Strat Course Outline

This file is a transcript of notes taken during Rob Smith’s course, Introduction to the Strat.

Each top-level section in this outline corresponds to a video in the course. The notes follow what
Robs says in the order that he says it, which is why some topics are covered multiple times.

The course is available at https://sepiagroup.com

Nomenclature: The digits 1, 2, and 3 refer to those types of bars on a chart. To delineate
numbers of things, these are spelled out at one, two, and three.

Video: Universal Principles of Price Action

1. Timeframe Continuity Principle
a. Multiple timeframe analysis means taking into account the charts from not just
one but several key timeframes. The primary timeframes are the monthly,
weekly, daily, and hourly.
b. When the primary timeframes all agree, meaning that all four are red or all four
are green, that is called full timeframe continuity (FTFC).
c. FTFC that either buyers or sellers are in control of a stock’s price action.
d. Roughly 70% of trades are done by algorithms.
e. Algorithms must be told four things:
i. Buy or sell?
ii. How aggressively? Take the offer or wait to get your price?
iii. When? This can be a time-based schedule, a price range, or both.
iv. Which ticker?
f. Price doesn’t move, it aggregates. The word ‘momentum’ is just an analogy in
the trading context.
2. Scenarios
a. Only three things can happen from one bar to the next.
i. Scenario 1: The Inside Bar – Doesn’t take out the high or the low of the
previous bar. The shorthand for it is 1.
ii. Scenario 2: Up or Down Bar – Takes out either the high or the low of the
previous bar, but not both. The shorthand for a 2 that takes out the high is
2U (for 2-up), and one that takes out the low is a 2D (for 2-down).
iii. Scenario 3: The Outside Bar – Takes out both the high and the low of the
previous bar. It is extremely important to know that this phenomenon
exists. If you look inside a 3 bar at the shorter timeframe within it (e.g.
 look at the daily inside of a weekly 3 bar), you will see a broadening
formation.
1. When a bar takes out one side of the previous bar’s range and
then reverses and starts come back through that range, we know
that a 3 bar might be about to form. If we have FTFC in that
direction, then a 3 bar is likely about to form.
2. Using 3 bars is the proper way to gauge the magnitude of price
ranges that are open to be taken out.
b. Shorthand for Sequences of Bars
i. Sequences of bars on a chart are written with the number labels that
match the bars.
ii. For example, is there is a 3 bar, followed by a 2-up, then a 2-d, that is
written as 3-2U-2D.

Video: The Strat Reversals

1. 2-2 Reversal. A reversal to the upside is a 2D followed by a 2U, while a reversal to the
downside is a 2U followed by a 2D.
2. 2-1-2 Reversal. A 2 in one direction, followed by a 1 and then a 2 in the other direction.
3. Outside Bar Reversal. Starts as a 2U or 2D, then reverses and takes out the other side
of the previous bar’s range creating a 3, or outside bar.
4. 3-1-2 Reversal. A 3 happens at a high or a low, is followed by a 1, and then a 2 that
goes back into the previous range from before the 3.

Video: Market Internals

1. The market trades in the direction of the most 2’s and failed 2’s going 3. It has to.
a. We can count 2’s and 3’s and get a quick picture of what’s going on.
2. The Strat is very repetitive, methodical, and unexciting. It’s supposed to be.

