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Zero to Profitable Trader – Full 20 Hour Course — Transcript

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0:19Hey guys, welcome back to the channel.
0:22This video marks a beginning of a new
0:24course completely free of cost
0:26exclusively on the concept and
0:28application of price action trading. The
0:31course is designed in an orderly manner
0:33from the very basic to the advanced
0:35level. As we move up the ladder, I have
0:38accumulated a good chunk of the
0:40information from some of the best
0:42trading books, trading blogs, paid
0:45courses of some of the famous
0:47professional traders and a few relevant
0:50online sites. Also, I have taken a lot
0:53of effort to explain each concept in a
0:56way that even newbie traders can
0:58understand without much difficulty. So I
1:01heartly welcome every aspiring trader to
1:04take a ride with me throughout this
1:06course. So let's get started.
1:22At the heart and soul of it, the stock
1:24market is all about buying and selling,
1:27demand and supply. Sometimes we buy a
1:29stock and sometimes we sell one. But
1:32just by buying and selling based on our
1:34instincts will not do any good for our
1:37trading account. Chances are we end up
1:39in losses and a worst case scenario we
1:42blow up our trading account. That is why
1:45almost all the traders try to find an
1:47edge in the market to remain profitable.
1:50Depending on the type of trader you are,
1:52you can choose between technical
1:55analysis, fundamental analysis,
1:57quantitative analysis and finally price
2:00action analysis. The technical analysis
2:04primarily involves using different
2:06categories of indicators to predict the
2:09future price movements. Fundamental
2:11analysis on the other hand relies on the
2:14fundamentals of the stock or the company
2:16primarily focusing on the financials,
2:19earnings etc. to make a trade decision.
2:22Similarly, quantitative analysis
2:24utilizes the use of statistical tools to
2:27analyze the market data. But if you talk
2:30about technical analysis in particular
2:32which is followed by majority of
2:34traders, the interesting thing that can
2:37be identified is that the indicators
2:39used for the analysis are derived from
2:42some of the fundamental inputs of the
2:45market namely the price and the volume.
2:49Think about it for a while. Which is
2:50better? A fruit from our own Hong Kong
2:54or one with a heavy pesticide usage? The
2:57former may not be very good-looking and
2:59won't stay fresh for many days, but it's
3:02healthy. While the latter may look
3:04appealing to the eyes and stays fresh
3:06longer, but it's not even remotely good
3:09for our health. Likewise, too many
3:12indicators for our trading is not very
3:15good for our trading account. This is
3:17because the indicators are a result of
3:20so many intermediate processing of the
3:23basic price and volume so that the pure
3:26behavior of price and volume are lost
3:29and at the end of the day you make your
3:31own conclusion without listening to what
3:34the market has to say. I'm not in any
3:37way concluding that technical analysis
3:39is not good or that the indicators are
3:43Instead, what we have to
3:45understand is that we have with us a
3:48gold mine by the name of price, which if
3:51studied properly can help us identify
3:54what the market is doing. This study of
3:58price and its behavior is known as price
4:01action. So unlike indicators,
4:03fundamentals or algorithm, price action
4:06tells you what the market is doing and
4:09not what you think the market should do.
4:13The price action focuses mainly on the
4:15recent and current prices. It is also
4:19dependent on the overall market trend
4:22and finally on the price structure of
4:25the market. We will talk about each one
4:28of them in our upcoming episodes. Now
4:31price action is not the holy grail or
4:34the mantra for ultimate success in stock
4:37markets because trading is mostly about
4:39your psychology and implementation and
4:42not about a single special strategy. The
4:45goal for most traders is to maximize the
4:48trading profits through a style that is
4:51compatible with their personalities.
4:53Without that compatibility,
4:55I believe that it's virtually impossible
4:58to trade profitably for a long term. But
5:02if you devote a good amount of time to
5:04learning price action trading, you'll
5:07trade with cleaner charts without hell
5:09lot of indicators. You'll also be able
5:12to pinpoint your trade entries and exits
5:15with better precision.
5:31This video will focus on how the market
5:34price moves or how the prices are made
5:36to move in a particular way by some big
5:39players. You might have heard people
5:41saying things like history repeats
5:43itself, price memory and stuff like
5:45that. What they really mean is how the
5:48market price moves in a specific pattern
5:50time and time again. Now the question is
5:54why does the price of a stock go up or
5:57down? There can be different answers to
5:59this particular question like it could
6:01be the news or government passing some
6:04bill, a new monetary policy by the RBI,
6:07some legal issues etc. But at the center
6:09of it all the one thing that makes the
6:12market movements are the earnings of a
6:14company. Even if a piece of very bad
6:16news related to a particular stock has
6:18come out but it has no direct impact on
6:21the earnings of the company then there
6:23might be a temporary noise in the stock
6:25for a short period but eventually the
6:28stock will recover but on the other hand
6:31stocks like Vodafone Idea Bank etc are
6:35victims of the news that directly
6:37affects the earnings of the stock and
6:39thus resulting in their crash. In the
6:43stock market, there are mainly two
6:45players in general. Number one are the
6:47retailers and number two are the
6:50institutions. 90% or more of all the
6:54trading in the markets is done by
6:56institutions. Which means that the
6:58market is simply a collection of
7:00institutions. The institutions includes
7:03mutual fund houses, banks, brokerage
7:06houses, insurance companies, pension
7:08funds, hedge funds, etc. These companies
7:11account for most of the trade volume and
7:14they mostly trade on the fundamentals of
7:16the stock but now they are eventually
7:18shifting to the algorithmic side of
7:20trading. What I mean to say is that the
7:23trading done by these institutions
7:26controls the direction of the market on
7:28daily and weekly charts and a lot of the
7:31big intraday moves or swings are also
7:34controlled by the big institutions. It
7:37is not very surprising to know that
7:40almost all these institutions are
7:42profitable over time. So the
7:44institutions are generally considered to
7:47be the smart money. Meaning they are
7:49smart enough to make a living by trading
7:52and they trade a very large volume every
7:55day. No trade can take place without one
7:58institution willing to take one side of
8:01the trade and the other willing to take
8:03the other side. The small volume trades
8:07made by the retailers can only take
8:09place if an institution is willing to
8:11take the same trade. Let me explain
8:14this. If you want to buy at a certain
8:16price, the market will not get to that
8:19price unless one or more institutions
8:22also want to buy at that price.
8:25Similarly, you cannot sell at any price
8:27unless one or more institutions are
8:30willing to sell there because the market
8:32will only go to a price where the
8:35institutions are willing to buy and
8:37others are willing to sell. I hope the
8:40point is clear. Most individual traders
8:43or retailers have no ability to move the
8:47market. The market will only test a
8:49particular price if one or more
8:52institution believes that it is
8:53financially sound to sell at that price.
8:56On the other hand, there are other
8:58institutions which believes that it is
9:00profitable to buy there. So to be very
9:03precise at every tick in the stock
9:06market institutions are buying and other
9:09institutions are selling and all of them
9:12have proven systems that will make money
9:16by placing those trades. So the main
9:19point to be noted or the main point that
9:22I want to convey is this. You should
9:25always be trading in the direction of
9:27majority of the institution or like the
9:31professionals say follow the footprints
9:34of these institutions because they
9:36control where the market is heading or
9:39simply they move the market. Now let us
9:43look at a new scenario. You have found
9:46out a new trading strategy that makes
9:49money and it works perfectly but at some
9:52point it stops working after a while.
9:55Many of us might have gone through this
9:57situation. The reason for this is
9:59simple. The markets are changing. It is
10:02never fixed. But it is always in
10:05transition from one stage or one phase
10:07to the other. This simply means that if
10:10you are using a trend trading strategy
10:12today and you continue to do that then
10:14at some point you will lose money in
10:17range markets and similarly if you are
10:20using a range trading strategy and
10:22continue using it for a while at some
10:25point you'll end up losing the money in
10:27the trending markets. The thing to
10:29understand is that the profitability of
10:31trading system moves in cycles. There
10:34are periods during which the trend
10:36following systems are highly successful
10:38and profitable. Then the market shifts
10:40from the trending to range price action.
10:43That is when all the trend trading
10:45systems becomes unprofitable and the
10:48inexperienced traders start making
10:50losses. This is the reason why you see a
10:53lot of newbie traders boasting up their
10:56P&L during the trending markets while
10:58all of a sudden they disappear when the
11:01range market arrives. To sum it all up,
11:03market moves in three phases or three
11:06stages. Number one is the uptrend or the
11:09advancing stage. Number two is the
11:12downtrend or the declining stage and
11:15number three is consolidation stage. So
11:18the consolidation stage can be further
11:21subdivided into accumulation phase and
11:24distribution phase.
11:28So let us look at how the market
11:30transition from one phase to the other.
11:33Let us start with the accumulation
11:35phase.
11:37The accumulation phase is when the big
11:39institutions start buying a particular
11:42stock. These institution deals in huge
11:46bulks of money. Therefore their order
11:48sizes are expected to be huge. So think
11:51what happens if they buy such huge
11:54quantities in a single order. The prices
11:57would react suddenly and the prices
12:00would just shoot up.
12:02They will be able to purchase the stock
12:05at a specific price only if there is
12:08enough liquidity in the stock. Else the
12:11orders will be matched at higher prices
12:13which will in turn reduce the
12:15profitability of the institution. But
12:17they will not allow this to happen. So
12:20instead of placing a bulk order the
12:23institution places small orders secretly
12:26and this is called as position building.
12:28In short we can conclude that during the
12:31accumulation phase the institutions are
12:34building up the position slowly and
12:37silently and during the accumulation
12:39phase the market tends to be in a range
12:42or it is rangebound and the trend
12:44traders would face losses if they don't
12:47adapt suddenly.
12:49So how will you identify the
12:51accumulation phase? Generally the
12:54accumulation phase occurs after the
12:56price has fallen down or simply it
12:59happens after a downtrend. The
13:01accumulation phase can also be viewed as
13:04an area of low volatility or an area
13:07where there is a lack of interest
13:09between the bulls and the bears. Moving
13:12on to uptrend or the advancing phase.
13:15This stage occurs usually after the
13:18price breaks out of the accumulation
13:20phase. Here's what happens in the
13:22uptrend or the advancing phase. After
13:25building up the positions, the
13:27institutions take the market higher. So
13:30there is a bullish sentiment in the
13:32market all along. The institutions will
13:35not book profits anytime soon. So the
13:38uptrend can last anywhere from months to
13:41even years. It is during this phase that
13:44the trend traders make a lot of profit.
13:47We will discuss on how to identify an
13:50uptrend and how to approach your trades
13:53during an uptrend in our upcoming
13:55videos. But now let's move on to the
13:58third phase which is the distribution
14:00phase. The distribution usually occurs
14:03after the prices have rised to a good
14:06extent and the distribution phase looks
14:09similar to an accumulation phase where
14:12the market remains in a range. Here's
14:15what happens in the distribution phase.
14:18The institutions begins to distribute or
14:21sell or square off their positions after
14:24they have made a good chunk of profit on
14:27their initial investments. Similar to
14:29the accumulation phase, the institutions
14:32sells the shares secretly and slowly so
14:35that the market doesn't fall immediately
14:38creating a panic situation. So they will
14:41sell at a range of target prices and
14:44that is why the distribution phase is
14:46also rangebound and the trend traders
14:50don't stand a chance if they don't adapt
14:52suddenly. In the distribution phase, the
14:55volatility tends to be high due to the
14:57panic of an imminent crash or fall in
15:00the prices. The last and the final phase
15:03is the downtrend or the declining phase.
15:06The declining phase happens when the
15:09price breaks down of the distribution
15:11phase. During this phase, the selling
15:13pressure is high and the market outlook
15:17is bearish. Most traders try to cut
15:20their losses and those who don't, well,
15:23they remain as long-term investors in
15:26the hope that the price will come back
15:28up. The volatility tends to be very high
15:32due to panic and fear in the market. So,
15:35this is a good time for trend traders
15:38who can short the market and get hold of
15:40good profits. This is how the phases
15:44look like in a chart. And it is
15:46interesting to note that these stages
15:49continue to appear time and time again
15:52as cycles. And if you could spot them
15:55early, then you have an edge over the
15:58market and eventually you can use a
16:00suitable strategy that works in the
16:03situation. We will talk about different
16:06trend trading and range trading
16:08strategies in detail in the upcoming
16:11videos. And we will also understand how
16:13to design your trading strategy
16:15according to changing market conditions.
16:30In this age of social media, we come
16:32across innumerable apps like Tik Tok,
16:35Instagram, etc. where the creators
16:38introduce a new idea every day and some
16:40becomes so hyped and popular that others
16:44begin to perform the act. It becomes a
16:46trend or the act is said to be trending.
16:49Even YouTube has a trending section that
16:52features the most popular videos at a
16:54specific time. This trend stays for a
16:57short duration that is for a few days to
17:01a few weeks. So this is a short-term
17:03trend. Similarly, the stock markets also
17:07have trends that may range from
17:09short-term trends to medium-term trends
17:12to even long-term trends depending on
17:14the duration which the trend persist in
17:17the market. So, in the stock market
17:20scenario, a trend is the overall
17:22direction of the market during a
17:24specified period of time. In the stock
17:27market, there are mainly three types of
17:30trends. Number one, the uptrend. number
17:34two downtrend and number three sideways
17:37trend. There are different methods to
17:39identify the general trend of the
17:41market. But the most popular ones are by
17:44using the trend lines for visualizing
17:46the price swings and the other method
17:48includes the use of indicators like
17:51moving averages, average directional
17:53index etc. But we will limit our
17:56discussion to only the first method. The
17:59simple reason being this is a price
18:01action course and we want to trade with
18:03cleaner charts and minimum confusion.
18:06Before moving on further, let me talk
18:08about a situation where there are three
18:11stock market participants. An investor,
18:14a swing trader and an intraday trader.
18:17If I ask them what is the present market
18:20trend, do you think all of them will
18:22have the same answer? Not necessarily.
18:24investor could say it's a bullish market
18:27while the intraday trader would say it's
18:30bearish trend. Even the swing trader can
18:34say there is no trend at all or the
18:36market is sideways. What is the reason
18:39for different opinions? Why do different
18:42people have different views on the
18:44market trend given the same charts and
18:46same conditions at the same instance?
18:49The simple and straightforward answer is
18:52the time period that each trader use for
18:55their analysis. The investor might
18:58conduct his analysis on the monthly or
19:00yearly time frames while the swing
19:02trader might be using the weekly or
19:05daily time frames. And for an intraday
19:07trader, the time frame might be 15
19:10minutes or 5 minutes. Therefore, as the
19:13time frame changes, the analysis
19:16changes. So does the perspective on the
19:19market trends. So this is my first
19:22conclusion that trends are relative in
19:25nature that is trends are dependent on
19:28time frames and it change with time
19:31frames. There is a common saying in the
19:33market that trend is your friend. I will
19:36try to bring clarity as to why this
19:38statement is relevant for our trade
19:41success.
19:43In the last episode, we have talked
19:45about the four different phases or
19:48stages of the stock market price
19:50movement. Now, let us analyze in detail
19:53how the price moves. For that, let's
19:57take an example of a rubber ball for
19:59instance and let's bounce the ball once.
20:02The ball would not just take off and go
20:05out to space, right? It will come back
20:07to the ground and bounce back up.
20:09Similarly in the stock market also the
20:11price does not move indefinitely up or
20:14down. There will be direction changes
20:16once in a while. This nature of price
20:19oscillation is called as price swings. A
20:22typical price swing will consist of an
20:24impulse move and a corrective move. The
20:27impulse move is the strong move with
20:30stronger price action candle. While the
20:32corrective moves in a trend are
20:34generally weak or dull moves opposite to
20:37the direction of impulse move. Moving
20:40on, let's understand this by taking up
20:43each of the trend types and learning how
20:45to draw the trend line for analysis. By
20:49definition, uptrends are marked by
20:52rising data points such as higher swing
20:54highs and higher swing lows. So here the
20:57price moves up in such a way that the
21:00swings also move up making a
21:02recognizable pattern. During an uptrend,
21:04the impulse move is a strong up move
21:07with a series of strong bullish candles
21:09which forms a higher price than the
21:12previously formed high. The impulse move
21:15is followed by a corrective move in the
21:18opposite direction of the prevailing
21:20bullish trend. The corrective move
21:23usually includes a lesser number of
21:26weaker candlesticks that forms a lower
21:29price, but this lower price is still
21:31higher than the previous lower price
21:34formed. The corrective moves are
21:36generally due to profit booking by some
21:38traders. As a rule of thumb, a trend can
21:41be confirmed as an uptrend only when the
21:44price has made at least two swings on
21:46the upside. After finding out all the
21:49higher lows, all we have to do is to
21:52draw a line connecting all the swing
21:54lows or the higher lows that we have
21:56plotted. This line connecting a series
21:59of higher lows creating a support level
22:02for future price movement is called as a
22:05trend line. It is from the vicinity of
22:07this trend line that future price
22:09movements would reverse or break out and
22:12therefore it is a very important trading
22:14zone or an area of value. The trend line
22:17is an area from which we can trade the
22:20impulse swing moves or simply we can
22:22place a buy order when the price reaches
22:25the trend line. After identifying all
22:27the higher highs, we can draw a line
22:30connecting the series of higher highs or
22:32swing highs that we have plotted. And
22:34this line is called as the trend channel
22:37line which will act as an area of
22:40resistance for the prices. And we can
22:42trade the corrective moves from the
22:44trend channel line or simply we can
22:47place a sell order when the price
22:49reaches the trend channel line. Coming
22:51to downtrends by definition these are
22:54marked by falling data points such as
22:58lower swing lows and lower swing highs.
23:01In a downtrend the price moves down in
23:03such a way that the swings also move
23:06down making a recognizable pattern. So
23:09during a downtrend, the impulse move is
23:12strong in the downward direction with a
23:14series of strong bearish candlesticks
23:17which forms a lower price than the
23:19previously formed low. The impulse move
23:22is followed by corrective moves in the
23:25direction opposite to the prevailing
23:28bearish trend. The corrective move
23:30usually includes a lesser number of
23:32weaker or dull candlesticks that forms a
23:35higher price. But this higher price is
23:38still lower than the previous formed
23:40high. So the corrective move is
23:42generally due to profit booking by some
23:44traders who took a short trade earlier
23:47in the trend. So a trend can be
23:50confirmed as a downtrend. Only when the
23:53price has made at least two swings on
23:55the downside that is two impulse move
23:58and two corrective moves should be
24:00there. Now after plotting all those
24:03lower high points we can draw a trend
24:06line connecting all the swing highs or
24:08the lower highs that we have plotted.
24:10The trend line so found acts as an area
24:13of resistance from which we can trade
24:15the impulse move to the downside or
24:18simply we can place a sell order when
24:21the price reaches the trend line. As in
24:24the previous case, if we plot the lower
24:27lows and then draw a line connecting all
24:30these lower lows, we will get a trend
24:33channel line which will act as a support
24:36for the future prices. And it is from
24:39this trend channel line that we can
24:41place buy orders to trade the corrective
24:45move. So by now you might have the
24:47realization that the corrective moves
24:49are weak moves opposite to the existing
24:52trend while the impulse move happens in
24:55the direction of the trend and is
24:57generally a series of stronger candles.
25:00This is the reason why we should trade
25:02the impulse move during trending market
25:05so that the probability of profit is
25:08high. This is the reason why trend is
25:11your friend. As we move on, it is very
25:15important to understand when a trend
25:17will end and when the consolidation will
25:21start. This can be identified by the use
25:24of swing transition. During an uptrend,
25:27whenever the price breaks the higher low
25:31for the first time, then it is an
25:33indication that there is a transition in
25:35the uptrend.
25:38Similarly, when a price breaks the lower
25:41highs in a downtrend, it indicates in
25:44the transition from downtrend to a
25:47sideways trend or even an uptrend. The
25:50final type of trend is not actually a
25:53trend but it is a situation where there
25:56is no clear trend in the market where
25:58the market stays inside a range. We have
26:02talked about ranging stages of the
26:04market as accumulation phase and
26:06distribution phase. So the price
26:08movement between two price levels is
26:10called as sideways trends. There are
26:13three types of sideways trends. Number
26:15one is the range contraction. Number two
26:18is the range expansion and the last one
26:21is the triangular range. Let's talk
26:25about range contraction first. During
26:28range contraction, the levels shrink and
26:31the price action becomes almost neutral
26:34or flat. This shows the lack of any
26:37interest between buyers and sellers. The
26:40volatility in the market also drops. So
26:43range contraction happens when there is
26:46a shortening of the price bars or simply
26:49the candlestick sizes reduces. The high
26:52and low range or levels get narrower or
26:56closer to each other and this is a
26:58strong indication that a trend reversal
27:01is coming soon. That is if there was a
27:04prior downtrend now the trend might
27:06change to an uptrend but it is just an
27:09indication. It is not for sure. During a
27:12range expansion as the name suggest the
27:16levels will expand and the price action
27:18starts becoming visible. So range
27:21expansion is associated with lengthening
27:23of the price bar or the size of the
27:25candlesticks becomes larger and the high
27:28and low range or the levels gets wider.
27:32So range expansion usually indicates a
27:35continuation in the price pattern that
27:37is if there was a prior uptrend it is an
27:41indication that the uptrend might
27:43continue in the future but it is not for
27:46sure. Now the final type of sideways
27:49trend is the triangular range where the
27:52price shrinks or expand not between two
27:55fixed horizontal levels but rather an
27:58expanding or converging level. This is a
28:01topic which needs broader discussion. So
28:03we will talk about triangle patterns and
28:05how to trade them further forward in
28:08this course. Even though the trend lines
28:11do a good job of showing overall market
28:13direction, one issue with trend line is
28:16that they often need to be redrawn. For
28:19example, during an uptrend, the price
28:21may fall below the trend line. But this
28:23does not necessarily mean that the trend
28:25is over or there is a breakdown. The
28:29price may move below the trend line and
28:31then continue rising. So in such an
28:34event we have to adapt ourselves and the
28:37trend line needs to be redrawn to
28:40reflect the new price action.
28:44Drawing the trend lines is easy but
28:46there can be errors in drawing the trend
28:49line. So that is why just using trend
28:52lines exclusively to determine the trend
28:55is not really advised because most
28:58professional traders also tend to look
29:00at other indicators like moving averages
29:03or average directional index to confirm
29:06the market trends because the more the
29:09confirmations the better the analysis.
29:12So it's finally time for the most
29:14important part of the video that is
29:16identifying the strength of a trend. So
29:20generally trends can be categorized into
29:22two types depending on the strength that
29:26is there can be a strong trend or there
29:28can be a dull or weak trend.
29:31The main parameters to keep in mind
29:34while categorizing the trends based on
29:36their strength includes a few
29:38parameters. Number one is at least two
29:42or more swings has to be there or there
29:45should be two or more points of contact
29:48in the trend line. Then only a trend is
29:51considered to be valid. Number two is
29:54the slope. So the slope of a trend
29:57indicates how much the price should move
29:59each day. So steeper the slope, the
30:03better the trend. The slope is simply
30:05the angle between the critical price
30:07level during a consolidation and the
30:10trend line. So if it was an accumulation
30:13phase and the price breaks out to an
30:16uptrend, if we take the angle between
30:18the trend line and the top price level
30:21of the accumulation phase, then we can
30:24easily find out the slope of the trend.
30:26So if the trend is too flat, strength is
30:29considered to be weak or dull. The third
30:32parameter is the time of the trend. It
30:35is actually about the time required to
30:37form a trend. If the trend took months
30:41to form, then it is considered to be
30:43more stronger than a trend which took
30:46just weeks or days to form. So more the
30:49time a trend takes to form, the more
30:51stronger it is. We can also categorize
30:54the trend based on the duration like it
30:56could be a short-term trend, an
30:58intermediate trend or a long-term trend.
31:01The longer the trend remains, the
31:04stronger it is. So these are a few
31:06parameters to identify the strength or
31:10the weightage of a particular trend.
31:26In this video, you will learn how to
31:29read candlestick patterns like a
31:31professional trader. This is even if you
31:33have no experience with candlesticks
31:35patterns beforehand. And here's the good
31:37thing. I will explain a simple method to
31:40read the candlestick patterns without
31:42memorizing a single pattern. That's
31:45right. You don't need to buy heart any
31:47of these patterns. So let's get started.
31:51Candlesticks are a way to show the
31:53market prices of a security on your
31:56chart. It's not the only way to
31:58represent it. We have other ways of
32:00plotting them like bar chart, line
32:02chart, etc. But the candlesticks are one
32:05of the more popular approaches. The
32:07candlestick usually consist of two
32:10parts, a real body and shadows or wicks.
32:15Also, when you're dealing with
32:17candlesticks, you must be aware that
32:19there is a four price point for every
32:22candle on the chart. These price points
32:25are the opening price, the high price,
32:28the low price, and the closing price for
32:30the same period or simply we call them
32:32as OLC.
32:34The real body of the candlestick shows
32:37the open and close prices while the
32:40shadows on the top and the bottom of the
32:42body shows the high and low prices for
32:45that particular period. The shadows
32:48looks like wicks and hence they are
32:50called as candlesticks.
32:52The upper wick signifies the high of the
32:56period and the lower wick signifies the
32:59low of the period. The high is the
33:01highest price point of the candle at a
33:03particular time and the low is the lower
33:06price point of the candle at a
33:08particular time depending upon the time
33:10frame you're trading on. Candlesticks
33:12generally have two popular colors, green
33:15and red. Sometimes it might be white and
33:18black depending on the settings that you
33:20use, but most commonly it's green and
33:23red. And a very important feature is
33:26that for green and red bars or candles,
33:29their opening and closing prices are at
33:31different locations.
33:34The color of the body of the
33:35candlesticks determines if the
33:38candlestick is showing a bullish or
33:40bearish price moment. That is if the
33:43opening price is less than the closing
33:46price, then the body of the candlestick
33:48is green or white. Similarly, if the
33:52opening price is more than the closing
33:55price, then the body of the candlestick
33:58is red or black. The longer the real
34:02body, the more bullish or bearish the
34:04candle is. There are so many candlestick
34:08patterns out there ranging from
34:10engulfing candlesticks, shooting stars,
34:13hammers, spinning tops, dogeis, etc. to
34:16name a very few. So if you were to learn
34:19all these patterns, it would seem very
34:21hard and confusing. But don't worry
34:24because we have got an easier way to
34:26understand what each candlestick means
34:28and identify the strength or priority of
34:31each of them. To learn this method, all
34:34you have to understand is just two
34:36little things. Number one is the open,
34:39high, low, close or the OLC of the
34:42candles. And number two is to figure out
34:45who is more dominant in the market
34:48whether it is the bulls or the beers or
34:50simply the buyers or the settlers at a
34:52particular time period. Let's start our
34:55discussion on the first category of
34:57candlesticks. These candlesticks are
34:59called as marbosus. Let's look at the
35:02first type. Since the candle is a green
35:05one, it is a bullish candle. It has a
35:07big real body but has no wicks or
35:09shadows on either the upper or the lower
35:12end. So we know that the longer the real
35:15body, the more bullish the candle is.
35:17The OHLC of the candle is as follows.
35:20Since it is a bullish candle, the buyers
35:22are under control. So the closing price
35:25is greater or higher than the opening
35:27price. Since there are no weeks on
35:29either side, the high and low prices
35:32coincides with the close and open prices
35:35respectively. As a rule of thumb, the
35:38wick of a candle indicates price
35:40rejection or opposition by the opposite
35:43party. In case of a bullish marabosu,
35:46the open and low prices coincides and
35:49similarly the high and close price
35:51coincides which means that there is no
35:54selling pressure from the bears. That
35:56brings us to the conclusion that bullish
35:59marbus are the strongest bullish candles
36:02we can find on a chart. But we have to
36:05be very flexible with patterns. That is
36:08we have to first quantify and verify
36:11because in the market the patterns
36:12generally don't occur exclusively the
36:15same way as it is mentioned in those
36:17textbooks. So let's look at this green
36:20candlestick pattern where the price has
36:22closed higher for the period. It has
36:24opened lower and closed higher which
36:27means it is a bullish candlestick. And
36:29there is a small lower wick and a small
36:32upper wick. But the high and low prices
36:34are so close to the open and close
36:37prices. Which means there is a very weak
36:39selling pressure from the bears. So in
36:41real market conditions, we can actually
36:43consider these candles as bullish
36:46marobosus because even though there was
36:48a slight selling pressure, it is still a
36:51strong bullish candle. Now moving on to
36:53bearish marabosu which is similar to the
36:55bullish marobosus but this pattern is a
36:58strongest bearish pattern. For a bearish
37:01candle the open prices are higher than
37:04the closing prices. This is because the
37:06sellers are willing to sell at all the
37:09available prices. A bearish marobosu
37:11also indicates that there is so much
37:13selling pressure in the that the
37:15participants actually sold at every
37:18price point during the day. So much so
37:20that the stock close near the low point
37:23of the day. In case of a bearish
37:25marabosu, the high price and the open
37:28price coincides while the low and
37:30closing prices coincides. The candle has
37:33a big rail body with no wicks on either
37:36end indicating a strong selling and a
37:39complete lack of buying or of position
37:42from the bulls. As mentioned earlier, we
37:45can be a little bit flexible when
37:48trading in real markets. Now, let's look
37:51at the second category of candlesticks,
37:53the pin bars. The first category of pin
37:56bars are the hammers and hanging man.
37:59Talking about hammers, a pin bar is said
38:02to be a hammer when it appears at the
38:05bottom of a downtrend. The hammer
38:07consists of a small real body at the
38:10upper end of the trading range with a
38:12long lower shadow. The longer the lower
38:14shadow, the more bullish the pattern is.
38:17Generally, the prior trend for a hammer
38:20should be a downtrend. As mentioned, we
38:22should visualize the hammer pattern in
38:25the following manner. The market is in a
38:28downtrend. So, bears are in absolute
38:31control over the markets. When a hammer
38:33forms, the price goes even lower and it
38:36forms a new low price. The price action
38:39of hammer formation indicates that the
38:41bulls attempted to break the prices from
38:44falling further down. Which simply means
38:46that the bears tried to bring the market
38:49lower. But they did not succeed in their
38:52attempt to do so because the bulls
38:54generated a lot of buying pressure so
38:57much so that the price closed near the
38:59open of the candle. This action by the
39:02bulls has a potential to change the
39:03sentiment in the stock. So we can say
39:05that hammer is a reversal pattern and a
39:08hammer pattern could indicate a bullish
39:11reversal in the market. Now moving on to
39:14the hanging man. A pin bar is set to be
39:16a hanging man when it appears at the top
39:19of a trend. Similar to the hammer
39:21pattern, the hanging man is also a
39:24reversal pattern except the fact that it
39:26is a bearish reversal pattern. A hanging
39:29man signals the market high. Here's how
39:32you should visualize the hanging man
39:34pattern. The market is in an uptrend.
39:36Hence, the bulls are in absolute control
39:38over the market. A hanging man at the
39:41top of the trend indicates that the
39:43bears have managed to make an entry.
39:46This is emphasized by the long lower
39:48shadow of the hanging man which
39:50signifies that bears have tried to break
39:52the stronghold of the bulls because the
39:54bulls tried to push the prices higher
39:57but the bears managed to bring in so
39:59much selling pressure that the price
40:01closed closer to the open price creating
40:04a small real body. And there is a high
40:07probability that the market trend would
40:10reverse and the hanging man pattern is a
40:12good indication that bearish sentiment
40:14is about to prevail in the market and it
40:17is a good time to short the stocks. Now
40:20the second category of pin bars goes by
40:23the name of shooting stars or inverted
40:25hammers depending on where it is formed
40:28on the chart. Talking about an inverted
40:30hammer generally occurs at the end of a
40:33downtrend. This is the weakest bullish
40:35candle that you can find in the market.
40:38We can see that the range of the candle
40:40or the real body is very small. Also,
40:42the open and closing prices are close to
40:45each other. The long wick suggests that
40:48the bulls tried to take the price
40:50higher, but there was a big selling
40:52pressure by the bears. So, it indicates
40:54that the weak buyers are in control of
40:57the market and there can be a shift in
40:59the sentiment. So we can say that even
41:03though a green candle was formed, the
41:06sellers are actually in control of the
41:08market. The inverted hammer is generally
41:11accepted as a price reversal candlestick
41:14pattern just like the hammer where the
41:16trend shifts from a downtrend to an
41:18uptrend. But if you were to ask me which
41:21signal would you trade the hammer or the
41:23inverted hammer, I would definitely go
41:25for the hammer pattern because the
41:27hammer pattern gives a much stronger
41:29indication of a trend reversal than an
41:32inverted hammer pattern. This is also
41:34due to the difference in selling
41:36pressures in both these cases. Now
41:38moving on, a pin bar is set to be a
41:40shooting star when it occurs at the end
41:43of an uptrend indicating a price
41:45reversal. Similar to an inverted hammer,
41:48it also has a real body with the open
41:50and close prices close to one another.
41:53It also has a large wick on the upside
41:55indicating that the bulls tried to bring
41:58the price up but they were overpowered
42:00by the bears who pushed the price below
42:03the open price. So the shooting star is
42:05a strong bearish pattern. It is stronger
42:08than the hanging man pattern that is
42:10formed in the uptrend. This is because
42:12the sellers were more in control when
42:14the shooting star was formed rather than
42:17during a hanging man pattern. Now let's
42:19move to the third category of
42:21candlesticks. We can clearly see that
42:23the candles have a small real body. A
42:26small real body indicates the open and
42:28close prices are quite close. As we have
42:31discussed so far, the upper and the
42:33lower shadows are almost equal in
42:35length. Since the open and close prices
42:39are close to one another, the color of
42:40the candle doesn't really matter. Now,
42:42talking about the upper shadow, the
42:44presence of the upper shadow tells us
42:46that the bulls did make an attempt to
42:49take the market higher. However, they
42:50were not successful in their attempt. If
42:53bulls were truly successful, then the
42:55real body would have been a long green
42:57candle as seen before in case of
42:59marabosus. Hence this can be treated as
43:02an attempt by bulls to take the market
43:04higher but they were not successful at
43:07it. Similarly the presence of lower
43:09shadow tells us that the bears did
43:11attempt to take the market lower.
43:13However they were not successful in
43:15their effort. If they were really
43:17successful then the real body would have
43:19been a long red candle as in case of a
43:22bearish marabosu. Hence the bears
43:25attempt to take the market lower can
43:27also be treated as an attempt which was
43:30not successful. So here neither the
43:32bulls nor the bears could establish an
43:35influence or a superiority in the market
43:38which is evident from the small real
43:40body. What this means is that there is
43:43an indecision between bulls and bears.
43:46They are not able to clearly influence
43:49the market direction. So this type of
43:51candlesticks is called as spinning tops
43:54which are actually indecision
43:56candlesticks. Now let us consider two
43:59situations where spinning tops can be
44:01formed and let us discuss what the
44:04outcomes are. Now what if the spinning
44:06tops were to occur in a downtrend. So
44:08during a downtrend the bears are in
44:11absolute control as they are able to
44:14take the prices lower. A spinning top in
44:17the downtrend indicates that the bears
44:19could be consolidating their position
44:21before resuming the trend. It can also
44:24be seen as an attempt by the bulls to
44:26arrest any further price war. But are
44:28they really successful? Because if the
44:30bulls were to be really successful, it
44:33would have resulted in a strong bullish
44:34candle rather than a spinning top. So
44:37clearly there are two foreseeable
44:39situations or outcomes with equal
44:41probability in this case. Number one,
44:43either there will be another round of
44:45selling and the market will continue
44:47with its slow or number two the markets
44:50could reverse its directions and the
44:52prices would increase. As a trader, you
44:54need to be prepared for both the
44:56situations that is for either a reversal
44:58or a continuation. An obvious situation
45:00persist in the uptrend also. Now lastly,
45:04let's talk about the dois. So doies are
45:07similar to spinning tops except that it
45:10does not have a real body. This means
45:12the open and closing prices are equal.
45:15So dogee is an important candlestick
45:17pattern as it provides very crucial
45:19informations regarding the market
45:21sentiment. By a textbook definition,
45:24Dogee suggests that the open price
45:26should be equal to the close price which
45:28indicates that the real body does not
45:30exist. The upper and the lower wicks can
45:33be of any length and the color of the
45:35candle does not really matter because
45:37the prices are very close to each other.
45:40The dogeis have similar implications as
45:42spinning tops as we have discussed just
45:44now. So whatever we have learned from
45:47spinning tops applies to dois as well.
45:51Dogee also conveys indecision in the
45:53market meaning that the bulls and bears
45:55are confused whether to take a trade.
45:58Both dois and spinning tops ask the
46:01trader to remain cautious in the market.
46:04There are a lot of other candlesticks
46:06but those mentioned so far is enough to
46:09understand the idea of similar
46:11candlesticks that forms in the chart.
46:13Now let us arrange the candlesticks from
46:16strongest to the weakest. So first of
46:19all we'll consider the bullish candles
46:21and arrange them in the order of their
46:24strength.
46:28Moving
46:40on, let us arrange the bearish
46:42candlesticks in the order of their
46:44strength from strongest to weakest.
47:00A gentle reminder at the end of the
47:02video would be not to trade these
47:04candlesticks in isolation because more
47:07the confirmations the better. The key
47:10thing that I'm trying to bring across is
47:12that you understand what each individual
47:14candlestick pattern mean and afterwards
47:17you can use these tools and techniques
47:19that you have learned and make it a part
47:21of your trading plan when you consider
47:23different elements of price action which
47:25we are going to learn in the upcoming
47:28episodes of this training.
47:42In today's episode, our discussion will
47:44focus on one of the hot topics in this
47:47price action course. The simple reason
47:50being this topic is what helps a price
47:53action trader identify the critical
47:55price levels and decide with the entry
47:57targets and stop- losses. The support
48:00and resistance are one of the key
48:02factors that distinguish between your
48:05success and failure in trading. Starting
48:07off, the support and resistance are
48:10specific price points on a chart which
48:13is expected to attract maximum amount of
48:16either buying or selling. The support
48:19price is a price at which one expect
48:22more number of buyers than sellers.
48:25Likewise, the resistance is a price at
48:27which one expect more sellers than
48:30buyers. So, as the name suggest, the
48:33resistance is something that stops the
48:35price from rising further. This is a
48:38textbook definition that you can find in
48:41any standard trading book. Let's dig
48:44deeper into this topic. Let us
48:46understand why some price points behave
48:49in this particular manner. We have
48:51talked about the fact that stock market
48:53runs on demand and supply. This very
48:57concept is what causes some price levels
48:59to behave as a barrier or some as a
49:02booster for the prices. Take an example
49:05of a stock trading at 125 rupees. Let us
49:09say that an institution thinks that the
49:12stock will do good in the upcoming
49:14quarters but the fair price is 100
49:16rupees and not 125 rupees. In order to
49:20achieve the fair price, they take the
49:22market down to 100 rupees where they
49:25slowly and steadily build their
49:27positions. The price seems to respect
49:30the price level of 100 rupees. This
49:33level where the demand for the stock is
49:35met and from where the prices will start
49:37to rise is called as the support level.
49:40The support level can also be seen as a
49:43price level which holds the prices from
49:46falling further down. It is also an area
49:49where the big buyers will buy the stock.
49:52Due to a large number of buy orders at
49:54the support level and the lack of
49:56sellers to match all the orders, the
49:59price starts rising from the support
50:01level. A price level is set to be a
50:05support level when it is below the
50:07current market price. Now moving on with
50:10the same example. The price rallied from
50:13100 rupees to 200 rupees in a matter of
50:16months. This is when the institution
50:19thinks of squaring off their position or
50:21selling the stock to make a profit. They
50:24do this by placing a large number of
50:26small sell orders so that the supply
50:29meets the demand or in other words they
50:31ensure that there are enough buy orders
50:34at the same price at which they want to
50:36sell so that the profits are not
50:39reduced. This particular price level
50:42will look like it is stopping the prices
50:44from moving further up. So this level is
50:47known as the resistance level. The
50:50number of sell orders in this price
50:53level is higher than the number of buy
50:55orders or the supply is higher than the
50:58demand due to which the prices start to
51:01fall from this level. A price level is
51:04set to be a resistance level when it is
51:06above the current market price. As a
51:10trader working in any time frame, it is
51:13important to figure out the critical
51:15levels where there was some price
51:17action. By identifying the important
51:19price levels, you can make more
51:21successful trades using the price action
51:24technique. Let us learn how to draw
51:26supports and resistance in our chart by
51:29a simple four-step process. In short,
51:31these four steps are loading the data
51:34points and zooming out, identifying the
51:37obvious price action zones, aligning the
51:41zones and fitting a horizontal line. Now
51:44we can take a look at each of them. Step
51:47one is to load the data points and zoom
51:50out. After selecting your preferred time
51:53period for the trades, you want to zoom
51:56out your charts. This is because we want
51:58to see the bigger picture. Once you can
52:00see the big picture, it is much more
52:02obvious to your eyes which key levels
52:05should you be paying attention to. So if
52:08your objective is to identify the
52:10shortterm support and resistance for
52:12intraday trading, then you must load at
52:16least 3 to 6 months of data points. And
52:19if you want to identify the long-term
52:21support and resistance for swing or
52:24positional trades, load at least 12 to
52:2718 months of data points. So when you
52:30load more number of data points, the
52:32chart looks more compressed. Moving on
52:35to the second step, we have to identify
52:38the obvious price action zones. A price
52:41action zone can be described as sticky
52:44points on this chart. This is because
52:46the level sticks out or is easily
52:49visible to your naked eyes. So if the
52:51level sticks out, the level matters or
52:54it is a level of importance. But if you
52:56are doubting your eyes and asking if it
52:59is a level or not, then it's better to
53:02ignore it because it is not an important
53:04level. Just to give you better clarity,
53:06you can identify a critical level when
53:09the price has displayed at least one of
53:12the following behaviors. That is number
53:14one, the price hesitates to move up
53:17further after a brief up move. And
53:20number two, the price hesitates to move
53:23down further after a brief down move.
53:26And finally, number three, when sharp
53:28reversals occurs at a particular price
53:31point. These are some of the ways you
53:33can figure out the price action zones.
53:36Now, moving on to step number three,
53:38aligning the price action zones. Now
53:40when you look at a 12 to 18 month chart,
53:43it is very common to spot many price
53:46action zones by the method that we have
53:48just discussed. But we don't have to
53:50track down all these price levels. The
53:52trick is to identify at least three
53:55price action zones at the same price
53:58level. But a critical point to note
54:00while identifying these price action
54:02zones is to make sure that these price
54:04zones are well spaced in time. Meaning
54:07there should be a good time difference
54:10between the two levels spotted. The more
54:12the distance between the two price
54:14action zones, the more powerful the
54:16support resistance identification or we
54:19can say the support or resistance is a
54:21major price level. Now after identifying
54:25and aligning your price action zones, we
54:27move on to the step number four that is
54:30fitting a horizontal line. Connect the
54:32price action zones that we have
54:34identified with the horizontal line.
54:36After drawing the line, you have to
54:38adjust your level to get the maximum
54:41number of touches. The more touches, the
54:44better because the more number of
54:46touches, the stronger the price level
54:48will act as a major support or
54:50resistance.
54:52So, how do you tell that you have drawn
54:54a support or you have drawn a
54:55resistance? As we have discussed, if the
54:59market price stays above the level that
55:02we have drawn, it acts as a support.
55:06Similarly, if the market price is below
55:09the level that we have drawn, then it
55:11will act as a resistance. Here's an
55:14important mistake that most traders make
55:16while plotting the support resistance
55:18levels. The approximation risk.
55:22Generally, when identifying the support
55:24resistance, you run into approximation
55:27risk. The thing to understand is that
55:29the market will not respect just a
55:32single price level but rather a group of
55:35corresponding price levels or an area of
55:38prices. So hence we have to give a room
55:42for error which means that the price
55:44level should be depicted in a range and
55:47not just as a single price point which
55:50simply means that rather than drawing a
55:53single line to plote the support
55:54resistance we should represent it as a
55:57zone or an area where there is a price
56:00action happen. So this is a very
56:03important idea to remember when you are
56:05placing the targets and stop- losses
56:07while trading the support resistance
56:09levels. Especially if you are keeping
56:11stop- losses with respect to a single
56:14support or resistance line, you might
56:16end up hitting your stop- losses often.
56:20Let us talk briefly about how reliable
56:22the support resistance are. The support
56:25and resistance lines are only indicative
56:28of possible price reverses. That is by
56:31no means we can be certain that a
56:33reversal is going to happen. Which
56:36implies that support and resistance
56:38alone are not the holy grail to success
56:41in price action trading. Rather, a few
56:44optimization techniques will help us
56:47identify highquality trades. Remember
56:49the fact that when you see quality, the
56:52quantity will always be compromised. But
56:54this compromise is worth taking. The
56:57idea is to identify quality trading
57:00signals as opposed to identifying plenty
57:03of worthless trades and ending up
57:05bursting your pockets. This leads to an
57:08important idea. So what if we have a
57:11checklist or a framework for every trade
57:14that we consider? The checklist would
57:17act as a guiding principle before we
57:19initiate the trade. The trade should
57:21comply with the conditions specified in
57:23the checklist. If it does, we take the
57:26trade. Else we drop it and look for
57:29another trade opportunity that complies
57:31with the checklist. Not only that, we
57:34should not make a habit of just trading
57:37with a single confirmation. That is if
57:39the price reaches a support or
57:41resistance, we should not jump into the
57:43conclusion that the price would reverse
57:45the direction and we should enter the
57:47trade. Does not work like that. Instead,
57:49what we should do is that we should look
57:51for confirmations. In the previous
57:54episode, we have talked about price
57:56action candles which are very important.
57:59It is generally a very good idea to use
58:01some of these price action candles along
58:04with the supports and resistance to
58:05actually make a trading system that is a
58:08confluence trading system which is much
58:10more efficient than using a single
58:13indication or a single confirmation. So
58:15make your own system and create a
58:18checklist because the checklist has
58:20another advantage. It helps you to be
58:22disciplined because discipline as they
58:24say makes up 80%age of the trader
58:28success. So in my opinion the checklist
58:30forces you to be disciplined. It will
58:33also help you to avoid taking an abrupt
58:36and reckless trading decision. So we
58:39will continue this discussion on support
58:41resistance in the upcoming episodes
58:43because it is an extensive topic
58:46requiring a deeper understanding.
58:59In the previous episode, we have
59:01discussed the basic stuff regarding
59:03supports and resistances. In this video,
59:06we will go a step further seeking the
59:08depths of support and resistance levels.
59:11We will talk about how to identify if a
59:14level will break or not. how to approach
59:16our trades using supports and
59:18resistances. That is if we should trade
59:21a breakout or should we trade a reversal
59:24and finally we will learn to find trades
59:26that other traders fail to notice. Let's
59:29get started right away without wasting
59:31any time.
59:33The first and foremost question is how
59:35to identify when a support or resistance
59:38will break. to get started. When you see
59:41a series of higher lows into a
59:44resistance, you want to avoid selling at
59:46the resistance. The reason is very
59:48simple. Let me give you an example.
59:50Let's say you have a huge hammer in your
59:52hands and it's really powerful. And
59:54right in front of you, there is a brick
59:56wall. Now, you take the hammer and smash
59:59against the wall many times over and
1:00:02over again. Now, let me ask you, will
1:00:04the brick wall hold or is it likely to
1:00:06break? Well, common sense tell you that
1:00:08the brick wall is likely to break. And
1:00:11this is exactly the same concept. When a
1:00:14resistance level is tested multiple
1:00:16times within a short period of time, the
1:00:18chances are the resistance will break.
1:00:22Now, I'm not 100% sure that it is going
1:00:24to break because no one can be 100% sure
1:00:28in trading, but the odds of resistance
1:00:31breaking are high. And likewise, when
1:00:33you see a series of lower highs into the
1:00:36support, the chances are the support
1:00:38level is going to break. This is because
1:00:41the prices hit the support level
1:00:44multiple times in a short duration of
1:00:46time. We will expand this idea further
1:00:49in this video when we will talk about
1:00:52breakout trades. Moving on to the most
1:00:54important question, how to find the best
1:00:57support and resistance areas to trade.
1:01:00We can approach this question with two
1:01:02trade ideas. The breakouts or the
1:01:04reversals. We will understand when one
1:01:07should take a breakout trade and when to
1:01:10take a reversal trade. Now let's start
1:01:12with the idea of trading reversals. The
1:01:15most important question associated with
1:01:18this type of reversal trade is how do
1:01:20you know that a particular level is
1:01:23likely to hold? Only if the support or
1:01:26resistance level holds can you enter a
1:01:28reversal trade. Otherwise, you will end
1:01:30up in the wrong side of the trade and
1:01:32you will incur losses. In order to trade
1:01:35reversals, I want to share with you a
1:01:37few tips to bear in mind. The first and
1:01:39foremost thing is that you want to see a
1:01:42power move or a momentum move or a
1:01:45strong move into the market structure.
1:01:48Now, what this means is that if you have
1:01:50drawn a area of support or resistance,
1:01:53you want to see a strong move into the
1:01:55level. By strong move I mean big or
1:01:59largebodied candles which in turn means
1:02:01that for an area of resistance you want
1:02:04to see a strong bullish candle coming
1:02:06into the area of resistance and in case
1:02:09of a support level you want to see a
1:02:11strong bearish candle coming into the
1:02:13support. Now this is what I mean by a
1:02:16power move or a momentum move. I know
1:02:18this sounds counterintuitive as to why
1:02:20one should trade a reversal when there
1:02:23is a strong momentum move. So you can
1:02:25ask me why do you want to sell when
1:02:27there is such a strong bullish momentum
1:02:30into the resistance and also why do you
1:02:32want to buy when there is such a strong
1:02:35bearish momentum into the support level.
1:02:37Right now don't worry because as we move
1:02:40on we will find clarity as to why I'm
1:02:43talking about this. Now the second tip
1:02:45that I have to give you is that you want
1:02:47to see a strong price rejection at the
1:02:50area of value. That is the area of
1:02:52support or resistance. You want to see a
1:02:54strong price rejection. The price
1:02:57rejection can be in form of a pin bar.
1:02:59The pin bar may be a shooting star or a
1:03:01hammer etc. The idea is to see a long
1:03:05wick where the price gets rejected from
1:03:07the particular level that we are
1:03:09considering. Let's say this in case of
1:03:12resistance. A big bullish candle comes
1:03:14into the resistance and suddenly it gets
1:03:17rejected and the stronger the rejection
1:03:19the better. And that is exactly what you
1:03:21want to see. Let's take our discussion a
1:03:24little deeper and understand it closely.
1:03:27Initially I have told that you need to
1:03:30see a strong momentum move or power move
1:03:32into the area of support or resistance.
1:03:35Let me explain why you want to see
1:03:37largebodied candles into an area of
1:03:40support or resistance. Now let's say
1:03:42when you look at the resistance and when
1:03:44you have a strong move coming to the
1:03:46resistance level at this point ask
1:03:49yourself what exactly a resistance is.
1:03:52So in the previous video we told that
1:03:54resistance is a price level which stops
1:03:58the price from moving up or simply it is
1:04:00a level where the supply is high. Now
1:04:03also think about the fact that where
1:04:06exactly will you face an opposing
1:04:09pressure or simply where do you think
1:04:11will the buyers come in so that they
1:04:13could buy at good prices. So if you
1:04:16think about a good price that the buyers
1:04:18would come in and if you look at the
1:04:20chart the chances are that buyers would
1:04:23always love to buy at an area of
1:04:25support. So it is obvious from the
1:04:28market structure that the buyers would
1:04:30wait for the price to retest or reverse
1:04:33to the particular support level so that
1:04:35they can buy or they can go long.
1:04:38Further the price rejection at the
1:04:40resistance indicates that the buyers are
1:04:43not willing to buy at higher prices and
1:04:46this is exactly the best place to
1:04:48initiate a short trade. The other reason
1:04:51being the only place where you have to
1:04:53be afraid of the buyers coming back into
1:04:56the market is the support level. The
1:04:58advantage of taking a short trade at the
1:05:01resistance is that you can leverage the
1:05:03difference between the support and
1:05:05resistance level so as to obtain a high
1:05:08reward to risk ratio. However, on the
1:05:10downside, if you don't get a strong move
1:05:12or a momentum move into the particular
1:05:15level, instead what you get is a choppy
1:05:17move with a lot of swings like this,
1:05:20then it is not a good idea to short on
1:05:22the resistance. We can ask the same
1:05:25question here also. Where will the
1:05:27opposing pressure come in? That is where
1:05:29will the buyers come in so as to get a
1:05:31good buying price? Well, this time
1:05:33around the bias could potentially be at
1:05:36these swing lows. What this means to a
1:05:39trader who is looking to short at the
1:05:41resistance is that as the price
1:05:43approaches to these swing low levels,
1:05:45you will be facing opposing pressure
1:05:48that could turn the tide against you and
1:05:50you would not get a good reward to risk
1:05:52trade. That is exactly why you don't
1:05:55want to go short when there is a type of
1:05:57stairstepping price action or a swing
1:05:59price action into your levels. The
1:06:01reason being all these swing low levels
1:06:03are opposing pressures where the buyers
1:06:06could potentially come in and push the
1:06:08price against your trade. Now, another
1:06:10reason why you want to see large candles
1:06:13or larger momentum candles into a
1:06:16particular level is a very simple idea.
1:06:18Often when there is a strong price move,
1:06:21for example, there is a strong bullish
1:06:23move into a resistance level, most
1:06:25traders just look to buy the breakouts.
1:06:28I'm pretty sure that you have done it
1:06:30yourselves, right? So when there is a
1:06:32strong moment up, you might be thinking,
1:06:34let's buy the breakout. The market is
1:06:36rallying and it will continue to rally.
1:06:38So the simple decision at that point of
1:06:40time is to buy. Now this is where the
1:06:42twist in the plot comes. Where will you
1:06:44put your stop-loss? Now because you are
1:06:46taking a breakout trade, it is pretty
1:06:49obvious that you will put your stop loss
1:06:52under the resistance or maybe in the
1:06:55middle of the range or somewhere in that
1:06:57close vicinity. What is the importance
1:06:59of this? Now what this means is that if
1:07:02the breakout fails, it is going to hit
1:07:05all these clusters of stop-loss orders
1:07:07that is placed under the resistance. And
1:07:10what exactly are these clusters of
1:07:12stop-loss orders that are waiting under
1:07:14the resistance level? They are simply
1:07:17orders to exit the market or square off
1:07:19the positions which were kept by those
1:07:22breakout traders who went long on the
1:07:24stock. This in turn means that these are
1:07:26actually sell stop-loss orders which
1:07:29will induce further selling pressure in
1:07:31the market. Now more stronger the
1:07:34bullish move is into the market
1:07:36structure. More breakout traders will
1:07:38enter the trade and there is more buy
1:07:40and more buying in turn means more
1:07:42selling stop-loss order behind the
1:07:44resistance. And if there happens to be a
1:07:47price reversal or if the price reverses
1:07:49towards the downside, it will hit all
1:07:51the sell stop-loss orders of these
1:07:53breakout traders. Another key thing to
1:07:56remember is that the longer the price is
1:07:58away from the particular level, the
1:08:00better the trade is. And why is it so?
1:08:02The thing is the longer the price is
1:08:04away from a particular level, the more
1:08:07it would attract the attention from
1:08:09higher time frame traders. For example,
1:08:11if a price has not retested to rupees
1:08:15150 level on a daily time frame for
1:08:17let's say 3 months or 6 months or even 1
1:08:20year, then you can be sure that this
1:08:22particular level can be seen on the
1:08:24weekly time frame or even the monthly
1:08:26time frame. And because of this reason
1:08:28it will attract more traders from the
1:08:30higher time frame to pay attention to
1:08:32these particular levels and that is why
1:08:34you get a strong price rejection or a
1:08:37reversal at a level which has not been
1:08:40tested for a long period of time. All
1:08:42right. Now let's learn to identify
1:08:45breakout trades. Most newbie traders
1:08:47trade more breakouts than reverses. When
1:08:50they see a strong move, they think that
1:08:52the market is going out to the space and
1:08:54they jump into buying the breakouts. In
1:08:57the next moment, there is a price
1:08:59rejection and there is a strong reversal
1:09:01in the opposite direction. And all these
1:09:03traders get caught on the wrong side of
1:09:06the trade which in turn results in
1:09:08hitting their stop- losses which forces
1:09:10the price to go even lower. Now, when do
1:09:13you trade breakouts at supports and
1:09:15resistance? This concept is actually
1:09:18pretty much the opposite of what we have
1:09:20just learned earlier in case of
1:09:21reversals. So you know that price is
1:09:24likely to reverse at a support or a
1:09:26resistance when you have a strong power
1:09:28move or a strong momentum move into a
1:09:31market structure with a price rejection.
1:09:33When you are looking at it from a
1:09:35breakout standpoint, you don't want to
1:09:38see a strong momentum move into the
1:09:40market. In this case, what you want to
1:09:42look for is a price action that we have
1:09:44discussed right at the beginning of this
1:09:46video. We have to look for higher lows
1:09:49into a resistance which somewhat look
1:09:51like an ascending triangle or we should
1:09:54look for lower highs into the support
1:09:56which somewhat looks like a descending
1:09:58triangle or even a third type where
1:10:00there is a price buildup which is
1:10:02supported by a moving average. Now let
1:10:04me cover each one of them. Starting off
1:10:07higher lows into a resistance looks
1:10:09something like this. And you can see the
1:10:11price looks somewhat like an ascending
1:10:13triangle pattern. This is significant
1:10:15because it's telling me that the buyers
1:10:17are willing to buy at higher prices and
1:10:20the sellers are not interested or they
1:10:22are weaker. The ascending triangle
1:10:24pattern tells me that the sellers in
1:10:27terms of their strength are getting
1:10:29weaker or they are getting feeble. The
1:10:31thing is that the first time the sellers
1:10:33managed to push down the price by a good
1:10:35margin and in the consecutive times it
1:10:38got weaker and weaker and this is a sign
1:10:40of bullish strength that the market
1:10:43could possibly break out higher. At this
1:10:45instance, you don't want to be shorting
1:10:47at the resistance because number one,
1:10:49you don't have a momentum move into the
1:10:52resistance structure. And number two, if
1:10:54you were to go short into the
1:10:56resistance, there are swing levels which
1:10:58have been formed where the buyers could
1:11:01potentially come in and result is that
1:11:03you will hit your stop- loss. Now,
1:11:05similarly, let's look at lower highs
1:11:07into the supports, which are the same
1:11:09thing. And it tells me that the sellers
1:11:11are in control and they are willing to
1:11:13sell even at lower prices. On top of it,
1:11:16from a price action standpoint, it is
1:11:18telling you that the buyers are also
1:11:20getting weaker because this is a
1:11:22condition where the buyers barely pushed
1:11:25the price higher. And the subsequent
1:11:27times it only moved smaller and smaller.
1:11:30They were not able to push it any
1:11:31higher. Similar to the previous case,
1:11:34you should not be going long in this
1:11:36case as the sellers are the dominant
1:11:38force and there is a higher probability
1:11:40that the market will break down. And in
1:11:43case if you go long, there are swing
1:11:45levels which were formed during the
1:11:47ascending triangle formation where
1:11:49there's a possibility that the buyers
1:11:51can come in which will in turn result in
1:11:53hitting your stop- loss. Now you see the
1:11:56price action is quite interesting,
1:11:57right? where one side is getting
1:11:59stronger and stronger while the other
1:12:01side is getting weaker and weaker. Now
1:12:03let's discuss the third type where a
1:12:05buildup is supported by a moving
1:12:07average. In this case, the price could
1:12:09just come to a key support or resistance
1:12:11level and it just consolidates there.
1:12:13Now if you bring up the moving average
1:12:16like a 20 period or 50 period moving
1:12:18average, you'll notice that the moving
1:12:20average supports the price and vice
1:12:22versa pretty nicely. It's like the
1:12:24market is really respecting the moving
1:12:27average and it is getting ready to break
1:12:29out. So if you find a buildup or a
1:12:32slight consolidation when the price
1:12:34reaches the support or resistance, it is
1:12:36always an indication that the price is
1:12:38about to break down or break out. Now
1:12:41let's hop on to the final question. How
1:12:44to find support resistance trading
1:12:46opportunity that most traders fail to
1:12:49notice? Now it's very simple. If you are
1:12:51a trader who enters at a daily time
1:12:54frame then you have to go to a higher
1:12:56time frame like a weekly time frame and
1:12:58then you have to look for buildup or a
1:13:00tight consolidation. This is because
1:13:03when a higher time frame is forming a
1:13:05tight consolidation there are chances
1:13:07that you will be able to find support
1:13:09resistance trading opportunities on a
1:13:12lower time frame like a daily time frame
1:13:14in this case. Now taking another
1:13:15example, if your trading time frame is a
1:13:181 hour time frame, you should spot a
1:13:20tight consolidation on a higher time
1:13:22frame, which in this case could be a
1:13:25daily time frame. And if you are able to
1:13:27find a tight consolidation in your daily
1:13:29time frame, then it is likely that you
1:13:32will find a support and resistance
1:13:34trading opportunity in the lower time
1:13:36frame, which is a 1 hour time frame.
1:13:38This is a pretty good technique that you
1:13:40can use to find support and resistance
1:13:42trading opportunities in the market. You
1:13:44can also use it for even shorter time
1:13:47frames like 15 minutes or even 10
1:13:49minutes time frames. The only thing to
1:13:51keep in mind is to appropriately select
1:13:53a higher time frame and find a tight
1:13:56consolidation in the higher time frame
1:13:58so that you can find the support and
1:14:00resistance trading opportunity in the
1:14:02lower time frame. Now that is it for
1:14:04this video. I hope you have a good
1:14:06clarity about supports and resistance
1:14:09and how to approach your trades with
1:14:11supports and resistance after watching
1:14:13this video and the previous video.
1:14:28This price action course will not be
1:14:30complete if I don't talk about the
1:14:32market volumes. Throughout this course,
1:14:34our focus was strictly on prices. For
1:14:38the success of price action in market,
1:14:40volume plays a very pivotal role. Be it
1:14:42the identification of trends or
1:14:45patterns, be it finding out the
1:14:47breakouts and false breakouts, be it the
1:14:50entry or exit from the trade, volume is
1:14:52a necessity. As you may know volume is a
1:14:56leading indicator which means that it
1:14:58precedes the prices or simply before
1:15:00something happens in the price the
1:15:02volume will show the changes beforehand.
1:15:04So our duty as a trader is to find the
1:15:07relationship between the price and
1:15:09volume so as to get an edge over the
1:15:11market or even to predict the market
1:15:13moves beforehand. So let's open right
1:15:15away without wasting any time. Basically
1:15:18volumes indicate how many shares are
1:15:20bought and sold over a given period of
1:15:23time. So the more active the share, the
1:15:25higher would be its volume. For example,
1:15:27you decide to buy 100 shares of Tata
1:15:30Motors at rupees 485. At the same time,
1:15:33I decided to send 100 shares of Tata
1:15:35Motors at 485. Or it can be different
1:15:38people who want to sell a smaller
1:15:40quantity at the same price that is 485
1:15:43which are accumulated together to give
1:15:45you 100 shares that is let's say one of
1:15:47them has 50 shares the other one has 30
1:15:50shares and the third person has 20
1:15:52shares to sell at the same price of rups
1:15:55485 which will be matched with the
1:15:58buyer. So basically there is a price and
1:16:01quantity match which results in a trade.
1:16:04This means that you and I have together
1:16:06created a volume of 100 shares or you
1:16:10and the other three sellers which we
1:16:12have talked about created a volume of
1:16:14100 shares because if you notice overall
1:16:17100 shares were transferred from the
1:16:19seller to the buyer. Now many people
1:16:22tend to assume the volume and count it
1:16:24as 200 because 100 were bought and 100
1:16:27were sold. But this is not the right way
1:16:29to look at volumes because only 100
1:16:31shares transport hands from one person
1:16:34to the other. With that being said, the
1:16:36volume information on its own is quite
1:16:39useless. For example, we know from the
1:16:41NSE website that volumes on Reliance
1:16:43India for this particular day is 16 lakh
1:16:47700 shares. So tell me how useful is
1:16:50this information when read in isolation.
1:16:52So if you think about it, it has no
1:16:54merit when used individually and hence
1:16:56it would actually mean nothing for our
1:16:59analysis. However, when you associate
1:17:01today's volume information with the
1:17:03preceding trend in the price and the
1:17:06preceding trend in the volumes, then the
1:17:08volume information becomes more
1:17:10meaningful. Now I will show you a table
1:17:12that consists of four price to volume
1:17:15relations for different conditions and
1:17:17the related outcome that is expected
1:17:20under such conditions. Now before going
1:17:22ahead don't fall into the conclusion
1:17:24that if you understand the relations
1:17:26provided here you can trade right away.
1:17:28It doesn't work like that. In order to
1:17:30use this idea and market conditions you
1:17:32should have a fair idea about the market
1:17:35structure and the participants in the
1:17:37market of which you need to understand
1:17:39how the big players or institutions
1:17:42work. And number two you need to have a
1:17:44good understanding of the candlesticks
1:17:47and their relevance at different price
1:17:49areas. If you know these two things spot
1:17:51on, then this will just be a walk in the
1:17:53park. For those who don't have an idea,
1:17:56I recommend you to watch these two
1:17:58videos beforehand that we have already
1:18:00discussed earlier in our course. Before
1:18:02we understand the price volume trend
1:18:04table in detail, think about this
1:18:07scenario when we are talking about an
1:18:09increase in the volume. What does this
1:18:11actually mean to a trader? What is the
1:18:14reference point or what is the metric to
1:18:16say if the volume is high or the volume
1:18:19is low? Should it be an increase over
1:18:21the previous day volume or the previous
1:18:24week's aggregate volume? What is the
1:18:26reference point? As a practice, traders
1:18:28usually compare today's volume over the
1:18:31average of either last 3 days or last 5
1:18:34days or last 10 days or even last 20
1:18:38days volume depending on the type of
1:18:40trader they are and what exactly is
1:18:42their time frame for analysis. Generally
1:18:46the rule of thumb is that higher the
1:18:48time frame and higher the number of
1:18:50volume bars or data taken to calculate
1:18:52the volume the more reliable the
1:18:55analysis is. For the sake of this video
1:18:57let me consider the volumes from a swing
1:19:00trader perspective that is a 1 day time
1:19:02frame and 10 days of volume data for the
1:19:06average volume measurement. After the
1:19:08average volume measurement is done we
1:19:10can use it for the comparison of today's
1:19:13volume. Now today's volume is set to be
1:19:15the average volume if it is equal to the
1:19:19last 10 days average volume. Now if
1:19:21today's volume is set to be higher
1:19:24volume or is set to be an increasing
1:19:26volume then it is greater than the last
1:19:2910 days average volume. And finally if
1:19:31today's volume is set to be a low volume
1:19:34or a decreasing volume then it is less
1:19:37than the last 10 days average volume. In
1:19:40order to get the last 10 days average,
1:19:42all you need to draw is a moving average
1:19:44line on the volume bars and the job is
1:19:47done. This feature is available on most
1:19:49charting platforms for free. So you
1:19:52don't have to calculate it by yourselves
1:19:54every time. As you can see in this
1:19:56chart, the volume bars are represented
1:19:59as red and green bars and is placed at
1:20:02the bottom of the price chart. The blue
1:20:04line that is overlaid on the volume bars
1:20:06indicate the 10day average volume. As
1:20:09you notice all the volume bars that are
1:20:11over and above the 10day average volume
1:20:14can be considered as increased volume.
1:20:16Although destinies want increased volume
1:20:19necessarily and why is it important?
1:20:21Well, increasing volume means higher
1:20:24trading activity than usual which means
1:20:26more shares are being exchanged hand.
1:20:29Now who do you think will be responsible
1:20:31for this? Can retain traders by
1:20:33themselves contribute to such high
1:20:36volumes single-handedly? Common sense
1:20:38tells you that it is not possible and
1:20:40it's obvious that there is some
1:20:42institutional activity or large
1:20:45participation by some big players has
1:20:47taken place. On the same note, what does
1:20:50a lower than average volume mean to a
1:20:52trader? It means that big institutions
1:20:55or big players are not interested in the
1:20:58particular stock at that period of time
1:21:00and the major volume is contributed by
1:21:02the return participants and speculators.
1:21:06So the simple logic in stock market is
1:21:08to follow the ding institutions if you
1:21:10want to be successful. We have discussed
1:21:12this in the market structure episode.
1:21:15Okay. Then let's look at the thought
1:21:17process behind the volume table. When
1:21:20institutional investors buy or sell,
1:21:22they do not transact in small chunks or
1:21:25small quantities. For example, think
1:21:27about LIC or life insurance corporation
1:21:29of India which is one of the biggest DII
1:21:32or domestic institution and investor.
1:21:35Now, if they were to buy the shares of
1:21:37TCS, would you think they would buy 500
1:21:40shares or,000 shares? Obviously not.
1:21:43They would probably buy five lakh or
1:21:45even 50 lakh or even more shares. So,
1:21:47what happens if they were to buy five
1:21:50lakh shares from the open market all in
1:21:52one go? Yes, it would definitely start
1:21:55reflecting in the volumes. And besides
1:21:58besides this, because they are buying
1:22:00large chunk of shares, the share price
1:22:02also tends to go up. Now this is where I
1:22:05have to remind you that institutional
1:22:07money is referred to as smart money. It
1:22:10is perceived that smart money always
1:22:12make wiser moves in the market than post
1:22:14retail traders. So being smart or wise
1:22:17they would not just buy all at once.
1:22:19Rather they would accumulate the shares
1:22:22in small quantities over a period of
1:22:24days or weeks or even months so as to
1:22:27get the desired price that they want to
1:22:29buy. Now most traders have a
1:22:31misconception that when the volume is
1:22:33high the price will also move up or down
1:22:36with larger candles depending on the
1:22:38color and size of the volume bars. But
1:22:41this is a wrong way to understand the
1:22:43price volume relation. The thing is that
1:22:45volume is the number of shares that has
1:22:47traded hands which can also mean that
1:22:50the orders can also be at a single price
1:22:52point. For example, let's say there are
1:22:5510,000 buy orders and 10,000 sell orders
1:22:58all at rupes 400 of a stock. And let us
1:23:01say that the average volume of the stock
1:23:04is 8,000 for the last 10 days. Even
1:23:06though the 10,000 shares were exchanged
1:23:10resulting in a higher than average
1:23:12volume for the particular day, the price
1:23:14will not move up. The single recent be
1:23:16all the orders are placed at the same
1:23:19price that is rupees 400. On the other
1:23:21hand, the price were to move up with the
1:23:24increase in volume, then there should
1:23:26have been more buy orders at higher
1:23:29prices. That is, buyers should be
1:23:31willing to buy at even higher prices.
1:23:33And a similar case, if the price were to
1:23:35go down, then the sellers should be
1:23:38willing to sell at even lower prices and
1:23:40it is at these instances we can leverage
1:23:43an increase in the volume for our trade
1:23:45decisions and not otherwise. The case is
1:23:48the same when the volume is low. The low
1:23:50volume does not necessarily mean the
1:23:52price would not do anything. It is just
1:23:54that the number of shares exchanged
1:23:56hands are a lower number, but there is
1:23:59still a possibility of buying or selling
1:24:01interest where the orders can be placed
1:24:04at higher or lower prices by the buyers
1:24:06or sellers respectively. Then there is a
1:24:09definite chance that the prices can do
1:24:11something. But on the downside, the big
1:24:14players are not interested in this
1:24:16particular stop. And it leads us to the
1:24:18conclusion that the price move was
1:24:20supported by retail traders which is
1:24:23actually evident from the lower volumes
1:24:25and hence following the smart money is
1:24:28the wisest idea that you can have as a
1:24:30trader. Well then we shall discuss each
1:24:33of the four cases in detail. Both price
1:24:36and volume are increasing. This only
1:24:39means one thing that a big player is
1:24:42showing interest in the stock. Now going
1:24:44by that assumption the smart money
1:24:46always makes smart choices and the
1:24:48expectation of the market turns bullish.
1:24:51The institution build their position
1:24:54slowly and gradually but sometimes there
1:24:56won't be enough liquidity at a price
1:24:58where they want to buy or simply there
1:25:01are not many sellers who want to sell at
1:25:03the price that the institution wants to
1:25:05buy. What this does is that it will in
1:25:08turn push the price higher. Keep in mind
1:25:10the fact that the quantity that these
1:25:12big players take for delivery is huge.
1:25:15And therefore, every rupee is worth
1:25:17lakhs for them. And due to this reason,
1:25:19the institution starts to sell some
1:25:22quantity which will in turn bring the
1:25:24prices down to where they want to buy
1:25:26it. Because of this, the panic sellers
1:25:28would sell off the stock at the
1:25:29foreigner price that the institution
1:25:31want. And this phase of position buildup
1:25:34will look similar to an accumulation or
1:25:36consolidation in the chart. Once the
1:25:39institution finishes placing all the
1:25:41orders, that is when the market actually
1:25:44starts to move higher and this is the
1:25:46time when the retail traders actually
1:25:48start to notice that the market is
1:25:50starting to go higher and even they will
1:25:52start to join the party by buying the
1:25:54stock which will push the price even
1:25:56higher. So this is the reason why one
1:25:59should look for buying opportunities in
1:26:01the stock because the expectation turns
1:26:03bullish when both the price and volume
1:26:06increases. Now whenever you decide to
1:26:08buy ensure that the volumes are
1:26:10substantial. This means that you should
1:26:12be buying along with the smart money
1:26:14market. Also also you have to look for
1:26:16bullish candlestick patterns like
1:26:18hammers or engulfing candles to confirm
1:26:21your trade entry. You'll find more
1:26:22details regarding this online
1:26:24candlestick video. Now all is well if
1:26:26you are an intraday trader but if you
1:26:28are a swing trader or an investor we
1:26:31will have to keep an eye on a third
1:26:32parameter which is either the delivery
1:26:35volume or the delivery percentage. Now
1:26:37delivery volume is the volume of the
1:26:39stock delivered to actual buyer out of
1:26:42the total traded volume or in simple
1:26:44terms the shares which were taken as
1:26:47delivery for the original day. year ago.
