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Despite a promising setup, a large entry bar resulted in a stop-out. 
Charts show patterns like descending triangles and W formations, 
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| Edward R. Dewey (1967): » If you had used these dates for trading, your percentage gains between 1872 and 1939 would have been 50 times your losses! « |
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| » Periods When to Make Money « ; the original business card of George Tritch Hardware Co. Apparently, the diagram was compiled by George Tritch in 1872, but was not attributed to him by Samuel Benner in 1875. |
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| Traders Laboratory (2007) - Taylor Trading Technique |
A day in which there is a new high followed by a lower close
is a downwards reversal day (RB). An upwards reversal day is a new low followed by a
higher close. A reversal day by itself is not significant unless it can be put
into context with a larger price pattern, such as a clear trend with sharply
increasing volatility, or a reversal that occurs at the highest or lowest price
of the past few weeks. Short-term reversals are likely after wide-ranging (WR4) and narrow-ranging days (NR4), especially when the open, high, low and close of the daily price bar are altogether above or below of a simple three-day moving average line of daily close prices.
A wide-ranging day is likely to be the result of a price shock, unexpected news, or a breakout in which many orders trigger one another, causing a large increase in volatility. A wide-ranging day could turn out to be a spike or an island reversal. Because very high volatility cannot be sustained, a wide-ranging day will likely be followed by a reversal, or at least a pause. When a wide-ranging day occurs, the direction of the close (if the close is near the high or low) is a strong indication of the continued direction. An outside day (OB) often precedes a reversal. An outside day can also be a wide-ranging day if the volatility is high, but when volatility is low and the size of the bar is slightly longer than the previous bar, it is a weak signal. As with so many other chart patterns, if one day has an unusually small trading range, followed by an outside day of normal volatility, there is very little information in the pattern. Context and selection are important.
Larry Williams presented a free session at the November 2014 Las Vegas Traders Expo in which he discussed 8 possible Range Patterns. He showed that from any bar to the next there are only 4 possible outcomes:
Price action cannot occur in any other way. Within these 4 Range Patterns each last bar can either be an up bar or a down bar. So there are actually 8 possible Range Patterns:
1. Down Range, Down Day
2. Down Range, Up Day
3. Up Range, Down Day
4. Up Range, Up Day
5. Inside Range, Down Day
6. Inside Range, Up Day
7. Outside Range, Down Day
8. Outside Range, Up Day
Using these 8 patterns some powerful strategies can be created. Larry Williams presented back-tested statistics associated with trading these patterns using a simple entry and exit technique. He stressed that they were not the best entry or exit techniques but shown because they were easy to understand and program. This strategy is intended only to show where we have a bias or advantage in the marketplace.
His message was that we could go home and verify using our own software. His results for testing this on the e-mini S&Ps from 2002 forward [to 2015] were as follows:
So, the Down Range, Down Close day [1.] offers the best potential short term 'long' setup based on net profit. This was the take-home message of the presentation.
Larry further dug into the Down Range, Down Close setup to uncover which day of the week offered the best trade: The stats support the 'Turnaround Tuesday' concept.
And further investigating by Trading Day of Month revealed that 1, 17, 19, 22 and 23 were the best days, showing 92% winners and $47,500 net profits with 107 trades.
It was also found that a Down Range Larger Range day was better than a Down Range smaller Range day. $205 Avg 80% Win, vs $33 Avg 85% win,
Also naked close was better than a covered close (naked close meaning that the close was outside of the previous day’s range). $155 Avg 83% Win vs $30 Avg 83% Win
And combining these two concepts:
Down Range, larger range, Covered close: $60 Avg, 83% Winners
Down Range, larger range, Naked close: $215 Avg, 85% Winners
References:
