Hey Eric, I hope you had a great Christmas!
I've been going through and reviewing the lessons to shore up some things. After reviewing the reversal bars, I have a question. In the article you wrote on Mack's site and I think Al Brooks mentions it too, that you want to see "A lower tail that is no more than 1/3 – ½ the height of the bar, and a small or nonexistent upper tail [prevents the signal bar from having trading range characteristics. Also a strong close improves directional momentum]"
In the course video I didn't see anything about the tails, just referencing that it gives the bar trading range characteristics. But then there's plenty of reversal bars marked with a long tail. (Lower tail for bull bars and upper tail for bear bars)
Is that something I should be paying close attention to when judging reversal bars? Or are there situations where it's more important? Thank you!
Tails on reversal bars
Re: Tails on reversal bars
Thank you and the same holiday wishes to you and family.
The opening lectures cover that paper in a little more detail, but let's consider this from an order flow perspective considering 1 bar:
1. A bar opens on its high and prices move downwards.
2. After a period of time prices stop their descent and begin to move upwards
3. The bar segment closes with prices finishing exactly where they began at the beginning of the bar
What can you say about where prices will now go?
Well it depends, based on context. While there was an area where bears were stronger, it was followed by the exact same returning offset.
Bars that have larger bodies vs the tail in general indicate a stronger directional bias. This is why there is a tail length reference. However, now consider, outside of the tail, what a trading range means. It is more of a momentum balancing function in general. That is what trading ranges are. Periods where bias is reducing.
Let's consider a trading range first. In a trading range, prices will establish higher and lower ranges, and when prices attempt to break out, they will most often fail. The edges then of a trading range are extremes, with the center of a trading range being an area of balance. So when prices fail to break out of a trading range they will then most often move towards the center of the pattern, and often towards the other side.
Now, a doji (trading range), at the edge boundary of a trading range. That would potentially then be showing rejection of the breakout, and thereafter the return into the trading range pattern, then moving towards the middle to balance. So a doji at the edge of a trading range potentially shows the breakout rejection. This is why it is a potentially good signal bar under trading range rules for a return to balance (rejection of the breakout of a trading range at the edge).
As for trends, if it is a newer trend, after a spike phase, there is often a channeling phase. There is a higher probability of prices still moving in the direction of the spike, and therefore a doji may indicate a rejection of a selloff (if the spike is upwards), but that will always be weaker than a good bull bar. Why did prices have to sell off in the first place if the bulls were strong? And this is why the length of tail makes a difference. The larger the tail, the greater the strength which was shown before reversing.
Hopefully helpful and good trades to you!
The opening lectures cover that paper in a little more detail, but let's consider this from an order flow perspective considering 1 bar:
1. A bar opens on its high and prices move downwards.
2. After a period of time prices stop their descent and begin to move upwards
3. The bar segment closes with prices finishing exactly where they began at the beginning of the bar
What can you say about where prices will now go?
Well it depends, based on context. While there was an area where bears were stronger, it was followed by the exact same returning offset.
Bars that have larger bodies vs the tail in general indicate a stronger directional bias. This is why there is a tail length reference. However, now consider, outside of the tail, what a trading range means. It is more of a momentum balancing function in general. That is what trading ranges are. Periods where bias is reducing.
Let's consider a trading range first. In a trading range, prices will establish higher and lower ranges, and when prices attempt to break out, they will most often fail. The edges then of a trading range are extremes, with the center of a trading range being an area of balance. So when prices fail to break out of a trading range they will then most often move towards the center of the pattern, and often towards the other side.
Now, a doji (trading range), at the edge boundary of a trading range. That would potentially then be showing rejection of the breakout, and thereafter the return into the trading range pattern, then moving towards the middle to balance. So a doji at the edge of a trading range potentially shows the breakout rejection. This is why it is a potentially good signal bar under trading range rules for a return to balance (rejection of the breakout of a trading range at the edge).
As for trends, if it is a newer trend, after a spike phase, there is often a channeling phase. There is a higher probability of prices still moving in the direction of the spike, and therefore a doji may indicate a rejection of a selloff (if the spike is upwards), but that will always be weaker than a good bull bar. Why did prices have to sell off in the first place if the bulls were strong? And this is why the length of tail makes a difference. The larger the tail, the greater the strength which was shown before reversing.
Hopefully helpful and good trades to you!
Re: Tails on reversal bars
Thank you Eric! That makes sense and is very helpful 