How to Identify Supply & Demand Imbalance created by Continuation Pattern?
Welcome to Episode 7 of Price Action Trading Series from MarketSecrets.
In this episode we are go to learn about “Supply & Demand Imbalance created by Continuation Pattern “.
There are 2 types of supply and demand imbalances:
- Valleys and Peaks – which is called extremes
- CP (Continuation Pattern)
In the last episode we focussed on Extremes which is Valley & Peak. In this episode, we will be focussing on Continuation Pattern.
To watch all the episodes, please use this link: https://www.youtube.com/playlist?list=PLRpfTFEfJ27Y9rFMjQZgXPRjxiA3dPhOP
CONTINUATION PATTERN (CP)
A Continuation Pattern or CP is a pause in the market before price resumes current trend.
In an uptrend it requires a rally followed by a base, followed by another rally. In a downtrend a CP requires a drop followed by a base followed by another drop.
This rally or drop is otherwise called as legs. Legs in and outs must be ERC candles or failed ERC candles. The bar(s) in a CP base can have any color. A CP is a pause in the market.
We can think of this pause as accumulation of buy orders for longs or the distribution of sell orders for shorts.
Very important: Locating and drawing CPs can be very tricky sometimes. There are as many variations as there are colours in the light spectrum.
Don’t get obsessed with having all of them right, sometimes they will be valleys/peaks, or just a mess.
Your trading decision and trend analysis can change if you don’t draw them correctly. This is part of trading.
Unfortunately, most of the times charts do not look nice and clean with great formations as described and shown in the examples – this is the hard and true reality.
The sooner you come to grips with it and accept it the quicker you will learn. Having said that, nobody forces you to trade messy formations, as there are a lot of instruments to trade.
Furthermore part of the tradability scoring of a supply/demand zone that will increase the probability of a trade and which I will show you later, comes back to this subject.
Nevertheless you better get used to the fact that you just can’t control everything and accept that you will always be making mistakes. It’s part of the game.
A Continuation Pattern is composed of these formations:
- Rally-Base-Rally
- Drop-Base-Drop
Some of its features:
- CPs are best for momentum trading, when trading with the trend or bouncing off of a bigger timeframe.
- Low odds when the Trendline is broken on the TF it’s been located on, or a bigger timeframe is in control
- Low odds when price has been running for a while and more than 3 consecutive Continuation Patterns have been formed
- High odds at the beginning of a trend change, at potential reversals or after a Wow trade that goes with the bigger picture’s trend and momentum
Please note that some of the things mentioned here might be new to you. Please do not worry if they are not yet clarified. This will all be taught in later episodes.
Please also note that you will come across such situations in almost every episode, but again it will be taught later.
The further you advance the more things become clear and the puzzle pieces fit together.
Therefore it is important and I cannot stress this out more often, that you go through this course over and over and over as mentioned in the first episode.
Every level is different, imbalances don’t occur in perfect formations every time, you need to read candle by candle.
Sometimes it’s very tricky to distinguish a CP from a valley/peak. In such cases, you must carefully read price action candle by candle to see the clearer picture.
If the zone is not clear to you, the wisest thing you can do is wait for confirmation and again, there are multiple types of confirmations, which will be explained in later episodes
Assignment:
Open your chart and mark at least 10 CPs each for rally-base-rally & drop-base-drop.
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