Why Chain is the important element in Price Action Trading?
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.
By drawing the trendlines as explained in the trendline lesson we are making sure that we’ll be connecting the latest impulses in any direction, bullish or bearish. We must do the same for every timeframe in our sequence in order to apply the realignment rules, a single timeframe is not enough to make a trading decision.
By combining the two core concepts on how imbalances are created (trendline break and opposing zones being removed) we will start seeing how these impulses start losing steam and give birth to opposing imbalances that create an opposing force impulse) against the last two obvious impulses. This linked relationship is called the Chain.
PRACTICE AND PRACTICE: it’s very important that you put these rules into practice so that you gain confidence in the methodology. Reading and analysis helps a bit but the accomplishments in your learning process will only happen when you do your homework. Only with practice, your brain starts to create habits and patterns based on these rules.
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.
In the following examples you will see how this chain is formed. These rules apply to any market and timeframe, these two core concepts and rules provide us with mechanical rules to locate potential imbalances to lean on our trading. It’s very important to bear in mind that all these imbalances have the potential status. A potential imbalance will be validated further once we apply the realignment rules, score the levels and put these levels into context in a bigger picture trend made of at least three timeframes. More about this concept in the very next episode.
Example:
Take these chart as an example to understand how the chain works.
Consider, there is a valid supply zone and price is dropping from there. In fact it actually formed a downtrendline. Consider this as beginning of the chain.
Now in this step, the downward trendline is broken, which creates a new demand zone.
Since, the downward trendline is now broken, we have removed it. Next day, price gaps up above the supply zone, taking it out. So this gap up creates a new demand zone, which I have marked. Price fills the gap and hits the demand zone and bounces back, forming a new uptrendline. The original SZ is already taken out, so it will be removed from the chart now.
In this step, price breaks the trendline and creates a new supply zone at the top. I have marked the new SZ. We can remove the upward trendline now.
So if you look at these steps/examples, you can clearly see how the trendlines and zones are integrated and related to each other, forming a chain relationship. The relationship between trendline and zone is continuous. Even if you go back 10 years in the chart and start marking zones from that day till today, you can see a clear chain like relationship from 10 years back to today. Some of the zones I marked 10 year back can be used for trading next year as well. These chain relationships are continuous and will help you to read the charts easily. If you give it enough time, these chains will speak to you when you look at the chart. It will also clearly say whether a demand zone is in control or whether a supply zone is in control now. So understand the chain is most critical in price action trading. Hope you have understood it.
For more details and examples, checkout the video:
Related
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