Video: What We Look For – Part 1

1. We mainly look for the 2-2 reversal, the 2-1-2 reversal, and the failed-2-goes-3 reversal.
2. We’re always looking for 1’s and 3’s, for that’s where there will soon be 2’s.
3. A 1 eventually has to go 2. It could go 1-1-1-1 for a while, but it eventually has to go 2.
We always ask, “What’s the next 2? What will it create, negate, or do?”
4. A 2 can stay a 2 or become a 3. When a 2 becomes a 3, a reversal has happened inside
of that bar.
5. We don’t trade a 1 on the daily after 12pm EST. The day is all consolidation at that point.
We wait for a 2 day.
 6. We don’t trade a 1 on the weekly after Wednesday. There are too many inside days in
that week. We wait for a 2 week.
7. We generally don’t want to trade 1 bars, but sometimes on a monthly we can because
there can be enough range in a month.
8. Outside bars are good signals because they show that the market participants are
aggressive on both sides. If they’ve been willing to buy up and sell down once, they
might do it again.
9. One thing to look for is a 3 followed by a 2 in one direction then a 2 in the other. The 3-2-
2 bars become a compound outside bar of what came before. This sequence is good for
gauging magnitude.
a. A 2-2 reversal after a 3 will take out the high of the 3 if it’s to the upside, or the
low of the 3 if it’s to the downside.
10. RevStrat – Short for “reversal strategy.” This is one of two sequences:
a. 2-2 reversal after a 1
b. 3 after a 1

Video: What We Look For – Part 2

1. Used to be Somebody – Reversal that’s coming back through a range that used to be a
lot higher.
2. In Force – The identified strat is still going, e.g. a 2-2 reversal that is still taking out
range in the direction of the reversal.
3. Exhaustion Risk – When we go into new highs or new lows, we want to stay there.
When buyers have taken out a previous range, shorts don’t have enough pivots to be
short against and the price can fade even without longs selling.
4. Mother Bar Issue – When you have a 1 bar, the bar previous to it is called the mother
bar. The next several bars can all remain inside of that mother bar, creating a compound
1 (a series of bars that are all inside of a mother bar). This zone is a chop shop where
price discovery is starting over. Remember price discovery happens in a series of
broadening formations. These bars that are part of the compound 1 may be 2’s of each
other, but they are all 1’s of the mother bar. We don’t trade in here. We wait for a
reversal that takes out the high or low of the mother bar, as that indicates that price
discovery has resumed.
a. Look for a 2-2 reversal that follows a 3. The 3-bar shows the magnitude once the
reversal is in force.
5. Pivot Machine Gun – A series of bars that all trend in the same direction. The pivots of
these bars indicate roughly where stop losses are set, and a reversal can potentially
take out the whole range. Look for FTFC in the direction of the reversal.
6. 2-2-2 Shotgun – Starts with a 2, then the next bar takes out one side of its range, then a
third bar takes out the other side of its range.
 7. Triangle They Out – TTO for short. This starts when there is corrective activity against
the trend, such as several consecutive 2U’s on the hourly while the day, week, and
month are red. You wait for a reversal that takes the price back into FTFC. The range
that this takes out will be full of short stops if it’s to the upside, or long stops if it’s too the
downside. Once you’re into a TTO, you don’t have to do anything but wait for shorts to
cover or longs to get stopped out. They have to take action, not you. Triangle, they out!
a. Use multiple timeframe analysis. Check that the monthly signal is in force, then
break it down to the weekly. The weekly should have a continuation that
reconfirms the monthly reversal.
b. We like to take a position on the reversal, then add on the continuation.

