I've had a few questions on the prior blog on dax setups.

I didn't explain the entry criteria for the setup I showed on the previous blog exhaustion trade.
I was trying to get across the structure of the market needed before the trade setup.
The higher low area is the entry area on the long side trades.
I need to see a failed retracement at this point.
This is where sellers are forced to cover with the previous price structure exhausting selling strength.
My entry is 2 bar high then an entry on the next higher tick.
I find my risk is small compared to potential reward.
This is a setup on the Dax I traded today.

Dax extrade.jpg (138.38 kb)

Anatomy of downside moves.

I thought it would be worth looking at the Dax 5 min chart on Friday and the SPI 5 min chart today.

Both had downside moves with the structure showing similarities which could be exploited when timing trades.

Trading inside bars that fail can help in capturing these momentum moves.

The move down in both cases was steep with little or no retracement until a large volume bar printed in both cases.

I call these exhaustion bars with a wide range and large volume signaling forced selling in the market.

These bars signal a potential short term momentum slowdown as buyers and sellers move to a more equal balance.

In many cases after a bounce, price retests these lows giving a gauge of directional strength.

In each of these examples price moved to new lows showing that buyers have only slowed downside momentum.

The new lows are showing less volume than the exhaustion bars but more than the retracement bars.

As the day progresses selling dissipates and we see higher lows form, setting up potential for buyers to take control.

Points to take away from these trend days.

Failed inside bars can be efficient momentum entries.

Look for exhaustion bars to halt the momentum.

Expect a retracement in the short term reaction.

Watch for a retest of the exhaustion lows.

Gauge how strong sellers are by the strength of the retest. (new lows show strength in sellers, higher lows show buyers getting the ascendancy)

Look for reversal bars which coincide with higher lows to time reversal trades.

SPI 5min exhaustion.jpg (125.59 kb)                            

Dax 5min exhaustion.jpg (117.93 kb)

Lets look at yesterday's trade on the Dax.

The major trend moves came off multi bar highs and lows.

I have found this to be consistent behavior.

This type of price movement suggests that trends the majority of the time do not start from the middle of tight congestion.

Price tends to wash out either the buyers or sellers before trending.

The price trends down are marked with an orange line.

The price trends up are marked with a green line.

Note that the trends started after failed expansion bars.

We can use information through study to formulate trading strategies.

Dax trends.jpg (124.67 kb)

For a market to trend it needs to deceive and shakeout the majority of traders.

Much like a side step in football the market feigns direction before embarking on a move when the least amount of traders are on board the move.

The market moves in this way because it must.

If the majority of traders are on board an up trend who is going to step up and pay more price to push the market to higher levels?

The subtleties within price movement and the awareness that the market will feign direction can give us an edge with our strategies.

A trade I took today is based on the market shaking out longs before heading higher. (A market side step)

At this moment I have covered half my position at first resistance area 5488 and have moved the other half to break even.

The entry is based firstly on an inside bar.

The added feature is the inside bar is at a higher low than the preceding inside bar which had greater momentum to the downside.

So we have a potential reversal upward with low risk and declining momentum to the downside.

Dax 5-10.jpg (137.11 kb)