1:26:50We need to go through both these
1:26:52parameters because the delivery volume
1:26:54would also include the BTS trade that is
1:26:57buy today sell tomorrow trades which
1:26:59will not give the correct picture. So we
1:27:01also have to keep an eye on the delivery
1:27:04percentage. But now since the BTS trades
1:27:07are stopped, we can consider any one of
1:27:09them. We will get the delivery volume
1:27:11details on the NSE website. I will put a
1:27:13link to it in the description box. Now
1:27:15the importance of delivery volume is
1:27:17that it gives you the real picture of
1:27:20the interest of big players or big
1:27:22institutions. If the big institutions
1:27:24start buying they will take the shares
1:27:26for delivery. If you can see a rise in
1:27:28the delivery volume or delivery
1:27:30percentage per few days you'll
1:27:32understand that there is a real buying
1:27:34intent in the market. Also understand
1:27:37that even if the overall traded volume
1:27:39is very high does not necessarily
1:27:42guarantee that the delivery volume will
1:27:44also be high or simply does not straight
1:27:46away mean that there is an interest from
1:27:49the investors can be seen as a heavily
1:27:52traded day and nothing else. Moving on
1:27:54to the second case. What do you think
1:27:56will happen when the price increases but
1:27:59the volume in decreases? Think about the
1:28:01situation in the following terms. Number
1:28:03one, why is the price increasing? Simple
1:28:06answer, because the market participants
1:28:09are high. Easy, right? Are there any
1:28:11institutional buyers associated with
1:28:14this rise in price? The simple answer is
1:28:16it is not necessary that there should be
1:28:19institutional buyers associated with the
1:28:21price rise. Now the critical question,
1:28:23how would you know that there is no
1:28:25meaningful purchase by the institution
1:28:27investors or the big players? Now using
1:28:30the basic rule if they were by then the
1:28:32volumes would have increased and not
1:28:34decreased. In this case the price
1:28:36increased but the volume has decreased.
1:28:39Now what does the price increase
1:28:41associated with a decreasing volume
1:28:43indicate? It means that the price is
1:28:45increasing because of small retail
1:28:47participation and not really the
1:28:49influential buying by the big players.
1:28:52Hence what this price falling relation
1:28:54is telling you is to stay cautious in
1:28:56the market cuz it would be a potential
1:28:59bull trap. That is if you have taken a
1:29:01long trade there are every chances that
1:29:03the market can reverse and go in the
1:29:06opposite direction resulting in your
1:29:08loss. So when it comes to decreasing
1:29:10volen but with increasing prices we
1:29:13should be cautious and not to take any
1:29:15long-term trades because the market is
1:29:17run by the retailers and there is no
1:29:20investor participation or investor
1:29:22interest in the stock going forward. The
1:29:25third type is a decrease in price along
1:29:28with an increase in the volume. This
1:29:30particular relation between price and
1:29:32volume sets a bearish expectation in the
1:29:34market. We will discuss why. First
1:29:37question to ask yourself, what does a
1:29:39price decrease indicate? A price
1:29:41decrease indicates that the market
1:29:43participants are selling the stock. But
1:29:45on the positive note, an increase in the
1:29:47volume indicates the presence of smart
1:29:50money or the big institutions. Now,
1:29:52clubbing both events together that is
1:29:54decrease in the price and increase in
1:29:56the volume. It simply implies that the
1:29:58smart money is selling the stocks. They
1:30:01do this gradually so that the market
1:30:03participants won't panic. Think about
1:30:06it. What would have happened? They place
1:30:08N cells all at once. It would definitely
1:30:11be shown on both wool in price. That is
1:30:14the prices would drop and the wounds
1:30:16would increase. This will further induce
1:30:19panic in the retailers who will further
1:30:21start selling and because of this
1:30:23extensive selling the prices would even
1:30:25drop further and the institutions will
1:30:27not be able to sell at the desired price
1:30:30that they want and this would directly
1:30:32affect their profits really badly. Being
1:30:34smart they will sell the shares in small
1:30:37quantities slowly and gradually and
1:30:39generate the ample liquidity to sell at
1:30:42the desired price that they want. Now
1:30:44going by the assumption that smart money
1:30:46always makes smart choices. The
1:30:48expectation in the market is bearish and
1:30:51we should look for selling opportunities
1:30:53in the stock. Now whenever you decide to
1:30:55sell ensure that the volumes are good.
1:30:58This also means that you should be
1:31:00selling with the smart pattern and also
1:31:02use bearish candlestick patterns for
1:31:05your trade entry and confirmation. If
1:31:07you are a swing trader or an investor,
1:31:10it is a good practice to look at the
1:31:12delivery volume or delivery percentage
1:31:14which in this case would be decreasing
1:31:16since the investors are selling their
1:31:18shares. Now an increase in the volume
1:31:20does not necessarily mean an increase in
1:31:23delivery volumes. Moving forward to the
1:31:25final case where both the volume and
1:31:28price decreases. Ask the questions.
1:31:30Number one, why is the price decreasing?
1:31:33Simply because the market participants
1:31:35are selling. Question number two, are
1:31:37there institutional sellers associated
1:31:40with this price decrease? Simple answer,
1:31:42we can't be sure about it. Now the most
1:31:44critical question, how do we know that
1:31:46there was no meaningful sellouts by the
1:31:48institutional investors? Straightforward
1:31:51answer. If they were settling, then the
1:31:53volume would have increased. But in this
1:31:55case, the volume decreased. And what
1:31:57does a price decrease and a decreasing
1:31:59volume indicate? It means that the
1:32:02retail participation is the reason for
1:32:04the decrease in prices and not really
1:32:06the influential selling. So this is the
1:32:09case where you have to be cautious if
1:32:11you are planning to sell the stock as it
1:32:13could lead to a possible beer trap. That
1:32:16means if you have shortened a stock
1:32:18there is every possibility that the
1:32:20stock can reverse and go against your
1:32:23trade. Now that is it for this video
1:32:25guys.
1:32:38Now that we have finished with the
1:32:39fundamentals of price action from the
1:32:41market structure to the volumes, we are
1:32:43all set to learn the different price
1:32:45action strategies that we can employ in
1:32:47the market under various market
1:32:49conditions. The first one in the list is
1:32:52obviously breakouts. You may ask why
1:32:55breakouts? It is just that breakout
1:32:57trading can be exciting. The price
1:33:00quickly moves in your favor and makes it
1:33:02seems like you're riding a wave and at
1:33:04the same time making a hell lot of money
1:33:06for you. However, that being said,
1:33:08breakout reading is also quite painful.
1:33:11For example, you notice the price
1:33:13breaking above the resistance. Now, the
1:33:15candles formed are big and bullish and
1:33:17you instantly get the fear of missing
1:33:19out. So, you decide to go long and as
1:33:22soon as you enter the trade hoping to
1:33:24get a strong move up, the price does a
1:33:26180° reversal and before you know it,
1:33:28you bought the highs and now your stop
1:33:30loss is hit. And if you have not placed
1:33:33a stop-loss order, you will see your
1:33:34account bleeding. I hope this has
1:33:36happened to at least some of you. This
1:33:38brings us to a very critical question.
1:33:41How do I filter for high probability
1:33:44breakout rates and know which are the
1:33:46ones to avoid? We have talked about the
1:33:49basic idea governing a breakout and a
1:33:51reversal in the sixth episode of this
1:33:53price action course. I want you guys to
1:33:56watch that video first because this
1:33:58video will be a continuation of where we
1:34:00left off in episode 6. And so in order
1:34:03to understand the concept completely
1:34:05watch that episode and then attend this
1:34:08video. Well then a breakout occurs when
1:34:10the price moves beyond a certain level.
1:34:13Not just any level but a level of
1:34:16importance or an area of value. The area
1:34:19of value can be anything from a
1:34:21resistance, a support to a trend line or
1:34:24a moving average. The very idea of
1:34:26breakout trading is entering the trades
1:34:29when the price momentum is in your
1:34:31favor. However, no system in the stock
1:34:33market is perfect. Keeping this in mind,
1:34:36let us first discuss the positives and
1:34:39shortcomings of a breakout trade. I will
1:34:41explain its pros and cons. First of all,
1:34:44let us talk about the pros of a breakout
1:34:46trades. Breakout trades comes with a
1:34:48limited risk which means that in many
1:34:51instances breakout trades present
1:34:53themselves during the consolidating
1:34:55market phases. So the initial stop-
1:34:57losses that we place for our trades may
1:35:00be relatively small according to the
1:35:02compression or the price range used for
1:35:05the market entry. So in addition, a
1:35:07confirmation of a trade's failure may
1:35:10come very rapidly, which offers an
1:35:12opportunity for a quick exit, which
1:35:14simply means that if the trade does not
1:35:16go in our favor, the price will reverse
1:35:18immediately and hit our stop-loss. We
1:35:21don't have to wait a whole day for the
1:35:23trade to complete and also the
1:35:25risk-to-reward associated with breakout
1:35:27trades is much better so that you can
1:35:29control your stop- loss accordingly. The
1:35:32second advantage is that the momentum is
1:35:34in your favor. If a breakout trade is
1:35:36successful, large gains are possible. So
1:35:39getting in on strong trend early can be
1:35:41a profitable situation. And the third
1:35:43advantage is trade management which
1:35:46means that the market entry and exit are
1:35:48predefined with the stop- losses and
1:35:51profit targets being identified before
1:35:53the trade. So that our only job is to
1:35:56place the stop- losses and targets and
1:35:59wait for either one of them to get hit.
1:36:01Now talking about the disadvantages,
1:36:04number one is false breakouts. So false
1:36:07breakouts are a considerable part of the
1:36:09breakout approach of trading. No matter
1:36:12how sound your methodology used in
1:36:14identifying the breakout is or how good
1:36:16your system is in quantifying the
1:36:18market, in many instances, a signal may
1:36:21appear to be solid, but it will end up
1:36:23lacking the intended participation or
1:36:25the increased participation from the
1:36:27market participants which is the most
1:36:29essential thing for a breakout trade to
1:36:32succeed. The second disadvantage is
1:36:35associated with opportunity cost. The
1:36:37optimal breakout setups don't occur
1:36:39frequently. So searching for setups can
1:36:42often leave a trader on the sidelines
1:36:44instead of pursuing other opportunities
1:36:46in the market or simply the number of
1:36:48breakout trades are less or it is hard
1:36:50to come by. Before venturing into
1:36:52different breakout trading techniques,
1:36:55it is always better to understand how
1:36:57not to trade breakouts in the first
1:36:59place. Let us talk about instances when
1:37:01you should avoid trading breakouts.
1:37:04First of all, under no instance you want
1:37:06to be trading breakout against a trend.
1:37:09Now trading against the trend is quite
1:37:11illogical for me as a trader and you
1:37:13don't want to do this in the first
1:37:15place. We have all heard the famous
1:37:17saying a trend is your friend until it
1:37:20bends. So let's see why trading with the
1:37:23trend puts you in a much more favorable
1:37:25position than going against it. When you
1:37:27are moving with the trend or in the
1:37:29direction of the trend, the moves that
1:37:31you get are pretty strong and it can
1:37:33last for longer period compared to
1:37:35someone who wants to trade against the
1:37:37trend. For example, let's look at the
1:37:39bull traders who are going long in a
1:37:42bearish market. Look at these up moves
1:37:44or corrections that are resulted from
1:37:47trading against the trend. So these are
1:37:49up moves which are very sharp and very
1:37:51limited. You can see that the strength
1:37:53of the bulls is very weak compared to
1:37:55the beers from the size of the candles
1:37:57formed. So if you are looking to trade
1:37:59against the trend then you can see that
1:38:01there is not really much of a strength
1:38:03in the move or the move is pretty weak
1:38:05which in turn means that the gains from
1:38:08these trades are pretty much limited
1:38:09because you are trading against the
1:38:11trend. Likewise if you want to trade
1:38:13breakouts I would strongly discourage or
1:38:15in fact I will strongly advise you not
1:38:18to trade against the trend and let's say
1:38:20you are looking to trade the breakout
1:38:22higher. I would say the chances are this
1:38:24breakout isn't going to go very far
1:38:27because after all you are trading
1:38:28against the trend. What is likely to
1:38:30happen in this situation is that even if
1:38:32you get a breakout, it would not trade
1:38:34any higher before it will collapse lower
1:38:37which will give you a false breakout at
1:38:39that point. So you have to be beware of
1:38:42trading against the trend. Whether you
1:38:44are trading breakouts, pullback or
1:38:46whatever entry technique you are using,
1:38:48trading against the trend is not usually
1:38:50the ideal situation for you as a trader.
1:38:53Moving on, you don't want to be trading
1:38:55a breakout when the price is far from
1:38:57the market structure. We have talked
1:39:00about the market structure in the second
1:39:01episode of this price action course. The
1:39:04important thing that I have to tell you
1:39:05is whatever market you are looking be
1:39:08bullish or bearish or whatever time
1:39:10frame be it swing time frame or intraday
1:39:12time frame the principles we are
1:39:14discussing are essentially the same and
1:39:16it applies to all of them equally
1:39:18whether it is a 4hour time frame a daily
1:39:21time frame a weekly time frame or hourly
1:39:23time frame they're all the same.
1:39:24Nevertheless what we are looking at
1:39:26right now is an uptrend. At this point
1:39:28in time, you see that the price has
1:39:30traded at a point which is so high and
1:39:33some of those former traders will look
1:39:35at this chart and decide to get long
1:39:38before the price trades any higher
1:39:40without them. So they enter long at a
1:39:42high price over there. Now what the
1:39:44problem with going long at this high
1:39:46price based on the example? Think about
1:39:49this. Where are you going to put your
1:39:51stop-loss? Or in other words, where is
1:39:53the logical place for you to put a
1:39:55stop-loss? The possible answer is the
1:39:58previous resistance level with a
1:40:00possibility of it becoming a support if
1:40:02the price drops down. The level is the
1:40:05one that you need to lean against to
1:40:06place your stop- loss. And of course,
1:40:08you don't want to be placing the stop-
1:40:10loss exactly at the level as well
1:40:12because the price could just come into
1:40:14the level and bounce higher after
1:40:16hitting your stop- loss instantly. So
1:40:18the chances are you need to put your
1:40:20stop loss somewhere below the resistance
1:40:22because in this case the price has to
1:40:24move at least an equal distance as that
1:40:27of your stop loss so as to achieve at
1:40:29least a one is to1 risk-to-reward. As
1:40:31you can see having a large stop-loss
1:40:34give you a poor risk-to-reward. So I
1:40:36would discourage you to trade breakouts
1:40:38when it is far away from the market
1:40:40structure because of the fact that you
1:40:43need to have a very large stop-loss and
1:40:45it gives you a very poor risk-to-reward
1:40:48as a result of it. Now that we have
1:40:50understood what not to do, we are ready
1:40:52to learn the different techniques of
1:40:54breakout trading.
1:40:56There are two things to bear in mind
1:40:59when you have to identify a high
1:41:01probability breakout trade. they are you
1:41:03want to trade with the trend or trade in
1:41:06the direction of the trend and secondly
1:41:09you want to trade near a market
1:41:11structure or an area of value. Now let
1:41:14me explain each of them in detail. Let's
1:41:17start with the trend trading breakout
1:41:19strategy. So trading with the trend is
1:41:21something which you should be familiar
1:41:23by now because earlier I discourage you
1:41:26from trading against the trend and it
1:41:28only makes sense to be trading with the
1:41:30trend. Now here's the deal. For an
1:41:32intraday trader or a swing trader, let
1:41:35us say in a strong trend, the price
1:41:37tends to stay above the 20 period moving
1:41:40average. So if you are waiting for a
1:41:42pullback to the moving average or even a
1:41:45trend line, then most often or not, you
1:41:47will be disappointed as the market will
1:41:49continue making new highs without you
1:41:51able to initiate a long trade. The thing
1:41:54is that there is a time for trading
1:41:56pullbacks, but it's definitely not when
1:41:58the market is in a strong trend. We will
1:42:01discuss the pullback trading systems in
1:42:03the upcoming episodes. Right now in this
1:42:06scenario, you want to trade breakouts
1:42:08instead of pullbacks. This type of
1:42:10breakout trading strategy is called as
1:42:12the trend trading breakout strategy.
1:42:15Here you can either trade the break of
1:42:17the swing high or swing low depending on
1:42:20the type of the trend the market is in.
1:42:22Let's see how this works with an
1:42:24example. Let's say the market is in a
1:42:27strong uptrend and the market respects
1:42:29the 20 period moving average. The idea
1:42:32of this trade is to buy the breakouts
1:42:34above the swing high. You can see that
1:42:37the price has consolidated and broke
1:42:39higher. The price looks like forming a
1:42:41slack pattern. Then you could possibly
1:42:43trade higher from it. In this case, the
1:42:45trend is in your favor. So the ideal
1:42:48thing is to trade the breakout in the
1:42:50direction of the trend. Here you will
1:42:52increase the odds of the trades working
1:42:55out in your favor. The exact entry for
1:42:57this trade would be the candle above the
1:43:01breakout candle high. The next thing
1:43:03that you have to do exit when you're
1:43:05wrong. This refers to your stop loss. In
1:43:08other words, you want to ask yourself at
1:43:10which point on the chart will I get out
1:43:12of the trade if the market moves against
1:43:14me. As a guideline, your stop loss
1:43:17should be at a level where if reached
1:43:20will invalidate your trading setup,
1:43:22which simply means that keep your stop
1:43:24loss at a level which you think will
1:43:26invalidate the breakout trade that you
1:43:28have taken. So in this case, set your
1:43:30stop loss one ATR below the swing low.
1:43:34If you don't know about what ATR
1:43:36indicator is, watch this video on ATR
1:43:38indicator. Or else you can simply place
1:43:40the stop loss below the trend line or
1:43:42even below the 20 moving average for
1:43:45that sake. Now the second exit is when
1:43:47you're right. On the flip side, what if
1:43:49the market moves in your favor? How
1:43:51would you exit your trade? It is simply
1:43:53about setting the targets. My suggestion
1:43:56is to ride the trend for all it's worth,
1:43:58which means there is a good chance of
1:44:00the price heading even higher. For an
1:44:02intraday trader, place your target as
1:44:04the next potential high point or the
1:44:07swing high, which is actually difficult
1:44:09to identify or it can even be the
1:44:11nearest resistance level. But for a
1:44:14swing trader, I would ask you to write
1:44:16the trend and exit the trade only if the
1:44:19price closes below the 20 moving average
1:44:21or when the market breaks out of the
1:44:24structure. By the structure, I mean
1:44:26uptrend in this particular case. That is
1:44:29when the market stopped forming the
1:44:31higher highs or higher lows is the time
1:44:33to exit the trade. So you can place a
1:44:36similar entry and exits for a downtrend
1:44:39with proper modifications. Moving on to
1:44:42the second strategy which is trading
1:44:44near the market structure or an area of
1:44:47value. Earlier we have discussed that
1:44:49when the price is very far away from the
1:44:51structure, it doesn't really make much
1:44:53of a sense because your stop-loss is so
1:44:55large and you will get a very poor
1:44:58risk-to-reward. But what if you're
1:44:59trading the breakout when it is near the
1:45:02structure? In this example, you can see
1:45:04an area of resistance. Resistance in a
1:45:07market, as you may know, is an area
1:45:09where there will be potential sellers
1:45:11coming in or where the supply is higher
1:45:14than the demand. Now the price tested
1:45:16the area of resistance and the price
1:45:18break and closed above it. This is a
1:45:21breakout of resistance which is slightly
1:45:23different from the breakout of a swing
1:45:25high as we have discussed earlier
1:45:27because resistance is a much more
1:45:29respectable area in the chart. So the
1:45:31probability of the trade success in this
1:45:33case is higher. Now if you are looking
1:45:35to get long right now where is the
1:45:37logical place to put your stop loss? The
1:45:40possible answer would be below the
1:45:42previous resistance support. You can put
1:45:45the stop- loss somewhere below the
1:45:47previous resistance. So, this is a much
1:45:49tighter stop-loss. With a much tighter
1:45:51stop-loss, it gives you a better
1:45:53risk-to-reward because the price does
1:45:55not have to move a lot in your favor to
1:45:58start giving you the gains. And why do
1:46:00you think you have a much tighter
1:46:02stop-loss? It is because you're trading
1:46:04much closer to the market structure. So
1:46:07compared to the earlier example where
1:46:09the structure was too far away, it does
1:46:11not really make any sense to make a
1:46:13trading in that scenario. Now
1:46:16identifying when to trade is as
1:46:18important as knowing how to trade. The
1:46:21breakout trade near a market structure
1:46:23can be classified into three types.
1:46:26Number one is breakouts with buildup.
1:46:28Number two is higher lows into the
1:46:31resistance level. And finally number
1:46:34three is the lower highs into the
1:46:36support level. Let's start with the
1:46:38first one that is breakouts with
1:46:40buildup. Now buildup is basically a
1:46:42congestion or consolidation or a tight
1:46:45range near an area of value. You can
1:46:48think of a buildup along these lines. A
1:46:50lot of traders will look at the prices
1:46:53consolidating at the resistance. These
1:46:55traders go short at the resistance or
1:46:57somewhere in the middle of the range and
1:46:59they will place their stop- loss above
1:47:02the resistance. That's what they will do
1:47:04because at the resistance it makes sense
1:47:06to go short. But think about this a
1:47:08little deeper. If the price is
1:47:10consolidating at the resistance, what
1:47:12does it really tell you? You know that
1:47:15resistance is an area where there are
1:47:17potential sellers who will come in and
1:47:19push the prices lower. But in this
1:47:22example, the price is consolidating at
1:47:24the area of resistance. So where are the
1:47:27sellers? Why aren't they pushing the
1:47:29prices lower and why is that? The reason
1:47:32why the sellers are not pushing down
1:47:34could be one of these two things. Either
1:47:37there are no sellers out there who are
1:47:39interested in selling or there are
1:47:41equally strong buyers at the resistance.
1:47:44No matter what the scenario, whether it
1:47:46is number one, there are no sellers or
1:47:48number two there are equally strong
1:47:50buyers, it does not look good for
1:47:52traders who are looking to short either
1:47:54way. And on top of that, the clusters of
1:47:57stop- losses above the resistance level
1:47:59would create an incentive for the smart
1:48:02money or the big players to actually
1:48:04break out higher so that they can
1:48:06leverage the stop- losses to take the
1:48:09market above the resistance. So my point
1:48:11is that when you see a consolidation at
1:48:14a resistance, basically a buildup just
1:48:16in front of the area of resistance, this
1:48:19is a sign of bullish strength. In this
1:48:21scenario, I'll be looking to go long and
1:48:24my trade entry is when the price trades
1:48:26above the breakout candle high. And I'll
1:48:29put my stop losses below the resistance
1:48:31level, that is below the low of the
1:48:34buildup or consolidation. or you can
1:48:36even keep it around two times the ATR
1:48:39value below the resistance. Now talking
1:48:42about the targets, my target would be
1:48:44the next nearest structure. In this
1:48:46case, the next nearest resistance level.
1:48:49Now look through your charts, look
1:48:51through the price approaching the
1:48:53support area and ask yourselves what
1:48:55happens if there is a consolidation at
1:48:58the support area and what will you do?
1:49:00Comment down below. So buildup is a core
1:49:02concept whenever we trade breakouts.
1:49:05However, there are variations of it. For
1:49:07example, when you see higher lows into
1:49:10resistance, it is a sign of a strength
1:49:13or weakness. Now, think about it. When
1:49:15you see higher lows into resistance,
1:49:18what does it tell you? It tells you that
1:49:20there is not enough selling pressure or
1:49:22the sellers are weak. It also tells you
1:49:25that there is strong buying pressure
1:49:27which supports the higher prices. And
1:49:30the final thing to keep in consideration
1:49:32is that there are buy stop-loss orders
1:49:34which are clustered above the resistance
1:49:37which are kept by those sellers who went
1:49:39short at the resistance level. And
1:49:41clearly this is a sign of bullish
1:49:44strength. Now you might be familiar with
1:49:45this chart pattern called the ascending
1:49:47triangle pattern. So if you spot such a
1:49:49pattern in the market condition, it
1:49:51means that the market could break out
1:49:53higher, right? It's the exact same
1:49:56scenario here. You shouldn't be looking
1:49:58to go long in this case. The entry
1:50:00should be above the breakout high and
1:50:03your stop loss should be slightly below
1:50:05the last higher low to the resistance
1:50:07level. And finally, your target for the
1:50:10trade should be the next nearest
1:50:12resistance or it should be equal to the
1:50:15length between the first higher low
1:50:17level and the resistance level projected
1:50:20above the resistance level. Now let us
1:50:23look at a situation of a breakdown. This
1:50:25is the inverse of what you have learned
1:50:28earlier. So whenever you see lower highs
1:50:30into the support, it tells you three
1:50:32things. Number one, there is no buying
1:50:35pressure or the buyers are weak. Number
1:50:38two, there is strong selling pressure
1:50:40pushing the price even lower. And number
1:50:43three, there are sell stop-loss orders
1:50:45clustered below the support level which
1:50:47are kept by the buyers who went long at
1:50:50the support. Now clearly this is a sign
1:50:52of weakness in terms of buy and you
1:50:55might be familiar with this chart
1:50:57pattern called the descending triangle.
1:50:59So if you spot such a pattern in the
1:51:01market, it means that the market could
1:51:03break down lower. In this case, we
1:51:06should initiate a short trade below the
1:51:09breakdown candle low after the candle
1:51:11closes below the support level just for
1:51:13confirmation. The stop loss can be kept
1:51:16above the last lower high into the
1:51:19support or it can be two times the
1:51:21average true range value above the
1:51:23support level. And finally talking about
1:51:25the targets in this case target should
1:51:28be the next support level or it should
1:51:30be equal to the length between the first
1:51:32lower high level and the support level
1:51:34projected below the support level.
1:51:36Moving on, let us look at a highly
1:51:38profitable breakout rate scenario. Now
1:51:41here's the thing. The market is always
1:51:43changing. It moves from a range to a
1:51:46trend, from a trend to a range, etc. The
1:51:48longer the market stays in a range, the
1:51:51harder it breaks. This is true. But why
1:51:54is it true? Because the longer the
1:51:55market is in a range, the more orders
1:51:58are placed in the market. Let me
1:51:59explain. The bullish traders will put
1:52:01buy orders above the resistance hoping
1:52:04to catch the breakouts. Similarly, the
1:52:06bearish traders will look to short the
1:52:08market at the resistance and they will
1:52:10have their stop-loss which is also a buy
1:52:13stop-loss order and they place it above
1:52:15the resistance and as the time passes
1:52:18you'll get an overwhelming amount of buy
1:52:20stop-loss orders above the resistance
1:52:22level. And by some chance if the market
1:52:25manages to break out of the resistance,
1:52:27it will trigger all of these clusters of
1:52:30buy stop-loss orders which will fuel
1:52:32further buying pressure and in turn it
1:52:35will take the market higher. So if you
1:52:37want to identify explosive breakout
1:52:40trades with high profitability, you have
1:52:42to pay close attention when the market
1:52:44is in a range for a long period of time.
1:52:47Because the longer it is in a range, the
1:52:50harder it breaks and the more profitable
1:52:53you become.
1:53:06In the previous episode, we have
1:53:08discussed about breakout trading in
1:53:10great detail. A breakout trading is one
1:53:12of the oldest trading styles in the
1:53:14book. You watch the price consolidate
1:53:17within a range and then when the price
1:53:20breaks out of that range, you bounce
1:53:22onto the trade and enjoy the benefits of
1:53:24a strong move. And often when the price
1:53:27has been stuck in a range, it will move
1:53:29out of that consolidation range with
1:53:31some good momentum giving the traders a
1:53:34good profit potential. butt and it's a
1:53:36big butt. The breakout pattern has an
1:53:39evil twin which is actually a curse to
1:53:41all the breakout traders and it's none
1:53:43other than the fake out. If you have
1:53:46ever traded breakouts, you'll recognize
1:53:48this situation. Just when you think you
1:53:50have caught the big move, the market
1:53:52turns against you and shakes out of your
1:53:54trade. So, how can we tell the
1:53:56difference between a breakout and a fake
1:53:59out? Now there are a number of tools
1:54:01that traders can use. But the first
1:54:03thing I have to let you know is that
1:54:05there is no way you can avoid false
1:54:07breakouts completely. There are certain
1:54:09times no matter how good a setup you
1:54:12have, you're still going to get caught
1:54:14in a false breakout. But you can
1:54:16minimize the chances of getting caught
1:54:18in a false breakout. We have got some
1:54:20price action methods and some tips that
1:54:23you can make use to minimize your
1:54:25chances of getting a false breakout.
1:54:27With that being said, the first tip I
1:54:29have for you is to stop chasing the
1:54:31power moves or stop going after the
1:54:34power moves into an area of value. What
1:54:37are power moves? I have talked about
1:54:39power moves in the episode 6 of this
1:54:41price action course when we talked about
1:54:43reversals. But let me talk about it
1:54:46briefly so as to brush up your memory.
1:54:48If you see a big or strong momentum move
1:54:51with large candles, this is what a power
1:54:54move is. Now, if the price moves up from
1:54:56a level with little or no pullback and
1:54:59then it goes up higher breaking an area
1:55:01or a level of value like a support or
1:55:04resistance, then my advice is not to
1:55:07chase the breakout of this type because
1:55:09more often or not the market tends to
1:55:11reverse under these conditions. And why
1:55:14am I so sure and why is it so? Let me
1:55:17give you a very simple explanation of
1:55:19why this actually occurs. When you chase
1:55:21a market where the price is making a
1:55:24strong move or a power move, there is no
1:55:27floor or support to these higher prices.
1:55:30Now, if you look at the chart, most of
1:55:32the time the price exhibits a specific
1:55:35type of price action where the prices
1:55:37goes up and then retraces or pulls back.
1:55:40In this type of price action, there are
1:55:42levels like swing lows to support these
1:55:45higher prices. What this means is that
1:55:48for example take the case of a
1:55:50resistance. If the market were to
1:55:52reverse from the resistance, it would
1:55:54find a floor or a support where
1:55:56potential buying pressure could push the
1:55:58price higher. These types of moves are
1:56:01more sustainable because they are a
1:56:02series of higher swing levels along the
1:56:04way to support these higher prices. Now
1:56:07what happens when the market has given a
1:56:09power move into a level? In this case,
1:56:12let's talk about a resistance level. It
1:56:14means that there are no intermediate
1:56:16swing levels to support these higher
1:56:18prices or there is no obvious levels for
1:56:21the buyers to come in to oppose the
1:56:23sellers if they sell at the resistance.
1:56:25Now the only possible area for buying is
1:56:28the previous support level and so there
1:56:31will be a lot of sellers waiting at the
1:56:33resistance to sell and also there will
1:56:35be a lot of buyers who looks to buy the
1:56:37breakout who place their stop- losses
1:56:40below the resistance. Now there is a
1:56:42cluster of sell orders below the
1:56:44resistance by both the sellers and the
1:56:46buyers. And by some chance if the price
1:56:48manages to reverse all of these stop-
1:56:51losses would be triggered which will
1:56:53induce further selling in the market and
1:56:55the market will reverse even lower. And
1:56:57there is a good chance if the reversal
1:57:00comes it can be very swift towards the
1:57:02downside to the nearest support level or
1:57:04the floor area where the buyers could
1:57:06then potentially come in. But this is
1:57:09going to be a huge distance and for any
1:57:11buyer who hasn't placed a stop-loss can
1:57:14end up bleeding his account. So as a
1:57:16matter of fact, you want to stay away or
1:57:19stay on the sidelines if you are a
1:57:21breakout trader under such conditions
1:57:23where there is a power move in the
1:57:25market to an area of value. Now we will
1:57:28look at some price action tricks that
1:57:30you can easily apply on the market to
1:57:32stay cautious of the fake outs. However,
1:57:34the problem with each of them is that
1:57:36you are left waiting for the candles to
1:57:38form their patterns and sometimes this
1:57:41might be a reason for missing out on
1:57:43some of the trades. So, it's up to your
1:57:45decision making as a trader in the real
1:57:46market conditions for them to make any
1:57:49sense. Now, there are clues in the
1:57:51candlesticks and volume data which can
1:57:53give information whether the breakout is
1:57:56a genuine breakout and these are worth
1:57:58considering and can be used in
1:58:00conjunction with other tools like
1:58:02indicators. A breakout occurs because
1:58:04the price has been contained below a
1:58:07resistance level or a support level for
1:58:09potentially some period of time. Now the
1:58:11resistance or support level becomes a
1:58:13level which many traders use to set
1:58:15their entry points or stop-loss levels.
1:58:18So when the price breaks through the
1:58:20support or resistance level, the traders
1:58:23waiting for the breakout would jump in
1:58:25and those who did not want the price to
1:58:27break out will exit their positions to
1:58:30avoid larger losses. This is very much
1:58:32clear. Now this flurry of activity will
1:58:35cause the volumes in the market to rise
1:58:37which shows a lot of traders were
1:58:39interested in the breakout level. Now
1:58:41the higher than average volume helps to
1:58:44confirm that it was a breakout. But if
1:58:46there is a very little volume on the
1:58:48breakout then the level may not have
1:58:50been very significant to a lot of
1:58:52traders or not enough traders felt
1:58:54convinced to place a trade near the
1:58:57particular level. And most of these no
1:58:59volume breakouts are likely to fail. In
1:59:02case if you are talking about an upside
1:59:04breakout, if it fails, the price will
1:59:07fall back below the resistance level.
1:59:09And in case of a downside breakout of a
1:59:11support, often called as a breakdown, if
1:59:14it fails, the price will rally back
1:59:16above the support level. In some
1:59:19instances, even after a high volume
1:59:21breakout, the price will often retrace
1:59:24or pull back to the breakout point
1:59:26before moving in the breakout direction
1:59:28again. This is because the short-term
1:59:31traders will often buy the initial
1:59:33breakout, but they will attempt to sell
1:59:35quite quickly for profit. This selling
1:59:37by the short-term traders will
1:59:39temporarily drive the prices back to the
1:59:41breakout point. Now if the breakout is
1:59:43legitimate then the price should move
1:59:45back in the breakout direction after the
1:59:48retest or pullback and if it does not it
1:59:50is a fail breakout and the prices would
1:59:53reverse. Analyzing volumes were one way
1:59:56of identifying if it is a breakout or a
1:59:58fake out but as I have mentioned earlier
2:00:01does not work every time and there are
2:00:03occasions when this idea will fail. So
2:00:06let us consider a few more ideas to keep
2:00:08in mind so as to distinguish between a
2:00:11fake out or a breakout. The first thing
2:00:13is that we have to wait to see if the
2:00:15candlestick closes through the line of
2:00:17support or resistance. Which means that
2:00:20the real body of the breakout candle
2:00:22should close above the resistance level
2:00:24or the real body of the breakout candle
2:00:26should close below the support level
2:00:28which in turn means that just a wick
2:00:31poking through the level is not enough
2:00:33to confirm a breakout. So it's a good
2:00:35rule to follow but on its own it's not
2:00:38particularly reliable. Now the second
2:00:40thing is that you have to wait for a
2:00:42close beyond the support or resistance
2:00:44level and then you have to wait for the
2:00:46price to retrace back to the level or
2:00:49pull back by a little bit and then move
2:00:51in the direction of the breakout and
2:00:53this candle should close beyond the
2:00:55closing price of the breakout candle.
2:00:58This is a resistance turned support or a
2:01:00support turn resistance method which is
2:01:03a reliable way to trade breakouts. But
2:01:05on the downside there is a lot of
2:01:07patience required because there is a lot
2:01:09more waiting around and sometimes the
2:01:11prices won't even retest or pull back to
2:01:14the level and chances are you might miss
2:01:16the trade. Now the third point is to
2:01:18look for big candlesticks which will
2:01:20indicate that there is momentum behind
2:01:22the breakout and you have to check for
2:01:24large breakout volumes which is higher
2:01:26than the previous volume. But on the
2:01:28downside a very large candle means that
2:01:31you have potentially missed a hefty part
2:01:33of the move. So it can rightly affect
2:01:35your risk-to-reward as well as the
2:01:37placement of your stop- losses. And the
2:01:39final point to keep in consideration is
2:01:41that we have to look for a price buildup
2:01:43at the market structure which may be a
2:01:46tight consolidation near the area of
2:01:48value or higher lows into the resistance
2:01:51similar to an ascending triangle or
2:01:53lower highs into the support similar to
2:01:55an ascending triangle which are credible
2:01:58enough patterns that can give you high
2:01:59probability breakout rates. We can learn
2:02:02a lot more about them in the previous
2:02:04video. Now we will look at a faster way
2:02:07to get a breakout confirmation using an
2:02:09indicator which will give us an
2:02:11immediate yes or no confirmation as to
2:02:13whether we can rely on this breakout or
2:02:15not. So we have to add the RSI indicator
2:02:18or the relative strength index indicator
2:02:20in our chart. So when we are looking for
2:02:22a breakout we are expecting the breakout
2:02:25to come with a degree of momentum and we
2:02:27will use the RSI indicator to find that
2:02:30momentum. So basically RSI is a momentum
2:02:32indicator and it measures the speed of a
2:02:34move. So if the speed is increasing the
2:02:37momentum will be building or increasing.