Video: What We Look For – Part 3

1. You get the big moves when you have FTFC and then break it down to see the smaller
moves building up into the larger ones.
2. Price discovery happens in a series of broadening formations. This is why we avoid
trading inside bars—they indicate that price discovery has started over and the price
action will be untenable for trading until a trend establishes with timeframe continuity. On
a longer timeframe, this is a 3-1-2 reversal.
3. Some people trade just 3-1-2’s because of the known magnitude. The reversal will take
out the range of the 3.
4. The 3 happens because buyers and sellers are equally aggressive. Then the 1 happens
when they meet in an equilibrium (consolidation), then the winner emerges and there is
a 2 bar.
5. Kicking Pattern – Most common on the daily chart. This happens when a 2 bar gaps
completely over the range of a preceding bar. Anyone who got short on that previous bar
had to cover, and there are short stops at the pivots before that. As short stops get taken
out, it removes liquidity and drives the price up in front of people who are trying to buy
long.
a. We’re looking for a bar that’s 80% full (short wicks), then a gap and a reversal.
It’s best when there are multiple pivots to be taken out because then it takes
longer to reach new highs or lows.
b. The best kicker pattern is one that follows a pivot machine gun. We need to have
pivots to go through for a good-sized move. Going into new highs or lows puts us
into exhaustion risk.
6. Another good setup is a 2-2 reversal after a 3. We know that a 3 bar is a broadening
formation, so a 2-2 reversal after it will take out its entire range in the direction of the
reversal. At that point the two 2 bars become an outside bar of the 3, and now the
broadening formation exists on that timeframe.
 a. For example, a 3 bar on the weekly is a broadening formation of the daily and
hourly timeframes within it. If there is a 2D that takes out the bottom of the 3’s
range, followed by a 2U that takes out the top of the 3’s range, then that
broadening formation now exists on the weekly timeframe as well.
7. Motor City Madness – A 3-1-3 happens when a 3-1-2 reversal fails and becomes a
continuation. This is where there is a 3 followed by a 1, then a 2 begins to reverse into
the range but fails and reverses into another 3 that continues the same direction as the
reversal on the first 3.
a. For example:
i. Bar A is a 3 that started as a 2U and reversed downward into a red 3
ii. Bar B is a 1
iii. Bar C starts as a 2U taking out some of the 3’s range but fails and
reverses into another red 3.
8. We are always looking for combinations across multiple timeframes. A reversal on
a daily can cause a 3 or a 2 reversal on the weekly. The weekly can cause this on the
monthly, etc.
a. Especially be aware that a 2-2 reversal on a daily can cause a 3 on the weekly. If
there is a pivot machine gun on the daily, it will drive the magnitude of the 3 on
the weekly.
b. We always want to verify these setups with multiple timeframes.
9. What’s the next 2? What will that create, negate, or do?
a. During outside bars, look for 2D-2U-2D continuations and 2U-2D-2U
continuations.
10. Exhaustion Risk – This is any time that we’re going into new highs or lows instead of
coming back through a previous range. That means either the buyers or sellers have to
keep stepping up to continue the direction because there are no more stop losses to be
take out. Once you get into this territory, you need to defend with tight stops and be
ready to get out quickly on a reversal against you.
11. Hammer – A bar with an open and close that are close together, a very long bottom
wick, and a much shorter or non-existent top wick. It gets its name because it resembles
a hammer.
a. This indicates that sellers came in hot and drove the price down, but buyers took
over and brought the price back to slightly under or slightly over the open.
b. A regular hammer is a 2D and may signal a 2-2 reversal.
c. A momo hammer is either a 2U or a 1 with continuity.
i. On a momo hammer, you can take the trade as soon as the next bar
takes out the momo hammer’s high, because anyone who go short in
there is getting jammed and needs to cover. If you have FTFC, then there
will be real buyers in there too. This can create an order vacuum because
once everyone has covered their shorts and everyone who wanted to buy
long is in, a reversal can start quickly as soon as the first long takes
 profits. Defend with tight stops and be ready to get out quickly on a
reversal.
12. Shooter – The inverse of a hammer. This bar also has an open and close that are close
together, but it has a very long top wick and a much shorter or non-existent bottom wick.
a. This indicates that buyers can in hot and drove the price up, but sellers took over
and brought the price back to slightly over or under the open.
b. A regular short is a 2U that may signal a 2-2 reversal.
c. A momo shooter is either a 2D or a 1 with continuity.
i. On a momo shooter, you can take the trade as soon as the next bar takes
out the momo shooter’s low.
13. Remember that hammers and shooters aren’t inherently bullish or bearish. A hammer
isn’t bullish until it is confirmed by having its high taken out, and a shooter isn’t bearish
until it is confirmed by having its low taken out.
14. The 3-2 continuation is another good setup, but it’s aggressive. This is when a red 3 is
followed by a 2D, or when a green 3 is followed by a 2U.

