In previous lessons we have talked about what Supply and Demand trading is and how it can help us to achieve success in the markets. We talked about imbalances, which manifest themselves as either peaks or valleys or in continuation patterns that will help us pin point “potential areas of interest. We narrowed the areas…
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What are the OBSTACLES to Price Action Movements?
Price does not move in straight lines. So when we draw the zones, we need to remember this. We would have drawn a demand/supply zone and will be waiting at those zones for taking entry. But there are many obstacles price can come across on its way to our entry. When one of these obstacles is reached, price usually does not retrace to our entry.
These obstacles are:
• HTF imbalance in control
• HTF trending trendline confluence
• HTF sloping 20 EMA confluence
What is Re-Alignment in Price Action Trading?
SUPPLY, DEMAND, AND THE MARKETS, HAVE MEMORY:
How many times have you seen a market retrace back to a level where a recent major move started from, only to respect that level almost exactly before making another strong directional move? It happens often enough to be something that you need to understand, and know how to make correct use of, because these scenarios can often yield very high-probability and high reward to risk trades
It’s important to note that the trade setups by Market Secrets are not a perfect science. There are occurrences in the market that are critical to understand, and our trade setups will provide a tool to have at your disposal when you’re analysing charts.
Why Chain is the important element in Price Action Trading?
The Chain is a critical element of price of Price Action Trading. Chain integrates the imbalances and trendlines and gives the detailed picture of the demand and supply.
As described in a previous lesson a potential imbalance is valid once,
• An opposing imbalance is taken out
• A trendline is broken with one or more full OCHL candles
The idea behind drawing a trendline by connecting the last two valleys and peaks is to connect the latest two impulses (bullish or bearish). If we start seeing impulses in the opposite direction then the dynamics for that timeframe in particular will probably be changing and we should lean on a bigger timeframe before we start trading in the same direction where the last impulses happened. These concepts are the core of the realignment rules that will be explained in the next episode.
THE CHAIN:
There is a relationship between the trendline break connecting the last two impulses and when an imbalance is created. We will be referring to this relationship as the Chain from now on. This chain connects both core concepts and provide us with a very objective methodology to locate potential tradable imbalances on any price chart and timeframe.
When a potential imbalance is confirmed as a zone?
There are TWO SCENARIOS:
1. A potential imbalance takes an opposing imbalances out (and/or)
2. A potential imbalance is created if price breaks a trendline with one or more full OCHL candles. This trendline must connect the latest 2 peaks/valleys or 3 or more consecutive CPs (Continuation Pattern)
Both scenarios can happen at the same time, which is why I am using the AND/OR Boolean statement in the rule above. As long as only one criteria is met the imbalance will be confirmed.
So, once you draw a zone based on rules, you need to confirm validity of the zone using the 2 rules mentioned.
How to read Doji & High-Wave candles?
Doji and high wave candles is the topic we have missed to discuss so far, which we will be covering in this episode.
There are different types of doji formations.
Plain doji indicates balance and not imbalance in price and represents the indecision in the market. Same is applicable for Long Legged Doji as well, but in long legged doji, the zone formation is different.
In this case, we cannot include both the wicks together while drawing zones, as the wicks are too long. From a price action perspective, long legged doji also represents balance and not a good imbalance
How to draw trendlines methodically for Continuation Patterns (CP)?
Rules for drawing Trendline for CP:
• Rules for drawing Trendline for CP is different from drawing trendlines for Valley’s and Peak’s.
• Most importantly, A Continuation Patterns can’t be used with valley and peak to form a trendline.
• It’s possible to see CPs before a new valley is printed. They will be irrelevant on how we draw trendlines since we are not allowed to use them to connect trendlines.
• We’ll only use CPs to draw a more aggressive trendline when 3 or more consecutive CPs have been created.
• So, we can create trendlines using 2 valley’s, 2 peaks or 3 CPS. As simple as that. You cannot form trendline using 1 valley and 1 or 2 CPs, likewise you can’t draw trendline using 1 peak and 1 or 2 CPs.
• We can create Trendline if we find 3 CPs in the chart continuously. Once the 3rd CP is created, we’re allowed to draw a more aggressive trendline by connecting them since we’ll consider price is probably over extended.
• Once this agressive trendline is broken, a new supply/demand zone will be created.
How to draw trendlines methodically for Extremes (Valley’s and Peak’s)
Rules To Draw A Trendline:
1. Identifying potential reversals. We don’t need an opposing zone eliminated in order to draw a trendline, it can be used as confluence. If an opposing zone is eliminated then we’ll have a trend.
2. We should be Connecting the last two bullish or bearish impulses on every timeframe of our sequence.
3. Learn as soon as possible when opposing impulses are being created on your trading timeframe, if that happens we must lean on timeframes higher than the one when we start seeing opposing impulses. If the trend is down and bearish impulses are being created, what would you think if the next impulse is bullish and stronger than the last bearish impulse? Wouldn’t you think the market dynamics for that timeframe are changing? Exactly. That’s the reason why the trendlines are drawn like this.
4. The break of a trendline with a full OHCL candle will create a potential imbalance.
5. Using trendlines in combination with multiple timeframe analysis and the sequence can give you the exact point where a new trade setup can occur.
6. Trendlines can signal that a change in trend may occur.
7. We’ll need at least two touches of the trend line connecting the latest two obvious valleys and peaks (swing lows and swing highs), the more touches the TL has the more structured and powerful the trendline and trend will be.
How To Draw A Trendline?
1. Connect the latest two obvious valleys (swing lows) and peaks (swing highs).
2. These valleys and peaks must be clear and obvious. If they are not, consider them as pauses. If they are not clear basing should be unclear and poor and removal would be expected anyway.
3. Update the trendline every time there is a new valley or peak
4. Each timeframe has its own trendline independent from other timeframes and this is where subjectivity comes into in other methodologies
5. Continuation Patterns (CPs) will not be used to connect trendlines unless there are 3 or more (over-extension)
WHAT IS AN ENGULFING PATTERN?
What are engulfing bars? The engulfing bar formation consists of at least two candles, where the second candle completely engulfs the previous one. The signal that the engulfing bar formation provides is, depending on whether the second bar is bearish or bullish, either a reversal or a continuation.
Engulfing patterns like all candlestick patterns have many different looks and as a rule of thumb an engulfing pattern is defined as a candle that closes higher than the previous candle’s body high (bullish engulf) or lower than the previous candle’s body low (bearish engulf). If it closes above the high rather than above the body or below the low rather than below the body, then the engulfing pattern will even be stronger. The candle that engulfs the prior candle shouldn’t be a 50% candle.