The concept of ‘smash day’ setups is credited to veteran American author and legendary futures trader Larry Williams. Many of the patterns Williams trades with are ‘failure’ patterns, where he aims to take advantage of a market that reverses on those who buy into simplistic signals.
A naked smash day occurs after relentless buying or selling pressure causes a close that is entirely outside the range of the previous day. The close is ‘naked’ because it is out in the open for even the most unobservant market participants to see. Ideally, it should take out the highs or lows of the prior four or five days. The market needn’t be trending up to this point – naked close smash days are also effective in range-bound markets, where the public will read them as ‘breakouts’. Such moves give strong signals that are easily read by the public, who are led by their emotions and jump onboard at the next day’s open so that they ‘don’t miss the move’.
Much of the time this bullish or bearish outlook is with good cause and the markets continue to rise or fall . . . but not always. We’re not interested in why the market sentiment changes (it’s usually due to new information entering the market place), and we don’t need to sit watching CNN – if valuation has changed sufficiently to completely reverse upon the previous days extreme bullish or bearish action, then those who bought into those signals will suddenly be caught like rats on a sinking ship, and they will start to jump (or their brokers will give them a helpful push!).
And that’s where we come in: around the opposite extreme of the naked close day we will start to get a run on stops, and the market should begin to accelerate away from the naked close – smash!
Naked Smash Day - Sell Setup
Day two closes significantly above day one’s highs, and ideally the highs of the preceding four or five days.
On day three price reverses and the trade sets up when price trades at day two’s lows.
Naked Smash Day - Buy Setup
Day two closes significantly below day one’s lows, and ideally the lows of the preceding four or five days.
On day three price reverses and the trade sets up when price trades at day two’s highs.
Parameters for buy orders (sells are reversed)
A naked smash day occurs after relentless buying or selling pressure causes a close that is entirely outside the range of the previous day. The close is ‘naked’ because it is out in the open for even the most unobservant market participants to see. Ideally, it should take out the highs or lows of the prior four or five days. The market needn’t be trending up to this point – naked close smash days are also effective in range-bound markets, where the public will read them as ‘breakouts’. Such moves give strong signals that are easily read by the public, who are led by their emotions and jump onboard at the next day’s open so that they ‘don’t miss the move’.
Much of the time this bullish or bearish outlook is with good cause and the markets continue to rise or fall . . . but not always. We’re not interested in why the market sentiment changes (it’s usually due to new information entering the market place), and we don’t need to sit watching CNN – if valuation has changed sufficiently to completely reverse upon the previous days extreme bullish or bearish action, then those who bought into those signals will suddenly be caught like rats on a sinking ship, and they will start to jump (or their brokers will give them a helpful push!).
And that’s where we come in: around the opposite extreme of the naked close day we will start to get a run on stops, and the market should begin to accelerate away from the naked close – smash!
Naked Smash Day - Sell Setup
Day two closes significantly above day one’s highs, and ideally the highs of the preceding four or five days.
On day three price reverses and the trade sets up when price trades at day two’s lows.
Naked Smash Day - Buy Setup
Day two closes significantly below day one’s lows, and ideally the lows of the preceding four or five days.
On day three price reverses and the trade sets up when price trades at day two’s highs.
Parameters for buy orders (sells are reversed)
- Identify a naked down close on a daily price chart.
- Place a buy stop order one point above the highs of the day.
- Use a stop loss equal to 30% of the Average True Range.
- Exit your position at the first profitable (cash session) open.