| Let's
review the basics of the blip pattern.
The
first example is a Bottom Blip. You would place
a Buy-Stop order just above the high of Day3
(the most current day). You would have two
choices to place your stops. One would be just
under the low of Day2 (the low of the pattern),
and the other would be just under the low of
Day3 (or today’s low). You want to make sure
that the protective stop is far enough out of
the average day’s trading range that you
don’t get stopped out during the day. But you
also want to make sure that if you place your
stop under the low of Day2, that it still offers
a descent risk/reward set-up.
A
top blip looks the exact opposite, and is traded
in the same except that you sell a break-out
below the low of Day 3 and you can risk the
trade to either day 2’s high or day 3’s
high, depending upon the size of the pattern and
risk to reward set-ups.
Blips
are not a magic formation, and they do not
always work, but I have found them to be a
useful pattern to watch out for.
But, even when a blip doesn’t do
exactly what you would like it to do, you can
still learn a lot from the failure, or the
“Blip Reversal” as I like to call them.
Let’s
look at the following diagram to see what a Blip
Reversal day looks like, and then we can look at
how to trade them.
As
you can see, Example A confirmed and did what we
thought it would. If we had placed our Buy-Stop
order above the high of Day3, we would have been
filled on Day4. But what happens if Day4
reverses, and does not go above Day3? Well,
this is the Blip Reversal, as I call it, and is
shown in Example B.
In
Example C, what was previously a Bottom Blip has
now changed and become a new Top Blip!
Now in Example C, if you had entered the
market using a Buy-Stop order, you would not
have been filled and would have stayed out of a
bad trade, since the price did not exceed the
high of Day3 and your Buy-Stop order was above
Day3. This is why I recommend that students use
Stop Orders when trading blips, as a stop order
will only be executed if the pattern is
confirmed.
Now
that you know we don’t live in a perfect
world, I’m going to show you an alternative
method for trading Blips.
When faced with a blip pattern, the
trader can also “bracket” the pattern, by
placing buy and sell stops around the blip
pattern, just as one would a “Channel” or
“Trading Range.”
In
the Example “Top Blip Forms” you see a
possible trade here to short the market on the
formation of a Top Blip. This is the
“normal” way to trade these Blips. Now,
here’s the “twist” on how to trade a Blip.
You place two orders! Your first order would to
be go short, and place your Sell-Stop
order below the low of Day3. But at the
same time, you place another Buy-Stop order to
go long above the high of Day3. These
would be an OCO order (One Cancels the Other),
so the order that gets filled first cancels the
other order. This way, you can’t have two
orders at the same time. The only order you
would be in is the one that gets filled
first.
Now,
if you got filled short when the price broke
below the low of Day3 you are probably pretty
happy, because the Blip did what you expected it
to do. It dropped. On the other hand, if it
didn’t drop, but rallied because it was a
false Blip, you got filled going long at a break
above the high of Day3. It’s a potential
win-win situation.
The
next question obviously is, where do you place
your stops?
What
you should do is tell your broker that when one
order fills, the other order becomes my
protective Stop Loss order. Again, this is just
using some Common $ense in your trading.
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