Prices – How Prices Continue

1. Prices are always going to be consolidating (inside bar), continuing, or reversing.

2. 2-1-2 continuation – A 2 bar followed by a 1, and then another 2 bar that continues the
directional trend of the first one.
3. 3-1-2 with continuity – A red 3 followed by a 1 and then a 2D, or a green 3 followed by
a 1 and then a 2U.
a. Look for FTFC in the direction of the continuation.

Video: Prices – How Prices Reverse

1. 2-1-2 Reversal – Happens on all timeframes, and we can look for them in the direction
of FTFC.
a. For example, look for 2D-1-2U when FTFC is green; and look for 2U-1-2D when
FTFC is red.
i. You’re looking for the third bard the kick off the reversal – either a 2U that
breaks the high of the 1, or a 2D that breaks its low.
b. Understand the term in force. This means that an actionable condition has been
met and is still valid, e.g. a 2U taking out the high of a 1 and continuing to trend
upward with remaining range to take out.
c. A conflicted 2-1-2 happens when the second 2 bar takes out the high of a green
2D or the low of a red 2U. Most common on the daily due to gap-ups and gap-
downs.
2. 2-2 Reversal – A 2U followed by a 2D or vice versa. It goes in force when a 2U takes
out the high of a 2D, or a 2D takes out the low of a 2U. The magnitude is the high/low of
 the second-previous 2, and we know that both sides of that range can be taken out
because 3 bars exist.
3. Scenario 3 / Outside Bar – Every 3 must begin as a 2 and then reverse into becoming
a 3. Either a 2U fails and reverses to the downside to form a red 3, or a 2D fails and
reverses to the upside to become a green 3.
4. 3-1-2 Reversal – The 2 bar puts the reversal in force as soon as it takes out the high of
the 1 if the 3 is red, or the low of the 1 if the 3 is green.
5. 3-2 Reversal – Goes in force when a 2U takes out the high of a red 3, or when a 2D
takes out the low of a green 3. Aggressive strategy.
6. RevStrat – Short for reversal strategy. There are two types of reversals that get this
label.
a. These have to come after an inside bar. Remember that a 1 is an equilibrium,
meaning that neither buyers nor sellers are in control.
b. One pattern is a 1-3 RevStrat. The 3 starts as a 2 in one direction, then fails and
comes back through the other side of the 1 bar’s range.
c. The other is a 2-2 reversal after a 1. It goes in force when the second 2 bar takes
out either the high or the low of the first 2 bar’s range. The two 2 bars then form
an outside bar of the 1.
d. In both of these cases, a broadening formation now exists on the timeframe
where the RevStrat occurred.

Video: Trading – Trading Gaps

1. Rob puts out a list of gappers on Twitter each morning with the hashtag #mindthegap.
2. Looking mainly for gappers that reverse back into their FTFC.
3. The newer you are or the more restricted your trading is, the more you want to stay on
the 60m and 30m charts because it’s a slower pace.
4. Some people just trade the opening signal on the 60m and then check at the end of the
trading day.

Video: Trading – Scanning Technique

1. Who is opening the month by taking out last month’s highs? What do they have in
common? Is there a concentration of this happening by sector?
2. Who is opening the month by taking out last month’s lows? If it’s a list of nobodies, then
that tells you the market is generally going up. If it’s a list of top companies, then that
tells you the market is generally going down.
3. We scan for stocks that are gapping above yesterday’s highs and below yesterday’s
lows. We also scan and confirm with the weekly.
a. This will either confirm or negate what we know about the monthly signal.
 b. When we get to Tuesday, we want to see if it confirms or negates the signal from
Monday. A 2-2 reversal on a Tuesday can change the weekly continuity.
i. If Monday is 2U, then the week is also 2U at that point. However, a 2-2
reversal on Tuesday can change the week to 2D. If this happens in the
first week of the month, it can also flip the month to red.
4. We like sector-specific simultaneous breaks (for these types of gaps to be happening
across entire sectors), because these signals tell us what big institutions are doing—
buying tech, selling energy, etc.

