"The labels we will give these patterns are not as important as understanding how the day evolves in relation to the initial balance and the confidence with which the other time-frame has entered the market.
Think of the initial balance as a base for the day's trading. The purpose of a base is to provide support for something, as the base of a lamp keeps the lamp from tipping over. The narrower the base, the easier it is to knock the lamp over.
The same principle holds true for futures trading in the day time-frame. If the initial balance is narrow, the odds are greater that the base will be upset and range extension will occur. Days that establish a wider base provide more support and the initial balance is more likely to maintain the extremes for the day."
Trend Days exhibit the widest price ranges, making it costly to trade against the move or to recognize the pattern too late. They occur only a few times each month, but capturing them can be highly profitable. Trend Days are often preceded by quiet, narrow-range sessions (e.g., Toby Crabel’s NR4, NR7, or Inside Day patterns). Although rare, a Trend Day can occasionally be followed by another.
Trend Days are driven by initiative buying or selling, as participants show strong conviction in moving price into a new area of value. As price moves farther from value (about 70% of the prior day’s range), participation and volume increase, reinforcing sustained directional movement.
Once the breakout occurs, the market trends and builds a second distribution of trading activity, testing whether new value is accepted. By the close, volume is concentrated at both the early and late ranges, forming the characteristic double distribution.
The initial balance is crucial for this structure. A narrow initial balance increases the likelihood of breakout, while a wider initial balance makes such a move less probable.
3. Typical Day
The opening surge is often triggered by economic news released early in the session. Because the initial balance is wide, it generally serves as a firm base that is unlikely to be broken.
The Expanded Typical Day resembles the Typical Day in beginning with early directional conviction, but the opening move is weaker. As a result, the initial balance is wider than that of a Double-Distribution Trend Day yet narrower than that of a Typical Day, leaving it vulnerable to violation later in the session.
Eventually, one of the extremes is broken, usually through initiative buying or selling, and price extends in the direction of the breakout. Because the base is neither wide nor narrow, both sides of the initial balance are susceptible to failure, and either—or both—may be tested during the day. Once an extreme gives way, price expands to establish a new area of value, with continued directional movement often carrying through to the close.
Responsive sellers enter shorts near the top of the range, driving price back toward the lows, while responsive buyers enter longs near the bottom, pushing price toward the highs. This back-and-forth activity continues throughout the day, providing clear opportunities for timing entries and facilitating trade.
There is no trade facilitation and no directional conviction. The session is a non-trend day with a very compressed range, often forming an inside day, and the risk-reward ratio for day traders is low. The initial balance is narrow, suggesting the potential for a Double-Distribution Trend Day; however, initiative buying or selling never develops, leaving the market quiet for the remainder of the session.
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| Jan Firich (2012). |
