Squat Bars: A Methodology to Identify Short Term Reversals

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Intermediate
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Paolo Pezzutti

30 Apr, 2006

in Technical Analysis

Applying this method you will see that it will provide you with small wins and sometimes small losses, but your profits will be based on a few big wins. The advantage is is that risk is strictly controlled because the stop loss is easily identified, since the beginning of the trade.  I believe it cannot be applied fully automatically but a form of supervision is needed.

Figure 1: Emini S&P Daily chart. A long trade setup.

Figure 2: Emini 1-minute chart.  A short trade setup.

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The problem with MFI and all indicators other than maybe the simple moving average is the tendency to allow them to mask what is really happening and to assign a greater significance to the values and lines than actually exists in reality.

What is it you are not going to bother to look at if you use MFI?

You are not going to be looking at where the open and close are situated relative to each on the range. Are they far apart or close together? Are they biased more toward the top or the bottom of the range, or in the middle? What is the relationship of this bar to the previous bar? All these factors are of major significance.

MFI uses the ratio of volume/range. The author of this article makes clear that we are only interested in squats with increasing volume. According to Williams' original work this is correct in this context. But it is too limited a context. You only need to consider the situation where volume increases by a factor of 2 and the range by a factor of 4. Decreasing MFI with increasing volume, but hardly a potential turning point. It's already turned and you have missed the chunk of the move. You need to be using all the primary data and as little, preferably none, secondary or derived data (indicators).

May 18, 2006

Junior Member (47 posts)

Thanks for producing this article, I always enjoy reading about ideas that are new to me. I think I understand what you mean. Since one of the defining components of a squat bar is it's volume, I'd like to see the volume printed on the chart as well.

JO

May 17, 2006

Legendary Member (705 posts)

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