Untitled 1
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. 
The above report is intended as a beginning basis for trade analysis.  Traders should do their own homework by reviewing the long term charts, as well as the potential risk to reward set-ups of any trade before initiating a position in the futures market.  For more information about trading in a disciplined fashion, call your Common Sense Capital broker.