OK, This is getting a bit more advanced and technical...
While we are discussing reversals, I saw one today that needs some explanation, as on the surface it could easily be missed.
And it was an almost 'text book perfect' reversal (over three bars), that gave a decent opportunity to get in and out, and it paid pretty well.
The reason it could easily be missed is because of price gaps.
When price gaps from a previous close, the bars "True Range" includes the gap
(we are not talking Average True Range here - we are talking about an individual bars True Range (TR))
Below is a quick graphic to explain-
So if possible develop an eye for a bar with a gap.
Look at the bar back to the previous bars close, and imagine the current bars full true range.
Always do this with a bar that has gapped (up or down), and you will develop an eye for it.
So the reversal was on the NCM (Newcrest Mining chart)
Can anyone see it on the raw bar chart below ??
It is a bit hard hey .... mainly because that chart gaps around a lot which makes it really difficult.
Most charts don't gap that much.
When I build my own charts using MS Excel, I usually include a function where I can add True Range (TR), so it can be seen more clearly.
I usually show the gap as the hollow part of the bar, and the solid part is the 'traded range'.
Can you see it now ??
This chart shows all the bars true range (TR), and doesn't the chart look more clear and understandable (compared to the raw chart above).
Gaps are hollow, traded range is solid.
