fail.
If I consider the above chart as a MTR I could see that the market raced down to the bottom with strong bear bars and therefore there is a chance the trend would continue and buying above the last bull bar on the chart doesn't make sense. The probability is higher that it will BO as bear bars are strong.
Why is there an inconsistency between the two, if MTR are trading ranges?
How can one differentiate between the two? How to know if the given context on chart is MTR or simply a trading range? it's important to differentiate between the two because in a trading range even if the market races up with strong bull bars it still has a 80% chance of failed BO, however, if market races to the top with strong bull bar to test the extreme in MTR setups the BO chances will definitely be higher than 50%.
Big bull bar at the end of the trading range could still mean breakout will fail, however big bull bars to test the MTR extreme could mean that break out will succeed. How can one differentiate between the two if the context looks like what's in the chart above.
Hello there,
I understand your confusion; we all have them in the beginning.
Your chart has a MTR that has already failed. The market has 4 consecutive bull trend bars from the bottom of the bear trend, all of them closing at/near their highs and 5th one being a doji, which creates a double top with the beginning of the TR. This is the first BO from the preceding bear trend and we expect it to be a minor reversal, as seen here.
For a MTR setup, as you know, you need a strong enough break of a trend line, which we have here in the form of those 4 bull bars. Then, we need a weaker resumption towards the previous extreme (in this case, to the low of the bear trend). That move here is a wedge - it has 3 pushes down that goes past the 50% pullback of the bull leg. The last bar of that move is a bull bar (8th bar from the end, counted in reverse) with a small tail. At the close of that bull bar, the market has a reasonable MTR setup.
You can also look at it as a double bottom; there is another bull bar 3 bars before the last bull bar. It doesn't matter whether you say there is a wedge or a double bottom. What matters is, the market has given a reasonable MTR setup, so you'd enter after the wedge, above the last bull bar.
Like I said, the MTR attempt failed as expected because it has around 40% probability, and the market reversed into bear and the bear move itself has 4 consecutive strong bear trend bars, which are getting bigger. This looks like the 2nd leg of the previous bear move (the wedge) and like a vacuum test of the previous low. The next bar (and the last bar on the chart) is a bull bar but it is too small compared to the bear leg that precedes it.
Arguably, there isn't a second MTR here at this time, because the bull signal bar is small and the bear leg is very strong. Would you want to buy above such a small bull bar after such a strong bear leg?
I'd say you have a TR at the end of the chart - not a MTR, so a scalp, rather than a swing, which means you have three options for a trade:
- Have a pending buy order around the previous low, which would have already triggered and you would already be long. This has the lowest probability because you'd have bought a sell the close bear leg i.e. you are buying in a market that is strongly moving against you.
- Enter after the last bar (the bull bar), betting that the strong bear leg is just a 2nd leg trap and a vacuum. This has higher probability than #1 because you now have at least a bull bar (can be considered a failed bear BO). Yet this still has lower probability overall because the strong bear move indicates that there possibly will be sellers above - the strong bear 2nd leg is strong enough to have its own 2nd leg; there is a high probability that the market will move at least a bit more down.
- Wait for 1-3 more bars to get a 2nd entry, preferably above a bull bar that closes near/at its high. This has the highest probability for a profitable long here because you'll get a double bottom (and the 2nd leg of the last strong bear leg would probably be inside it), but as usual it has the possible downside of the entry being far away from the low of the TR (more risk).
All of these choices are reasonable for this chart, therefore which you pick depends on your experience and personality. If you are new, and looks like you are, then waiting for the highest probability situation can be the correct way to go.
The same goes for your stop; you can put it very close or at least a measured move away from the last bear leg, or somewhere else that makes sense. The wider the stop, the higher the probability of a profit.
Hope this helps!
Hello khan,
Thank you for your response. I appreciate the time you have taken to reply. You have correctly understood my question however the doubt I have is still unanswered at the moment.
Doubt - Strong moves up or down in a TR could still have a 80% probability that BO will fail. So, at the end of this chart if we do consider it as a trading range then we have a 80% chance that the BO will fail even if I wait for a second entry a couple of bars later the probability of a BO is only 20%. So regardless of the four strong bear bar at the end of the TR I would still bet on upside and would be looking to buy.
however, If I consider this as a lower low MTR reversal after the higher low MTR reversal failed. I would have to think twice before getting long at the last bar. Because now that I am considering it as a lower low MTR the four big bear bars are too strong to take the long.
so do you see how the perspective is changing for buying the last bar if you consider it as a TR vs. when you consider it as a lower low MTR setup?
in short, at the end of this chart if you consider it as a trading range it's a good buy (even after four big bear bars as market races down in TR and then races up), however, if you consider it as a lower low MTR setup it's not a good buy
(as four bear bars are way too strong). so how does one decide what to consider it as? 😉
Thanks again for your response.
