Trading Continuation: LTF Reversals Into an HTF Run

Most people trade this backwards. They see three green daily bars, decide the trend is up, and buy at the open of the fourth. The trade has no level behind it, no signal, and no stop that means anything. The whole edge is in the other order: the higher timeframe tells you the direction and the level, and a lower-timeframe signal gives you the entry and the risk.

The setup, in the order you check it

1. Direction. The daily is 2u-2u (or 2d-2d), each bar closing further than the last, off a reversal that worked. Two 2s in a row is enough; you do not need three before you trade.
2. Continuity. The higher timeframes agree, or at least do not fight it — see full timeframe continuity and conflict. A daily 2u-2u under a red week and a red month is a corrective bounce, not a trend.
3. The level. Write down yesterday’s high (or low). That single number is the whole trade: it is what today has to take to be the next 2.
4. The signal. Now drop to the 15, 30 or 60 minute and wait for a reversal in the direction of the run that will take that number. You are not predicting; you are waiting for a trigger.

Step 4 is the trade. Everything before it is homework you do the night before.

The four shapes that do it

The lower-timeframe cause is usually one of four shapes. They are the same actionable signals as everywhere else in the method; what makes them a continuation trade is the direction they point and the level they take.

The gap cases are worth their own section, because they are the ones that look most like the trade is over — and they are where the crowd is positioned wrong.

The gap up sell that makes the third 2d

A daily is 2d-2d, each bar closing lower. Overnight it gaps up, and the sell-off looks like it is stopping. The 60 minute says otherwise: the opening hour cannot even reach yesterday’s high, and the next hour goes 2d through the opening hour’s low and takes yesterday’s low with it. The third daily 2d goes in force inside the first two hours.

Why the gap helps you. The gap up is where the buyers are. It fills the day with people who paid the highest prices of the session, in the first minutes, with no level under them. Then the opening hour stops a dollar short of Tuesday’s high and closes red: the gap bought nothing, and every one of those buyers is at a loss. The 10:30 hour opens at its high, never trades higher and closes at its low — a full hour of one-way selling, which is not just your entry, it is their exit. The same reading in reverse is the 30/60 gapper.

The trade. Trigger: the opening hour’s low, 321.50. Stop: above the opening hour’s high, 324.58 — which was the high of the day, and the level that says you were wrong about who was trapped. Target: yesterday’s low first, then the far side of the range the run is working through.

The gap down buy that makes the third 2u

Inverted, the same trade. A daily is 2u-2u; the open gaps down, sells some more, and then the whole first hour is bought back. The bar that reclaims it is the reversal, and the next 2u takes yesterday’s high.

How to read it. XOM gapped down 60 cents and immediately sold two dollars more. That first hour did two things at once: it printed the low of the day, and it closed green with its high sitting exactly on Friday’s 158.00. The sellers who pressed the gap were the trapped side, and 158.00 was already the number written down from the night before — the 10:30 hour took it and the third daily 2u was in force. This is the gap up buy logic applied to the other side of the open: what matters is not the direction of the gap, it is whether the gap is bought or sold and what level that puts in play.

Entry, stop, target — and when to stop adding

Entry: the trigger of the lower-timeframe signal — the reversal bar’s high (or low). Not the daily level. The daily level is what the trade is for; the lower-timeframe trigger is where you get in with a stop that is worth having.

Stop: the other side of the lower-timeframe reversal bar. That is the whole reason to use the lower timeframe: the same trade taken on the daily has a stop the width of a daily bar. On the 30 minute it is the width of a 30 minute bar, and the level it sits behind is the low of the day.

Target: yesterday’s high or low is the first one — in all four charts on these two pages it was taken in the same session it triggered. After that the target is magnitude — the far side of the range the run is travelling through, on the timeframe you are trading.

Adds: add to the winner on the next lower-timeframe signal in the same direction, not on the next daily bar. The number of adds has no limit; add before the end of the open you are trading on, because later in that bar the continuity level and its signals approach exhaustion. Scale out at the target, or on a signal against you. TSLA’s third 2u closed at 445.00 and the next day went inside — a pause. XOM’s fourth 2u closed at 162.55 and the day after that was an outside bar that closed at 156.28 — three sessions of gains in one day. The pattern that got you in is the same pattern that tells you when it is late.

The exit: a lower-timeframe reversal against the run, at a level, is one exit — the same shape you used to get in, pointing the other way. The others are the target, exhaustion of the signal by time or by price, and a trailing stop (see stop losses). A reversal against is not a reason to flip; on its own it is a reason to be flat and to go back to step 1.

The checklist

• Is the daily 2-2 in one direction, each bar closing further? If no, this is not the trade.
• Do the week and the month agree, or at least not fight it?
• What exactly is yesterday’s high (or low)? Write the number.
• Is there a lower-timeframe reversal, in the direction of the run, against a level? Take that.
• Is the stop the other side of that reversal bar, and can you afford it? See position sizing.
• Are you near the open you trade on? Enter near the opens, and add before the end of the open.

Frequently asked

What is the continuation trade?

Taking a lower-timeframe reversal in the direction of a higher-timeframe run that is already 2-2, so that the entry is the event that puts the next higher-timeframe 2 in force. The higher timeframe gives you the direction and the level; the lower timeframe gives you the entry and the stop.

Why trade the lower timeframe instead of just buying the daily?

Risk. A daily entry carries a daily-width stop. The 15, 30 or 60 minute reversal that takes yesterday’s high has a stop the width of one lower-timeframe bar, sitting behind the low of the day — the same target, a fraction of the risk, and a defined moment to be wrong.

Does a gap against the trend mean the run is over?

No, and it is often the best entry of the run. What matters is what happens to the gap: a gap up that is sold back inside the first hour, in a daily 2d-2d, traps everyone who bought it, and the third 2d then comes from the level they are trapped against. The same in reverse for a gap down that is bought.

When do you stop adding to a continuation?

Not at a count: the number of adds has no limit. Add on each new lower-timeframe signal in the direction of the run, before the end of the open you are trading on. You scale out at the target, the far side of the range, or on a signal against you: a 2 the other way or an outside bar. See exhaustion risk and corrective activity.

Related: The 2-2-2 Continuation · The Gap Up Buy · The 30/60 Gapper · Adding to Winners · Exhaustion Risk · Stop Losses & Trade Management
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