Chapter 13
Twenty Gap Bars
When the market stays on one side of the moving average without touching it for 20 consecutive bars or more, the trend is strong, but it is also overdone and will likely soon pull back to the moving average, creating a 20 gap bar setup. If there was no clear trend reversal before the pullback, the first touch is a high-probability scalp for a test of the trend's extreme. There are traders who will enter at or just above or below the moving average with limit and market orders, but it is better to wait for a price action entry (a reversal back in the direction of the trend and an entry on a stop) in case the pullback goes well beyond the moving average. There is nothing magical about 20 bars. It is just a guideline that is useful to remind you that a trend is strong. You can arbitrarily pick any large number of bars and generate a setup that will usually be the same, and it will also work on other time frames. A trend can be extremely strong and still touch the moving average every 30 minutes, and a trend can be away from the moving average for four hours, only to suddenly reverse into an opposite trend. When it occurs on a 5 minute chart and the market has not touched the moving average for at least two hours, I used to refer to it as a two hours from the moving average setup, or a 2HM. Since the same concept works on all time frames, it is more useful to refer to the number of bars instead of the number of hours. The 20 bars can be at any time during ...
