Warning Signs- Long Bars Review

Last updated 10/15/2009 7:57 PM EST (GMT -5) 7 Comments

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

Bradley W. Gareiss

Technical Analyst, GFT

I warn of long bars near the completion of a pattern in nearly every trade I put on fx360.com. The reason for this is that they are the number one signal that a pattern is likely to fail. Of course, some patterns are going to fail and some patterns are going to win. There is nothing anyone can do about that, and no one wins them all. However, long bars are the number one red flag that indicates we should not take a trade when utilizing our geometric pattern recognition that we use on fx360.com

Geometric pattern recognition is a methodology that attempts to find points of significant support or resistance. In other words, we are looking for a reversal in price action. If the price is falling, we are looking for it to begin to rise at the point we suggesting going long. If the price is rising, we are looking for it it to fall at the point we suggesting going short.

Since we are looking for reversals, we want to enter our trades with as little momentum as possible. The more momentum a currency pair has, the more force it requires to reverse. Long bars are simply an indication that there is a lot of momentum or force that will have to be reversed at the entry point. In turn, long bars near the entry of the trade decrease the probability that the trade will reverse as the pattern suggests.

There is no simple way to measure what a "long bar" is. There are several reasons for this. First, every currency pair has a different range. A 100 pip bar on the NZD/USD is relatively longer than a 100 pip bar on the GBP/CHF. Additionally, each pattern is different. Some patterns are much smaller than others, so it is difficult to put a "pip" value on a long bar. Even if we defined a long bar as a percentage of the CD leg, this could vary whether we were viewing the pattern on a 30 minute chart or a 2 hour chart.

So how do we determine long bars? If CD is one very long bar, that one is obvious. However, sometimes long bars are more subjective. The easiest way to tell is to look at the price symmetry. Notice on the chart below, that the CD leg has a much steeper slope than AB. This indicates CD moved more rapidly than AB, and therefore CD likely has more momentum than AB. If CD completes before the hypothetical D (as in this chart), it is likely their are long bars. If AB and CD have approximately the same slope, we call this a "symmetrical" pattern. Also, when taking a trade, we want to look for deceleration into the entry, not acceleration. Therefore, if there is a long bar at the beginning of the CD leg, but the pair decelerates so that the overall slope of CD is roughly equal to AB, the trade is probably okay to take.

The moral of the story is that if it looks like the pair is accelerating into the entry or their are clear long bars, simply wait for the next trade. The market provides a never ending stream of trading opportunities. Even if you miss one that would have been profitable, it is not the end of the world because there will be more than enough trades in the future. In conclusion, if you suspect there are long bars, there probably are. It may be tempting to enter that trade you have been waiting to enter for a day or two, but in the long run it is better to pass on long bars, and wait for patterns that are symmetrical.

• • USD/JPY setup.">
    
  • 1hr Chart - Long bar example from yesterday's USD/JPY setup.

Comments (7)

esanariam

October 19, 2009 at 08:09 AM ET

Excellent!

BUFFALO DC

October 16, 2009 at 04:33 AM ET

"The market provides a never ending stream of trading opportunities. Even if you miss one that would have been profitable, it is not the end of the world because there will be more than enough trades in the future. "

I know this is not the theme of this article, but that is a VERY profound statement.

DC

bgareiss

October 16, 2009 at 01:57 PM ET

If you like that, make sure you check out "Trading in the Zone" by Mark Douglas. A lot of of what I write regarding trading psychology is based on his theories in that book. Brad

Ammore

October 16, 2009 at 09:22 AM ET

when can we short GBP/USD ?
it is moving crazily.

bgareiss

October 19, 2009 at 05:46 PM ET

I don't look to long or short any pair. I just watch for patterns to form and then act accordingly, regardless of the direction. At this point, I don't see anything I feel comfortable trading on the GBP/USD.

jacobuzon

October 16, 2009 at 05:36 AM ET

Good article, I enjoyed the nuanced perspective.

bgareiss

October 19, 2009 at 05:42 PM ET

Thank for the feedback. Brad

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