Hello Siddhant,
For what I have seen in the course it is possible that there is no way to know if that is one or the other because some times the market is two things at the same time. During the course Al talks a lot about TR for example where theres a Bull/Bear Trend but at the same time you are in a TR, so should you hold a buy or buy a setup high if it is a Bull Trend, well you can, but at the same time you cant do that on a TR and you will never know in advance what it is going to be in the future.
Something similar happens when he explains BO, imagine that you are in a TR but it looks like it is going to be a BO and the price starts racing up, it seems like a BO but until you have a clear BO closing above the TR and FT you have nothing, because it can fail.
What I am trying to say with this is that maybe it is not possible to say this is a "insert your thought" here because it can be both, and you have to take a decision based on what you are seeing in the chart and the market cycle, sometimes you will be right and sometimes you wil not, but if someone bought that MTR was he wrong? I dont think so, its just that MTR failed and the same can happen later if someone see that as a TR or a Bear Trend where Bears trapped Bulls.
I hope this could help you, have a nice day!
Hey Siddhant,
Great question about your doubt. I have an equally great answer and it is the same as Alejandro (and ultimately Al) said: Clarity exists only briefly in markets and usually only for a short time, i.e. in strong BOs. Other times, there are reasonable setups for both bulls and bears and that's why trading can take place - both sides believe they can make money by buying and selling, so there is never certainty, but only doubt and therefore, confusion.
It is entirely subjective and most of the time you can choose to buy, or choose to sell at any given moment.
Again, it is like Alejandro said: you, we, and anyone else, can never be absolutely sure which way the market will move on the next bar.
So, in your example you can decide that the market is in a TR (and it is) and go long with many different ways (some of which I explained), or you can decide that the market is having a double bottom MTR (and it is) and go long. To me, as a MTR that looks bad, so low probability, but that's just me.
Yesterday I was editing my post to explain the bear case as well but I took too long and the forum rejected my last edit. I'll write it down here for completeness sake.
For the bear case, you'd think the opposite:
- You can conclude that selling pressure is higher than buying pressure here and go short for any reason because you conclude that a bear BO is likely, even though you are in a TR, because a TR will eventually have a successful BO. It can be right now, or it can fail. If it fails, you'll be ready for it and you can get out quickly, with a small loss.
- Since the last bear leg is strong, a 2nd leg is likely, so you can sell a minimum scalp size above from the bottom of the last bear leg for a scalp.
- You can wait for a 50% PB from the last bear leg to sell for the same reason as above.
As you can see, most of the time you can look at markets however you choose. It is up to you and ultimately it doesn't matter which direction you choose. You only have to be aware of general probability of profit of your choice so you can structure a mathematically profitable trade and that's it.
With experience, assessing probabilities becomes easier and faster, so you can quickly say "nah, I don't like that MTR setup" or "I think a BO from this TR is likely now" and you'll mostly (but not more than that) be right.
What you can and should do is to accept and embrace the confusion, pick a reasonable setup in either direction and not worry about it, because you can only ever be certain after the fact - after you win or lose.
Be at peace and trade! 🙂
Hello guys,
Thank you for your valuable info Alejandro Diaz Hernandez.
and thanks again Khan I really appreciate the input.
let me show you how this unfolded.
Nice thread, here is my 2c (attached)
Thank you mike.
Nice one mike.
Since I was only writing, I didn't want to get the post too long and skipped a lot of things, otherwise I'm in complete agreement with your analysis, well done.
Let's say we don't know we have the strong sell off in front of us and ignoring bars that leave gaps behind, instead our thought is "prices has to reverse at some point for sure". Check out attachment where we take every reversal up 🤫
Good thread! Given the overall context is bearish, would that further reduce the probability of a bounce off the TR bottom ie higher probability to short at top of TR (which didn't happen) rather than go long at bottom of TR?
Could this be considered to be a bear flag after a first leg down (and does the gap down give extra probability to this?).
Very interesting!
Hey James,
what are your thoughts on it?
Fellow traders let me attach another example that similar to this. Now look at this chart and specifically the first blue box. The leg down (first blue box) is definitely strong and buying there should not be appropriate from what I understood from the previous replies to this thread, however, still the market bounced back up as it would in a trading range (without even a second entry). Now had I considered this as a MTR (till the first blue box) I wouldn't be thinking of buying as the bear leg is pretty strong (that is test the extreme low), but if I would get a hint that it could be a trading range I would know that it has a pretty good chance of bouncing up (like it did here).
I hope you guys understand my point. I am just saying how the perspective to buy shifts as we consider it a MTR vs a TR with strong moves.
Any thoughts guys?
Siddhant, we could look at the chart this way, no?
Hey Mike, yes we can look at the chart this way for sure at the end of the session ;).