posted by Tom C.
Trader-X has mentioned the "u-turn" setup several times over the past week and given me more credit than I deserve for it. I want to point out a few things:
1.) It works best on a gap up. Why? Because price is usually falling into - and making the "u-turn" on - support from the previous day.
2.) It works better if it happens in the first 3 bars, with an entry on the 4th bar (when it breaks the 3rd bar high).
3.) It works best if both the 2nd and 3rd bars touch the morning low. This helps keep the 3rd bar from being overextended and makes them better resemble "offsetting bars" that X has referenced many times in the past.
4.) They don't always make it to the FE. As X pointed out a few days back, the previous high should be your first target and then the halfway point between the high and the FE.
Does that mean you can't trade them on a gap down, or if the 2nd and 3rd bars aren't perfectly offsetting? No. Just realize there is higher risk as the quality of the setup goes down. The HBC trade from earlier this week is a good example - it would have been perfect had the 3rd bar touched the morning low...but it was still a good setup. Note how the 3rd bar closes above the dashed white line (halfway point between the low and 50% retracement).
Also, the "u-turn" is really a variation of X's "top out" setup...it is just the mirror image (ie, a long setup).
I am happy to be back here making a post every now and again. I will target one a week beginning in late March. As of now, the next few weeks are booked with vacation (much needed) and finishing my "Five Rules" (a great site that you should be reading and contributing to; trust me when I say it is a soul-searching, positive experience to write yours).
Also, I want to wish RJ a speedy recovery. He has been contributing comments as long as I have, and I hope he is back here soon. If you have not already done so, leave him a comment to read when he gets back!
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