Quote from NoDoji:
Here are the price action environments that I've found to be warning signs to tread carefully. When these contextual clues appear, I realize that two sides feel equally confident and a lot more defense takes place both directions. This leads to chop and narrowing consolidation and out of this environment a new strong move will eventually transpire. My job is to either watch patiently for the market to tip its hand (and this can take half an hour or sometimes over an hour to happen), or to cross-reference a shorter time frame chart to see where smaller scalping opportunities may arise.
Back to back opposing bar breaks: Price swings on any given chart consist of two or more price bars that trend in a direction. If it's a smooth swing, there is no bar overlap. If price is falling for two or three bars and then the high of a down bar is broken to the upside, that signals a potential turn of direction. The key word here is potential. If the upside break fails quickly or if the very next bar breaks in the opposite direction, we have...chop.
Break of a wide range bar: The break of a wide range bar in the opposite direction of the previous price move is usually not the signal of a turn of direction. It's often a nice head fake trap. Think about it: If price prints wide strong green bar, then the next bar retraces all that green and breaks the low of the green bar, what's happening on the same chart with a shorter time frame? It's a range and the initial break of a range fails more often than not.
Two-leg pullback traps: When price turns following a strong directional move and retraces more than half the move with one or two strong pullback bars, and there's a key S/R level closer now than the previous swing high or low, a break of a retrace bar back in the direction of the strong directional move is frequently a two-peg pullback trap, and the journey to the key S/R level will often resume.
Price closes on the opposite side of a rising or falling 20EMA: In well-defined trend, the 20-bar EMA will be clearly rising or falling. In a really strong trend price may not even pull back to it for a long time. Once price closes on the other side of it, though, it flattens the 20EMA. This is a sign of a potential trend reversal, but it doesn't usually happen quickly. Often there's a period of back and forth chop as the previous trend-following side vies for continued control against the side that's trying to take over.
Initial break out of a range: The initial break out of an established range usually fails.
Initial break of a symmetrical triangle: The initial break out of a symmetrical triangle usually fails in both directions.
(If the range or the symmetrical triangle is very narrow, the initial breakout is usually strong.)
Inside bars, outside bars and doji bars: These are simply ranges or flags on a shorter time frame chart. Since initial breaks out of ranges are prone to fail, be careful about being the first mouse to trade the break of single inside or outside bars.
Initial break of a well-defined trend line (overshoot): These are nearly always fades on the initial breakout. Be the cautious second mouse who gets the cheese in such an environment.
Running into the defense (âcongestion between campsâ): Price levels where a previous group of traders successfully went long or short for a decent ride will nearly always be defended if price gets all the way back to that zone. Also, channel lines, trend lines and 20-bar moving averages in a well-defined trend will nearly always be defended on the first re-visit. If you're planning to put on a trade, be sure you have enough ticks of room (airspace) between your entry and these defensive zones to escape with little damage if the defense is strong and drives price back against you. If these levels are really close together, you're dealing with congestion between the bulls and bears and this can often lead to...chop.
... How do we handle them ?
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