This is my favorite trading formation. Let me repeat that. This is my favorite trading formation.
I look for Blips after a big rally or after a big downtrend, especially if the market is oversold or averbought which I will cover in detail in the course. I guess you could say that I’m looking for a major price reversal with a Blip. You can use the Blip to enter a trending market too.
I did not have a specific name for it at first, so I just called it a Blip because I could not think of a better name for it, and still can’t. They must be catching on because you even see them on Gecko Charts. They call them darts, though.
I hope I have your undivided attention, because what you are about to learn could provide you with a comfortable living if you learn to trade it correctly.
A Blip is when the price on Day2 of a three-day formation is higher (Top Blip) or lower (Bottom Blip) than Day1 and Day3. Inside Days don’t count (and it doesn’t matter if it’s Day1, Day2, or Day3) when looking at these formations. Remember that an Inside Day is when the current day (the Inside Day) traded within the price range of the previous day.
Let’s look at the following diagram to see how these actually look, and then I’ll show you how I trade them.
As you can see in the next diagram, both Blips represent a trend reversal. Some are short-term, lasting a couple of days, and some are long-term, lasting a few weeks, while others developed into long-trend reversals.
Think Of A Blip As A Three-Day Formation
When you see a three-day formation where Day2 is either higher or lower than Day1 and Day3, watch closely.
Look at a Top Blip. On Day2 it traded higher than Day1, and Day3 traded lower than Day2. In other words, Day2 has higher lows and higher highs than Day1 and Day3. When this Blip takes place, you will often see a trend reversal, and Day4 will fall below Day3. Remember, Day2 must have higher lows and higher highs than Day1 and Day3, in the case of a Top Blip.
The exact opposite is true for a Bottom Blip. Day2 must have lower highs and lower lows than Day1 and Day3.
I will show you how to trade Blips in a minute. Right now, just try and grasp what they look like.
Now, look at the following chart, and you will see where I have put a “Flag” near several Top and Bottom Blips. How many were places where the trend reversed?
You might have a good idea how to trade these by now, but let’s look at it in detail. Blip days usually have a total of three days (not counting an inside day). I’ll call them Day1, Day2 and Day3. In the case of a Bottom Blip, you would want to go long on Day4, but at what price do you place your order? That’s a tough one, but this is what I do.
When I first started trading, I used Limit Orders or Market Orders that were dependent upon where the price closed for the day, but I’ve found that I had better luck using Sell-Stop and Buy-Stop orders for trading Blips. Look at the following diagram. Remember, we talked about these kinds of orders in Lesson One.
The first example is a Bottom Blip. You would place a Buy-Stop order just above the high of Day3. You would have two choices to place your stops. One would be just under the low of Day2, and the other would be just under the low of Day3. 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 meets your reward/risk ratios.
Place Your Trades To Coincide With What The Market Does
The second example is a Top Blip and you would place your orders and protective stop just opposite of a Bottom Blip.
Placing your orders and your stops correctly is critical! When you place an order based on the Blip formation, I always use a day order (good for that day only). Never place an open order (also called a GTC, or Good Till Canceled Order) based on a Blip. The reason is that if the market does not do what you think it should, then you don’t want to be in the market.
Although you can't make the market do what you want it to, you can always place your trades to coincide with what the market does. If you were to use a GTC order, you might not get filled that day, as the market did not follow the usual Blip pattern, and went the other way. With an Open Order (GTC) you might get filled several days later, or several weeks later, and that’s not what you want to do. Remember, a GTC order just sits there waiting to be filled. It’s easy to forget that you have an open order for something, and weeks later, you get a call from your broker telling you that you were filled on an open order that you placed two or three months ago. (Don’t ask me how I know this either). Be careful with placing open orders