What are Exceptions and resets in a Trend?
Exceptions and resets
In the last episode, we discussed what is over extension, how to identify over-extension and how we can draw an aggressive trend line and once this trend line is broken, how we need to realign.
But there is an exception to this rule. Over-extension and thus an aggressive trend line can be ignored when,
· A level (CP) that is part of that over-extension has caused an important accomplishment such as breaking a supply or demand level of a higher time frame OR
· When we have formed a new valley or peak as a valley or peak is considered a pullback and thus a reversion to the mean.
Now, what we do when any of these two exceptions occur is to simply resume trading in the original direction until we have a loss. Once we the loss we will wait for a realignment in a higher time frame zone as mentioned in the last episode.
Also, you need to understand the significance of trend lines and its correct application
· So far we have discovered the rules to objectively determine when price is trending, when price is consolidating and when a new trend has begun.
· Trend lines are a visual aid that guide and help us to stay objective. They help to determine if we are working within the rules that we have given ourselves to survive in a market that hardly has rules.
· If we do not lay objective rules upon ourselves than our trading endeavor will be short lived.
· The break of a trend line signifies a change of dynamics, nothing more nothing less. This change of dynamics is usually the result of a reaction to a higher time frames supply or demand area
Correct application of trend lines
Regular trend lines: A regular trendline is applied when price is in state of normalcy, printing clear and obvious valleys and peaks
· A regular up trend line should be drawn between the penultimate valley (its lowest point) to the last valleys lowest point.
· A regular down trend line should be drawn between the penultimate peak (its highest point) to the last peaks highest point.
Aggressive trend lines: An aggressive trend line is applied when price is over extended The criteria for these situations was discussed in the last session.
· For an aggressive up trend line, we need 3 CP’s or more. So aggressive trendline should be drawn covering at least the latest 3 CP’s or more.
· For an aggressive down trend line we need 3 CP’s or more. So trendline should be drawn covering at least the latest 3 CP’s or more
IMPORTANT: Please note that it is not allowed to connect Valleys/Peaks to a CP or a CP to Valleys/Peaks. There is a simple reason. Price is either in a state of normalcy or overextended. It cannot be both!
Again, any break of a trendline signifies a change of dynamics, nothing more nothing less. This change of dynamics is usually the result of a reaction to a higher time frames supply or demand area.
But remember that having a break of a trendline does not necessarily mean that we have an opposing trend, the dynamics of the market might be changing, price is losing steam, potential consolidation stage happening
· 1 demand level taken out = Consolidation Stage
· 1 supply level taken out = Consolidation Stage
· 2 demand levels taken out = Downtrend
· 2 peaks with a descending TL = Downtrend
· 2 supply levels taken out = Uptrend
· 2 valley’s with a ascending TL = Uptrend
Demand being respected & Supply being removed — Should happen in Uptrend
Supply being respected & Demand being removed — Should happen in Downtrend
For more details and examples, checkout: