From the May 2013 issue of Futures Magazine • Subscribe!

Trading off high-range bars

Despite being so simple — we buy or sell — trading is notoriously hard to do competently, and almost impossible to master. One reason for this difficulty is the human brain is not wired to be conducive to trading success. We seek comfort in everything we do. Thus, entering a position to obtain the most favorable risk/reward ratio collides with our desire to confirm that a move is going to play out the way we want.

We’ve learned that you succeed by buying when there’s blood in the streets. But after a huge drop and financial rout, fear is rampant and resources are tight. It’s hard to accept that moments such as these are when opportunity presents itself. We prefer to buy after the move is confirmed.

Although seemingly obvious, this scenario plays out on all time frames over and over again. On the daily scale, a condition that twists traders in knots is the wide-range candle power bar. A wide-range power bar is a candle that extends aggressively either up or down. Because we are wired for comfort, the wide-range bar has the potential to interrupt our goal of consistent profitability.

Power bars depend on context, and every power bar is a potential trap that could stop out a position and drain prior gains, but you can trade them, and trade them well if you know what to do.

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