2:02:39In this particular scenario I'm talking
2:02:41about RSI convergences. RSI convergence
2:02:44occurs when the RSI direction mirrors
2:02:47the price trend. For example, if the
2:02:49price of a security trends upwards, then
2:02:52the RSI will also trend upwards. This is
2:02:54what I mean by RSI convergence. So if
2:02:57the price is moving up through an area
2:02:59of value, we want the RSI indicator to
2:03:02be showing higher highs which signals
2:03:04building momentum or increasing
2:03:06momentum. The idea is that if the market
2:03:08momentum is increasing, the RSI should
2:03:10also be increasing. The same is true if
2:03:12the prices are headed down and breaking
2:03:14through the value of support which will
2:03:17indicate a momentum towards the opposite
2:03:19direction or the downward direction in
2:03:21the RSI. So this confirmation for both
2:03:24bullish and bearish signals are
2:03:26generally more useful when the RSI
2:03:28period is 14 days or more and anything
2:03:31below the 14 period may be typically
2:03:34considered less reliable for confirming
2:03:36the convergence. And of course no
2:03:39indicator is infallible but using RSI to
2:03:42confirm breakouts will give you a
2:03:44significant edge in the market. It adds
2:03:46weight to the evidence of a possible
2:03:48breakout and not a fake out. So I
2:03:51recommend that you add it in your charts
2:03:53and see what it can do for you. Now
2:03:55coming to the most important part or the
2:03:58important point of this video. You have
2:04:00to back test these techniques that I
2:04:02have discussed with you so as to
2:04:04understand how reliable each system is
2:04:07and then choose a system of your liking
2:04:09and convenience because practice makes
2:04:11you perfect and back testing can save
2:04:14your account.
2:04:27In this episode, we are going to learn
2:04:30all about trading pullbacks. A pullback
2:04:33to an area of value is one of the best
2:04:36techniques when trading in the market
2:04:38direction and it is also one of the
2:04:40safer techniques because of the
2:04:41confirmation that it gives. We will
2:04:44discuss the pros and cons of trading
2:04:46bullbacks and we will talk about the
2:04:48likely places on the chart where the
2:04:50market will pull back and how to
2:04:52approach your trades. So if you are
2:04:54ready, let's begin. What actually is
2:04:57pullback trading and why does it work in
2:04:59the market. Now a pullback is when the
2:05:02price temporarily moves against the
2:05:04underlying trend in the market. For
2:05:06example, in an uptrend, a pullback would
2:05:09be a move lower or we can say it is a
2:05:12corrective move. On the other hand, in a
2:05:14downtrend, a pullback would be a move
2:05:16higher. So, in essence, what you are
2:05:19trying for pullback trading is to buy
2:05:21the dips in the markets or the
2:05:23retracements to a critical level or the
2:05:25corrections in an existing trend. For
2:05:28example, the price breaks out of the
2:05:31resistance level with a strong candle
2:05:33and then it retraces or pulls back or
2:05:37test the resistance level and then move
2:05:39up higher. Another example would be if
2:05:42the market is trending higher, you are
2:05:44always looking to buy the dip or to buy
2:05:46the retracement or to buy the pullback
2:05:49so as to buy at the least possible
2:05:51price. And in case of a trending market,
2:05:54the reason why pullback trading works is
2:05:56because when the market is trending, it
2:05:58does not go up in a single straight
2:06:00line. Instead, in an uptrend, you can
2:06:03expect to see a series of higher highs
2:06:05and higher lows. So, as a pullback
2:06:08trader, what you're trying to do is to
2:06:10time your entry on the pullback or the
2:06:12retracement or the correction. So, you
2:06:15are basically entering the trade as the
2:06:17market trades at lower prices during an
2:06:20uptrend. As a pullback trader, you are
2:06:23trying to take a trade in the direction
2:06:25of trend, but you look to enter when the
2:06:28market is sort of going against the
2:06:30trend on the retracement or the
2:06:32corrective move, but you are still
2:06:34trading in the direction of the trend.
2:06:36And the reason for pullbacks in the
2:06:38prices is simple. It is due to the
2:06:40short-term profit booking by some
2:06:43traders which causes the prices to dip
2:06:46lower. Now let us move on to
2:06:48understanding the pros and cons of
2:06:50pullback trading. We will start off with
2:06:52the positives. With pullback trading,
2:06:55you are basically buying low and selling
2:06:58high. For example, if you are trading
2:07:00pullbacks in an uptrend, you are
2:07:02basically buying at lower prices and the
2:07:04intention is to sell higher. And if
2:07:07you're selling pullback in a downtrend,
2:07:09you're basically selling at higher
2:07:11prices so that you can buy back at lower
2:07:14prices. And the second thing about this
2:07:16is that it is actually easier when it
2:07:19comes to your trading psychology when
2:07:21you're trading the pullbacks. The reason
2:07:23being you are basically trading from an
2:07:25area of value because buying low and
2:07:28selling high is something that we are
2:07:30all accustomed to even when we start
2:07:33learning about the markets. Think about
2:07:35it in terms of a small business.
2:07:37Basically what we want to do is to buy
2:07:39at lower prices and then sell at higher
2:07:42prices. Now we will talk about the
2:07:44shortcomings of trading pullbacks. Now
2:07:46the downside of pullbacks is that you
2:07:49might miss the move more often or not.
2:07:51Let me explain. For example, we know
2:07:53that an uptrend consists of a higher
2:07:56highs and higher lows. Let's say the
2:07:58price is pulling back or retracing back
2:08:00right now. Assuming that you are hoping
2:08:03the prices to retest back to the lows
2:08:06onto the trend line or the moving
2:08:07average. But what happens in the market
2:08:10is that the price does not pull back
2:08:12deep enough and then it broke out higher
2:08:15without you being able to take an entry.
2:08:18So it ended up causing you to miss the
2:08:20move. This is the biggest disadvantage
2:08:23when it comes to trading pullback which
2:08:25is that sometimes you actually miss the
2:08:27move while waiting for the price to come
2:08:29to your desired level. The second
2:08:31disadvantage or maybe I won't call it a
2:08:34disadvantage is that pullbacks are not
2:08:37suitable for impatient traders. Now if
2:08:41you are an impatient trader or you have
2:08:43no patience to wait for a pullback then
2:08:46this strategy might not be your piece of
2:08:48cake. Now that we have understood about
2:08:50the advantages and disadvantages of a
2:08:53pullback trade, let us learn how to
2:08:56approach a pullback trade. So there are
2:08:58a few things to look for on trading a
2:09:01pullback. The first point is to identify
2:09:04the market trend. Now the first and
2:09:07foremost thing that you have to figure
2:09:09out while you trade pullbacks is to find
2:09:11the existing market trend. You must have
2:09:14a trend in the market because most often
2:09:16you will encounter a pullback
2:09:18opportunity when there is a trend in the
2:09:20market. And more importantly, make sure
2:09:22to trade in the direction of the trend
2:09:25and not go against the direction of the
2:09:27trend. Now, I'm not saying that there
2:09:29won't be any pullback opportunities if
2:09:31the market is not trending or if the
2:09:34market is in a range, but instead the
2:09:36probability of getting a pullback setup
2:09:38is higher when there is a trending price
2:09:41action. And most often or not, during a
2:09:44range or consolidated price action, the
2:09:46market tends to give explosive breakouts
2:09:49where the chances for pullbacks are
2:09:51lower due to increased interest and
2:09:53participation by the market
2:09:55participants. Now, the second point is
2:09:57to identify an area of value. Here's the
2:10:01thing. Just because the market is in an
2:10:03uptrend doesn't mean you want to blindly
2:10:05enter a trade. Instead, you want to be
2:10:08trading from an area of value. An area
2:10:11of value could be any of these including
2:10:13a swing low or a swing high, a support
2:10:16or a resistance level, a trend line or a
2:10:19moving average etc. These are all
2:10:21potential areas on your chart where
2:10:23buying or selling pressure could step
2:10:25in. Now the third point to consider is
2:10:27to look for an entry trigger or an entry
2:10:30area assuming that the market is
2:10:32trending higher and it has made a
2:10:34pullback towards an area of value. But
2:10:36this does not mean that we can blindly
2:10:38hit the buy button. As a pullback
2:10:40trader, you want to look for specific
2:10:42entry triggers to let you know that the
2:10:45buyers are stepping in or to make sure
2:10:47that buyers are in control and they are
2:10:50about to take the prices higher. The
2:10:52entry trigger could be as simple as
2:10:54reversal candlestick patterns which may
2:10:57be bullish hammers or bullish engulfing
2:10:59patterns etc. So that's an entry trigger
2:11:02for us to time our pullback to get on
2:11:04board the trade and to join the existing
2:11:07trend in the market. Now the fourth
2:11:09point is setting up your stop-loss.
2:11:12Since you are trading pullback the most
2:11:14important question is where do we set
2:11:16our stop-loss? Logically speaking if you
2:11:19are trading pullbacks on a uptrending
2:11:21market then your stop loss should be
2:11:23below the loss of the pullback. So in
2:11:26case if the market is on an uptrend and
2:11:28you have kept your stop loss below the
2:11:30swing low, this means that if the market
2:11:33corrects or retraces and breaks below
2:11:36the lows of the pullbacks, it tells you
2:11:38that this pullback has failed and you
2:11:41want to get out of this trade. So in
2:11:43order to be safe and not hit your
2:11:45stop-loss before the pullback finishes,
2:11:47you'll have to identify the loss of the
2:11:49pullback and give some buffer below the
2:11:51loss. For this purpose, you can either
2:11:54use the ATR indicator or you can even
2:11:57set it based on your risk-taking
2:11:59ability. Let's take a look at the ATR
2:12:01method briefly. Let us say the low of
2:12:03the pullback is 100 rupees and let us
2:12:06say you pull out the ATR indicator and
2:12:08the average true range of the market is
2:12:11rupees 5. You can simply take rupees 100
2:12:14which is the low of the pullback and
2:12:16subtracts rupees 5 which is the value of
2:12:19the ATR at that specific period. Now
2:12:21your stop loss turns out to be rupees 95
2:12:24which will set a small buffer below the
2:12:27low of the pullback. Now a similar
2:12:29approach can be taken in case if the
2:12:31market is on a downtrend. And the final
2:12:34point is setting up your targets. Now
2:12:37where do you take profits? Let's say you
2:12:40are trading in the direction of an
2:12:41uptrend. What you can do is to reference
2:12:44the extreme swing high to take the
2:12:47profits. When you're trading pullbacks
2:12:49during an uptrend, you are buying the
2:12:51dip when the market has retraced against
2:12:54the trend. If you look prior to the
2:12:56retracement, you should be able to
2:12:58identify a swing high on the chart. And
2:13:00this swing high could be a reference
2:13:02point for you to take the profits. Now,
2:13:05if you're looking to buy a pullback and
2:13:07you went long and the market is moving
2:13:09favorably in your direction, you can
2:13:11look to take the profits just before the
2:13:13swing high or before the nearest
2:13:16resistance. If you are an intraday
2:13:18trader and you can ask me why not after
2:13:21the swing high or why not at the swing
2:13:23high or why not at the resistance level.
2:13:26The simple reason being swing highs and
2:13:28lows, supports and resistances are not
2:13:31specific levels on the chart. Instead,
2:13:33they are areas or zones on your chart.
2:13:36This means that the price could come
2:13:38close to the swing high but may not be
2:13:41able to reach the exact price point and
2:13:43then start to reverse from there. So, if
2:13:46you don't want to watch your open
2:13:48profits come close to your target only
2:13:50to do a sudden reversal and then hit
2:13:52your stop- loss, what you want to do is
2:13:55to set your profit target just before
2:13:57the recent swing high or the nearest
2:13:59resistance level for this example. Now
2:14:02that we have learned how to approach our
2:14:04pullback trades, let us move on to the
2:14:07different ways of trading pullbacks
2:14:09successfully and how to employ the entry
2:14:11and exits in the right manner. Starting
2:14:14off with breakout pullbacks. Breakout
2:14:17pullbacks are very common and probably
2:14:19most of you have encountered them.
2:14:21Breakout pullbacks commonly happen at
2:14:23the market turning points. Uh that is
2:14:26when the price breaks out of a
2:14:28consolidation pattern or a range. Now
2:14:30some of the most popular consultation
2:14:32patterns includes the head and
2:14:34shoulders, the wedges, triangles,
2:14:36rectangles etc. So the question that
2:14:38naturally comes up is how to trade the
2:14:40pullbacks. Although there are many ways
2:14:43how you can approach the pullback
2:14:45trading, I will talk about two main
2:14:46concepts of pullback trading during a
2:14:49breakout. Now these principles can be
2:14:51applied to all other pullback scenarios
2:14:54that we will discuss along. Let us take
2:14:56the case of an aggressive trader. Now
2:14:58the aggressive trader waits for the
2:15:00price to come back to the pullback area
2:15:03which may be a support or a resistance
2:15:05level, a trend line, a moving average
2:15:07etc. and he enters the trade right away
2:15:10and the price pull backs to the level.
2:15:13Let us say the point one marks this
2:15:15approach in the scenario of a breakout
2:15:17and pullback. Now there are a few more
2:15:19points that you need to consider when
2:15:21choosing such an approach using an
2:15:23aggressive trade entry. You may be able
2:15:26to enter at the best possible prices as
2:15:29this point can often mark the extreme
2:15:31point of the correction wave and the
2:15:33pullback phase. So the potential reward
2:15:36to risk ratio is highest following such
2:15:38an approach because the stop-loss can be
2:15:40placed very tightly. But the major
2:15:43drawback is that you enter a trade
2:15:46against the price direction without any
2:15:48confirmation. So the price could easily
2:15:51go against your trade. So such an
2:15:53approach can therefore have a lower win
2:15:56rate or a lower probability of success.
2:15:59But the higher reward to risk ratio may
2:16:01offset it though. But I wouldn't go by
2:16:03this method. Me being a conservative
2:16:06trader waits until the price continues
2:16:09the trend structure and breaks over the
2:16:11pullback. With this approach, the trader
2:16:14goes with momentum and confirms that the
2:16:17trade is in the desired direction unlike
2:16:20the aggressive trader case where there
2:16:22was no confirmation of the trade
2:16:24direction. Now the conservative approach
2:16:26or the conservative entry happens later
2:16:30and therefore the potential reward to
2:16:32risk ratio is smaller. If you ask me
2:16:34there is no right or wrong when it comes
2:16:36to trading and it all comes down to your
2:16:38personal preferences as a trader. Now
2:16:41talking about the stop losses, you have
2:16:43to place the stop loss below the
2:16:45pullback low in case of a breakout on
2:16:47the upside and make sure to add the
2:16:50suitable buffer based on your risk
2:16:52potential or you can even use the ATR
2:16:55indicator to do the same. It is always
2:16:57better to stay cautious as to not move
2:17:00your stop-loss to break even because
2:17:02this is a very dangerous and
2:17:03unprofitable thing to do. And the reason
2:17:05for this is that pullbacks happen so
2:17:08often in the market. After a long
2:17:10uptrend, the market stays in a range
2:17:13between defined levels. Now, many
2:17:16traders use the levels to time their
2:17:18breakout entries. In this case, we are
2:17:21anticipating a breakout on the downside
2:17:23and most traders would use the support
2:17:26level to time their breakout entry. But
2:17:29where they go wrong is that they move
2:17:30their stop-loss to break even too soon.
2:17:33And when the breakout pullback happens,
2:17:35they will get kicked out of their trade
2:17:38just to see the price return in their
2:17:39anticipated direction but without them.
2:17:42Finally, the targets can be the next
2:17:45potential resistance level or place a
2:17:48suitable target based on the type of
2:17:50consolidation pattern the market was in
2:17:52right now. Be it a wedge, be it a
2:17:54triangle pattern, be it a rectangular
2:17:56pattern. Use a suitable target based on
2:17:59the consolidation pattern formed in the
2:18:01market. Now the second way of trading
2:18:03pullbacks is using horizontal steps. Now
2:18:06the stepping behavior can be observed
2:18:08during many trending phases in the
2:18:10market. During the ongoing trending
2:18:12phases, the price will often present
2:18:15those stepping patterns. This pullback
2:18:17approach is a great addition to the
2:18:19previously discussed breakout pullback.
2:18:22The breakout pullback happens very close
2:18:24to the market turning points. But if the
2:18:27trader misses the initial entry
2:18:28opportunity, the horizontal steps can
2:18:31allow the trader to find alternative
2:18:33entry scenarios. It also helps the
2:18:35trader to enter a trade even if the
2:18:38pullback does not form a swing low
2:18:40touching the trend line or a moving
2:18:42average. In case of an uptrending
2:18:44market, the entry in this case would be
2:18:46during the retracement from a swing high
2:18:48level to the previous swing high levels
2:18:51and using confirmation candlesticks like
2:18:53bullish engulfing or hammer patterns for
2:18:56the trade entry. And if you talk about
2:18:58the stop- loss for the trade, it would
2:19:00be suitable to place the stop-loss below
2:19:03the step pattern or the swing low with a
2:19:06suitable buffer depending on your risk
2:19:09appetite. Further, a trader could simply
2:19:12choose to use the stepping pattern as a
2:19:14trial stop-loss behind the trend in a
2:19:16much safer way. In this case, the trader
2:19:19waits until the price has completed a
2:19:22particular step and then try the stop-
2:19:24loss behind the last pullback area. And
2:19:27because of this, the stop-loss is
2:19:30protected and it is not very vulnerable.
2:19:33The target in this case would be each of
2:19:35the swing high levels as the price moves
2:19:37in your favor. Now the third idea should
2:19:40have been trend line. We know that trend
2:19:42lines are famous pullback tool. But the
2:19:44drawback with trend lines is that it
2:19:46takes longer to get validated. As a
2:19:49thumb rule, we all know that a trend
2:19:51line requires at least three contact
2:19:53points to get validated. You can always
2:19:56connect two random points, but only when
2:19:59you get the third contact point, you are
2:20:01really looking at a trend line. Trend
2:20:03lines can work nicely in addition to
2:20:05other pullback methods, but as a
2:20:07standalone method, the trader will miss
2:20:09many opportunities as the trend line
2:20:12validation takes a long time. So instead
2:20:14of using a trend line, we can use the
2:20:17moving averages for pullback trading.
2:20:19And without any doubt, moving averages
2:20:22are amongst the most popular tools in
2:20:24technical analysis. And they are used in
2:20:26many ways, including trend
2:20:28identification. And you can also use
2:20:30them for pullback trading as well. You
2:20:33could use a 20 period, a 50 period, or
2:20:36even a 100 period moving averages. It
2:20:38does not really matter. And it comes
2:20:40down to whether you are a short-term
2:20:42trader or a long-term trader. Now,
2:20:45short-term traders generally use shorter
2:20:47moving averages to get the trade signals
2:20:50quicker. And of course, shorter moving
2:20:52averages are more vulnerable to lot of
2:20:54noise and wrong signals. And longerterm
2:20:57moving averages on the other hand moves
2:20:59slower and so they are less vulnerable
2:21:02to noise. But you may not get much
2:21:05trading opportunities as in case of the
2:21:07short-term moving averages. So it is up
2:21:09to you to weigh the pros and cons of
2:21:12your own trading style. For the purpose
2:21:14of this example, I will use a 50 period
2:21:17exponential moving average and the price
2:21:19is in an uptrend. Now here we can see
2:21:22that the prices are correcting and
2:21:24reaching the moving average and it is
2:21:26actually respecting it. The entry in
2:21:29this case would be above a rejection
2:21:32candlestick from the moving average like
2:21:34a bullish pin bar or a hammer and
2:21:37bulling engulfing candles which shows
2:21:39that the buyers are willing to buy at
2:21:41higher valuations. You can place a stop
2:21:44loss below the moving average line
2:21:46adding some buffer space because it is
2:21:49very common for the price to overshoot
2:21:51the moving average and show very deep
2:21:54pullbacks. And that is why you need to
2:21:56give your stop-loss more breathing row
2:21:58if you choose such a pullback strategy.
2:22:01And if you enter the trade with proper
2:22:03confirmation and not being aggressive to
2:22:06enter the moment the candle pulls back
2:22:08to the moving average, then you can
2:22:09actually save yourself from the
2:22:11overshoot problem. Finally, riding trend
2:22:14till the end is the best possible
2:22:16target. In case of an intraday trader,
2:22:18look to place the nearest resistance as
2:22:21the target. And for a swing trader, exit
2:22:24the trade either when the price breaks
2:22:26out of the moving average line or exit
2:22:29the trade when the market structure
2:22:31changes from trending to range or
2:22:34consolidation. So, as you have seen,
2:22:36there are many different ways on how to
2:22:39approach the pullbacks. So you can even
2:22:41use it with Fibonacci levels also. You
2:22:43can even combine the various tools to
2:22:45come up with even stronger signals. With
2:22:48that being said, it is always a good
2:22:50idea to back test what you have learned
2:22:53to get a sense of how the strategy works
2:22:55in real market condition and see if it
2:22:58works for you.
2:23:12Reversal trading can be one of the most
2:23:15profitable trading strategies you can
2:23:17use. You can trade reversals in trending
2:23:20markets, ranging markets and even
2:23:23against the trend. We have discussed the
2:23:25concept regarding reversals in the sixth
2:23:28episode of this price action course. Do
2:23:31check out that video to know the basic
2:23:33stuff regarding how reversals work. In
2:23:36this video, however, we will talk about
2:23:38the reversal trading strategies with
2:23:40respect to price action. Reversals
2:23:43refers to large price changes where the
2:23:45trend changes its direction altogether.
2:23:48But the thing is that when it starts to
2:23:50occur, a reversal isn't distinguishable
2:23:53from a pullback. And the main difference
2:23:55between them is that a reversal keeps
2:23:57going and form a new trend while the
2:24:00pullback ends and then the price starts
2:24:02moving back in the trending direction or
2:24:04simply the price will continue with its
2:24:07previous trend. Reversals often occur in
2:24:10intraday trading and happen rather
2:24:12quickly but they also occur over days,
2:24:14weeks and years. Therefore, reversals
2:24:17occur on different time frames which are
2:24:19relevant to different traders. So an
2:24:22intraday reversal on a five-minute chart
2:24:24doesn't matter much to a long-term
2:24:26investor who's watching for a reversal
2:24:28on the daily or weekly chart. Yet the
2:24:31five minute reversal is very important
2:24:33for an intraday trader. So as a reversal
2:24:35trader, you are in a sense a counter
2:24:38trend trader who is trading against the
2:24:41trend or the current market momentum.
2:24:43For example, let's say the market is in
2:24:46an uptrend making a series of higher
2:24:48highs and higher lows. As a reversal
2:24:50trader, you will look to sell in that
2:24:53uptrend. Or for example, if the market
2:24:55is in a downtrend, then as a reversal
2:24:57trader, you are looking to trade against
2:24:59the trend and the momentum. Reversal
2:25:02trading, especially the trend reversal
2:25:04trading, can be a profitable way to
2:25:07trade the markets. However, like any
2:25:09other trading strategy, there is a
2:25:11correct way and a wrong way to trade
2:25:14reversals. Before we talk about the
2:25:16correct way to do reversal trading, let
2:25:18me first explain how we should not trade
2:25:21the market reversals or simply or talk
2:25:23about the mistakes that most traders
2:25:26make while trading reversals. The first
2:25:28and the most important point to consider
2:25:31is to not catch a falling knife. For
2:25:34those of you who do not know what is
2:25:36catching a falling knife, it means
2:25:39trying to enter a long position in a
2:25:41market that is crashing down. So let's
2:25:44say the market is dropping every day.
2:25:46You don't want to blindly enter a trade
2:25:49because you are a reversal trader
2:25:51looking to buy low and sell high. There
2:25:53is absolutely no sense in trying to
2:25:55catch a crashing market similar to a
2:25:57falling knife. And why is it so? Because
2:26:00if you are buying into the lows of the
2:26:02market, there is no logical place for
2:26:04you to set your stop-loss. There is no
2:26:07support or market structure you can
2:26:09refer to. And there are no signs that
2:26:11the downtrend could be ending anytime
2:26:14soon. And most importantly, trends need
2:26:16time to reverse their direction as we
2:26:19have discussed in the market trends as
2:26:20well as market structure videos. So
2:26:23avoid catching a falling knife. The
2:26:26second mistake that traders make is
2:26:28entering the first pullback anticipating
2:26:31that it will be a reversal. Now this is
2:26:33a common mistake that traders make that
2:26:36is attempting to trade the first
2:26:38pullback itself. This means that you go
2:26:40long when you see the market rallies
2:26:43after a huge decline. But often this
2:26:46type of a rally is only a retracement of
2:26:48the existing trend. And why do some
2:26:51traders always do this? This is simply
2:26:54because of the fear of missing out or
2:26:56former and you don't want to miss out on
2:26:58the next move. Thus, you enter a trade
2:27:01as soon as the market shows any sign of
2:27:03reversal. Unknowingly, this sign is
2:27:06usually a retracement or a pullback of
2:27:08the existing trend and the market will
2:27:11continue the trend causing you to lose
2:27:13your money. Now that we have understood
2:27:15about what not to do during a reversal
2:27:18trade, let us look at how to approach
2:27:21reversal trades in the market. The first
2:27:24and foremost point is to have a
2:27:27reference point on your chart. Now, what
2:27:29exactly is a reference point? A
2:27:32reference point can be a trend, a
2:27:34consolidation or an area of value like a
2:27:37support resistance, a trend line, a
2:27:39moving average, etc. where there is a
2:27:42chance for some sort of a price action.
2:27:44Now, after you have figured out a
2:27:46reference point, the second point is to
2:27:49wait for the market to reach that
2:27:51particular reference point. No matter
2:27:53where the price is trading right now,
2:27:55for a price action trader to make any
2:27:58sort of conclusion with the prices, it
2:28:00has to be in an area where there is a
2:28:02potential interest from the side of the
2:28:04market participants or simply the price
2:28:07should be at an area of value. Now the
2:28:10third point to consider is regarding the
2:28:12trade entry. Now that the price has
2:28:15reached an area of value, you have to
2:28:17look for reversal candlestick patterns.
2:28:20You can use reversal candlestick
2:28:22patterns like engulfing candles or pin
2:28:24bars to tie in your trade entry. So you
2:28:27will enter a trade only after the market
2:28:30shows signs of reversal. However, you
2:28:32risk entering at a much higher price
2:28:35which may lower your risk-to-reward
2:28:37ratio, but it gives you a higher win
2:28:40rate. Now the fourth point is setting up
2:28:43a proper stop-loss. When it comes to
2:28:45stop-loss, you want to place it at a
2:28:48level that invalidates your trading
2:28:50setup. This means if your stop loss is
2:28:52hit, then the pattern is broken and
2:28:55there is no reason to stay in the trade
2:28:57any longer. So, it is generally a good
2:28:59idea to keep the stop-loss with
2:29:01reference to the area of value and the
2:29:03highs or lows of the reversal
2:29:05candlesticks by giving the ample buffer
2:29:08space to save yourself from pullbacks.
2:29:10The buffer space can be decided using
2:29:13the ATR indicator or with respect to
2:29:15your risk appetite. And the final point
2:29:18to consider is to set a conservative
2:29:20profit target. Now your exits depend on
2:29:23your goals. So what do you want to
2:29:25accomplish? Either you can capture a
2:29:27swing or try the trend. So if you want
2:29:30to capture a swing then you can exit the
2:29:32trades before the opposing pressure
2:29:35comes in. For example, if you are long
2:29:37in a market, then you want to exit your
2:29:39trade before the next resistance level
2:29:41or the swing high where the sellers can
2:29:44come in. And on the other hand, if you
2:29:46want to ride a trend, then you can trail
2:29:48your stop-loss as the market moves in
2:29:51your favor. For example, you can trail
2:29:53your stop- loss using a 20 moving
2:29:55average. Now that we have understood how
2:29:58to approach a reversal trade, I'm going
2:30:01to share with you three techniques which
2:30:03can help you identify reversal trades in
2:30:06the market. And as a reversal trader,
2:30:08you want to be smart about when you want
2:30:10to enter your trades. So here we go. The
2:30:13first strategy is the break of the
2:30:15market structure. We have talked about
2:30:17the different stages of market in the
2:30:20market structure video and we also know
2:30:22how to identify a particular trend type
2:30:25from the market strengths video. Now
2:30:27think about this in a trending market
2:30:30let's say an uptrend you know the price
2:30:32makes a higher high and higher lows and
2:30:35what do I mean by a break of the market
2:30:37structure the break of market structure
2:30:40is the clue that the market is telling
2:30:42you that it is about to get weaker or
2:30:45simply it is about to reverse its
2:30:47direction so in case of an uptrend you
2:30:50have a breakoff structure when the price
2:30:52fails to make a new higher low or a
2:30:55higher high. So this is the first clue
2:30:57or the first evidence that the market is
2:31:00about to reverse lower. But there is no
2:31:02100%age guarantee that the reversal will
2:31:05happen. But it's an evidence given to
2:31:07you by the market that there is a
2:31:09breakoff structure and there is a good
2:31:12chance that the price could potentially
2:31:14reverse lower. Again looking at the
2:31:16concept that I just shared with you for
2:31:18an uptrend to reverse we are looking for
2:31:21a break of the trend market structure.
2:31:23That is what we are looking for is a
2:31:26lower high or a lower low which
2:31:28invalidates the uptrend setup. At this
2:31:31point you have actually got a lower high
2:31:34and when the price breaks below the area
2:31:36of support formed by the previous higher
2:31:38low you will have a lower low. This
2:31:41tells you that this trend could be
2:31:43weakening and the trend could eventually
2:31:46reverse. Now the trend will not reverse
2:31:49all of a sudden because markets need
2:31:51enough sellers to bring the prices down
2:31:54and so most often the market go into a
2:31:56phase of consolidation where the price
2:31:59will stay inside a range for some time
2:32:02and then it will show a trend reversal
2:32:04when there is an ample selling pressure
2:32:06available. This time when the price
2:32:08breaks out of the consolidation or the
2:32:11distribution stage and move lower is
2:32:14actually the best short trade entry for
2:32:16a reversal. In case of a tighter
2:32:19stop-loss, you can keep the stop loss
2:32:21above the breakout candle high. And to
2:32:23be much safer and to avoid deep
2:32:25pullbacks, you can even place the stop-
2:32:27loss above the consolidation range. The
2:32:30target in this case will be the nearest
2:32:32support level. Now let us consider this
2:32:34in case of a downtrending market. Again
2:32:37we will apply the break of market
2:32:39structure concept. We can see that
2:32:42during a downtrend there is a series of
2:32:44lower highs and lower lows. The break of
2:32:47downtrend structure comes when the price
2:32:50stops forming the lower highs and lower
2:32:52lows or simply when you have a higher
2:32:55high because the price broke the prior
2:32:58resistance formed by a lower high or if
2:33:01it formed a higher low. This again
2:33:04should give you a strong clue that this
2:33:06downtrend could possibly come to an end
2:33:09and the market could potentially reverse
2:33:11its direction. In this case also the
2:33:14reversal may not come quickly. Instead
2:33:16there can be a consolidation or an
2:33:19accumulation stage where the buyers can
2:33:21come in ample quantities so as to take
2:33:24the market higher. Here also the trade
2:33:26entry would be when the price breaks
2:33:28above the accumulation stage and moves
2:33:31higher. You can keep a safer stop-loss
2:33:33below the consolidation range and the
2:33:36target can be set as the next nearest
2:33:39resistance level or singly you can write
2:33:41the trend until there is again a breakin
2:33:44structure. Now there is no such thing as
2:33:48guarantee in trading or in price action
2:33:50or in whatsoever. So if anyone promises
2:33:53you guarantees then it's better to stay
2:33:55far away from them. This is why I like
2:33:58to use words like probably, likely,
2:34:00possibly. So keep that in mind. There is
2:34:03no guarantee for anything and especially
2:34:05when it comes to trading. Now the second
2:34:07strategy is the higher time frame
2:34:09reversal structure. So in a market it's
2:34:12very important to pay attention to where
2:34:14you are in terms of the big picture or
2:34:17simply you should stay attention to what
2:34:19the higher time frame is doing. This is
2:34:22where the higher time frame reversal
2:34:24structure comes in handy. In this
2:34:26example the price apparently breaks
2:34:28above the swing high and then it
2:34:30collapses lower below the support level.
2:34:33At this point, a lot of unaware traders
2:34:36would have bought the breakout on the
2:34:39upside only to get caught on the wrong
2:34:41side. And why is that? This is a chart
2:34:44in the 4hour time frame. Now, let's see
2:34:47the same chart on a higher time frame.
2:34:49For example, a 1 day period. On the
2:34:51higher time frame chart, it is evident
2:34:53that most of the traders are buying the
2:34:56breakout into a previous support level
2:34:59as shown that could eventually act as a
2:35:02resistance and thus it makes a very low
2:35:04probability breakout trade. This means
2:35:07that the traders are buying into a huge
2:35:10selling pressure. And what do you think
2:35:12will eventually happen? It's pretty much
2:35:14no wonder why the market reversed from
2:35:16the resistance level. This is what I
2:35:18mean by a higher time frame reversal
2:35:20structure. So what exactly are we
2:35:23looking at in case of this strategy? We
2:35:25have to look for a higher time frame
2:35:27area of value like a support or
2:35:30resistance where the prices can
2:35:32eventually reverse and you can then take
2:35:34a trade entry on a lower time frame with
2:35:37the help of a reversal candlestick for
2:35:39confirmation. In this case there was a
2:35:41false breakout and you can leverage the
2:35:44highs of this false breakout to place
2:35:46your stop loss. Now the third strategy
2:35:48we will be discussing is using moving
2:35:51averages. You can make use of moving
2:35:53averages for reversal trading. In this
2:35:56particular technique, we will use the
2:35:58lower term moving averages like the 100
2:36:00moving average or 200 moving average
2:36:03with a positional trading perspective.
2:36:05We know from the basics that if the
2:36:07price is above the 200 moving average
2:36:10for example we should try to stay long
2:36:13and if the price is below the 200 moving
2:36:15average try to stay short on the market.
2:36:18Now the reason for this is quite simple.
2:36:20If you think about this the 200 period
2:36:22moving average summarizes the price of
2:36:25the last 200 candles based on your time
2:36:28frame. So if the price is right now
2:36:31above the 200 moving average, it is
2:36:33telling you that the price has been
2:36:35trending higher. And similarly, if the
2:36:37price is below the 200 moving average,
2:36:39it is telling you that the price has
2:36:41been trending lower. This is a simple
2:36:44way to tell you what's the long-term
2:36:46trend on the particular chart that
2:36:48you're trading. Why is it a long-term
2:36:51trend on the particular chart of your
2:36:54trading? It is because you could be
2:36:56using a 200 moving average on a 5minut
2:36:58time frame. That is not really a
2:37:01long-term trend because it's a 5minut
2:37:03time frame, right? Likewise, it can be a
2:37:05200 moving average on a daily time
2:37:08frame. Then that's a pretty long time
2:37:10frame. So it is actually the long-term
2:37:12trend of the chart that you are trading
2:37:15and depending on what time frame you are
2:37:17looking at. So let's use 200 moving
2:37:20average and 1 day time frame for this
2:37:22particular example. Over here the price
2:37:25is above the 200 moving average. So from
2:37:27the basic rule you want to look for long
2:37:30opportunities in this market. We can
2:37:32plot an area of support and every time
2:37:35the price comes into the area of
2:37:37support, it forms a price rejection that
2:37:40is validating your trading setup. But
2:37:42the key point to note here is that the
2:37:45price is actually forming a
2:37:46consolidation and it has tested this
2:37:49support level multiple times. And you
2:37:51know what that means from this simple
2:37:53concept that we have discussed about
2:37:55supports and resistances in episode 6.
2:37:57And it is exactly what happened. The
2:38:00price broke down the support level and
2:38:02even moved below the 200 moving average
2:38:05with great momentum. There wasn't any
2:38:07price rejection of any sort from both
2:38:09these areas of values. Now we can have a
2:38:12short bias since the price is trading
2:38:15below the 200 moving average and now we
2:38:18can look for opportunities to go short
2:38:20on the market. Now this is how you can
2:38:23actually use the 200 moving average to
2:38:25give you a bias to know whether you
2:38:28should go long or stay short. And after
2:38:31you have identified your bias, then just
2:38:34reference to a market structure like a
2:38:36support or a resistance or even the
2:38:38moving average itself to kind of
2:38:40identify the area of value that you want
2:38:43to trade from. And sometimes the price
2:38:45will test the 200 moving average which
2:38:47is actually an area of resistance. And
2:38:50if it turns out to be a false breakout
2:38:52of the highs, you can use the help of
2:38:54reversal candlestick patterns to take a
2:38:57reversal trade lower. Anyway, the 200
2:39:00moving average is useful to help you
2:39:02find out the trend reversals and to
2:39:05identify the trade on the right side of
2:39:07the trend. Now, these are some of the
2:39:09techniques which we can adopt and back
2:39:11test in the market conditions to check
2:39:13if they work for you and if it does the
2:39:15entry and exits can be decided based on
2:39:18your risk appetite and patience.