Video: Trading – Sector-Specific Simultaneous Breaks

1. Simultaneous breaks are high concentrations of activity in one direction. They can be
across the board or sector specific.
a. For example, if all the major tech stocks are green, and SMH is green, then
institutions are buying semiconductor stocks.
i. Looking at the biggest stocks and one or two representative ETF’s in a
sector will show if there is sector-specific simultaneous break.

Video: Trading – Refining Your Universe

1. It’s a big market out there. We want to start out slow and stay in a certain universe.
2. Every morning Rob tweets out the gap list with #mindthegap
3. Start out only watching the 30’s and the 60’s. This way you only have to look at 20
minutes past the hour and 10 minutes before the hour to see what the 30’s and 60’s are
setting up.
4. It’s OK to be a one-trick pony and master only a single setup. For example, some people
only trade 2-1-2 reversals or 3-1-2 reversals.
5. Each weekend, watch the Strat Weekend Vid on sepiagroup.com.
6. You can look for monthly continuations from the weekend vid.
7. If the gappers are doing nothing, the Strat Time Report comes out at 12:30pm.
Algorithmic activity has been identified by that point, and Rob goes over anything
important that’s going on in the market day.
8. Once a month, Rob puts out the Macro video where he talks about the quarterly and
yearly setups.
9. Tuesday after close is the Strat Attack show. Rob goes over setups that are following
through on monthly and weekly signals. This is a good universe to work within also.
10. Monday after close: Power Hour. Stratters discuss universes and setups on
sepiagroup.com
Video: Continuity – The Time Frame Continuity Principle
1. From one bar to the next, there are only three possible outcomes:
a. The inside bar (1) – consolidation.
b. The up/down bar (2) – trending.
c. The outside bar (3) – broadening: either a reversal or a continuation.
2. The market will move in the direction of the most 2’s and failed 2’s going 3. It has to.
3. We use multiple timeframe analysis (monthly, weekly, daily, 60m) to see who is getting
their price: buyers or sellers.
4. We want to know: Is the price higher or lower than when it opened on that timeframe?
5. We want to identify likely participants by price and time. For example, if the month,
week, day, and hour are all green (FTFC to the upside), then that means buyers are
paying the ask, not sitting on the bid. If they are all red (FTFC to the downside), then
sellers are accepting the bid and not waiting on the ask.
6. Conflict is when the four major timeframes don’t agree, for example when a stock is
green on the month but red on the week.
7. Buyer / seller control starts with the 60m. For example, if the month is green, but the
week and day are red, we know that the monthly buyers are probably gone. Red on the
60m will reconfirm this, while green on the 60m could flip the day and maybe even the
week.
8. We prefer to have the 60m and the daily reconfirm the weekly and monthly.
9. There is also intraday timeframe continuity, which is: 60m, 30m, 15m, 5m.
10. Event continuity: Any time news breaks during the day that affects the market. For
example, the oil inventory numbers come out every Wednesday in the 2nd hour, and the
price of crude reacts to the news.

