Most start their journey into technical analysis by looking for what moves markets and stocks. It typically starts with a time-consuming search for the right indicators.
Indicators are not the answer; they are the problem and why so many fail.
The answer is supply and demand based on beliefs and expectations about the future created with Money. Those beliefs once acted on create price patterns.
How one determines how to read those beliefs and expectations using technical analysis may be endless, so we must narrow our focus. At Master Trader, we trade price patterns - no indicators.
The Price Pattern We'll Cover Today is the Money Bar Setup.
All technical setups come after a correction through price or time.
Price corrections occurred through pullbacks lower or retracement higher.
Time corrections occurred through movements sideways.
Corrections can be large, small, or very small.
This year, the markets have had a large correction, and it’s uncertain whether that correction is over or not yet.
The type of correction we’re going to look at today is a minor correction after the move starts and what we will refer to as a continuation pattern.
Continuation Patterns Come in Variations. This one we call a The Money Bar.
Both examples were corrected sideways in the above image, and then the move started with a Bullish Wide Range Bar (+WRB).
A +WRB is significantly wider in ranged than bars that preceded it. This bar is an “Igniting Bar” because it starts a move from a correction. Big Money creates a +WRB
In these examples, the move is higher, but an igniting bar could start a move lower also.
When we see a pattern like the ones shown, it creates a belief that prices will continue to move in the direction ignited.
The next step in the process is how to get on board.
Position and Money Management is Essential in all Trading
There are different ways to get on board. You may or may not be watching the pattern developing at the time and a +WRB scan found it. Or, it may have been brought to your attention afterward.
If you were watching, you buy above the high of the +WRB with a stop below the +WRB.
The +WRB is a “Power Bar” and does create a short-term extended situation in a smaller timeframe. Therefore, you may wait for a minor correction that could be one bar.
We refer to this setup as a Bullish 1,2,3 continuation pattern. The entry is above the smaller narrow range bar and the stop below the area of the +WRB.
At times, because the +WRB created a short-term extended situation in the smaller timeframe prices will not advance above the number two bar.
We don’t know if this will occur. Patterns are always evolving, so we have a method that evolves with the pattern called Bar-by-Bar Analysis.
In the example on the right, the number three bar is a correction bar. It takes out the low of the prior bar, and buyers step up during the formation of the bar.
At the end of the timeframe being used (pattern works on all time frames), what was a red bar with the close at the low at that time is now a Bottoming Tail Bar (BT). Buyers/Demand are below.
Those that could not get filed bidding at lower prices will have to take the offer and pay up.
We buy above the BT bar with a stop below the +WRB.
A 5-Min. Time Frame Money Bar Setup Formed Last Thursday - Actual Trade
Last Thursday, 12-22-22, the broader market started trending lower before the opening.
They continued to trend down throughout the morning, and when they attempted to stabilize midmorning, the attempt to move higher failed, and they continued lower.
That failure ignited the next momentum move that began to stabilize shortly after 1 o'clock. At that time, it was unknown whether that stabilization would result in the next lower or not.
Knowing that prices were extended lower in the short term and what appeared to be the beginnings of a Head and Shoulders bottom, I continued to watch.
At that time, I could not know what would happen or the pattern that would form. However, Bar-by-Bar Analysis would tell me what is happening.
Once the +WRB formed from the bottoming pattern, I knew there would be a countertrend move. How to get on board? We covered that above.
Once the red bar formed after the +WRB, we had a 123 pattern - if it traded above the high of the red bar.
It didn't trade above the high; it traded below the low, and buyers stepped up, pushing prices back to the high of the number three bar. Demand was strong and will continue.
The Money Bar pattern was formed, and the next step was entering above the bar's high.
I traded the Money Bar pattern using S&P Futures, Nasdaq Futures, and Russel Futures.
They all formed the Money Bar pattern.
I cannot recall a time when this setup failed to produce a move in the direction suggested by the pattern.
The Money Bar Setup happens on all time frames and can also be used for Swing Trades.
The pattern does not form daily but hit the button when it does.
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Happy trading! If you have any questions or comments,
Please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director of Master Trader
Dan Gibby
Chief Options Strategist