2:39:34The inside bar pattern is one of the
2:39:36most common candlesticks you will find
2:39:39on your charts. The inside bar is a
2:39:41simple yet powerful candlestick pattern.
2:39:44It can help you better time your trade
2:39:46entries with lower risk. And the best
2:39:49part once you learn to identify this
2:39:51pattern then you will very quickly see
2:39:53it everywhere. You will see it in many
2:39:55different markets and in all your
2:39:57different time frames. However, just
2:40:00because the inside bar forms often and
2:40:02can be easily identified does not mean
2:40:05you should be using it or trading it. So
2:40:07in this video go through exactly what
2:40:10the inside bar is and how we can use it
2:40:13successfully in our trading. What
2:40:15exactly is an inside bar pattern? The
2:40:18inside bar pattern is a candlestick
2:40:21pattern where the price forms completely
2:40:24within the previous candlestick. So for
2:40:27an inside bar to be considered valid,
2:40:29both the high and the low of the
2:40:31candlestick needs to be completely
2:40:33inside the previous candle's range. Most
2:40:36often or not, traders have this
2:40:38confusion around the wicks or shadows of
2:40:41the candlesticks. To clear this up from
2:40:43the start, the inside bar takes into
2:40:45account the candlestick's shadows or the
2:40:47wicks also. This means that the high and
2:40:50the low including the wicks of the
2:40:52inside bar candle must be within the
2:40:55high and the low of the previous
2:40:57candlestick. To simplify this even
2:40:59further, inside bar must have a high
2:41:01that is lower than the previous candle's
2:41:04high and it should have a low that is
2:41:06higher than the previous candle's low
2:41:09including the wicks. However, not all
2:41:11inside bars are created equal. There are
2:41:14different types of inside bar patterns
2:41:16formed in the market. Let us take a look
2:41:18at a few of these. The first type is an
2:41:22inside bar with a small range. So, this
2:41:25is a standard inside bar where the range
2:41:27of the candle is small and it is covered
2:41:30by the prior candle or the previous
2:41:32candle. Now, this tells you that there
2:41:34is an indecision or low volatility in
2:41:37the market. We will talk about this
2:41:39further in this video. The second type
2:41:41is the inside bar with a large range.
2:41:44Now you can have an inside bar with a
2:41:46large range. So this is still an inside
2:41:49bar as the range of the candle is
2:41:51covered by the prior candle or the
2:41:53previous candle. But in this case, you
2:41:55will notice that the range of the inside
2:41:57bar is too large. Now depending upon the
2:42:00close of the inside bar, this could
2:42:02either represent an indecision in the
2:42:04market or a reversal in the market. Now
2:42:07let's see an example each for the long
2:42:10range candles of this types. As you can
2:42:13see in the first category there is a
2:42:15large inside bar with bullish close
2:42:17which shows signs of bullish strength.
2:42:20Moving on to the second type it is a
2:42:22large inside bar with a small real body
2:42:25which shows signs of indecision. So
2:42:28depending upon the range and the real
2:42:30body the inside bar can either represent
2:42:33an indecision or a reversal in the
2:42:35market. Now the third type of inside bar
2:42:38is multiple inside bars. So in this case
2:42:41you have multiple inside bars together.
2:42:44This is a powerful pattern because it
2:42:46tells you that there is a low volatility
2:42:49in the market. to briefly talk about
2:42:51volatility. Low volatility is associated
2:42:54with weak participation from the market
2:42:57participants or it can signify weak
2:43:00price movements while a high volatility
2:43:02is associated with elevated interest
2:43:05from the market participants and we know
2:43:07the market volatility is always changing
2:43:10that is it moves from a period of low
2:43:12volatility to a period of high
2:43:14volatility and vice versa. So when you
2:43:17see multiple inside bars together, it is
2:43:20a strong sign that the market is about
2:43:22to make a big move soon. Now the fourth
2:43:25type is the hikake pattern which is a
2:43:27variation of the inside bar. This is
2:43:30actually a must know pattern for all the
2:43:32traders because this pattern helps you
2:43:35identify a false breakout from the
2:43:37inside bar pattern. Imagine this
2:43:39situation. You identified an inside bar
2:43:42and you are hoping that the market will
2:43:44go higher or simply you have a bullish
2:43:46outlook. So you go long when the price
2:43:49breaks above the highs of the inside
2:43:51bar. But the next thing you know the
2:43:53market does a 180° reversal and
2:43:56collapses lower and you are now in deep
2:43:58loss. Now this is what we call a hikake
2:44:01pattern which is a false breakout
2:44:03pattern. Now there are two variants of
2:44:05the hikake pattern. The first type is a
2:44:08bearish shikake pattern which actually
2:44:10entices the bulls or the buyers into
2:44:13buying and then trap them and make them
2:44:15hit their stop- loss. The second one is
2:44:18the bullish shikake pattern which
2:44:20actually entices the beers or the
2:44:22sellers into shorting the market only to
2:44:25trap them and reverses the price against
2:44:27their position. Now the hik pattern can
2:44:30be traded the same way you trade an
2:44:32inside bar which we will discuss as we
2:44:34move along this video. But this is a
2:44:37much more powerful strategy since the
2:44:39breakout traders get caught on the wrong
2:44:42side of the move and the stop-loss would
2:44:44push the market in your favor if you
2:44:46take the right side of the trade. Now
2:44:48let us talk about the nature of an
2:44:50inside bar or the outlook of an inside
2:44:53bar in the market. The inside bar is
2:44:55actually an indecision candlestick
2:44:57pattern. the inside bar is formed
2:45:00because the price was not able to break
2:45:02either the high nor the low of the
2:45:04previous session or the previous candle.
2:45:06Now this shows us that or this tells us
2:45:09that neither the bulls nor the beers
2:45:11were in control during the session. This
2:45:14is a very important information when
2:45:16used correctly. However, it is important
2:45:19you note where the inside bar is formed
2:45:21and in what type of market. So if an
2:45:24inside bar is formed in a strong trend,
2:45:26for example, a trend higher, then it
2:45:29could be signaling a quick pause before
2:45:31the price continues on with the trend.
2:45:34And if the inside bar is formed at a
2:45:36swing point or even at a major support
2:45:38or resistance area, then it could be
2:45:41signaling that the steam has run out of
2:45:43the current move and the reversal is
2:45:46about to play out or simply the market
2:45:48is about to reverse. Because this is an
2:45:50indecision candlestick, it is very
2:45:52important to pay attention to where and
2:45:54how this pattern forms. Moving on, let
2:45:57us look at the best time frames to trade
2:46:00the inside bar candle. As I have
2:46:02mentioned earlier, you will be able to
2:46:04find this pattern on all your time
2:46:06frames from the 1 minute chart right
2:46:08through the monthly chart. However, just
2:46:11because you can find an inside bar on
2:46:13all your time frames does not make them
2:46:15all created equal because inside bars
2:46:18formed on a higher time frame will hold
2:46:20more weight compared to inside bars
2:46:23formed on a smaller time frame. The
2:46:25reason for this is simple because of the
2:46:28time that goes into forming this
2:46:30pattern. So if price action is showing
2:46:32indecision and it cannot break the
2:46:35previous candlestick high or low on the
2:46:371 minute time frame that shows us that
2:46:40for 1 minute the price was stuck.
2:46:42However, if we see that the price could
2:46:44not break higher or lower on the daily
2:46:47time frame and it formed an inside bar
2:46:50then it shows that for a whole day
2:46:52neither the bulls nor the beers could
2:46:54gain control of the market. This leaves
2:46:57us with the conclusion that the higher
2:46:59time frame inside bar candle holds a
2:47:01much higher weightage than a inside bar
2:47:04on a shorter time frame. Well, then
2:47:06let's talk about the trading strategies.
2:47:08Now, there are many ways you can use the
2:47:11inside bar in your trading. You can use
2:47:13it to find new trades and you can also
2:47:15use it to manage your trades. The three
2:47:18simplest and most common strategies to
2:47:20trade the inside bar are the inside bar
2:47:23breakout, the inside bar reversal and
2:47:26the inside bar trend trading strategy.
2:47:28Let us start with trading the inside bar
2:47:30as a breakout. The first key to trading
2:47:33the inside bar as a breakout strategy is
2:47:36identifying a strong trend either higher
2:47:38or lower. In this example, the price is
2:47:41in a strong trend lower. And because
2:47:44there is a strong trend, the inside bar
2:47:46represents a pause in the price action
2:47:49where some profit booking is being taken
2:47:51and the price is taking a breather. So
2:47:54when you are looking to enter with the
2:47:56inside bar breakout, you are looking to
2:47:58enter when the signal confirms itself.
2:48:01This happens when the price breaks the
2:48:03inside bar high or the low in the
2:48:06direction of the trend. In this
2:48:07particular example, we are looking to
2:48:09take a short entry when the signal
2:48:11confirms itself and breaks lower with a
2:48:14trend or simply we are looking to enter
2:48:17when the price breaks below the previous
2:48:19candle low. But to be frank, I'm not a
2:48:21great admirer or a fan of the inside bar
2:48:24breakout strategy in particular. And
2:48:26it's simply because of the sheer number
2:48:28of false breakouts that this particular
2:48:30strategy can generate. Also, it is not a
2:48:33very smart move to trade an inside bar
2:48:36on a choppy range or consolidation
2:48:38because of its low probability trade.
2:48:40And why is it so? Because a range or a
2:48:43consolidation happens when the market is
2:48:45taking a breather or when the bulls or
2:48:48beers are in some form of indecision.
2:48:50So, it does not make any sense to use an
2:48:52indecision candlestick to take a trade
2:48:55on a market where indecision exist. So
2:48:58personally I would be well off using the
2:49:00other two strategies than the breakout.
2:49:03So moving on to trading the inside bar
2:49:05as a reversal. The key to inside bar
2:49:08reversal strategy is where the inside
2:49:10bar falls. To use the inside bar as a
2:49:13reversal, you need to see it formed at a
2:49:15swing high or a swing low depending on
2:49:18the market trend and even at key price
2:49:20action levels or areas of values. And
2:49:23these levels are often the major support
2:49:25or resistance level. For example, the
2:49:28price approaches a support level and we
2:49:31know that a support level is one where
2:49:33there can be higher chances for demand
2:49:36for the stock or where the buyers will
2:49:38be willing to enter a position. And if
2:49:41an inside bar was formed at or near the
2:49:44support, then it could be an indication
2:49:46that the price is looking to make a
2:49:48reversal back higher and we could get
2:49:50long when the price breaks back above
2:49:53the inside bar high. But that being
2:49:55said, I prefer to wait for the price to
2:49:58make a reversal move first and then form
2:50:01an inside bar as shown in this case. Now
2:50:04what is the benefit of this? By doing
2:50:06this I get to know two very significant
2:50:08things. Number one that the buyers are
2:50:11in control at this period as they manage
2:50:14to make the first wave of reversal from
2:50:16the support level. Number two is that
2:50:19there is a volatility contraction due to
2:50:22the formation of an inside bar. And if
2:50:24the buying pressure could continue
2:50:26further, then it will manage to break
2:50:29out the reversal candles high and move
2:50:31higher. This is exactly when you can
2:50:34enter a long position. That is when the
2:50:36price breaks out of the inside bar. This
2:50:39particular approach will let you enter
2:50:41the trade as the price moves in your
2:50:43favor. But on the downside, there is a
2:50:46possibility of a false breakout due to a
2:50:48bearish hikake pattern. As we have
2:50:50learned earlier, you can avoid this trap
2:50:53by taking on a more conservative
2:50:55approach. You can wait for the breakout
2:50:57candle to close and enter the very next
2:50:59candle if the breakout candle manage to
2:51:02close above the reversal candle high.
2:51:04Now again in this scenario you risk
2:51:07missing a big move or sometimes it can
2:51:09lower your reward to risk potential. So
2:51:12clearly there is no right or wrong
2:51:14answer to it. So you have to find a
2:51:16trade entry which suits you best. When
2:51:19it comes to the stop loss, you don't
2:51:21want to set it beyond the loss of the
2:51:23inside bar as the general rule states.
2:51:25And why is this? Because we have already
2:51:28learned that there is a variation of the
2:51:30inside bar which is the hikake pattern.
2:51:33This means if you set a stop loss just
2:51:36below the loss of the inside bar, you
2:51:38could get stopped out prematurely on a
2:51:41bullish hikake pattern. So a better way
2:51:44to set your stop loss is using the ATR
2:51:47indicator. that is you can place a stop
2:51:49loss one ATR below the low of the inside
2:51:52bar in case of long entry trades. This
2:51:55will ensure that your trade has more
2:51:57breathing room. So if you want to know
2:51:59more about the ATR indicator, you can
2:52:01watch the video here. Now I will talk
2:52:03about setting the targets at the end of
2:52:06this video after we have discussed the
2:52:08next strategy. The third strategy is
2:52:10catching the trend. Previously you have
2:52:13learned how inside bar allows you to
2:52:15catch reversals in the market. Now you
2:52:17will learn how to use it to identify
2:52:20trend trading opportunities. Now here's
2:52:22the main idea behind it. Let us
2:52:24reference with the use of a 20 moving
2:52:26average. In a strong uptrending market,
2:52:29the price is above the 20 moving
2:52:31average. So pullback in such a market
2:52:33will be shallow. So when the price
2:52:36stalls or stops after a pullback in form
2:52:38of an inside bar, let us say you want to
2:52:41enter as soon as the price receives the
2:52:43direction of the trend. Now here's how
2:52:45you can approach the trade when you are
2:52:47going long on the market. Now as we have
2:52:49mentioned the price is in a strong trend
2:52:52that is the price is above the 20 moving
2:52:54average. We have to wait for a pullback
2:52:56to occur and if the pullback has
2:52:58occurred we have to wait for an inside
2:53:01bar to form. And if the inside bar is
2:53:03also formed then you can go long when
2:53:06the price breaks above the highs of the
2:53:08previous candle of the inside bar. Or
2:53:10you can wait for the confirmation that
2:53:12is wait for the breakout candle to close
2:53:15above the inside bar's previous candle's
2:53:17high so as to avoid being trapped by the
2:53:20hick pattern. For this trend trading
2:53:22strategy, you can consider setting your
2:53:25stop- loss one ATR away from the 20
2:53:28moving average since the market finds
2:53:30support at the 20 moving average. Now
2:53:33let us talk about setting targets for
2:53:35inside bar trades. Now your exits or
2:53:38targets depends on your goals. So you
2:53:41can either catch a swing or you can ride
2:53:44a trend. So if you intend to catch a
2:53:46swing then you can exit your trades
2:53:48before the opposing pressure comes in.
2:53:50For example, if you are taking a
2:53:52reversal trade from the support and you
2:53:54are long on the market then you want to
2:53:56exit your trade before the next
2:53:58resistance or the swing high. Now if you
2:54:02want to ride the trend then you can
2:54:03trail the stop- loss as the market moves
2:54:06in your favor. For example, if you have
2:54:08taken the trend trading approach, you
2:54:11can trail your stop loss using the 20
2:54:13moving average and when the price breaks
2:54:15below the 20 moving average, that is
2:54:17when you should exit the market. Now
2:54:20when trading the inside bar pattern by
2:54:23entering above or below the breakout of
2:54:25the pattern using any of these
2:54:27strategies, I would recommend you to go
2:54:29with the small ranged inside bar
2:54:31breakouts. Now there are a few reasons
2:54:34as to why this is important. The first
2:54:36benefit is that you can place a very
2:54:38tighter stop-loss. You can reference the
2:54:40low of the inside bar to set your stop-
2:54:42loss as we have discussed. And the
2:54:44smaller the inside bar, the smaller the
2:54:46stop loss is. And with a smaller
2:54:48stop-loss, you can put a larger position
2:54:51size and still keep your risk constant.
2:54:53The second benefit is that the price
2:54:55will move quickly in your favor. The
2:54:57market moves from a period of low
2:54:59volatility to a period of high
2:55:01volatility and vice versa. So if you
2:55:04trade a small ranged inside bar, it
2:55:06means the volatility is low and there is
2:55:09a very good chance that it could expand
2:55:11or break out in your favor. This means
2:55:14you could get a good reward to risk
2:55:16potential on your trade in a short
2:55:18period of time. I hope this makes sense
2:55:20to you. As a closing note, even if you
2:55:23find the inside bar on all your
2:55:25different time frames, the higher the
2:55:27time frame, the more weight the pattern
2:55:29holds. Because this is an indecision
2:55:32pattern, it is absolutely crucial as to
2:55:35where and how it is formed. So you need
2:55:37to look at and follow the price action
2:55:40that is formed around the inside bar to
2:55:42successfully start using them in real
2:55:44market conditions. And as always, don't
2:55:47forget to learn about the pattern in
2:55:49detail and back test it so that you are
2:55:52comfortable while using it in the
2:55:54market.
2:56:07In the fourth episode, we have talked
2:56:09about the different candlesticks and
2:56:12what each of them had to say with
2:56:14regards to the market participation. And
2:56:17one of the main candlesticks of our
2:56:19discussion was the pin bar candlesticks.
2:56:22The pin bar is one of the most popular
2:56:25reversal candlestick patterns. You can
2:56:27use a pin bar on all your different time
2:56:30frames and it can be traded across many
2:56:32different markets making it a very
2:56:34flexible trading candlestick pattern.
2:56:36Most importantly, the pin bar
2:56:38candlestick is a reversal pattern and it
2:56:41can often help you find when a new swing
2:56:44either higher or lower is about to
2:56:46occur. Let's hope into a more detailed
2:56:48study about the pin bars. So, what is a
2:56:51pin bar candlestick pattern? If you
2:56:54remember, a pin bar is a candlestick
2:56:56that has a very large shadow or a
2:56:59candlestick wick with a small real body.
2:57:02The shadow of the pin bar is at least
2:57:04two times the size of the real body. The
2:57:07tail or the shadow of the pin bar shows
2:57:09the area of the price that was rejected
2:57:12and the implication of it is that the
2:57:14price will continue to move opposite to
2:57:16the direction the tail points. Now this
2:57:20pattern can be bullish or bearish
2:57:22depending upon where it occurs and how
2:57:24it is formed within the price action.
2:57:26The example here shows a bearish pin
2:57:29bar. The pin bar is formed with the
2:57:31price trying to break higher. In this
2:57:33particular market, the bulls are in
2:57:35control. But as soon as the bearish pin
2:57:38bar was formed, it shows that the beers
2:57:41have entered the market and are looking
2:57:43to take the price lower with a reversal.
2:57:46And this is exactly why the large
2:57:48candlestick wick is created which shows
2:57:50that the higher prices were rejected and
2:57:53the bears are trying to regain control
2:57:55after the initial break higher.
2:57:58Similarly, a bullish pin bar shows
2:58:00rejection of lower prices. The large
2:58:03lower wick shows the beers were in
2:58:05control earlier but eventually it was
2:58:07overcome by the bulls and now the bulls
2:58:10are dominant and the market could
2:58:12reverse higher. Now the most important
2:58:14point is that the key to highquality pin
2:58:17bars is where they form in the market.
2:58:20As we discuss more about pin bars in
2:58:22this video, we will understand why the
2:58:24best pin bars are found at the key
2:58:27market levels or within the obvious
2:58:29trends. Let us try to understand the two
2:58:32pin bar types in greater detail. Let us
2:58:35start off with the bullish pin bar. Some
2:58:37of the highest quality pin bars are when
2:58:40there is an obvious trend in the market.
2:58:42In this particular example, the price is
2:58:45moving in a clear trend higher. We can
2:58:48see from the price action that the price
2:58:50is making regular higher highs and
2:58:52higher lows with this uptrend. For a
2:58:54bullish pin bar to make sense to a price
2:58:57action trader, we want to see it formed
2:58:59at one of these swing lows with the
2:59:01trend. Now the reason as to why the pin
2:59:04bar should be formed at the swing lows
2:59:06is that pin bar is actually a reversal
2:59:09signal and we are looking to enter the
2:59:11bullish pin bar and make a profit as the
2:59:14price reverses higher with the trend or
2:59:16simply we want to enter when the buying
2:59:19demand starts to kick in and in addition
2:59:21to that we want to trade with the trend.
2:59:24In this particular example, the price
2:59:27forms a bullish pin bar at this swing
2:59:29low within the trend higher and the
2:59:32rejection is quite strong which will
2:59:34actually strengthen the bullish
2:59:36perspective even more. So in this case
2:59:39we can enter a trade straight after the
2:59:41pin bar has finished forming or we could
2:59:44use additional confirmations. A
2:59:46confirmation type of entry is where we
2:59:48are looking for the price to break
2:59:50higher and above the pin bar high. And
2:59:53when we see the price breaking above the
2:59:55pin bar high, we can enter long. Now let
2:59:58us take a look at the bearish pin bar
3:00:00setup to clear things even more. As
3:00:02mentioned, the pin bar can be both
3:00:05bullish or bearish depending upon where
3:00:07and how it forms with respect to the
3:00:09price action. The difference between the
3:00:11bullish and the bearish pin bar is that
3:00:13the bullish pin bar has a wick or a
3:00:15shadow rejecting lower prices while the
3:00:18bearish pin bar has a wick rejecting the
3:00:20higher prices which is a sign that the
3:00:23bears are more dominant over the bulls.
3:00:26Now the other great time that you will
3:00:29find high probability trades with this
3:00:31candlestick in addition to a trending
3:00:34market is when the price is rejecting a
3:00:36level in the market that is of
3:00:38importance or an area of value. These
3:00:42can often be the key support or
3:00:44resistance level or dynamic levels like
3:00:46the moving averages. In this example,
3:00:49the price moves higher into a key
3:00:51resistance level. We can see that the
3:00:53price rejects from this resistance level
3:00:55and forms a bearish pin bar. This tells
3:00:58us that the resistance level has held
3:01:01and the price may now be looking to sell
3:01:03off lower and then we can either enter
3:01:06the trade the very next candle or we can
3:01:09wait for the confirmation that is we can
3:01:11wait for the price to break below the
3:01:13lows of the pin bar candlestick. Moving
3:01:16on, let us find out which are the best
3:01:18markets to trade the pin bar. Now the
3:01:20best markets to trade pin bar strategy
3:01:23are markets where the price has a solid
3:01:25amount of volatility or the markets with
3:01:28a high volatility. The more the price
3:01:30movement and volatility, the more
3:01:32opportunities you will have to trade the
3:01:35pin bar and also the bigger potential
3:01:37for large winning trades. But markets
3:01:40such as individual stocks that can often
3:01:42have large gaps like gap ups or gap
3:01:45downs are not ideal for pinbar trading.
3:01:48Instead the markets which are fast and
3:01:50free flowing with smooth price action is
3:01:53actually good for pinbar trading. So
3:01:55markets like forex, crypto etc are the
3:01:58best candidates for this particular
3:02:00strategy. In trading mistakes are bound
3:02:03to happen. Sometimes it may be due to
3:02:06lack of knowledge and other times it may
3:02:08be due to how we conceive an idea. That
3:02:11is if we understand a particular idea in
3:02:14a different context that will lead us to
3:02:16confusion. So I will talk about some of
3:02:18the mistakes that you should avoid while
3:02:21using the pin bar trading strategy. The
3:02:23first and foremost mistake is to expect
3:02:26market reversals because of a pin bar. A
3:02:29trend either uptrend or downtrend will
3:02:32not reverse just because there is a pin
3:02:34bar on the chart. It takes more than a
3:02:36single candlestick to reverse a trend.
3:02:38Sometimes even a major news release has
3:02:41difficulty in reversing a trend. So what
3:02:43more of a pin bar? We have talked about
3:02:45the market structure or the different
3:02:47stages of the market and why and how
3:02:49they are formed. So you can watch the
3:02:51second episode to get more insights on
3:02:54this topic. So if you spot a pin bar
3:02:56against the trend, it does not
3:02:58necessarily mean a trend reversal is
3:03:00about to play out. The odds are that the
3:03:02trend will continue. The second mistake
3:03:04is giving too much attention or interest
3:03:07to pin bars. Now we have learned that
3:03:10pin bar represents price rejection. But
3:03:12here's the important thing. Price
3:03:14rejection can come in different forms
3:03:16and patterns and not just in the form of
3:03:18pin bars. So if you focus only on pin
3:03:21bars and reversals associated with pin
3:03:24bars then you will miss out a lot of
3:03:26other trading opportunities in the
3:03:28market. Now the most important mistake
3:03:30of all considering all pin bars to be
3:03:32equal. The point is if you see a strong
3:03:35momentum on the upside followed by a
3:03:37small bearish pin bar, it is likely to
3:03:40be a pause in the price action as the
3:03:42bulls are in control of the market. And
3:03:44on the same note, if you see a weak
3:03:46momentum on the upside followed by a
3:03:49huge bearish pin bar, it is likely to be
3:03:51a reversal since the preceding price
3:03:54action tells you that the bulls are
3:03:56getting weak. So, it's clear we should
3:03:58not treat all pin bars the sames because
3:04:00they are actually not. And remember the
3:04:03bigger the pin bar relative to the
3:04:05previous candles, the stronger the price
3:04:07rejection. It is always a good idea to
3:04:10compare the pin bar with the previous
3:04:12candlesticks to understand the price
3:04:14action logic. Now let us hop on to the
3:04:16pin bar trading techniques. Starting
3:04:19with trading the pin bars with the
3:04:21trend. One of the simplest and most
3:04:23effective ways to start stacking the
3:04:25oats in your favor is to trade in line
3:04:28with the obvious trend in the market.
3:04:30When trading with a clear market trend,
3:04:32you are trading with the current flow
3:04:34and not trying to push against it. So
3:04:36the trick when using pin bar and trend
3:04:39trading is to look to enter from areas
3:04:41of value and important swing points
3:04:44which are swing highs or swing lows. In
3:04:46this example, the price is in a clear
3:04:48trend higher. And so we will start
3:04:50looking for a bullish pin bar to get
3:04:53long. And when the price makes a swing
3:04:55low due to a short-term profit booking
3:04:58into an area of value like a trend line
3:05:00or a moving average or even a swing
3:05:02level and then forms a bullish pin bar
3:05:05reversal candlestick rejecting the lower
3:05:07prices. We could look to enter long
3:05:09trades. We could either go long as soon
3:05:12as the pin bar has formed or we can wait
3:05:15for a confirmation to enter when the
3:05:17price breaks above the pin bar height.
3:05:19In case of stop- loss, you can place the
3:05:21stop loss 180R below the swing loss or
3:05:24the trend line or the moving average as
3:05:27amber buffer or you can even place the
3:05:30stop loss below the lows of the pin bar
3:05:32candlestick in case you want a tighter
3:05:34stop-loss. Now the target can be set as
3:05:37the next swing high or the nearest
3:05:40resistance level or you can ultimately
3:05:42write the trend and exit when the price
3:05:44breaks out of the uptrend structure. Now
3:05:47there are a few advantages by trading
3:05:50with the trend. Number one is that you
3:05:52don't require a precise entry to make a
3:05:54good profit. Secondly, you have better
3:05:57odds for the trade to work out as you
3:05:59are trading with the market flow. And
3:06:01finally, you have a greater profit
3:06:03potential as the impulse move is
3:06:05stronger than the corrective move.
3:06:07Moving on to the second strategy,
3:06:09trading pin bars from an area of value.
3:06:12Take this example where the price moves
3:06:14higher into a key resistance level. We
3:06:17know as a thumb rule that resistance is
3:06:20an area of value where sellers will be
3:06:22looking to short the market or there
3:06:24will be a larger supply for the stock
3:06:26than the demand. So when we see a price
3:06:29rejection from the market level and it
3:06:31forms a bearish pin bar candlestick,
3:06:34this is a clue that the resistance level
3:06:36has held or the sellers are active and
3:06:39this is an indication that the price may
3:06:41now be looking to sell off even lower.
3:06:44The important point to note here is that
3:06:46pin bars are reversal candlesticks which
3:06:49can help us make a trade entry but can
3:06:52guarantee us a reversal. Now since there
3:06:54is a strong price rejection from the
3:06:56resistance level, we can either take a
3:06:59short entry on the very next candle or
3:07:01we can wait for a confirmation. The
3:07:04confirmation in this case is when the
3:07:06price breaks below the lows of the
3:07:08bearish pin bar candle and the stop loss
3:07:11for this trade would be above the highs
3:07:13of the bearish pin bar candle with a
3:07:16suitable buffer using the ATR indicator.
3:07:18And finally, the target can be set as
3:07:21the nearest swing low level or the
3:07:24nearest support level. Now, some of the
3:07:27benefits of trading at a support or
3:07:29resistance level are that you are
3:07:31trading from an area of value. Secondly,
3:07:34it tells you when you are wrong. That is
3:07:37if the reversal fails, your stop-loss
3:07:39will be hit and you will be out of your
3:07:41trade. And finally, it improves your
3:07:44winning rate as well as improve your
3:07:46reward to risk because of the area of
3:07:49value and also based on the degree of
3:07:51rejection from the level. Now the third
3:07:54strategy is using a combination of
3:07:56moving averages and support resistance
3:07:58levels. So in strong trending markets,
3:08:02the price is unlikely to pull back
3:08:04towards the trend line or a moving
3:08:06average or simply the pullbacks are
3:08:08shallow. Thus you can look to trade from
3:08:11a 200 moving average. Now by a general
3:08:14rule of defining the market trend if the
3:08:17200 moving average is pointing higher
3:08:19and the price is above it then the
3:08:21market is on an uptrend. Now on an
3:08:24uptrend find key support and resistance
3:08:26levels using a higher time frame or you
3:08:29can even use a more responsive 20 moving
3:08:31average. Then we have to wait for the
3:08:33price to come to an area of value which
3:08:36could be a support resistance level or a
3:08:39dynamic support resistance level like
3:08:41the 20 moving average. And if the price
3:08:43comes to the area of value and when you
3:08:45see a bullish pin bar or a price
3:08:47rejection from this area of value then
3:08:50you can go long. You can take a long
3:08:52entry on the very next candle or you can
3:08:54wait for the break of the highs of the
3:08:57pin bar so as to enter with a
3:08:59confirmation. If you are long, you can
3:09:01place the stop loss below the low of the
3:09:03pin bar or 180R below the pin bar low.
3:09:06Now, if the price goes in your favor,
3:09:09then you can take the profits at the
3:09:11nearest swing high level or the nearest
3:09:14resistance level or you can even use the
3:09:1620 moving average as a trailing
3:09:18stop-loss and exit when the price breaks
3:09:20below it. Now, on a closing note, pin
3:09:23bars will show up in any market
3:09:25condition on all the time frames. So be
3:09:28sure to understand the prerequisites and
3:09:30practice identify and trading them on a
3:09:33demo account before trading them with
3:09:35real money because practice makes you
3:09:38perfect.
3:09:51Traders have always benefited from
3:09:53massive jumps in asset prices especially
3:09:56during volatile market conditions. So it
3:09:59is our responsibility as a trader to
3:10:01understand these massive gems in asset
3:10:04prices or simply the gaps formed in the
3:10:06market and then learn about them analyze
3:10:09them and finding ways to trade them in
3:10:11the market. So what exactly is a gap?
3:10:14The difference between two consecutive
3:10:16candles closing price and opening price
3:10:19is called as a gap or simply a gap is an
3:10:22area of discontinuity in the chart where
3:10:24the price of the asset either falls or
3:10:26rises from the close of the previous
3:10:28day. A gap occurs when the prices skip
3:10:32between two trading periods that is
3:10:34skipping over certain prices and so it
3:10:36creates a void on the price chart or
3:10:39simply these are areas on the chart
3:10:42where no trading activity has taken
3:10:44place. Now you will have a question in
3:10:46your mind why do gaps occur in the
3:10:49market in the first place. Now there are
3:10:51a few reasons as to why gaps occur in
3:10:53the market. Let us look at the reasons
3:10:56one by one. First of all, gaps occurs
3:10:59due to an imbalance between the demand
3:11:01and supply. The gap up, for example, is
3:11:03because of the aggressiveness of buyers,
3:11:06which means that there are more buy
3:11:08orders in the market or simply the
3:11:10demand is greater than the supply, which
3:11:13will boost the prices to go up or in
3:11:16other words, the price will gap up.
3:11:18Similarly, a gap down is because of the
3:11:21aggressiveness of sellers which simply
3:11:23means that there are more sell orders or
3:11:26simply the supply is more than the
3:11:28demand which cause the price to gap down
3:11:31lower. So in short gaps occurs at levels
3:11:34where there is a supply and demand
3:11:36imbalance. The second reason due to
3:11:38which gaps occur are due to the
3:11:40overnight sentiments of the market
3:11:42participants or due to any big news.
3:11:45Gaps usually occur when there is a fresh
3:11:47news or a big announcement that will
3:11:50lead to change in the market
3:11:51fundamentals usually when the markets
3:11:53are closed. So when such a news spreads
3:11:56there is a flood of buyers or sellers
3:11:58waiting to buy or sell depending upon
3:12:00the nature of the news. And finally
3:12:03sometimes this smart money or the big
3:12:05institutions try to skip the important
3:12:07support and resistance level. That is
3:12:09for example if they are bullish on a
3:12:11particular stock they will gap up the
3:12:13price above the supply zone where they
3:12:16could have faced a potential selling
3:12:18pressure. Another important point to
3:12:20note about gaps is that gaps can act as
3:12:23supports or resistances. So in case of a
3:12:26gap up the gap can actually act as a
3:12:28support zone and during a gap down the
3:12:31gap can act as a resistance zone. We
3:12:33will use this particular idea further up
3:12:35in this video. Now another idea which is
3:12:37worth mentioning is the idea of gap
3:12:40filling. Now gap fill refers to the
3:12:42price retracement back to the previous
3:12:44day closing price. Now you can ask the
3:12:46question that do all the gaps get
3:12:48filled? The simple answer to this
3:12:50question is a no. That is not all gaps
3:12:53get filled. However, 90%age of gaps
3:12:56eventually get filled. The problem that
3:12:58you will have if you are making trades
3:13:00thinking that a gap will get filled
3:13:02every single time is that even if it
3:13:05does get filled, it can take a very long
3:13:07time. While most gaps get filled
3:13:09quickly, some gaps will not be filled
3:13:11for months or even years. So if you are
3:13:14looking to make trades aiming for the
3:13:15gap to get filled, then you need to keep
3:13:18in mind that not all the gaps will fill
3:13:20and some of them will take a very long
3:13:22time. Now all the gaps are not the same.
3:13:25There are different types of gaps and
3:13:27actually the gaps are divided based on
3:13:29the context in which they appear. So
3:13:32I'll talk about three of them. Number
3:13:33one is the breakaway gap or the breakout
3:13:36gaps. The breakaway gap means breaking
3:13:39the important support or resistance
3:13:41level or a significant trend line in the
3:13:44form of a gap. The breakaway gap
3:13:46actually appears after the completion of
3:13:48an important pattern like a price in a
3:13:50consolidation range or a continuation or
3:13:52a reversal pattern. So the main logic
3:13:55behind breakaway gap is that the smart
3:13:57money knows exactly where the support
3:14:00and resistance areas are. Let us say for
3:14:02example if the smart money is bullish
3:14:05and higher prices are anticipated the
3:14:07smart money will certainly want a rally
3:14:10but the problem is how to avoid the old
3:14:12resistance which could trigger some
3:14:14selling pressure. So what they will do
3:14:16is that they will gap up through the old
3:14:18area of supply as quickly as possible as
3:14:20a way of avoiding the resistance. Now
3:14:23after the breakaway gap has occurred, we
3:14:25have a clear sign of strength. Now the
3:14:27smart money does not want to have to buy
3:14:30the stock at higher prices because they
3:14:32have already bought their mean holdings
3:14:34at lower levels during the
3:14:35consolidation. And they also know that a
3:14:38breakout above the old resistance area
3:14:40will create a new wave of buying in the
3:14:43market. And how can they be sure about
3:14:45this? Number one, many traders who have
3:14:47shorted the market will now be forced to
3:14:50cover their positions by buying back the
3:14:52stocks. And then there will be a second
3:14:54group of traders who will be looking to
3:14:56buy the breakouts. And finally, there
3:14:58will also be traders in the market who
3:15:00may feel they are missing out on a big
3:15:02opportunity and they will be encouraged
3:15:04to start buying. Most often or not, the
3:15:06breakaway gap will not be a trapup move
3:15:09or a false breakout because high volumes
3:15:11will be supporting the move often. Now
3:15:13coming to the second type of gap, it is
3:15:15a runaway gap or a measuring gap. In
3:15:17this case the price move have been
3:15:19underway for some while and somewhere in
3:15:21the middle of the move the prices will
3:15:23gap up and this type of gap up is called
3:15:25as a runaway gap. So in case of an
3:15:27uptrend it is a sign of the continuation
3:15:29of a trend and also in case of a
3:15:31downtrend it is also a signal that the
3:15:33trend will continue. Moving on to the
3:15:35third type which is an exhaion gap.
