Just a short lesson here, but an important one. Take a look at the table above. Was there anything that could have helped us predict the glitch on that last bar?
There’s a lot going on on every chart. In this case, we had a long bull flag that just broke down. It had taken a little “too long” and challenged the downward limit of the pattern. (We discussed this every day in our members’ videos below MarketLife.) While this may have kept us on guard, it was not enough to trigger trades.
It is also worth mentioning that this will be written at the end of October 2020, shortly before the US presidential election, in the middle of the COVID-19 crisis, as the world is apparently facing rising infection rates and after some failed political negotiations, another US stimulus package is to be created . All of this creates uncertainty, but it is also not a trade trigger.
The trigger is something simple. Look at the penultimate bar in the table marked with a blue arrow. This is an inside bar, and inside bars can be powerful signals.
What is an indoor bar and why do we care?
Inside bars are bars where the high is below the previous high and the low is above the previous low. The range of the bar is completely within the range of the previous bar. They are usually consolidating and often do not bring new technical information to the table.
We often ignore bars within bars, but they can be very powerful if they follow a larger than average bar or if they approach a critical level.
In this case, the bar was likely just enough consolidation on the lower side of the bull flag to set up a glitch. Traders looking for short entries may have trimmed a breakdown of the previous day’s range (though you should have caught this in the overnight session. This is often the case with stock index futures.)
These breakouts tend to be short-lived signals, so it is not easy to make longer-term predictions based on this pattern. But take a look at your trades and see how many of them could possibly have been improved if you had looked for inner bar breakout entries.
At the very least, you don’t want to be on the wrong side on such a step. If you buy weakness on such a collapse (or flip the chart and imagine you have shorting strength on a breakout to the upside) you are likely on the wrong side of the market.
See what this signal can do for your market analysis and chart reading. Small bars can make a big difference.