Video: Continuity and Breaks – Definition of a Compound 3

1. We know the common reversals are 2U-2D, 2D-1-2U, 2U-1-2D, and failed 2 going 3.
2. A RevStrat is a reversal but a little different. A RevStrat is reversing out of an inside bar
equilibrium.
a. The 1-2-2 RevStrat happens when a 2 after a 1 fails but doesn’t quite go 3, then
is followed by a 2 in the other direction.
b. The 1-3 RevStrat happens when a 2 after a 1 fails and goes 3.
i. A 3-2 continuation can follow this one, which would mean that the
rejection which caused the reversal is still in force on the next candle. You
have to keep a really tight stop on this one, because the 2 after the 3 can
fail and become a 3 or a 2-2 reversal.
3. Compound 3 – is where two or more bars on one timeframe form a 3 on the next larger
timeframe.
4. To reiterate these patterns:
 a. The two-bar RevStrat is a 2-2 reversal after a 1, and the one-bar RevStrat is a 3
after a 1.
b. The 3-2 continuation is a red 3 followed by a 2D or a green 3 followed by a 2U.
c. There is also the 3-2-2, which is a 2D-2U reversal after a red 3, or a 2U-2D
reversal after a green 3. Very powerful.
5. Remember magnitude – You go into exhaustion risk once your reversals / continuations
have hit their price targets.

Video: Continuity and Breaks – Simultaneous Breaks

1. A simultaneous break is something we look for to have higher probability moves. These
can be by time, by price, by sector, etc. When there is a high concentration of signals
going in the same direction, e.g. multiple indexes are green on the daily, or the small
caps are red on the hourly, then it is very difficult to turn that around and so you have
higher probability moves in that direction.
a. A simultaneous break can often happen at the flip (the bottom of the hour).
Breaks change at the bottom of the hour all the time, which is why it’s called the
flip.

Video: Continuity and Breaks – Flips and Simultaneous Breaks

1. Remember full timeframe continuity (FTFC): the month, week, day, and hour all agree.
2. It’s important to understand that when things occur matters.
3. Timeframe Decoupling – Every Monday, three of the four major timeframes start over:
the week, day, and hour. Every month, at least the month, day, and hour start over. If the
first of the month is on a Monday, then all four major timeframes start over.
4. When reviewing the markets on the weekend, only monthly signals are in force because
the rest are about to start over.
5. Once the four timeframes are decoupled, you now have four separate participation
groups.
6. The bottom of the hour is called the flip. When you watch the flip, you’re watching for
new participation groups. You’ll see trading algorithms turn on and off at the flip.
a. There is also a perception change at the flip. A green hour looks great, but then a
new red candle looks bad even though it’s just the first minute or two. And that
perception can become a reality if market participants act on it.
7. An inside bar on the 60m is a big deal because it means that a 2 is coming. A 1 always
eventually has to go 2.
8. A new 60m is like a new day. On a reversal to the downside, you’re looking for trades
with FTFC to the downside. On a reversal to the upside, you’re looking for FTFC to the
upside.
 9. A flip back into FTFC after some corrective activity (especially a 1) is a high-probability
move.
10. When volatility is heightened, the smaller timeframes matter more. With high volatility,
there can be as much price action in an hour as in a normal week or month. That’s when
you can take it down to the 60m, 30m, 15m, and 5m. Some traders even take it down to
the 1m.
11. The basic approach is to monitor the gap list 20 minutes after the hour and 10 minutes
before the top of the hour. You’re looking to see if there is a break in the 30m that will
cause the 60m to change. Remember, “What’s the next 2? What will that create, negate,
or do?” You’re looking for a reversal or continuation that takes the 60m into full
timeframe continuity.
12. You can also look for simultaneous breaks. A simultaneous break is when there are
many simultaneous 2’s in the same direction in either a subsector, sector, index, or
broader average. They can also be failed 2’s going 3.
13. The market will trade in the direction of the highest concentration of 2’s and failed 2’s
going 3. It has to.
14. A high concentration of 2’s and failed 2’s going 3 on the monthly, weekly, and daily
indicates a bias. When this happens, especially on the broader averages, it indicates
that institutions aren’t just buying or selling one thing—they’re buying or selling
everything. That makes for a high probability move.
15. Sector ETF’s are good places to look for sector-specific simultaneous breaks. These tell
you that institutions are either buying or selling these sectors, and are high-probability
moves because they are very hard to turn around.

[Course Concludes]