3:15:38These are generally weak gap ups or gap
3:15:40downs. So it can be a weak gap up to the
3:15:43resistance or a weak gap down to a
3:15:45support. This price action is actually
3:15:47designed to trap you in a potentially
3:15:49weak market and into a poor trade and
3:15:52thereby hitting your stop- losses and
3:15:54most often or not it will form a false
3:15:56breakout or a false breakdown in the
3:15:58market. Well then let us figure out how
3:16:01to trade the gaps successfully. There
3:16:03are several ways to leverage gaps in the
3:16:05market to your advantage. In this
3:16:07episode however we will talk about the
3:16:09idea of breakouts and reversals with
3:16:11respect to market gaps. These strategies
3:16:13are based on two types of gaps with the
3:16:16open price depending upon the highs and
3:16:18lows of the previous trading section or
3:16:20the previous session's range. So it can
3:16:22be an outside gap or a full gap. Now
3:16:25this happens when the market open
3:16:27outside the previous day range that is
3:16:29the candle opened outside the previous
3:16:31day high or the low or gap up or gap
3:16:34down respectively. And the second type
3:16:35of gap is an inside gap or a partial
3:16:38gap. In this case, the market opened
3:16:40inside the previous day range. That is
3:16:42in case of a gap up, the candle opened
3:16:45above the previous day close but not
3:16:46above the previous day high. So there
3:16:48are three main factors we have to
3:16:50monitor to determine whether the gap is
3:16:52real or a trapped gap. So these three
3:16:54factors are the volume, opening price
3:16:57and the pullback to a particular level.
3:16:59Let's talk about the volume briefly. It
3:17:02is important to watch the volume
3:17:03carefully when determining if a gap is
3:17:06valid or not. So for example, if a stock
3:17:08gaps up and the volume is also high and
3:17:11also the price remains above the opening
3:17:13price after the morning pullback, it is
3:17:15an excellent sign that the stock can
3:17:17further go on the upside. In addition to
3:17:20volume, you can also make use of an
3:17:22indicator called the VWAP or the volume
3:17:24weighted average price which plots the
3:17:27average price adjusted for volume on the
3:17:29chart and it is fairly very easy to make
3:17:31use of. Also, the VWAP assigns more
3:17:34weight to the price points with high
3:17:36volume. To talk about VWAP briefly, VWAP
3:17:39is typically used with intraday charts
3:17:41as a way to determine the general
3:17:43direction of the intraday prices. It is
3:17:46similar to a moving average in that when
3:17:48the price is above the VWAP, prices are
3:17:50rising and when the price is below the
3:17:53VWAP, the prices are falling. But for
3:17:55the sake of this video, we will go with
3:17:57the conventional approach of following
3:17:59the volume bars for confirmations. Now
3:18:02talking about the time frames, the
3:18:04strategies that I am about to discuss
3:18:06are based on a smaller time frame that
3:18:08is the intraday time frames particularly
3:18:10on the five minute chart and considering
3:18:12the price data from two consecutive days
3:18:14where the gap has occurred. So to begin
3:18:17with I have to plot the previous days
3:18:19high and lows and also bring up the
3:18:21volume indication on the chart. Then you
3:18:24have to see if it is a gap up or a gap
3:18:26down and you have to figure out if the
3:18:28gap was a partial gap or a full gap. Now
3:18:31after finding out these prerequisites
3:18:33you are ready to take either the
3:18:34breakout approach or the reversal
3:18:36approach. And the most important thing
3:18:39of all do not trade the first hour after
3:18:41the market open in case of a gap opening
3:18:44because we need to understand the price
3:18:46range or the price action happening
3:18:48during such a volatile opening so as to
3:18:50implement our strategy with some amount
3:18:52of confidence. As I have mentioned
3:18:54earlier, there are two types of gaps,
3:18:56partial gaps and full gaps. And these
3:18:59can be further categorized to partial
3:19:01gap ups and gap downs and full gap ups
3:19:04and gap downs. So for these four
3:19:06category of gaps, we can actually
3:19:08implement a long trade and a short trade
3:19:11which will leave us with eight different
3:19:12strategies to use with. But at this
3:19:15point, I will pinpoint only four
3:19:17strategies which has a higher win rate
3:19:19than the other four strategies. And let
3:19:22me make this very clear that sometimes
3:19:24the trades won't work out as we have
3:19:26planned and it is better if we opt to
3:19:29not trade under such situations.
3:19:31Starting off with trading the full gaps.
3:19:33Let us talk about a full gap up that is
3:19:36open price of the gap up candle is
3:19:38higher than the previous day high. We
3:19:40have to note here that the previous day
3:19:42high is an important price level which
3:19:45can act as a support level for the
3:19:46prices. it can trigger a buying pressure
3:19:49in the direction of the gap up. So in
3:19:51this particular situation, we have to
3:19:53wait for the prices to form a range
3:19:56during the first hour of the market
3:19:58open. And then if we manage to find a
3:20:00pullback to the previous day high, which
3:20:02is the demand zone here, then we will
3:20:05look for a continuation trade on the
3:20:06upside direction when the price actually
3:20:09breaks above the opening range high or
3:20:11the high that was formed during the
3:20:13first hour of market open. We also have
3:20:15to see if the volumes are favorable or
3:20:17high enough which will help to
3:20:19strengthen our trade confirmation. We
3:20:21can enter a long trade above the high of
3:20:23the range and we can keep the stop- loss
3:20:25below the previous day high level with a
3:20:28suitable buffer. And in case if the open
3:20:30range high is very large, we can
3:20:32actually enter a trade above the range
3:20:35keeping at least 1.5 is to1
3:20:37risk-to-reward and placing the stop-
3:20:39loss below the highs of the range or
3:20:41below the breakout of the range candle
3:20:44lows. Now you may have a doubt in your
3:20:46mind. What if the gap up is too large?
3:20:48That is if the price opened far above
3:20:51the previous day high which means it is
3:20:53far away from any area of support. And
3:20:56in such a case the probability of the
3:20:58price retracing back to the support
3:21:00level or the previous day high level is
3:21:02very low. So as a price action trader we
3:21:05can't initiate any reasonable trades as
3:21:08there is no critical price levels where
3:21:10we can find a trade entry. And of course
3:21:13if there is any market support and
3:21:15resistance level near the 1 hour range
3:21:17after the market open then we can take a
3:21:20breakout or a reversal approach based on
3:21:22price action. Other than that, it is
3:21:24better as a price action trader to stay
3:21:26away from such a huge shift from the
3:21:28price level as the win rate of the trade
3:21:30can be low. I'm not saying that it is
3:21:33not possible to trade such huge gap ups.
3:21:35Of course, it is possible with technical
3:21:37indicators like VWAP which we will talk
3:21:40about in the technical analysis course
3:21:42but on the scope of a price action
3:21:44trader, it is better to stay away from
3:21:46such setups. Moving on, let us talk
3:21:48about a similar case but it is about a
3:21:51full gap down. That is the price opened
3:21:53below the previous day's low. In this
3:21:55case, the previous day low will act as a
3:21:58resistance level where there could be
3:22:00potential sellers coming in and push the
3:22:02price lower. So in our approach, we will
3:22:04wait for the first hour so that the
3:22:06volatility will cool down and then if we
3:22:09see a pullback of the prices back to the
3:22:12previous day low which is a potential
3:22:14resistance level. Now you have to mark
3:22:16the low price of the range so formed
3:22:18during the first hour and if the price
3:22:20manages to break below this range low
3:22:23with a high amount of volume then we can
3:22:25enter a continuation trade in the
3:22:27direction of the gap down. We can take a
3:22:29short entry below the breakout of the
3:22:31range low and we can place the stop-
3:22:33loss above the previous day low. Or in
3:22:36case if the range is too large, we can
3:22:38enter a short trade with a predefined
3:22:41reward to risk of at least 1.5 is to1
3:22:44keeping the stop- loss just above the
3:22:45breakdown of the range candle low.
3:22:48Similar to the previous case that we
3:22:50have discussed in case of a full gap up.
3:22:52In case of a full gap down where the
3:22:54open price is far from the previous day
3:22:57low which is a potential resistance
3:22:59level, the probability of a pullback or
3:23:01retest back to the resistance level is
3:23:03very low. And it does not make any sense
3:23:05as a price action trader to be trading
3:23:08without a critical price level to rely
3:23:10upon. So better avoid trading when the
3:23:12price does not respect any support or
3:23:15resistance levels. Now these are the two
3:23:17full gap trading strategies that I
3:23:19prefer using in contrast to their
3:23:21counterparts which are the full gap up
3:23:23short trade and a full gap down long
3:23:26trade. Now the idea to trade the other
3:23:28two techniques is based on the strength
3:23:30of the pullback which means if the
3:23:32pullback is very strong and breaks
3:23:34through the level with high volumes then
3:23:36we can think about implementing these
3:23:38two strategies. You can research more
3:23:40about the other two strategies if you
3:23:42are curious enough. Moving on, let us
3:23:44talk about the two partial gap trading
3:23:46strategies. One of the most important
3:23:48points that we have discussed earlier
3:23:50was that a gap can act as a support or
3:23:53resistance level. When price does move
3:23:55in and close the gap or fill the gap, it
3:23:58will often bounce away and act as an
3:24:00area of supply or demand. So there are
3:24:02two potential levels to consider out
3:24:04here. The first one is the previous day
3:24:06closing price which can oppose the
3:24:08prices. So is the opening candle of the
3:24:10particular day under consideration. So
3:24:12both these levels are potential levels
3:24:14for price reversal. So instead of
3:24:16considering both these levels as
3:24:18separate entities, we will look at them
3:24:20as a zone or area of price action. Now
3:24:23starting off with a partial gap up that
3:24:25is open price is above the previous day
3:24:27close but still below the previous day
3:24:30high level. Now when a market gaps up
3:24:32the gap can act as a support level for
3:24:34any pullback. The pullback test the gap
3:24:37with lighter volume which tells us that
3:24:39the price does not have enough legs to
3:24:41get passed through the gap or break down
3:24:43below the gap. Instead the gap becomes a
3:24:46support and there is a potential price
3:24:48reversal possible towards the upside and
3:24:50any bullish signal that is triggered is
3:24:52our buy entry. So it can be a bullish
3:24:55pin bar or a bullish engulfing pattern
3:24:57etc. We can also look for a rise in the
3:25:00volumes when the prices starts to rise.
3:25:03we enter long at this bullish signal.
3:25:05That is we can wait to enter above the
3:25:07reversal candlestick high or for an even
3:25:10more conservative approach we can enter
3:25:12when the price breaks above the days
3:25:14high level formed so far. But this
3:25:16particular approach of entry doesn't
3:25:18make sense if the range high is very
3:25:20close to the previous day high. Then
3:25:22there can be potential selling pressure
3:25:24and your trade can go against you. So
3:25:27make sure to maintain a good reward
3:25:29percentage and keep an eye on the
3:25:31important levels where the opposing
3:25:33pressure could potentially come in. We
3:25:35can place the stop loss just below the
3:25:36gap zone and we can fix a reward to risk
3:25:39of at least 1.5 is to 1 or you can even
3:25:42keep the target as the previous day high
3:25:44level. So the benefit of using this
3:25:46strategy is that gaps fill 90%age of
3:25:49time. So this is a popular trading
3:25:51strategy. The second strategy is when
3:25:54there is a partial gap down that is open
3:25:56price is below the previous day close
3:25:59but it is still above the previous day
3:26:01low. When a market gaps down then the
3:26:04gap acts as a resistance level for any
3:26:06pullback. If the pullback tests the gap
3:26:09with a smaller volume, it tells us that
3:26:11the price does not have enough strength
3:26:13to break through the gap or break out
3:26:15above the gap. Instead, the gap becomes
3:26:18a resistance level and there is a
3:26:19potential price reversal possible
3:26:21towards the downside and any bearish
3:26:24signal such as a bearish engulfing
3:26:26candle or a bearish pin bar gets
3:26:28triggered. It is our opportunity to
3:26:30short the market. We will also have to
3:26:32check if there is high enough volume
3:26:34associated with this particular move.
3:26:36You can enter a short trade below the
3:26:38bearish confirmation candlestick and
3:26:40place the stop- loss just above the gap
3:26:42for safety or it is much better if you
3:26:44keep a predefined reward to risk
3:26:46beforehand as a part of risk management.
3:26:49Now these were the two partial trading
3:26:51strategies. The two others are the
3:26:53partial gap up with a short entry and
3:26:56the partial gap down with the long
3:26:57entry. In these strategies also volume
3:27:00and pullbacks back to the gap regions is
3:27:02the key. That is if there is a strong
3:27:04enough pullback assisted with strong
3:27:06volume break through the gap zone then
3:27:08we can think about utilizing these
3:27:10techniques. You can check them out
3:27:12yourself if you want. You can also
3:27:14notice that all the strategies that we
3:27:16have discussed we were actually taking a
3:27:18trade in the direction of the gap and
3:27:21not against it. And finally it is up to
3:27:23you as a trader to back test these
3:27:26strategies on the chart and find out if
3:27:28you can actually implement successfully
3:27:30in your trades.
3:27:36I know many of you have seen a lot of
3:27:38videos on chart patterns on YouTube and
3:27:40how to trade them. But most of these
3:27:43videos don't tell you why you should
3:27:45trade them and in fact why these chart
3:27:47patterns actually work in the market. So
3:27:50this is going to be one of the most
3:27:51comprehensive courses on chart patterns
3:27:54out there. Many professional traders
3:27:56even sell paid courses on chart patterns
3:27:58that are worth thousands of rupees with
3:28:01very little content. But guess what?
3:28:03This course is completely free of cost
3:28:06and is exclusively for educational
3:28:08purposes only. So share it with all your
3:28:11fellow traders and friends. And if
3:28:13you're new to the channel, consider
3:28:14subscribing to the channel and also
3:28:16enable the bell icon so that you won't
3:28:18miss out on any upcoming videos. Now the
3:28:21working of these chart patterns are
3:28:23quite simple. Chart patterns work by
3:28:26representing the market's supply and
3:28:28demand. This causes a trend to move in a
3:28:31particular way on a trading chart
3:28:33forming a particular pattern. So when a
3:28:35trader looks at the price chart of a
3:28:37stock or an index, it can often appear
3:28:39to be completely random price movements.
3:28:42This is often true. Yet within those
3:28:44price movements are patterns. So chart
3:28:48patterns are geometric shapes found in
3:28:50the price data which can help a trader
3:28:52understand the price action as well as
3:28:55make predictions about where the price
3:28:57is likely to go. However, chart pattern
3:29:00movements are not guaranteed and simply
3:29:02trading the chart patterns is not a
3:29:04sureot way to success in the markets and
3:29:07it is better used alongside with other
3:29:09methods of market analysis. So in
3:29:12general there are three types of chart
3:29:14patterns. There are continuation chart
3:29:16patterns, reversal chart patterns and
3:29:18neutral chart patterns. The topic of
3:29:21discussion in this video are
3:29:22continuation chart patterns. I will talk
3:29:24about five most common continuation
3:29:26chart patterns and why and how they are
3:29:29formed and how to trade them with the
3:29:31proper entry, stop-loss, and target
3:29:33setups. So if you don't know what
3:29:35continuation chart patterns are as the
3:29:38name suggest these patterns signal that
3:29:40the existing trend in the market will
3:29:42most probably continue or in simple
3:29:45terms it predicts that the market will
3:29:47continue in the same direction after the
3:29:49end of the pattern. Now most of these
3:29:52continuation patterns are formed as
3:29:54consolations in between trends. So it's
3:29:57like market taking a tea break because
3:29:59of exhaion and getting back to work
3:30:02after refreshment. We will be discussing
3:30:04five patterns and their subcategories.
3:30:07We will start off our discussion with
3:30:08flag patterns followed by penance. Then
3:30:11we will talk about the ascending and
3:30:13descending triangles. Further we will
3:30:15discuss about the rectangle patterns and
3:30:18finally we will wind up with cup and
3:30:20handle and inverted cup and handle
3:30:22patterns. Before moving on to the
3:30:24patterns, let me make something clear up
3:30:26front. It's none other than time frames.
3:30:29All these patterns that I'm going to
3:30:30talk about forms in almost all the time
3:30:33frames from intraday to swing to
3:30:35positional time frames. All these
3:30:37patterns work better as the time frame
3:30:39increases because it takes more time to
3:30:41form and therefore more people are aware
3:30:44of them. Moreover, the time frame to
3:30:46trade these patterns will depend on your
3:30:48trading style, the duration you want to
3:30:50hold positions and your expectations.
3:30:53So, I have already made a video on how
3:30:56to select the appropriate time frames to
3:30:58trade. So you can watch that video to
3:31:00know which time frame to choose
3:31:02depending on your trading style. Okay
3:31:04then let's get started.
3:31:07The bullish flag or the bull flag as the
3:31:10name suggest forms during a bullish
3:31:12trend. The bull flag starts with a
3:31:14strong almost vertical bullish trending
3:31:17move which then stabilizes and turns
3:31:20into a minor bearish correction with
3:31:22parallel tops and bottoms which are
3:31:25important levels of supports and
3:31:27resistance. Now there are three
3:31:28compliments to any flag patterns that
3:31:31make it. So I'm going to give you a few
3:31:33hints to correctly identify the bull
3:31:35flag. We have to look for a preceding up
3:31:37move or an uptrend which makes a flag
3:31:40pole. As we know that the bull flag
3:31:42pattern forms during a bullish trend.
3:31:44This means that the candle's range is
3:31:47more bullish than usual and they tend to
3:31:49close near the highs. So it is a strong
3:31:51indication of buying interest in the
3:31:53market and it also signals that the
3:31:55bulls are dominating the market. Now
3:31:58after the strong move higher the market
3:32:00needs to take a break. Now this can be
3:32:02seen as a profit booking phase where the
3:32:04initial buyers are looking to book some
3:32:07of their profits. So here's where you
3:32:09can expect a potential bull flag to form
3:32:12as the market does a pullback. Now the
3:32:14type of price action that is exhibited
3:32:16in the pullback is what separates a flag
3:32:19pattern from a normal pullback. Now what
3:32:21you are looking for is a shallow
3:32:23pullback that consists of small ranged
3:32:25candles compared to the earlier strong
3:32:28bullish move or it can be seen as a
3:32:30group of indecision candles after a
3:32:32strong bullish move. Now this tells you
3:32:34that the sellers are struggling to bring
3:32:37the price down and that the buyers are
3:32:39still in control. Now, if you see a
3:32:42steep pullback with large range of
3:32:44candles, then it's probably not a bull
3:32:46flag pattern. Generally, this
3:32:48retracement ends below the 38%age
3:32:51threshold of the original trend as
3:32:54indicated by the Fibonacci. So, in
3:32:56general, it may not be considered as a
3:32:58flag pattern if the retracement goes
3:33:00below 50%age of the pole. Now, the
3:33:03tighter this range, the more likely the
3:33:05market will break out higher. Now that
3:33:07we have learned how to identify a bull
3:33:09flag, we can discuss how to trade the
3:33:11flag pattern. So I will discuss the
3:33:13entry methods, where to place the
3:33:15stop-loss and how to set the targets.
3:33:18Now starting off with the entry
3:33:19criteria. As it is a bullish
3:33:21continuation pattern, we are only
3:33:23interested in the break above the
3:33:25resistance line. So you can take a long
3:33:27entry following a breakout of the level.
3:33:30That is you can enter at the moment when
3:33:33the price breaks above the resistance
3:33:34trend line or you can look to buy above
3:33:37the high price of the breakout candle
3:33:39after it closes. Now the second method
3:33:41is to wait for a pullback or a retest
3:33:44back to the breakout level and then take
3:33:46a long entry when the price moves higher
3:33:48or when the price moves above the
3:33:50breakout candle high. Now you may be
3:33:52probably wondering which one is a better
3:33:55method. Well, there's no best approach.
3:33:58Let's say if you enter the trade as and
3:34:00when the breakout happens, it could
3:34:02potentially result in a false breakout
3:34:04also. But if it is a real breakout, it's
3:34:07the best possible price you can get.
3:34:09Alternatively, if you wait for a close
3:34:11above the highs, you will reduce your
3:34:13chances of a false breakout. But if the
3:34:15breakout is too strong, you will end up
3:34:17entering at a much higher price. The
3:34:20same is the case with waiting for a
3:34:21pullback or a retest, which may not
3:34:23happen often if the market is trending
3:34:26strongly. And as a matter of fact, you
3:34:28will miss out on the trade completely.
3:34:29So it is up to you to decide your entry
3:34:32strategy and continue practicing it over
3:34:35a large number of trades. And above all,
3:34:37it is always recommended to confirm the
3:34:40validity of a breakout using volumes and
3:34:42other indicators. So a higher than
3:34:45average volume can validate a breakout
3:34:47most of the time as it shows the
3:34:49interest of the market participants and
3:34:51low volume breakouts are most likely to
3:34:54fail. Using momentum indicators like
3:34:56MACD and RSI can also help you identify
3:34:59a true breakout. I have already made
3:35:02videos on all these topics. So if you
3:35:04want you can check them out. Let us now
3:35:06focus on the criteria for setting stop-
3:35:08losses. So how to set your stop loss
3:35:10when trading the bull flag pattern. Now
3:35:13you don't want to set your stop loss at
3:35:15obvious levels like supports and
3:35:17resistances, swing highs or lows, etc.
3:35:20And why is that? Because you can get
3:35:22your stop loss 100 easily. It is as
3:35:24obvious a level to you as it is for
3:35:26others, including the smart money. So,
3:35:29how do you get a proper stop-loss setup?
3:35:31It's simple. Your stop-loss should be at
3:35:34a level that if crossed, invalidates
3:35:37your trading setup. So, what are we
3:35:39trading here? We are trading a bull flag
3:35:41and the pattern becomes invalid when the
3:35:44price breaks and closes below the bottom
3:35:46trend line support. So, you have to keep
3:35:49your stop loss below this particular
3:35:51support level. But there are still
3:35:53chances of long wicks which can take out
3:35:55your stop- loss and then move higher in
3:35:57the desired direction which can be
3:35:59pretty annoying. So to be extra safe,
3:36:02you can give your trades more breathing
3:36:04space by setting your stop loss a
3:36:06particular distance away from the market
3:36:08structure using an indicator like ATR.
3:36:11So once you identify the swing low of
3:36:13the bull flag pattern, set your
3:36:15stop-loss one ATR below the swing low
3:36:18level. And now let's learn how to set
3:36:20target for bull flag patterns. Now there
3:36:23are many ways you can cash in your
3:36:24winners. And one of the most common
3:36:27approaches is to have a predetermined
3:36:29profit target based on the length of the
3:36:31flag pole. This method is also known as
3:36:33the price projection method. Let's
3:36:35measure the length of the flag pole from
3:36:37the bottom of the bullish price move to
3:36:40the top of the resistance level and then
3:36:42project this length from the breakout
3:36:44point above the resistance trend line.
3:36:46and this will be your profit target in
3:36:49the future. An alternate method is to
3:36:51choose to trail your stop-loss until the
3:36:54market takes you out of the trade. Why
3:36:56is this a better option? Think about
3:36:57this. The bull flag pattern usually
3:37:00appears in a strong trending market or
3:37:02just after it breaks out of a range. In
3:37:04such market conditions, there is a lot
3:37:06of potential for the trend to continue.
3:37:09And the only way to ride it is to trail
3:37:11your stop- losses. Now the question is
3:37:13how to trail your stop- loss in the best
3:37:15possible manner. Well, you can use a
3:37:17tool like moving averages or Chandler
3:37:20stop to trail your stop- loss and only
3:37:22exit the trade the market closes beyond
3:37:24it. Moreover, it is much better if you
3:37:26use a combination of both the projection
3:37:28method and the trailing stop-loss method
3:37:31so that you can predict the future move
3:37:32beforehand using the price projection
3:37:34method so as to lock in part of your
3:37:36profits there and then write the rest of
3:37:38the position using the trailing
3:37:40stop-loss and thereby not impacting your
3:37:42psychology and avoiding any potential
3:37:44losses. Now moving on in the market
3:37:47there are numerous opportunities that
3:37:49are available for trading bull flags.
3:37:51But if you were to ask me to select a
3:37:54few I would choose four different
3:37:55scenarios to trade with a bull flag so
3:37:58that my risk-to-reward is satisfactory.
3:38:00Now these four scenarios includes number
3:38:03one the formation of bull flag during a
3:38:06level breakout which is followed by a
3:38:08primary pullback. The second scenario is
3:38:10when the flag formation occurs during an
3:38:13uptrending market which further signals
3:38:15a trend continuation. The third scenario
3:38:17is when bull flags occurs inside a range
3:38:21market. And the final case is when the
3:38:23bull flag occurs in a downtrend
3:38:25signaling a trend reversal. Now the
3:38:28entry target and stop-loss criteria are
3:38:30the same for all these cases. So I won't
3:38:32be discussing them individually for each
3:38:35case. Let us take a look at the first
3:38:37case. This happens when the market
3:38:39breaks out of a range and then does a
3:38:41pullback for the first time. This is one
3:38:44of the best times to trade the bull flag
3:38:46pattern. And why is that? Because when
3:38:48the market is in a range, it will
3:38:50eventually have to break out. And
3:38:51besides, the longer it stays in a range,
3:38:54the harder it will break. So, what we
3:38:56are concerned about here is a resistance
3:38:58breakout where we can expect a bull flag
3:39:00to form. So when the market finally
3:39:03breaks out, the traders who miss the
3:39:05breakout move can wait to enter the
3:39:07market at the first indication of a
3:39:09pullback. These primary pullbacks
3:39:12usually have a shallow retracement as
3:39:14not many traders want to trade against
3:39:16the strong momentum and this presents a
3:39:19pullback trade with a very high
3:39:20probability. So if I were to explain the
3:39:23process in a rather simple fashion, it
3:39:25would go something like this. First of
3:39:27all, you have to identify a range market
3:39:29or a market testing a resistance level
3:39:32for quite a while. Now, let the market
3:39:34break out of the resistance level. Now,
3:39:36you have to wait for a bull flag pattern
3:39:38to form in the form of a primary
3:39:40pullback. Now, once you find such a
3:39:42formation, you can look to take a long
3:39:44entry on the break above the highs. Has
3:39:48it ever occurred to you that you think
3:39:50the price is too high and it would be
3:39:52better to wait for the price to retrace
3:39:55to the support or back to the breakout
3:39:57level before you go long, but the next
3:39:59thing you know, the market continues to
3:40:01break new highs and you are left on the
3:40:03sidelines regretting your decision. So,
3:40:05have you learned something from this? To
3:40:07put it simply, in a strong trending
3:40:10market, it's far easier to buy breakouts
3:40:12than to wait for the price to pull back,
3:40:15which rarely occurs. In such a market,
3:40:18you can use the bull flag pattern as an
3:40:20entry trigger. Here's how you can trade
3:40:22bull flags in a trending market. Now,
3:40:24the first step obviously is to find the
3:40:26market trend. You can look for strong
3:40:28trending market with the use of moving
3:40:30averages. For example, for short-term
3:40:32trades, you can make use of 20 simple
3:40:34moving average and for swing or
3:40:36positional trading purposes, you can
3:40:38make use of 50 or 200 period moving
3:40:41averages. Now, for this case, let us
3:40:43consider a 20 moving average. When the
3:40:45price trades above the 20 moving average
3:40:47predominantly and is sloping higher, we
3:40:50can conclude that the market trend is
3:40:52strongly bullish in a short-term
3:40:54scenario. Now you have to wait for a
3:40:56bull flag formation to develop in the
3:40:58form of a pullback. Now once you
3:41:00identify a pattern, you can look to take
3:41:03a long entry. Now as I have mentioned
3:41:05earlier, the same entry, stop-loss and
3:41:07targets can be used for this purpose.
3:41:13Predominantly, you can expect a bull
3:41:15flag to form after a breakout or during
3:41:18a strong trend. However, there are times
3:41:20when a bull flag pattern can form when
3:41:22the market is in a range and at a
3:41:24resistance level. So, in one of my price
3:41:26action videos, I have talked about the
3:41:28concept of breakouts with buildup near a
3:41:31resistance or support level. You can
3:41:33find the video on the I button if you
3:41:35want to learn more about it afterwards.
3:41:37Now, the same concept applies here. A
3:41:39buildup near a resistance level happens
3:41:41because there are no sellers stepping in
3:41:43or the buyers are willing to buy at
3:41:46higher prices. Now, whatever is the
3:41:48case, this is a sign of strength and the
3:41:50market could break out higher. So, how
3:41:52do you identify such an opportunity?
3:41:54Primarily, you have to identify a market
3:41:57which is in range. Then you have to wait
3:41:59for a flag pattern to form near the
3:42:01resistance level in the form of a
3:42:03buildup. Now, as always, you can trade
3:42:05the break above the buildup or wait for
3:42:07the market to close above the resistance
3:42:09level. There is no change in the entry,
3:42:12stop-loss and target criteria for this
3:42:14case also.
3:42:18Now, if you are probably thinking what
3:42:20the hell this dude is talking about,
3:42:22just a few minutes ago, you said that
3:42:24bull flag is a trend continuation
3:42:26pattern. Now, why are we looking for it
3:42:28in a downtrend? Yes, there is no denying
3:42:31that the bull flag is indeed a trend
3:42:33continuation pattern. But what if I tell
3:42:35you that there is a way you can profit
3:42:37by using the bull flag as a trend
3:42:39continuation pattern even on a
3:42:41downtrend. Now this method has to do
3:42:43with the market structure. So if you
3:42:45don't know about the market structure,
3:42:47you can watch it from my price action
3:42:49playlist. It's a rather simple method.
3:42:51You have to look for a few things before
3:42:53you proceed. First of all, the price
3:42:55must close above the downward trend line
3:42:58resistance. Now we are talking about a
3:43:00break in the downtrend structure. Then
3:43:03if the price forms a bull flag above
3:43:06this trend line resistance, hola, you
3:43:08have got a jackpot trade. What you're
3:43:10doing here is trading between an ending
3:43:12downtrend and a potential starting
3:43:15uptrend. You can benefit tremendously if
3:43:18you are able to catch the uptrend from
3:43:20the beginning itself. Now the entry
3:43:22stop-loss and target conditions will
3:43:24remain the same. But I suggest you use a
3:43:26trailing stop-loss such as a 20 period
3:43:29moving average since we are taking sort
3:43:31of a contrarian position just to be
3:43:33safe.
3:43:36Now a bare flag pattern is just the
3:43:39opposite of a bull flag pattern. It is
3:43:41yet another continuation chart pattern
3:43:43but the bare flag signals that the
3:43:45market is likely to move lower. So I
3:43:47will be quick with this one or else the
3:43:49length of the video will be too long.
3:43:51And if you are able to understand
3:43:53everything associated with trading a
3:43:55bull flag, then trading a beer flag is
3:43:57just a walk in the park. You just have
3:43:59to flip everything you learned with a
3:44:00bull flag at 180°. And there you have
3:44:03it. You now know beer flag pattern. Now,
3:44:06here's how to identify a beer flag.
3:44:08First, you have to look for a strong
3:44:10trending move lower. This means the
3:44:11range of the candles is more bearish
3:44:14than usual and they tend to close near
3:44:16the lows. After the strong bearish move
3:44:18lower, the market takes a break in the
3:44:21form of a pullback. Now the pullback
3:44:23should consist of smaller range candles
3:44:25compared to the earlier bearish move.
3:44:27And the more tighter the range, the more
3:44:29likely the market will break out lower.
3:44:32Now the strong bearish move represents
3:44:34the pole of the flag and the price
3:44:36consolidation during the pullback forms
3:44:38the flag of the pattern. The flag
3:44:40retracement should not move beyond
3:44:4250%age of the ball length or else it is
3:44:45not considered a bare flag pattern.
3:44:49Now the entry criteria are also similar
3:44:52except for the fact that we will now be
3:44:54looking for shorting opportunities only
3:44:56being a bearish continuation pattern.
3:44:58Now you can look to sell when the price
3:45:00breaks below the support trend line but
3:45:03it is usually prone to fake outs. So the
3:45:05better option is to wait for the
3:45:07breakdown candle to close and then enter
3:45:10below its low. But sometimes if the
3:45:12breakout candle is very large, you'll be
3:45:14entering at a very low price and the
3:45:16risk-to-reward will be affected. So you
3:45:19can either wait for a pullback or retest
3:45:21back to the breakdown trend line and
3:45:23then take a short entry when the prices
3:45:26start to move lower. Now the issue with
3:45:28this entry technique is that during a
3:45:30strong downtrending market the price
3:45:32won't pull back often enough and you
3:45:34will miss out on most of the
3:45:35opportunities. So it is up to you to
3:45:38decide your entry strategy and continue
3:45:40practicing it over a large number of
3:45:42trades. Also make sure to validate if
3:45:44the breakout is real by using volumes
3:45:47and momentum indicators like MACD, RSI,
3:45:50etc. When it comes to protecting your
3:45:52positions, you can place your stop- loss
3:45:54at a level that invalidates your trading
3:45:56setup. So, a bare flag pattern becomes
3:45:59invalid if the price breaks above the
3:46:01resistance trend line. With that idea in
3:46:04mind, you have to keep the stop- loss
3:46:06above the resistance trend line. Or to
3:46:08be even safer, you can give the price
3:46:10some breathing space by keeping 180R
3:46:13buffer above the swing high level
3:46:15depending upon your risk appetite. Now
3:46:17finally the target can be based on the
3:46:20price projection method or trailing
3:46:22stop-loss method. In case of price
3:46:24projection method you have to measure
3:46:26the length of the flag pole and then
3:46:28projected from the breakdown point below
3:46:30the support trend line. This will give
3:46:32you your projected future target price.
3:46:34For the trailing stop-loss method, you
3:46:36can make use of moving averages like 20
3:46:39or 50 period moving average depending
3:46:41upon your trading style or you can use
3:46:43an indicator like Chandler stop to ride
3:46:45your positions in case of a range
3:46:47breakdown or strong downtrend. Now, it
3:46:50is a deadly combination if you make use
3:46:52of both these techniques to exit your
3:46:54winners. Now, the most important thing
3:46:57to figure out is where to find these
3:46:59flag patterns. You can find a bare flag
3:47:01during a support line breakdown which is
3:47:04followed by a primary pullback. Now the
3:47:06breakout candles represents the flag
3:47:08while the primary pullback forms the
3:47:10flag consolidation of the pattern. Now
3:47:13you can take a short entry as per the
3:47:14entry criteria of your choice when the
3:47:17price breaks below the flag
3:47:19consolidation. Now the most common place
3:47:21where you will encounter a beer flag is
3:47:24during a strong downtrend. As we have
3:47:26discussed earlier, we can identify the
3:47:28market trend using moving averages. Now,
3:47:30the selection of moving averages will
3:47:32depend upon the trade duration or your
3:47:35trading style. For example, the 20
3:47:37moving average is good enough to
3:47:38determine the short-term trend. The 50
3:47:41moving average is suitable to identify
3:47:43the medium-term trend and the 200 moving
3:47:45average can gauge the long-term market
3:47:47trend. But the most important thing is
3:47:50to make sure that the price stays below
3:47:52the moving average and is sloping
3:47:54downwards. Now yet another occasion to
3:47:56look for bare flags is in a range market
3:47:58especially those where there is a
3:48:00buildup happening near a support level.
3:48:02Now this buildup can sometimes be in the
3:48:04form of a flag consolidation and you can
3:48:07enter a short position when the price
3:48:08breaks the buildup and the support
3:48:10level. Now the entry criteria stop-loss
3:48:12and targets will all be the same as in
3:48:15the other cases but make sure that the
3:48:17breakout is a valid one. You can also
3:48:19find a bare flag at the end of an
3:48:21uptrend when there is a break in the
3:48:23uptrend structure which is accompanied
3:48:25by a flag pattern consolidation. Now
3:48:27this will help you enter a trend
3:48:29reversal even before it happens.
3:48:34Penants are a class of chart patterns
3:48:36that closely resemble the flag patterns
3:48:39and symmetrical triangle patterns in the
3:48:41way they form and give breakouts. But if
3:48:43you were to consider a penant and a flag
3:48:46as two brothers, then the penant is the
3:48:48more aggressive brother due to the
3:48:50explosive breakouts it provides and the
3:48:52reward for risk it generates. Now there
3:48:55are two types of penance. Bullish
3:48:57penance and bearish patterns. Let us
3:48:59focus on the bull penance first. Now the
3:49:01bull penant is a chart pattern that
3:49:03forms a triangle during the pullback.
3:49:05Now it consists of two parts. the
3:49:07impulse move which forms the leg or the
3:49:10pole of the pattern and the correction
3:49:12move which is formed as a result of the
3:49:14pullback. Now you may ask what is the
3:49:16difference between a bull penant and a
3:49:18symmetrical triangle because they both
3:49:21look similar. Now the answer is quite
3:49:23simple. The difference is in the
3:49:25duration of their formation. With a
3:49:27symmetrical triangle you can clearly see
3:49:29the swings of the pattern. However, the
3:49:31candles of the bull penant are too
3:49:33crowded and too volatile for you to see
3:49:35the swings. Regardless, a bull penant is
3:49:38more similar to a bull flag pattern.
