The second rule appears to be very illogical until you think about it.
[B]2) After the CBL, the entry signal candle must have a body that is smaller than the body of the extreme candle.[/B]
[B]What!!?[/B]
This is a ridiculous rule!!
NO, not really.
Its logic is not obvious.
Remember, we are trying to get entries at the very end of a BB bubble or BB sausage.
When the price action is following a BB walk, the price really breaks out - and jumps by large leaps.
The candles are long, tending to be dominant candles.
But when you come near the top/bottom of such a BB walk, the price action becomes much more undecided, resulting in frequent doji candles.
That is why many a trend top is signalled with an evening star - the small doji or “star” candle is at the very top.
So that is our logic here.
[B]Next post is a schematic diagram of CBL rule 2.[/B]
As before, candle number 5 has the close intersecting the CBL.
But the candle 5 body is bigger than the body of extreme candle number 2.
It is, therefore, rejected.
Candle 6 meets both requirements.
Its close intersects the CBL. (rule 1).
The candle body is smaller than the body of the extreme candle 2. (rule 2).
The entry candle would now be the open of candle 7 (not shown.)
There are 2 other functions we must take into account when setting up a CBL.
Entries - when dealing with a suspected BB bubble or sausage, we [U]do not [/U]enter until the opposite BB has contracted.
The extreme candle can be found [U]anytime [/U]but is [U]not considered valid [/U] until there is a candle that breaks thro the outer BB.
Up until this moment, no extreme candle is considered to be valid.
On candle 3 (the first potential CBL candidate), you have drawn the CBL at the bottom of that candles wick, which is consistant with what you have taught so far regarding the CBL method. However on candle 6 (the actual CBL candle) your CBL line appears to be drawn from the close of the body and not the lower wick, (difficult to tell as it is a doji).
Second, in post 2315 you explained the 2nd rule in calculating the CBL was “The candle body is smaller than the body of the extreme candle 2. (rule 2).”
So you were comparing the [B][U]body[/U][/B] of both candles. Where as in the diagram above, candle 8’s body is bigger than the body of candle 6. So are you now saying that we should compare the body of the later candle with the body [U][B]and[/B][/U] wicks of the extreme candle?
The candles at 1 do not pass thro the BB and do not start a qualifier.
Candle 2 is a suitable extreme candle and its following candle (blue), passes rule 1 but its body is larger than candle 2 (fails rule 2).
Candle 3 is a suitable extreme candle and its following candle (blue), passes rule 1 but its body is larger than candle 3 (fails rule 2).
Candle 4 is a suitable extreme candle and its following candle (blue), passes rule 1 but its body is larger than candle 4 (fails rule 2).
Nothing can get smaller than a rickshaw man doji.
Candle 5 is a suitable extreme candle.
Candle 6 is more extreme than candle 5 but its CBL extension is lower than that of candle 5 - we NEVER lower the CBL and so the CBL extension of candle 5 holds true.
The doji after candle 6 has its close lower than the CBL (rule 1) plus its body is smaller than candle 5 (of course!!).
The entry candle is the yellow candle after the doji.
It is marked E.
It is an excellent exit point if you traded the OBB along the BB sausage and is an excellent entry point for trading short to the mid BB from here on.
Thanks Tymen. This was just what I was hoping to see. A lot to study and digest here. I had a feeling we might use a candlestick to confirm entry. I’ve read your previous work
I’ll probably need lots of study and some demo practice before I can ask intelligent questions.
Thanks for clearing up my earlier questions, much appreciated. I do have one other question regarding the above diagram.
Why is candle 5 a potential CBL candidate when it has not passed through the upper BB?
Has it got something to do with candles 2,3 & 4 which had passed through the upper BB and therefore “played candle 5 on side” as it were?
Also one last thing. Would it be fair to say that you should look for an opposite BB contraction before even bothering to look for potential CBL entries?
Note #2 I read this as once a previous candle has broken thru the BB, any other higher candle is eligible to be an exteme candle…and you should count your new CBL from that candle.
