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Warning Signs- Long Bars Review

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Last updated 3/8/2010 7:16 PM EST (GMT -5) 10 Comments

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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.

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

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Comments (10)

Derekis

March 08, 2010 at 07:47 PM ET

Hi Brad,

This article finally clears my doubt on why some patterns are invalidated due to these so-called "long" bars. Great job.

Cheers,
Derekis

bgareiss

March 09, 2010 at 01:07 PM ET

I am glad this helped.

Brad

wwwin

March 08, 2010 at 11:54 PM ET

I think you guys need to realize that when the market is too volatile due to ever changing fundamentals...this type of technical analysis does not work, as evidence by the results...it is just to wild to predict with patters....bailout is on,,,bailout is off...etc etc etc....this is not the time to pick tops and bottoms. Just my humble opinion

bgareiss

March 09, 2010 at 01:19 PM ET

The results since the website launched are actually fairly favorable. Unfortunately we cannot post all that data on the site, and we are limited to posting only a small piece of the results. I have gone over the reasons I prefer technical analysis on the site many times, so I won't beat a dead horse. Of course, everyone is entitled to their opinion, which is a great thing because otherwise the markets wouldn't be able to function.

Brad

Semaj

March 09, 2010 at 07:42 AM ET

One thing I would incorperate in FX360's tech style is to at least get confirmation that the entry level is likely to hold. Wait for a 15 minute chart or lower to show that price is starting to move in the intended direction, hence a momentum reversal using whatever indicator you like with price pattern. Without respect at any level you think the market will start a new trend is just rolling the dice trying to call tops/bottoms, at least for my style of trading. Just a thought :)

bgareiss

March 09, 2010 at 01:22 PM ET

If you wait for the market to start to reverse, it is usually too late. All that would do is hurt our risk:reward ratio. As I have said many times, we are not looking for a new trend to start. We are looking for a short term retracement that usually corresponds with the trend one "level" above the size of the pattern. Also, we are buying/selling at a level that has at least three converging levels of support/resistance. So it isn't like we are flipping a coin here.

Brad

Semaj

March 09, 2010 at 03:53 PM ET

I disagree. Usually the market will attempt a retest of the high/low, which would be your entry price, resulting in a retracement of it's own or a double top/bottom etc.. this is the respect of the S&R I referred to which doesn't really increase the risk by much worth mentioning. It's just a more conservative/patient approach and if the market screams off the S&R then I wait for a better price, it will come to me most time. I guess the most important part of analysis is to decide whether your a bull or a bear first, then trade the setups in that direction. Anyway, to each his own. Best wishes :)

bgareiss

March 09, 2010 at 04:12 PM ET

Does that usually happen? As far as I can tell, that happens sometimes, but not always. There are many instances were the price hits the target only once. These trades would not be entered, so you would be missing out on the trades with the best results. It would also be very difficult to quantify what an appropriate initial move would be when trying to determine if the second time the entry is hit should lead to entering the position. I could go through a whole bunch of scenarios that would create problems because I have tried to test confirmation signals in the past, but I digress. In my opinion, keeping it simple while monitoring long bars (strong momentum) is the way to go.

Brad

Pidgeon

March 09, 2010 at 12:33 PM ET

I look for congestion at the end of major trends. I agree with the "long bar" scenario, as long as it's truly an outstanding bar. If there are several big bars going in opposite directions, that's just the end of the trend, getting ready to reverse. This works better on longer timeframes.

vatsan

March 09, 2010 at 03:51 PM ET

Brad
Nice topic, In the article you say : see the chart below. where is it?
Thanks

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