3:49:41Now, as I have cited earlier, bull
3:49:43penance creates a more explosive
3:49:45breakout than bull flag pattern. Now,
3:49:47let me explain the reason why. I hope
3:49:49you have seen videos in which a
3:49:51Coca-Cola bottle is shaken and then
3:49:53thrown onto the ground. Now, the cap
3:49:55explodes and the bottle flies off. I
3:49:58don't want to go deeper into the physics
3:50:00of this, but one of the factors that
3:50:02triggered this event is actually the
3:50:04shape of the coke bottle itself. If you
3:50:06try the same experiment with a Coke can,
3:50:08you may not get the same result. Now,
3:50:10the bottle is shaped similar to a nosil
3:50:13with the width of the bottle becoming
3:50:15narrower towards the top in comparison
3:50:18to a can where the width is almost equal
3:50:20throughout. So, what's the deal? Once
3:50:22you shake and throw the bottle, the gas
3:50:25pressure builds up and the coke wants to
3:50:27get out and the easiest exit is through
3:50:29the cap. But as they head towards the
3:50:31cap, the width starts getting narrower.
3:50:33the pressurized gases inside the bottle
3:50:35would go into rage mode and blast open
3:50:38the gap. Please don't blame me for this
3:50:40terrible physics lesson. But the point
3:50:42that I'm trying to prove is that the
3:50:44same thing happens with buyers and
3:50:46sellers in a bull penant pattern. The
3:50:48shrinking prices from left to right of a
3:50:50penent pattern is a sign of impending
3:50:53volatility as both the buyers and
3:50:55sellers are itching to get out of the
3:50:57pullback. Now this can result in a
3:50:59rather explosive breakout. But since the
3:51:01bullpen pattern is not a trend reversal
3:51:03pattern. Instead, it is a trend
3:51:05continuation pattern, we will only look
3:51:07for buying opportunities. This means
3:51:09that you are better off trying to use
3:51:11this pattern to ride on the existing
3:51:13trends rather than catching the bottoms.
3:51:16Now, let us talk about the entry,
3:51:18stop-loss and target criteria for this
3:51:20pattern. Now, starting off with the
3:51:22trade entry criteria. One of the most
3:51:24costly mistakes that traders make while
3:51:26trading the penance is entering a bull
3:51:29penant too early. As you know, ranging
3:51:31markets or even pullbacks can be
3:51:33challenging to enter for two main
3:51:35reasons. The range can overshoot or the
3:51:38range can undersshoot. Now, overshooting
3:51:40happens when the market is highly
3:51:42volatile and the prices will move beyond
3:51:44the trend line more often forming false
3:51:46breakouts. Now, undershooting is the
3:51:49opposite. That is the price fails to
3:51:51test the trend line every time. In case
3:51:53of a bull penant, we should be more
3:51:55cautious about overshooting due to the
3:51:57tight range. So what would happen if you
3:51:59buy as soon as the breakout above the
3:52:01trend line happens or if you place a buy
3:52:04limit order above the swing high? More
3:52:06often than not, the price could easily
3:52:08touch your buy order and reverse back
3:52:10into the range forming a fake out or
3:52:13overshoot. Now this can be annoying and
3:52:15can result in losses. So what is the key
3:52:17here? Now the ideal thing to do is to
3:52:20wait for the bullish breakout candle to
3:52:22close above the penant line. If the
3:52:24price makes this kind of a move, it's
3:52:26clear that the buyers who got squeezed
3:52:28finally managed to break out strongly,
3:52:30similar to the case of a exploding coke
3:52:33bottle. So, you can look to buy above
3:52:34the breakout candle's high price. But
3:52:37sometimes the breakout candle will be
3:52:38too large and you will be buying at a
3:52:41very high price thereby affecting your
3:52:43reward to risk ratio. The best move in
3:52:45such a situation is not to take the
3:52:47trade at all. Or you can wait for a
3:52:49pullback or retest back to the breakout
3:52:51level and then take an entry when the
3:52:54price starts to move higher. But because
3:52:56of the explosive nature of breakouts
3:52:58from the penance, the chances for a
3:52:59pullback or retest are fairly dim. So
3:53:02the best possible entry could be above
3:53:04the breakout candle high. Now validating
3:53:06the breakouts using volumes and other
3:53:08momentum based indicators can be a good
3:53:10practice. During the penant
3:53:12consolidation, the volume has to
3:53:14decrease due to the evident shrink in
3:53:16volatility and the breakout has to be
3:53:18supported by higher than average volumes
3:53:20which could indicate a rise in the
3:53:22buying interest. Now that you have
3:53:24learned how the bull penant works and
3:53:26how to enter it, let's talk about how
3:53:28and where to set the stop- losses when
3:53:30trading the bull penant pattern. As I
3:53:32have already discussed, you don't want
3:53:34to set your stop-loss at obvious levels
3:53:36like support and resistance, swing highs
3:53:39or lows, etc. because you can get
3:53:41stop-loss 100 easily. So your stop loss
3:53:44should be at a level that if crossed
3:53:46invalidates your trading setup. Now we
3:53:48are trading a bull penant here and the
3:53:50pattern is deemed invalid when the price
3:53:53breaks and closes below the bottom trend
3:53:55line support. So you have to keep your
3:53:57stop-loss level below this trend line
3:53:59support or below the swing low level to
3:54:02be precise. Now there are still chances
3:54:04of long wicks due to the overshooting
3:54:06issues which can take out your stop-
3:54:08loss if you keep it very tight and then
3:54:10the price can move higher in the desired
3:54:12direction which can be really
3:54:14frustrating. So to be extra safe you can
3:54:16give your trades more breathing space or
3:54:18buffer by setting the stop- loss some
3:54:21distance away from the penent market
3:54:22structure using the ATR indicator. Now
3:54:25once you identify the swing low of the
3:54:27bullish penent pattern, you can set the
3:54:29stop loss 180R below the swing low
3:54:31level. And finally, let's learn how to
3:54:34set a target for the bull penent
3:54:36patterns. Now, there are many ways that
3:54:38you can exit your winners. And one of
3:54:39the standard approaches is to have a
3:54:42predetermined profit target based on the
3:54:44length of the leg or the pole of the
3:54:46pattern. This is called the price
3:54:48projection method. And here you have to
3:54:50first measure the length of the pen and
3:54:52leg. Then project this length from the
3:54:54breakout point above the resistance
3:54:56trend line. Now this will be your profit
3:54:58target. You can also choose to trail
3:55:00your stop- loss until the market takes
3:55:02you out of the trade. Now is this a
3:55:04better option? Think about this. The
3:55:06bull penant pattern usually appears in a
3:55:09strong trending market or just after the
3:55:11price breaks out of a range. So in such
3:55:13market conditions, there is a lot of
3:55:15potential for the trend to continue
3:55:17higher and the only way to ride it is to
3:55:19trail your stop- losses. Now to trail
3:55:21your stop loss in the best possible
3:55:23manner, you can use the indicators like
3:55:25moving averages or Chandler stop and
3:55:28only exit the trade if the market closes
3:55:31below it. Moreover, it is a much better
3:55:32option if you use a combination of both
3:55:35the price projection method and the
3:55:37trailing stop-loss method so that you
3:55:39can gauge the potential of the move
3:55:40beforehand using the projection method
3:55:43so as to lock in part of your profits
3:55:45there and then write the rest of the
3:55:47position using the trailing stop-loss
3:55:48method thereby not impacting your
3:55:51psychology and avoiding any big losses
3:55:53due to price reversals. Now that you
3:55:55have learned what a penant is and how to
3:55:58trade one, it is essential to make a
3:56:00note of where to find one. So what are
3:56:02the different types of market condition
3:56:04where you can find a bull penant
3:56:06pattern. Now bull penance can be found
3:56:08almost anywhere be it in uptrend, range
3:56:11or downtrend. The only thing to remember
3:56:13is that whenever it forms in the market,
3:56:15the bull penant is a bullish
3:56:17continuation pattern and our bias should
3:56:20always be looking for long trades only.
3:56:23With that in mind, let's talk about each
3:56:25case separately.
3:56:29First, you need to define what an
3:56:31uptrend is in terms of your trading
3:56:33style and time frame you trade. Because
3:56:35if you can't define a trend objectively
3:56:37based on your requirements, then it is
3:56:39difficult to spot a bull pen and setup
3:56:41that satisfies your trading style. Now,
3:56:43the easiest way to define a trend is by
3:56:46using a trend filter such as a moving
3:56:48average. Now you can use any moving
3:56:50average like 20 period, 50 period or 200
3:56:53period etc to identify the trend based
3:56:57on a short-term, medium-term or
3:56:59long-term perspective. Let's say I have
3:57:01a medium-term outlook or I am a swing
3:57:03trader and I make use of the 50 period
3:57:06simple moving average to define the
3:57:08trend. Now if the price is above the 50
3:57:10period moving average, it means the
3:57:12trend is bullish for me. Then I will
3:57:14look for bull penent opportunities. And
3:57:17if a bullpen pattern is spotted, then
3:57:19you can look to take a long entry above
3:57:21the breakout candle. And since we don't
3:57:23know how long the trend last, you can
3:57:25even use the 50 moving average as your
3:57:27trailing stop-loss. And we would exit
3:57:29only when the price crosses below the 50
3:57:32moving average. So here, not only do we
3:57:35use the 50 moving average to filter
3:57:36trends, but we can also use it to book
3:57:39our profits.
3:57:42Since the bullpen is a trend
3:57:43continuation pattern, you might have the
3:57:45idea that this type of setup is
3:57:47unfavorable. So how exactly are we
3:57:49planning to trade the range market?
3:57:51Literally speaking, we are not trading
3:57:53the range market. Now what am I
3:57:55suggesting now? It means that instead of
3:57:57trying to buy the highs and lows within
3:57:59the range, we wait for the range to
3:58:02potentially end. That is we look for
3:58:04tight consolidations or buildups in the
3:58:07form of a bull penant pattern which is
3:58:09forming near the resistance level. So
3:58:11the moment you see a bull penant forming
3:58:13at the resistance, it tells you that the
3:58:16buyers are starting to dominate and an
3:58:18explosive breakout is imminent. You can
3:58:20look to enter above the breakout candle
3:58:22or when the price closes above the
3:58:24resistance and maybe you will even get a
3:58:26retest if you're lucky enough. Now the
3:58:28stop loss and the targets are same as we
3:58:31have discussed earlier. And since there
3:58:33is no valid trend, you can use a tighter
3:58:36moving average such as a 20 period
3:58:38moving average if you wish to trail your
3:58:40stop- loss.
3:58:42Even though the bull penant is a trend
3:58:44continuation pattern, there's still a
3:58:46way you can profit by using the bull
3:58:48penant as a trend continuation pattern
3:58:50even on a downtrend. Now, this method
3:58:53has to do with the market structure.
3:58:55Here you have to look for a few things
3:58:56before you proceed. First of all, the
3:58:58price must close above the downward
3:59:01trend line resistance. Now we are
3:59:02talking about a break in the downtrend
3:59:04structure. Then if the price forms a
3:59:07bull penant above this trend line
3:59:08resistance, you have a jackpot trade.
3:59:11What you're doing here is trading
3:59:13between an ending downtrend and a
3:59:15potential starting uptrend. So you can
3:59:17benefit tremendously if you are able to
3:59:20catch the uptrend from the start. Now
3:59:22the entry stop-loss and target
3:59:23conditions will be the same. And similar
3:59:26to the range market strategy, I still
3:59:28suggest you use a tight trailing
3:59:30stop-loss such as a 20 period moving
3:59:32average since we are taking sort of a
3:59:34contrary position.
3:59:38I won't go into all the details of a
3:59:40beer penant. This is exactly the
3:59:42opposite to bull penance. Now, it is a
3:59:45bearish continuation chart pattern. It
3:59:47has a leg comprising of impulse candles
3:59:50with a strong bearish body followed by a
3:59:52tight consolidation associated with
3:59:54smaller candles and a contraction in
3:59:57volatility. We expect the price to break
3:59:59out explosively below the trend line
4:00:01support level and continue with the
4:00:03trend. Even though this pattern is
4:00:04usually found in a downtrending market,
4:00:06we can also spot it when the price is
4:00:09about to break down from a range below a
4:00:11support level where a buildup is set up
4:00:13in the form of a beer pen and pattern.
4:00:15You can even find it at the end of an
4:00:17uptrend where the break of the structure
4:00:20is accompanied by a beer penant pattern.
4:00:25Now if I were to discuss the entry
4:00:27criteria, we will only look for shorting
4:00:29opportunities. Since the breakdown is
4:00:31expected to be explosive in nature, we
4:00:34can look to enter when the breakout
4:00:35candle gives a close below the trend
4:00:38line support. You can then short below
4:00:40the low of the breakout candle. In case
4:00:42if the breakout candle is too large and
4:00:44is affecting your reward to risk, it is
4:00:47better to drop the trade or wait for a
4:00:49pull back to the breakout level which
4:00:51happens less often in the case of a
4:00:53penant. So it is up to you to decide
4:00:55where you want to enter. Now make sure
4:00:57to validate the breakdown every time
4:00:59using volumes or momentum indicators or
4:01:02both. Now the volume generally declines
4:01:05during the penant formation and it
4:01:07increases above average when the
4:01:09breakout happens. Now the stop loss can
4:01:11be kept above the swing high level of
4:01:13the penant and providing 180R buffer
4:01:15above the swing high can deal with the
4:01:17unexpected overshoots and stop-loss
4:01:20hunting. Now the target can be kept by
4:01:22using the price projection method where
4:01:24the length of the leg is set as the
4:01:26target by projecting it below the
4:01:28breakdown point or you can adopt the
4:01:30trailing stop-loss method by making use
4:01:32of suitable moving averages when you are
4:01:35planning to ride the trend and you only
4:01:37exit when the price closes above the
4:01:39moving average. Now moving on we will
4:01:42focus on the triangle patterns namely
4:01:44the ascending triangle and the
4:01:45descending triangle chart patterns. So
4:01:47let's start with the ascending triangle
4:01:49patterns. The ascending triangle is a
4:01:52bullish chart pattern that signals the
4:01:55market is about to head higher. Now as
4:01:57you can notice the ascending triangle
4:01:59has a series of higher lows that
4:02:01approach a resistance line. Now this is
4:02:03a sign of bullish strength and for a few
4:02:06possible reasons. Now the higher lows
4:02:08are an indication that the buyers are
4:02:11willing to buy at higher prices. Now
4:02:13think about it. If the buyers were not
4:02:15willing to buy at higher prices, you
4:02:17won't see higher lows coming into the
4:02:19resistance. Now, the fact that the
4:02:21market forms a series of higher lows
4:02:24tells you that there is demand even as
4:02:26the price continues higher. The second
4:02:28point is that there is a lack of selling
4:02:30pressure. So, if there was actually a
4:02:33strong selling pressure, the price would
4:02:35not remain at the resistance for a long
4:02:37period. Instead, it would rather move
4:02:39lower very quickly. But since the price
4:02:42is hovering near the resistance, it
4:02:44means there is a lack of selling
4:02:46pressure even though it's an alluring
4:02:48level to sell. Yet another point to keep
4:02:50in mind is that there are a lot of buy
4:02:52stop-loss orders that are clustered
4:02:54above the resistance because as the
4:02:57price retest the resistance every time
4:02:59more traders will look to short the
4:03:01market and they will place their stop-
4:03:03loss above the resistance level. In such
4:03:05a situation, think about what will
4:03:07happen if the market breaks out higher.
4:03:10Well, all these buy stop-loss orders
4:03:12will be triggered and this will fuel
4:03:14further price advances towards the
4:03:16upside. So, don't make this common
4:03:18mistake when trading ascending triangle
4:03:20pattern because most trading books will
4:03:22tell you to go short when the price is
4:03:24at the resistance level. But not every
4:03:27resistance is meant for shorting.
4:03:29Instead, you must watch how the price
4:03:32approaches it. Since you have learned
4:03:33that higher lows coming into the
4:03:35resistance is a sign of bullish
4:03:37strength. This means the market is
4:03:39likely to break out higher from the
4:03:41resistance and the last thing you want
4:03:43to do is to go short and trade against
4:03:45it. I hope things are making sense. Now
4:03:49we will talk about the entry criteria.
4:03:51So how to better time your entry? Well,
4:03:53there are a few ways to do it. The first
4:03:55approach is to go long when the price
4:03:58breaks above the highs of the ascending
4:04:00triangle or above the resistance level.
4:04:02Now all you need to do is to place a
4:04:04limit buy order above the resistance
4:04:07level and you will be immediately long
4:04:09when the price breaks above the highs.
4:04:11If the breakout is real, this is one of
4:04:14the best prices to enter. But this
4:04:16method is very risky and chances are it
4:04:18might be a false breakout. The next
4:04:20method is similar to the previous
4:04:22approach. The only difference is that
4:04:24you wait for the price to break and
4:04:26close above the highs of the ascending
4:04:28triangle pattern. You can enter long
4:04:30above the breakout candle highs once the
4:04:33candle closes. This method reduces the
4:04:35likelihood of a false breakout. But if
4:04:38the breakout momentum is quite strong,
4:04:40you will be entering at a very higher
4:04:42price. So if you are an experienced
4:04:44trader, then you can even enter the
4:04:45market as the price pulls back or retest
4:04:48to the resistance line of the triangle
4:04:50pattern. Now this can help you enter the
4:04:52trade even if you miss out of the
4:04:54breakout move. and it offers a better
4:04:56entry price than waiting for the close
4:04:58of the breakout candle. But the issue
4:05:00with this approach is that the market
4:05:02may not give a pullback or retest every
4:05:04time. So it is up to you to choose the
4:05:06entry type that you like based on
4:05:08whether you are a conservative or
4:05:10aggressive trader with your approach.
4:05:12Now make sure to validate the breakout
4:05:14with volumes and other momentum
4:05:16indicators to see if there is actually
4:05:18an interest in the market participants
4:05:20to take the prices higher. Now we will
4:05:22learn how to set a proper stop-loss so
4:05:24that you don't get stopped out too
4:05:26early. Now it doesn't matter whether you
4:05:29are trading the ascending triangle,
4:05:31breakouts, pullbacks, etc. because the
4:05:34concept is the same. Your stop loss must
4:05:36be at a location that if reached will
4:05:39invalidate your trading setup. Now this
4:05:41means if the market hits the stop loss,
4:05:43you will automatically know you're
4:05:45wrong. So a stop loss below the
4:05:47resistance level is not a very good
4:05:49idea. So where else will you place it?
4:05:51Think about it. What is the ideal place
4:05:53to set a stop-loss so that if the market
4:05:56reaches it, you know the ascending
4:05:58triangle pattern is invalidated. Since
4:06:00the pattern forms higher swing lows and
4:06:03if the price moves below the recent
4:06:05swing low and forms a lower low, then we
4:06:08can be sure that our analysis has gone
4:06:11wrong. So it is exactly the place where
4:06:14you need to keep your stop loss that is
4:06:16just below the recent swing low level.
4:06:18You can give the price some breathing
4:06:20space by adding 180R buffer below the
4:06:23recent swing low. I hope it is clear.
4:06:25Now the third and most important point
4:06:27when and where to exit your winning
4:06:29trades for maximum profits. Now as
4:06:32always there are two techniques you can
4:06:34consider the trailing stop-loss method
4:06:36and the price projection method. The
4:06:39idea of a trailing stop-loss is that we
4:06:41have no idea how long a particular trend
4:06:44will last. So, we trail our stop- loss
4:06:46to ride the trend as far as possible to
4:06:49lock in your gains as the market moves
4:06:51in our favor. So, how do you trail your
4:06:53stop- loss? Well, as I have mentioned a
4:06:55number of times, you can use an
4:06:57indicator like moving average. For
4:06:59example, you can trail your stop- loss
4:07:01using 50 period moving average for a
4:07:03swing trading strategy. This means you
4:07:05will hold your position until the market
4:07:08breaks and closes below the 50 moving
4:07:10average. Now, some of you might be
4:07:12wondering why 50 moving average always.
4:07:14Actually, there is nothing special about
4:07:1650 moving average. A much better
4:07:18question to ask is what type of trends
4:07:21do you want to capture and what is your
4:07:23trading style. Now, for a long-term
4:07:25trade, you can use the 200 period
4:07:26average. For short-term trends, you can
4:07:28use the 20 period moving average and so
4:07:30on. The second method, the price
4:07:33projection method, is a classical
4:07:34charting technique to project where the
4:07:37price will exhaust itself. So, here's
4:07:39how it works. For an ascending triangle
4:07:41pattern, you have to calculate the width
4:07:42of the ascending triangle from the
4:07:44highest point which is the resistance
4:07:46level to the lowest point. Now add this
4:07:49amount to the breakout level and that's
4:07:51your price projection or expected target
4:07:54level. Now one of the issues with price
4:07:56projection is that the market can almost
4:07:58hit your target profit only to make a
4:08:01sudden reversal and sometimes it can
4:08:03reverse all the way back and hit your
4:08:05stop- loss. So what would you do to
4:08:07avoid something like that happening? The
4:08:10best idea is to combine both the
4:08:12techniques that is make a trailing
4:08:13stop-loss and price projection combo.
4:08:16This means if the market moves in your
4:08:18favor but it hasn't reached your price
4:08:21projection level, you can utilize the
4:08:23moving average to log into your profits.
4:08:25So even if there is a sudden reversal,
4:08:28you still protect what you have and do
4:08:30not give everything back to the market.
4:08:34Now the descending triangle is yet
4:08:36another logical pattern and if traded
4:08:39correctly it allows you to catch
4:08:40explosive breakout trades about to
4:08:42occur. This is a bearish chart pattern
4:08:44that shows the sellers are in control
4:08:46and it signals a bearish trend
4:08:49continuation. Now the descending
4:08:50triangle looks like a series of lower
4:08:53highs coming into an area of support.
4:08:55The pattern signals strong selling
4:08:57pressure and a lack of buying pressure.
4:09:00Usually when the price drops lower, more
4:09:02demand comes in to push the price
4:09:04higher. But that is not the case for
4:09:06descending triangle because as the price
4:09:08drops lower, there's still a lack of
4:09:10buying pressure. Instead, the sellers
4:09:13are willing to sell at even lower
4:09:15prices. That's why you get a series of
4:09:17lower highs. Now, yet another point to
4:09:19consider is that sell stop-loss orders
4:09:21are clustered below the support level.
4:09:24This is because many traders will buy
4:09:26because the price is at the support and
4:09:28they will set their stop- losses below
4:09:30the support level since that's what most
4:09:33textbook teach them. Now, as more
4:09:35traders do it, the cluster of stop-
4:09:37losses below the support level builds up
4:09:39over time. And since the market moves
4:09:41from one area of liquidity to the other,
4:09:44the price is likely to break below the
4:09:46support and trigger all these clusters
4:09:48of stop- losses which will increase the
4:09:50selling pressure and pushes the price
4:09:53downwards. Now being a bearish
4:09:55continuation pattern, the most common
4:09:57way to trade a descending triangle is to
4:09:59go short when the price breaks below the
4:10:02support level. Still, there are
4:10:03important things to consider if you want
4:10:05to find the highest probability breakout
4:10:08trades. The breakdown should occur near
4:10:10the apex of the descending triangle.
4:10:12Apex refers to the tip of the triangle
4:10:14pattern where both the trend lines meet.
4:10:17Now the reason you want to short near
4:10:18the apex is that it is where the
4:10:20volatility is the lowest and the prices
4:10:23are squeezed. Now when the volatility
4:10:25decreases, chances are the price will
4:10:28explode out of the descending triangle
4:10:30and quickly move in your favor. On top
4:10:32of that, the more times the support
4:10:34level is tested, the better. This is
4:10:36simply because when the price tests the
4:10:38support level multiple times, it will
4:10:40attract more buyers and thereby increase
4:10:43the number of stop-loss orders below the
4:10:45support level. Now, this is great for a
4:10:47breakout trader because if the price
4:10:49breaks below the support, all these
4:10:51clusters of sell stop-loss orders would
4:10:53be triggered thereby increasing the
4:10:55selling pressure towards the downside.
4:10:58Now, moving on, we will focus on how to
4:11:00trade this pattern. So, how to time your
4:11:02entry and set your stop-loss. I don't
4:11:05know if you have observed whenever the
4:11:07price falls it moves quicker than when
4:11:10it rises. So if you wait for the
4:11:12breakout candle to close below the
4:11:13support level chances are the price
4:11:16might drop a lot and you end up chasing
4:11:18the market. Thus in this case it is
4:11:20preferred to use a limit sell order and
4:11:23enter the trade when the price just
4:11:25breaks below the support level. Now, if
4:11:27you are a more conservative trader and
4:11:29you do not want to blindly place a sell
4:11:31limit order at the breakout point
4:11:33because the price could give a false
4:11:35breakout and rise higher. So, it is
4:11:37ideal to wait for the price to confirm
4:11:39your bias before shorting the markets
4:11:41after the breakout candle closes below
4:11:43the support level. But there can be
4:11:45occurrences when you can miss the
4:11:47breakout altogether. What happens then?
4:11:49So, if such a thing happens, the last
4:11:51thing you want to do is chase the market
4:11:53after a breakdown of the pattern.
4:11:55Instead, a better option is to wait for
4:11:57the price to retest the breakdown point.
4:12:00Now, if you wait for the retest, you are
4:12:02entering a favorable trade location
4:12:04where previous support is likely to act
4:12:07as a resistance level. This means you
4:12:09have a tighter stop-loss on your trade,
4:12:11which offers a better reward to risk
4:12:14ratio. But sadly, pullbacks or retest
4:12:17don't happen very often with this
4:12:18pattern. Also, making use of volumes for
4:12:21the breakout validation is a good
4:12:23practice. Now, what about the stop-
4:12:25losses? Straight away ask yourself, the
4:12:28point where the descending triangle
4:12:30pattern gets invalidated is when the
4:12:32price moves and closes above the most
4:12:35recent swing high level. So, a good stop
4:12:37loss would be above the most recent
4:12:39swing high level. And if you would like
4:12:41to be even safer, give it some buffer
4:12:44like 180R and set it above the recent
4:12:47swing high. Now, finally, how to exit
4:12:49your winners for maximum profits. Now,
4:12:52similar to every other pattern, there
4:12:54are two ways to exit the winning trades.
4:12:57Price projection method and trailing
4:12:59stop-loss method. In the price
4:13:01projection method, calculate the
4:13:02distance between the highest and lowest
4:13:05point of the descending triangle. Now,
4:13:06take this distance and project it
4:13:09downwards from the breakdown point. This
4:13:11projected future price point is where
4:13:13you exit your trade after you enter a
4:13:16breakdown of the descending triangle
4:13:18pattern. We can also use the price
4:13:19projection technique to decide whether
4:13:21it's too late to enter a trade or not.
4:13:23That is if the price is close to
4:13:25reaching its projection, there's
4:13:27probably not much reward left in the
4:13:28move and you might want to skip the
4:13:30trade. Now, the second method is using
4:13:32trailing stop- losses. And unlike the
4:13:35price projection technique, a trailing
4:13:37stop-loss does not have a fixed profit
4:13:39target. Instead, you trail your stop-
4:13:41loss as the price moves in your favor.
4:13:44So, you can ride the entire trend. Now
4:13:46you have to decide on the type of trend
4:13:48you want to capture whether it's a
4:13:50short-term, medium-term or long-term
4:13:52trend. And you trade your stop loss with
4:13:54the appropriate moving averages. For
4:13:56example, a 20 moving average can be used
4:13:59for a short-term, 50 period moving
4:14:01average for a medium-term and 200 period
4:14:03moving average for long-term trends.
4:14:05Then exit your trades when the price
4:14:07closes beyond or above the moving
4:14:10average. So if you want to capture a
4:14:12price swing in the market, the price
4:14:14projection technique makes sense. And if
4:14:16you want to ride trends in the market,
4:14:18then trailing stop-loss works best. Now
4:14:21moving to our fourth category of
4:14:23patterns, the rectangle patterns. The
4:14:26rectangle formation is a classical chart
4:14:28pattern established by horizontal lines
4:14:31which represents the important support
4:14:33and resistance. Now this is a
4:14:35continuation pattern that forms a
4:14:37trading range during a pause in the
4:14:39current market trend. It is quite easy
4:14:41to identify the pattern because it has
4:14:43at least two comparable highs and two
4:14:46comparable lows. These highs and lows
4:14:49can be joined to make two parallel lines
4:14:51that form the top and the bottom of the
4:14:54rectangle. Now a rectangle formation
4:14:56shows a period of indecision between
4:14:58sellers and buyers as they take turn
4:15:01throwing punches at each other but
4:15:03neither of them have the dominance over
4:15:05one another. So the rectangle patterns
4:15:07are also known as trading ranges or
4:15:09congestion areas or consolidation zones.
4:15:12In this case we are talking about
4:15:13continuation patterns. So we expect the
4:15:16price to break out and continue with the
4:15:18original trend. So in that sense there
4:15:20are two types of rectangles. The top
4:15:22rectangle which is formed during an
4:15:24upward price move. It signals the
4:15:26continuation of the uptrend. The next
4:15:28rectangle is formed during a downtrend
4:15:30and is called as a bottom rectangle
4:15:33which signals that the down move will
4:15:35continue after the breakout. Now the
4:15:37rectangle patterns can also reverse the
4:15:39trend. So these reversal patterns are
4:15:42given specific names like double top and
4:15:45triple top when the price test the
4:15:47resistance twice and thrice respectively
4:15:49and then moves lower. The other category
4:15:51is double bottom and triple bottom where
4:15:54the price tests the support level twice
4:15:56and thrice respectively and reverses
4:15:58upwards. So in order to clearly
4:16:01understand what the pattern is about to
4:16:02do, we have to wait till the breakout
4:16:04happens. So it is essentially a
4:16:07confusing piece of price action if you
4:16:09try to learn this pattern by heart. And
4:16:11what I recommend is to wait for the
4:16:13price to give a real breakout and then
4:16:15decide if you want to trade with the
4:16:17trend or against it. So in short in
4:16:20order to identify the rectangle pattern
4:16:22we will need to locate a trending stock
4:16:25that is having a period of consolidation
4:16:27and there should be minimum two tops and
4:16:30two bottoms that are horizontal to one
4:16:32another which will act as the resistance
4:16:34and support levels. As I have mentioned
4:16:37the top rectangle is seen during an
4:16:39uptrend. We would need to notice a
4:16:41breakout through the upper level of the
4:16:43pattern. Now this will confirm that the
4:16:45bullish move is coming back and traders
4:16:47can look to enter long positions when
4:16:49the pattern forms a break above the
4:16:51resistance level to continue with the
4:16:53bullish trend. While the bottom
4:16:55rectangle pattern is the total opposite
4:16:57of its bullish counterpart. This pattern
4:16:59occurs during a downtrend and the price
4:17:01would need to break the lower support
4:17:03level of the pattern to confirm its
4:17:05presence and traders can look to enter
4:17:07short positions when the price breaks
4:17:09the bottom of the range to continue with
4:17:11the bearish trend. Now, how to trade
4:17:13when you see a rectangle pattern? For a
4:17:16top rectangle pattern, you can enter a
4:17:18long trade when the price breaks above
4:17:20the resistance level if you are an
4:17:23aggressive trader looking for the best
4:17:25price to take an entry. The downside is
4:17:27that it could be a false breakout and
4:17:29you can get stopped out. The next
4:17:31approach is more conservative where we
4:17:33will wait for the breakout candle to
4:17:35close above the resistance level. Most
4:17:38often this method will reduce the
4:17:39chances of getting trapped in a fake
4:17:41out. But the only limitation is when the
4:17:44price breaks out with huge momentum and
4:17:46you will now be buying at higher prices.
4:17:48And finally, what if you miss out of the
4:17:51breakout completely? Then the only
4:17:53option available is to wait for a
4:17:54pullback or retest back to the
4:17:56resistance turn support level and take
4:17:59an entry from there. And if the retest
4:18:01doesn't happen, don't chase the price.
4:18:03Just avoid trading it all together.
4:18:05You'll find even better trades. Make
4:18:07sure that the volume rises during the
4:18:09breakout indicating a higher buying
4:18:11interest. You can also use indicators
4:18:13like MACD, RSI, etc. to do the same. And
4:18:17for a bottom rectangle pattern with a
4:18:19bearish breakdown, our primary instinct
4:18:22should be to sell. Now, here are the
4:18:24three entries possible. The most
4:18:26aggressive is entering as and when the
4:18:28breakout happens. The more conservative
4:18:31approach is to wait for the confirmation
4:18:33after the close of the breakdown candle
4:18:35below the support level. The final
4:18:37option is to wait for a retest in case
4:18:40you missed the breakdown. So I leave it
4:18:42up to you to decide. Make sure you
4:18:44validate the breakout with volumes and
4:18:46momentum based indicator each and every
4:18:49time. Now we will learn to set a proper
4:18:51stop-loss. We don't want the stop loss
4:18:53to affect our risk management. So when
4:18:56you notice a rectangle breakout, you
4:18:58have to measure the distance between the
4:19:00support and resistance and then place
4:19:02your stop- loss in the middle of this
4:19:04length. This is applicable to both top
4:19:07and bottom rectangles. Now your trade
4:19:09will be secured by doing this and you
4:19:11will be aware that the maximum you can
4:19:13loss from this trade is equal to half
4:19:15the size of the pattern. Now after
4:19:18buying or selling on the rectangle
4:19:20breakout pattern, the stop loss should
4:19:22be placed at the midpoint because the
4:19:24breakout will likely to have shakeouts
4:19:26before continuing with the trend. Thus,
4:19:28if you put your stop loss at or just
4:19:31below the breakout point, the smart
4:19:32money will probably hit your stop- loss
4:19:34before beginning to run with the trend.
4:19:37Now, how to exit a profitable trade?
4:19:39When trading the rectangle pattern,
4:19:41there is a clearly stated rule about the
4:19:43minimum target. You should remain in
4:19:45your trade for a minimum price move
4:19:47which is equal to the size or the width
4:19:49of the pattern. This implies that the
4:19:51distance between the support and
4:19:52resistance of the triangle should be
4:19:54placed on the chart beginning from the
4:19:57breakout moment. Now since the stop loss
4:19:59is at the midpoint of the rectangle
4:20:01range, it means that the target is twice
4:20:04the size of the stop- loss. This enables
4:20:06a reward to risk of 2 is to1 from the
4:20:08offset. You can also use the trailing
4:20:10stop-loss method if you want to write
4:20:12the trend until it's exhausted. There is
4:20:14yet another way in which traders can
4:20:16successfully trade rectangles and that
4:20:19is by buying at the support and selling
4:20:21at the resistance levels if the width of
4:20:23the rectangle pattern is very high. Now
4:20:26this can be used as an intraday or swing
4:20:28trading strategy if it provides a
4:20:30sufficient reward to risk ratio. So for
4:20:32a top rectangle pattern, you can take a
4:20:35long entry from the bottom support level
4:20:37and place your stop- loss below the
4:20:39lowest wick or candle formed during the
4:20:42consolidation and the target will
4:20:44obviously be the next resistance level.
4:20:46Similarly, for a bottom rectangle
4:20:48pattern, you can look to short when the
4:20:51price reverses down from the top
4:20:53resistance level and place your stop-
4:20:55loss above the highest wick or candle
4:20:57that is formed during the consolidation.
4:21:00The target is obviously the lower
4:21:01support level. Now let's jump into the
4:21:04final category of patterns. First of
4:21:06all, I will talk about the cup and
4:21:07handle pattern. The reason why I have
4:21:09kept the cup and handle pattern for the
4:21:11last is that there is still an ongoing
4:21:14debate as to whether the cup and handle
4:21:16pattern is more of a continuation
4:21:18pattern or a reversal pattern. In my
4:21:20opinion, the cup and handle pattern can
4:21:22be both a continuation and a reversal
4:21:25pattern. Now, it depends on where it is
4:21:27formed in the chart. If it is formed
4:21:29during an uptrend, then this pattern
4:21:31indicates a bullish continuation.
4:21:33Likewise, if it gets formed during a
4:21:35downtrend, the pattern will indicate a
4:21:38bullish reversal. Now, I'm not actually
4:21:40curious about where the pattern forms,
4:21:42but I'm more interested in the fact that
4:21:45the breakout always occurs towards the
4:21:47upside. That is a cup and handle pattern
4:21:49is expected to give a bullish breakout.
4:21:52Now, let's dive into the finer details.
4:21:54The pattern comprises of two parts. As
4:21:57the name suggests, a cup and a handle
4:22:00and also a neckline which will act as
4:22:02the resistance. The cup forms after a
4:22:05bearish price decline which is followed
4:22:07by a period of consolidation with
4:22:09smaller or weaker candles that shows
4:22:12signs of the market bottoming after
4:22:14which the price makes a higher high
4:22:16towards the resistance which indicates
4:22:19that the bulls are taking over from the
4:22:21beers gradually. Now it looks like a
4:22:23ball or an object with a round bottom
4:22:26and the volume should decrease towards
4:22:28the middle of the pattern which is
4:22:30during the consolidation and then rise
4:22:32towards the up move which indicates an
4:22:35increase in the buying pressure. How the
4:22:37price reacts at the resistance is
4:22:39important because it tells you whether
4:22:41there is still selling pressure
4:22:43available at the resistance. Now a cup
4:22:45and handle pattern becomes invalid if
4:22:48you see a large sell off from the
4:22:50resistance level as it tells you that
4:22:52the selling pressure is still available
4:22:54there and the market is not ready to
4:22:56head higher. But if you notice that the
4:22:58price is holding up nicely at the
4:23:00resistance then it is a sign of strength
4:23:03as it tells you that the buyers are
4:23:05willing to buy at higher prices. So the
4:23:07handle has to form a tight consolidation
4:23:09or buildup under the resistance level.
4:23:12At this point, many traders would do
4:23:14what they have learned from many trading
4:23:15books. That is price is at the
4:23:17resistance and it is time to go short.
4:23:19Now, that's fine if the price has made a
4:23:21strong momentum move into the resistance
4:23:23and it got rejected strongly from there.
4:23:26But if the price approaches the
4:23:28resistance and forms a buildup or even
4:23:31if it makes higher lows into the
4:23:32resistance, then you have to be very
4:23:34careful because this is a sign of
4:23:36strength which is telling you that the
4:23:38buyers are willing to buy at these
4:23:40higher prices. And the last thing you
4:23:42want to do is to short the market
4:23:44because it's likely to break out higher.
4:23:47So the handle has to give a tight
4:23:49consolidation which can be in the form
4:23:51of either a bull flag pattern or a bull
4:23:54penant pattern which by themselves are
4:23:56bullish continuation patterns. Now
4:23:58moreover the volumes should decline
4:24:00during the consolidation indicating a
4:24:02lack of selling pressure. Also keep in
4:24:04mind that the handle has to be smaller
4:24:06than the cup and it should not drop into
4:24:09the lower half of the cup and ideally it
4:24:11should stay in the upper third of the
4:24:13cup. The deeper the handle moves down,
4:24:16the less likely the market will break
4:24:17out higher. Now the handle is the last
4:24:20bearish attempt to push the prices lower
4:24:23and when it fails and the prices breaks
4:24:25above the handle, we can expect the
4:24:27market to rise. Now let us take a look
4:24:30at the entry stop-loss and target
4:24:32criterias. The first cup and handhandle
4:24:34confirmation comes when the price breaks
4:24:36above the tight consolidation range. So
4:24:38this is the most aggressive and cheapest
4:24:41entry price that you can find. But since
4:24:44there is a resistance level above it,
4:24:46the price could just reverse and hit
4:24:47your stop loss. So an alternative entry
4:24:50is to go long on the breakout above the
4:24:52neckline. This is the second best price
4:24:54you can get an entry at. But there is
4:24:56still a danger of a false breakout in
4:24:58this method. And if you are more
4:25:00conservative, you can wait for the
4:25:02breakout candle to close above the
4:25:04neckline and then take a long entry on
4:25:06the next candle above the breakout
4:25:08candle highs. However, sometimes the
4:25:11market closes much higher and you will
4:25:13have a poor reward to risk ratio. Now,
4:25:16this will result in a wide stop-loss and
4:25:18a smaller position sizing on your trade.
4:25:20And in such instances, you can wait for
4:25:22the price to do a shakeout in the form
4:25:24of a pull back or retest back to the
4:25:26neckline. and you can plan to enter when
4:25:29the price reverses higher. Now, make
4:25:31sure to validate if the breakout is real
4:25:33by using volumes and other momentum
4:25:36indicators. Another point to note is
4:25:38that the cups that have longer and more
4:25:40U-shaped bottoms gives a better signal
4:25:43and it is better to avoid the cups with
4:25:45a sharp V-shaped bottom. Now, the second
4:25:48question is where should I set my stop-
4:25:50losses? Now, whenever you place a
4:25:52stop-loss, it should always follow this
4:25:54thumb rule. Your stop loss should be
4:25:56placed at a level where if the market
4:25:58reaches it, your trading setup is
4:26:00invalidated. Now ask yourself when will
4:26:03a cup and handle pattern becomes
4:26:05invalid. A cup and handle pattern
4:26:07invalidation comes when the price breaks
4:26:10below the handle of the pattern. Now the
4:26:12stop-loss setting is same as in the case
4:26:14of a bull flag or a bull penant pattern.
4:26:17Now you don't want to put the stop loss
4:26:19at the exact low of the handle because
4:26:21the market could trade into that area of
4:26:24value and then reverse higher. So
4:26:26instead give it some buffer below the
4:26:28handle like 180R below it. And finally
4:26:31how to exit your winners. The first
4:26:34method is obviously the classic price
4:26:36projection method. Here we measure the
4:26:38height of the cup from the bottom of the
4:26:40cup to the neckline and then project it
4:26:43from the breakout point above the
4:26:45neckline. This will be your future
4:26:47profit target. Now, the second method is
4:26:49to use moving averages to trail your
4:26:51stop-loss and write big trends. So, in a
4:26:54trending market, the price can remain
4:26:55above the moving average for a long
4:26:57period of time and you will only exit
4:26:59when the price closes below the moving
4:27:01average. Moving on to the final pattern
4:27:04of this video, the inverted cup and
4:27:06handle pattern. If you flip a cup and
4:27:08handle pattern upside down, you will get
4:27:11an inverted cup and handle pattern. This
4:27:13is a pattern that gives a bearish
4:27:15breakdown. Depending on where it is
4:27:17formed in a trend, it can be a bearish
4:27:19continuation pattern or a bearish
4:27:21reversal pattern. But we are least
4:27:23interested in where it forms. But we are
4:27:26more interested in the bearish breakdown
4:27:28that it provides. The formation of the
4:27:31inverted cup shows a depleting demand
4:27:34and a lack of buying pressure which can
4:27:36be validated by using the volumes. Now
4:27:39the handle should be a tight
4:27:40consolidation in form of a beer flag or
4:27:43a beer penant which also comes with
4:27:45contracting volumes. Now if the handle
4:27:47moves way higher beyond the 50%age of
4:27:50the cup then it is better not to
4:27:51consider it as a valid pattern since
4:27:54there is enough buying pressure still
4:27:56available at the neckline or the support
4:27:58level which is pushing the prices
4:28:00higher. The entry criteria are to either
4:28:02take a short trade when the price breaks
4:28:05below the handle of the consolidation or
4:28:07when the price breaks below the
4:28:09neckline. And a more conservative entry
4:28:11would be below the low of the breakdown
4:28:14candle after the breakdown candle closes
4:28:16below the support level. And if you have
4:28:18missed out on an entry, you can wait for
4:28:20a price pullback or retest back to the
4:28:23neckline and then go short when the
4:28:25price reverses lower. Now the stop loss
4:28:28can be placed with 180R buffer above the
4:28:30handle of the pattern. And finally the
4:28:33target can be set equal to the height of
4:28:35the inverted cup from the neckline to
4:28:38the top of the cup and projected below
4:28:40the neckline from the breakout point.
4:28:43Yet another way is to write the whole
4:28:45trend using a trailing stop-loss method
4:28:48using moving averages and exit only when
4:28:51the price moves above the average. Now
4:28:53that is all the major continuation
4:28:56patterns in a single video.
4:29:02Now in the last part we talked about
4:29:04five different types of continuation
4:29:06chart patterns. However, in this video
4:29:09we will talk about reversal chart
4:29:11patterns and we will not just talk about
4:29:13it. We will examine why these patterns
4:29:16work in the market and why you should
4:29:18trade them. We will discuss the four
4:29:20most common and most profitable reversal
4:29:22patterns along with their entry,
4:29:24stop-loss, and target criteria. And if
4:29:27you don't know what reversal patterns
4:29:29are, as the name suggest, these patterns
4:29:31signal that the existing trend in the
4:29:33market will most probably reverse or in
4:29:36simple terms, they predict that the
4:29:38market will take a U-turn in the
4:29:40opposite direction of the existing trend
4:29:42after the end of the pattern. Now most
4:29:44of these reversal patterns are formed as
4:29:46consolidation in between the trends. So
4:29:49it's like the market telling us that it
4:29:51is tired of going in a particular
4:29:52direction and is looking to move in the
4:29:54completely opposite direction after
4:29:56taking some rest. So in this video I'll
4:29:59be discussing four reversal chart
4:30:00patterns and their counter patterns
4:30:03starting with the head and shoulders and
4:30:05inverted head and shoulder patterns
4:30:07followed by double top and double
4:30:09bottoms. then triple top and triple
4:30:11bottoms. And finally, we will wind up
4:30:13with the rising and falling wedges. So
4:30:15without wasting any time, let's begin.
4:30:17The head and shoulders pattern is one of
4:30:19the most popular reversal chart patterns
4:30:21out there. And because it is popular,
4:30:23the chances of making a mistake is also
4:30:25high. Now let us understand what this
4:30:28pattern really imply. Actually, the
4:30:30pattern consists of four different
4:30:31parts. The left shoulder, the head, the
4:30:34right shoulder, and the neckline.
4:30:36Overall, the pattern looks simple,
4:30:37right? But what does it actually mean
4:30:40and why does it matter? Let's analyze
4:30:42this in greater detail. We will start
4:30:44from the left shoulder. The initial
4:30:46trend in the market is an uptrend where
4:30:48the prices rallies higher and then the
4:30:50market does a pullback or a correction
4:30:53and the left shoulder is formed as the
4:30:55market does a pullback. And at this
4:30:57point there is no way to tell if the
4:30:58market will reverse because a pullback
4:31:01occurs regularly in a trending market
4:31:03and it may just be another swing low
4:31:05from which the prices can move higher.
4:31:07The market then trades above the
4:31:09previous swing high forming a higher
4:31:11high. However, the sellers take control
4:31:13or resist the upward rally and push the
4:31:16price lower towards the previously
4:31:18formed swing low. Now, the swing high
4:31:20formed as a result of this price action
4:31:22is the head of the pattern. Also, the
4:31:24line connecting both the swing lows
4:31:26forms a support level called as the
4:31:29neckline. Now, what we can observe here
4:31:31is that the uptrend structure of higher
4:31:33highs and higher lows is violated. But
4:31:36still we cannot guarantee that a
4:31:38reversal will happen because the price
4:31:40might even trade sideways. Now once
4:31:42again from the neckline the buyers make
4:31:44a final attempt to push the prices
4:31:46higher but they fail to even break above
4:31:48the previous high or the head of the
4:31:50pattern and yet again the sellers take
4:31:52control and push the price towards the
4:31:54neckline. This forms a lower high in
4:31:57compared to the previous high which
4:31:59indicates a shift in the sentiment
4:32:00towards bearishness. Now the only level
4:32:03that stands in favor of the bulls is the
4:32:05neckline which is also a support level
4:32:08or in other words the neckline is the
4:32:10last line of defense for the buyers and
4:32:13if the price breaks below it the market
4:32:15could head lower and begin the start of
4:32:17a new downtrend. So basically the head
4:32:19and shoulder pattern signals a possible
4:32:21trend reversal as the buyers fail to
4:32:24push the prices higher. Are all head and
4:32:26shoulder patterns worth trading?
4:32:28Actually there are a few things that you
4:32:30must seriously look at before you trade
4:32:32the head and shoulder chart pattern.
4:32:33These things are associated with how
4:32:35reliable is the head and shoulder
4:32:37pattern formed. Now what you need to
4:32:39understand is that not all head and
4:32:40shoulder patterns are created equal
4:32:43because how the right shoulder forms is
4:32:45a key criterion to whether you want to
4:32:47trade the breakout or not. For example,
4:32:49if you have a head and shoulder pattern
4:32:51that has a very long right shoulder,
4:32:53then you want to avoid buying the
4:32:54breakout. And why is it so? Because the
4:32:57price has moved a very long distance
4:32:59from the highs of the right shoulder to
4:33:01the neckline of the support area which
4:33:03will attract more sellers on the way. So
4:33:06the market is likely to face a buying
4:33:07pressure due to the profit booking by
4:33:09the sellers and also from the traders
4:33:11who want to buy from the support level.
4:33:13Now this creates a strong buying
4:33:15pressure which will lead to an increase
4:33:17in the price and the pattern will fail.
4:33:20So make sure that the right shoulder is
4:33:22shallow and ideally it should stay below
4:33:2450%age of the head. Other than this,
4:33:26there are two more things you must pay
4:33:28attention to while selecting the best
4:33:30head and shoulder patterns. First one is
4:33:32the market structure and the second one
4:33:34is the duration of the pattern. Let me
4:33:37explain each one of them. It is true
4:33:38that head and shoulders is a reversal
4:33:41chart pattern. But if the market is in a
4:33:43very strong uptrend, it is very unlikely
4:33:45that a simple chart pattern can reverse
4:33:48the entire up move. Instead, the market
4:33:50is likely to continue higher. Maybe the
4:33:53pattern can generate a short-term
4:33:55retracement but not entirely a reversal.
4:33:58So make sure that you don't bet against
4:34:00a very strong trending market just
4:34:02because you have seen a head and
4:34:04shoulder pattern. Now the second factor
4:34:05is the duration of the pattern. A
4:34:07typical head-and shoulder pattern can
4:34:09take 200 days, 20 days or even 20
4:34:12minutes to form depending on the chart
4:34:14time frames that you follow. But with
4:34:16some common sense, it is very obvious
4:34:18that the pattern that takes 200 days to
4:34:20form is more significant than a head and
4:34:22shoulders that takes 20 days to form,
4:34:25which is more relevant than a pattern
4:34:27formed in 20 minutes. And why you may
4:34:29ask? Because if the market breaks the
4:34:31200 day pattern neckline, there will be
4:34:34more traders or buyers who bought at the
4:34:36support and most of them will keep their
4:34:39sell stop-loss orders just below the
4:34:40neckline. Now these buyers will get
4:34:42trapped and they will rush for exit or
4:34:44their sell stop-loss orders will be
4:34:46triggered on breakdown which will
4:34:48further increase the selling pressure.
4:34:50Now when you take the case of the
4:34:51pattern formed in 20 minutes, this may
4:34:53not always hold true because only very
4:34:56few people are aware of it and the
4:34:57pattern may not give you the desired
4:34:59result. So a head and shoulder pattern
4:35:01on a higher time frame and one that took
4:35:04more time to form has a higher chance of
4:35:06success. Now this does not mean you go
4:35:09short immediately when the price breaks
4:35:11the neckline. There are a few ways to
4:35:13trade the head and shoulder chart
4:35:14pattern in the best possible manner.
4:35:18Now I will start off with the trade
4:35:20entry techniques and there are four
4:35:22possible entry methods for this pattern.
4:35:24The first and most aggressive entry is
4:35:27when the price break down the neckline.
4:35:29Now the idea is to wait for the
4:35:30breakdown candle to close below the
4:35:32neckline and then take a short entry
4:35:35below the close or the low price of the
4:35:37breakout candle. Now the advantage of
4:35:39this technique is that you'll be able to
4:35:41enter into a trade very early and
4:35:43perhaps you will get the best possible
4:35:45entry price. But the drawback is that
4:35:47the price could reverse and give a false
4:35:49breakout and might even hit your stop-
4:35:51loss. So the second entry technique is
4:35:53associated with a breakout following a
4:35:56buildup of prices. Now buildup means a
4:35:59tight consolidation of prices near an
4:36:01area of value prominently near a support
4:36:03or resistance level. You can learn more
4:36:05about this concept in the secrets of
4:36:07support and resistance in my price
4:36:09action course. In this case, we will
4:36:11wait for the market to form a tight
4:36:13consolidation near the neckline or
4:36:15support level. And if the market breaks
4:36:17down, you can reference your trade entry
4:36:19just below the close or the low of the
4:36:22breakdown candle. Now the advantage of
4:36:24this method is obviously the tight
4:36:26placement of stop-loss and an improved
4:36:28reward to risk ratio which we will
4:36:30discuss in the next section and it also
4:36:32provides a good entry price. But the
4:36:34drawback is that the breakdown candle
4:36:36can be huge and you will be selling at a
4:36:39much lower price. Now you might be
4:36:41wondering what if I miss the breakout or
4:36:43what if the market doesn't form a
4:36:45buildup and still continues to head
4:36:47lower. Won't I miss out on the trade?
4:36:49Now this is a relevant question because
4:36:51buildups don't actually happen every now
4:36:53and then. So another common method is
4:36:56waiting for a primary pullback in
4:36:58prices. This technique lets you catch
4:37:00the price move even after a breakdown.
4:37:02Now here is how it works. So if the
4:37:04market breaks down without forming a
4:37:06buildup then we will wait for a primary
4:37:08pullback to occur which is a temporary
4:37:10up move of prices with weak candles
4:37:13which generally resembles a flag or
4:37:15penant pattern which you may obviously
4:37:17know how to trade and eventually if the
4:37:19market does a pullback then you can look
4:37:21to go short on the break of the previous
4:37:24swing lows or enter right away when the
4:37:26price start moving lower. And as I have
4:37:28mentioned, the best pullbacks are those
4:37:30with shallow retracement and small
4:37:33bodied candles. But what if we get a
4:37:35steep pullback and with large bodied
4:37:37candles? What will we do then? Now if
4:37:40the pullback is deep, then we will wait
4:37:42for the price to retest the neckline or
4:37:44the previous support resistance level.
4:37:46As per the principle of polarity, we
4:37:49have to observe if the price retest the
4:37:51neckline and then wait for a price
4:37:53rejection from the neckline in form of
4:37:55bearish reversal candlesticks like
4:37:57shooting star, bearish engulfing
4:37:59pattern, evening star, etc. You can
4:38:01learn more about reversal trading using
4:38:03candlesticks in my price action course.
4:38:06And if you find there is a price
4:38:07rejection, then you can go short on the
4:38:09very next candle. Now, the retest
4:38:11technique lets you time your entry and
4:38:13even short the market at better prices.
4:38:16But the downside is that the market will
4:38:18not always do a retest and you might
4:38:20miss out on the trade altogether.
4:38:21Another important point to keep in mind
4:38:23is that the volume should decrease
4:38:25during the formation of the left
4:38:27shoulder and the head indicating a loss
4:38:29in the buying interest and it should
4:38:31rise during the formation of the right
4:38:33shoulder and also during the breakout
4:38:35confirming an interest in selling. So
4:38:38make sure you use the right entry
4:38:40techniques at the right times. Now let
4:38:42us talk about the placement of stop-
4:38:43losses with respect to our entry
4:38:46criterians. As I have discussed multiple
4:38:48times, the stop-loss should be at a
4:38:50level that if breached will invalidate
4:38:53your trading setup. Now since we are
4:38:55dealing with a head and shoulder
4:38:56pattern, your stop loss should be at a
4:38:58level that invalidates the pattern
4:39:00altogether. To be fair, if the price
4:39:02moves above the right shoulder, the
4:39:04pattern will get invalidated. So if your
4:39:07entry was aggressive as and when the
4:39:09price breakdown from the neckline then
4:39:11you should set your stop loss at or
4:39:13above the right shoulder of the pattern.
4:39:15Now what if you took a short entry after
4:39:17a buildup near the neckline then you get
4:39:20the freedom to place a much tighter stop
4:39:22loss preferably just above the buildup
4:39:24consolidation which will boost your
4:39:26reward to risk ratio by some margin. Now
4:39:29let's say you missed both these entries
4:39:31and you shortened the market after the
4:39:33prices formed a primary pullback. Then
4:39:35set your stop losses above the highest
4:39:38price in the group of the pullback
4:39:40candles or just place it above the
4:39:42neckline if the pullback is formed very
4:39:44close to the neckline. And the last
4:39:46method is if you have entered after a
4:39:48retest. In this scenario, the stop loss
4:39:51can be placed just above the highest
4:39:53wick of the group of retest candles or
4:39:56you can be more conservative and place
4:39:58the stop- loss above the right shoulder
4:40:00of the pattern. And finally, we will
4:40:02take a look at how to exit from our
4:40:04trade for maximum profit. Well, there
4:40:06are three popular techniques that you
4:40:08can use. The price projection method,
4:40:10the trailing stop-loss method, and a
4:40:12combination of these methods. Now, let
4:40:14me explain each one of them. The price
4:40:16projection is a classical charting
4:40:17technique that determines where the move
4:40:20might end. Now, it focuses on price
4:40:22exertion. The idea is quite simple. The
4:40:25prices will move a distance equal to the
4:40:28highest width of the pattern. Now in
4:40:30this case the highest width of the
4:40:31pattern is from the neckline to the
4:40:34head. So all you have to do is to
4:40:36measure the width from the head to the
4:40:38neckline and then project this distance
4:40:40from the neckline towards the downside.
4:40:43The second method is more like trailing
4:40:45your stop-loss to write big trends. Now
4:40:48if you have followed me on my last
4:40:49video, you know how to trail your
4:40:51stop-loss to write massive trends in the
4:40:54market. One way you can do this is to
4:40:55trail your stop-loss with moving
4:40:57averages. The selection of moving
4:40:59averages will depend on the time frame
4:41:01that you're trading on. For short-term
4:41:04trends, a 20 moving average will do the
4:41:06job, but for a medium-term trend, a 50
4:41:09moving average will be a good choice.
4:41:11And for a long-term trend, a 100 or 200
4:41:13moving average is the best possible
4:41:15option. The idea is to ride the trend
4:41:18until the price moves above the trailing
4:41:19stop-loss where you can exit your
4:41:21position. The last method uses a
4:41:24combination of both these techniques.
4:41:25The idea is to exit half your positions
4:41:28at the price projection level and then
4:41:30write the rest using a trailing
4:41:32stop-loss. By doing this, you'll be able
4:41:34to lock into some good profits and not
4:41:36fall prey to the market reversals. Now,
4:41:39I would like to add a few more points as
4:41:41to when and where to trade this pattern
4:41:43on the charts. So, when you think about
4:41:45it, head and shoulders is a reversal
4:41:47pattern, but it is also a bearish
4:41:50breakout pattern. With that idea in
4:41:52mind, you can either trade this when the
4:41:54uptrend is weakening and you find a head
4:41:56and shoulder pattern that confirms the
4:41:58trend change or you can also trade this
4:42:00pattern when the market is in a
4:42:02downtrend and the pattern appears as a
4:42:04temporary pause in the downward price
4:42:07action. By doing so, you are taking a
4:42:09trade in the direction of the trend and
4:42:11not against the prices. But make sure
4:42:14that you don't bet against a very strong
4:42:16uptrend just because you spotted this
4:42:18pattern and it may not work in your
4:42:20favor. Then moving on, the inverse head
4:42:22and shoulders or inverted head and
4:42:25shoulders or reverse head and shoulders
4:42:27pattern is a bullish reversal chart
4:42:29pattern that signals that the buyers are
4:42:31in control. It is just like a mirror
4:42:33reflection of the head and shoulders
4:42:35pattern. So I won't be digging deep into
4:42:37the minute details of this pattern.
4:42:39Anyway, let's find out what inverse head
4:42:41and shoulder pattern really means. This
4:42:43pattern also has four parts. The left
4:42:46shoulder is the result of a pullback
4:42:48against the downtrend either because of
4:42:50a profit booking or eager buyers
4:42:52stepping into the market. But the
4:42:54sellers are still in control as they
4:42:56push the prices lower. However, the
4:42:58buyers are also stepping in which
4:43:00explains the stronger pullback to retest
4:43:03the previous swing high level which
4:43:04forms the head of the battle. From this
4:43:07we can assume that the sellers are
4:43:08getting weak as they couldn't push the
4:43:11price lower. Instead, the buyers are
4:43:13getting stronger as they continue to
4:43:15push the prices higher, retesting the
4:43:17resistance area or the previous swing
4:43:19high, which forms the neckline of the
4:43:20pattern. Now, the sellers tried to push
4:43:22the price down one last time, but they
4:43:25were met with the intense buying
4:43:26pressure, thereby forming a higher swing
4:43:29low compared to the head of the pattern.
4:43:31Now, this forms the right shoulder of
4:43:33the pattern and it tells us that the
4:43:35sentiment has changed from bearish to
4:43:37bullish. And if the price manages to
4:43:40break above the resistance, then the
4:43:41inverse head and shoulder pattern is
4:43:43confirmed and the market could continue
4:43:45higher. Now you might be thinking of
4:43:47buying when the price breaks out of the
4:43:49inverse head and shoulders and gain some
4:43:51profits. But this is not easy because
4:43:54not all of them are reliable. What
4:43:56matters is the strength of the market
4:43:58structure and the duration of the
4:44:00inverse head and shoulder formation. So
4:44:02if the market trend is strongly bearish,
4:44:04the chances of reversal are quite dim
4:44:07even if the pattern forms and it could
4:44:09just be a short pause before the
4:44:11continuation of the trend. Now the other
4:44:12point is that the longer the inverted
4:44:14head and shoulder pattern takes to form,
4:44:17the more significant it is. This also
4:44:19means that the shorter the duration of
4:44:21the inverse head and shoulder pattern,
4:44:23the more likely it will fail, especially
4:44:25when you're trading it against the
4:44:27trend. Also keep in mind that how the
4:44:29right shoulder forms is also a key
4:44:31criterion for whether you want to trade
4:44:34the breakout or not. So let's say you
4:44:36have an inverse head and shoulder
4:44:37pattern that has a very long right
4:44:39shoulder. Then you might want to avoid
4:44:42buying the breakout because the price
4:44:44has already moved a long distance from
4:44:46the lows of the right shoulder to the
4:44:48resistance area which attracts more
4:44:50buyers along the way. So the market is
4:44:53likely to face a selling pressure from
4:44:55the profit booking by the buyers and
4:44:57also from traders who want to sell at
4:44:59the resistance level. Now this will
4:45:02create a strong selling pressure which
4:45:04will lead to a price decline. So a rule
4:45:06that you can follow is that the right
4:45:08shoulder should be above 50%age of the
4:45:11head of the pattern. Now let's talk
4:45:13about when you trade the inverse head
4:45:15and shoulder pattern. Even though this
4:45:17is a reversal pattern, the idea that
4:45:19inverse head and shoulder pattern is a
4:45:21bullish breakout pattern is more
4:45:23prominent. So it makes sense to trade
4:45:25this pattern when the market is in an
4:45:27uptrend. And when you trade the inverse
4:45:28head and shoulder pattern in an uptrend,
4:45:30you just increase your odds of winning
4:45:33because you are now trading with the
4:45:34trend and not against it. Another
4:45:36opportunity to trade this pattern is
4:45:38when you spot this pattern at the end of
4:45:41the downtrend and the inverse head and
4:45:43shoulder pattern acts as a confirmation
4:45:45that the existing downtrend is weakening
4:45:48and there's a possibility that the
4:45:49market might reverse and move higher.
4:45:52But make sure that you don't trade this
4:45:54pattern in a very strong downtrend
4:45:56because the possibility of trend change
4:45:58is very low in such instances. Now let's
4:46:00move on to learning how to trade this
4:46:02pattern when you're spot one. We will
4:46:04discuss the entry criteria first. The
4:46:07most aggressive entry is when the price
4:46:09breaks above the neckline or the
4:46:11resistance. The idea is to wait for the
4:46:13breakout candle to close above the
4:46:15neckline and then take a long entry
4:46:17above the close price or the high price
4:46:20of the breakout candle. The advantage of
4:46:22this technique is that you will be able
4:46:24to enter into the trade very early and
4:46:27perhaps you will get the best possible
4:46:28entry price. But the main drawback is
4:46:30that the price could reverse and give a
4:46:33false breakout and might even hit your
4:46:35stop- loss. The second entry technique
4:46:38is a breakout with buildup. Now this
4:46:40happens when we observe a tight
4:46:42consolidation of prices near the
4:46:44resistance level or neckline. So when
4:46:46you see a buildup at the resistance, it
4:46:48tells you that there is buying pressure
4:46:51willing to buy at higher prices despite
4:46:53profit taking and short selling from
4:46:55that level. Also, the traders who went
4:46:57short at that resistance level are
4:47:00likely to have their buy stop-loss
4:47:02orders above the resistance level. So,
4:47:04when the price breaks out of the
4:47:05resistance, these clusters of stop-
4:47:07losses will provide fuel to push the
4:47:10prices even higher. And if the market
4:47:12breaks out above, you can straight away
4:47:14enter into a long trade or you can wait
4:47:16for the candle to close and enter above
4:47:19the close or above the high of the
4:47:20breakout candle. The advantage of using
4:47:23this method is obviously the tight
4:47:25placement of stop- losses and an
4:47:27improved reward to risk ratio and also a
4:47:29very good entry price. But the main
4:47:31drawback is when the range of the
4:47:32breakout candle is very huge and you
4:47:35will be buying at a much higher price.
4:47:37Now what if the market doesn't form a
4:47:39buildup or it forms a huge breakout
4:47:41candle and still continues to head
4:47:43higher. So if you miss both the above
4:47:45entries, the other method is to wait for
4:47:48a primary pullback in prices to happen.
4:47:50This technique helps you to catch the
4:47:52price move even after a breakout. So if
4:47:54the market breakout without forming a
4:47:56buildup then we will wait for a primary
4:47:59pullback to occur which is a temporary
4:48:01down move of prices with weak candles.
4:48:04And if the market does form a pullback
4:48:06then you can look to go long on the
4:48:08break of the previous swing high or end
4:48:10right away when the prices starts
4:48:12rising. And as I have mentioned the best
4:48:14pullbacks are the ones with shallow
4:48:16retracement and small bodied candles.
4:48:19But what if we get a steep pullback with
4:48:22large body candles? What would we do
4:48:24then? So if the pullback is very deep,
4:48:26then we will wait for the price to
4:48:28retest the neckline or the previous
4:48:30resistance turn support level where we
4:48:33expect the buyers to come in. We need to
4:48:35observe if the price retest the neckline
4:48:37and if it does we will wait for a price
4:48:40rejection from the neckline in the form
4:48:42of bullish reversal candlesticks like
4:48:44bullish hammer, bullish engulfing
4:48:46pattern, morning star, etc. And if you
4:48:48find there is a rejection then you can
4:48:50go long on the very next candle. Now
4:48:53this retest technique lets you time your
4:48:55trade entry and even take up positions
4:48:57at better prices. But the downside is
4:49:00that there is no guarantee that the
4:49:02price will retest the level especially
4:49:04if the market is in a strong uptrend and
4:49:06you might miss out on the trade
4:49:08altogether. Yet another important point
4:49:10to keep in mind is that the volume
4:49:12should decrease during the formation of
4:49:14the left shoulder and head indicating a
4:49:16loss of interest in selling and the
4:49:18volume should rise during the formation
4:49:20of the right shoulder and also during
4:49:22the breakout confirming an increase in
4:49:24the buying pressure. So make sure you
4:49:27use the right entry techniques at the
4:49:29right times.
4:49:42This is exactly where you should
4:49:44reference your stop loss. So if your
4:49:46entry was very aggressive as and when
4:49:48the price break out from the neckline,
4:49:50then you should set your stop loss at or
4:49:53below the right shoulder of the pattern.
4:49:54Now, what if you took a long entry after
4:49:57a buildup near the neckline? Then you
4:49:59have the convenience of placing a much
4:50:01tighter stop-loss, preferably just below
4:50:03the buildup, which will in turn improve
4:50:05your reward to risk ratio. Now, let's
4:50:07say you have missed both these entries
4:50:09and you entered a position in the market
4:50:11after the prices formed a primary
4:50:13pullback. Then set your stop loss below
4:50:15the lowest price in the group of
4:50:17pullback candles including the wick or
4:50:20place it just above the neckline if the
4:50:22pullback form is very close to the
4:50:24neckline. Now the last method is if you
4:50:26are entering the trades after a retest.
4:50:28In this scenario the stop loss can be
4:50:31placed just below the lowest wick of the
4:50:34group of retest candles or you can be
4:50:36more conservative and place your stop
4:50:38loss below the right shoulder of the
4:50:40pattern to save yourself from long
4:50:42wicks. Now we will take a look at how to
4:50:45exit from our trade for maximum profits.
4:50:48And as previously mentioned, there are
4:50:50three popular techniques that you can
4:50:52make use of. The price projection
4:50:54method, trailing stop-loss method, and a
4:50:56combination of both these methods. The
4:50:58price projection helps determine where
4:51:00the price move might possibly exhaust.
4:51:02Now, here's how it works. Just calculate
4:51:05the distance between the head and the
4:51:06neckline. Then project this distance
4:51:09upwards from the breakout point or
4:51:11neckline. This projected price point is
4:51:14where you should exit your trade. This
4:51:16price projection techniques helps decide
4:51:18whether it's too late to enter a trade
4:51:20or not. And if the price is very close
4:51:22to reaching the price projection, then
4:51:24there's probably not much juice left in
4:51:26the move and you might want to skip the
4:51:28trade. But unlike the price projection
4:51:30technique, a trailing stop-loss method
4:51:32does not use a fixed target profit.
4:51:34Instead, you trail your stop-loss as the
4:51:37price moves in your favor so that you
4:51:39can write the entire trend. So in order
4:51:41to do that, the first step is to decide
4:51:43on the type of trend you want to
4:51:45capture. Whether it's a short-term,
4:51:47medium-term, or long-term trend. Then
4:51:49you can trail your stop- loss with the
4:51:51appropriate moving averages like 20
4:51:54period for short-term, 50 period for
4:51:56medium-term and 200 period moving
4:51:59average for long-term trades. You will
4:52:01exit the trade only when the price
4:52:03closes below the moving average. Now the
4:52:05last method uses a combination of both
4:52:07these methods and you will exit half
4:52:10your positions at the price projection
4:52:12level and write the rest using the
4:52:14trading stop-loss. By doing this you'll
4:52:16be able to lock in some of the profits
4:52:18and not fall prey to the market
4:52:20reversals. Let's move on to the third
4:52:23pattern which is the double top pattern.
4:52:25Now this is one of the most common chart
4:52:28patterns that you will encounter. So
4:52:30this is a good thing because you'll get
4:52:32a good number of trades but this is also
4:52:34a bad thing because which trades to
4:52:36select will be a big concern. So we will
4:52:39discuss the basics of what a double top
4:52:42pattern is, how it works and how you
4:52:44should go about trading it. Now a double
4:52:46top is a bearish reversal chart pattern
4:52:49and it consists of three parts. the
4:52:52first peak or the first price rejection,
4:52:54the second peak or the second price
4:52:56rejection and the swing low forms a
4:52:59neckline or an area of support. Now,
4:53:01what does the double top chart pattern
4:53:03really mean? The first peak is formed as
4:53:06a result of the market doing a pullback.
4:53:08At this point, you can't tell for sure
4:53:10if it will be a reversal as pullbacks
4:53:12are very common in trending markets from
4:53:14time to time. This is followed by a
4:53:16second peak where the prices get
4:53:18rejected in the same area again
4:53:20indicating that the buyers are not very
4:53:22keen to buy at higher prices. Now this
4:53:25is the first sign that the market could
4:53:27reverse lower and the break below the
4:53:29neckline will confirm our bias that the
4:53:31sellers are in control and the market
4:53:33could continue lower. So in a sense the
4:53:36double top chart pattern signals a
4:53:38possible trend reversal as the market is
4:53:41unable to move higher. But keep in mind
4:53:44that not all double top chart patterns
4:53:46are created equally. For example, if you
4:53:48spotted a double top when the market is
4:53:50in a strong uptrend, the chances are the
4:53:53market will continue heading higher and
4:53:55the last thing you want to do is to go
4:53:57short or trade against the trend just
4:54:00because you have spotted a double top
4:54:01chart pattern. So there are two
4:54:03important things that you must pay
4:54:05attention to when trading a double top
4:54:07chart pattern. First of all, you need to
4:54:09see where and how the pattern forms and
4:54:12secondly, how long does it take to form
4:54:14or the duration it takes to form the
4:54:16pattern. As I have already mentioned,
4:54:18you don't want to short a double top
4:54:20against a strong uptrend. And in
4:54:22addition to this, the space between the
4:54:24first and second peaks is also an
4:54:27important factor worth considering. This
4:54:29means you should probably avoid double
4:54:31tops with both their peaks very close to
4:54:34one another. Instead, we want to trade
4:54:36those double tops when the space is far
4:54:38apart from the first and second peak.
4:54:40And why does the space between the peaks
4:54:42have to be so far apart? The reason is
4:54:44quite simple. When there is more time
4:54:47and space between the first and second
4:54:49peaks, these swing levels or peaks
4:54:51become more significant as more traders
4:54:54will become aware of the price level.
4:54:56And as you may have already guessed,
4:54:57when a level receives more attention, it
4:55:00attracts more order flow as more traders
4:55:02would want to trade around that area. So
4:55:04when a large group of traders gets it
4:55:07wrong, it presents an opportunity that
4:55:09we can take advantage of. So beware of
4:55:11trading double tops and double bottoms
4:55:13and trading on an intraday basis over a
4:55:15shorter time frame. The higher the time
4:55:17frame and the larger the space between
4:55:19the swing highs, the greater the chances
4:55:21of a successful pattern. Now, most
4:55:24trading gurus will tell you to short the
4:55:26double top breakout when the price
4:55:28breaks below the neckline and they will
4:55:30ask you to set the stop-loss above the
4:55:32highs. However, there are two issues
4:55:34with this approach. First of all, after
4:55:36a strong move lower, the market could
4:55:39reverse higher proving to be a false
4:55:41breakout and thereby hitting your stop-
4:55:43loss. Secondly, the stop- loss is
4:55:45inherently very large and it does not
4:55:47offer a favorable reward to risk ratio
4:55:50on your trade. So there are a few ways
4:55:52that you can think of to fix this. Let's
4:55:54start by discussing the trade entry
4:55:56criteria first. Now the most aggressive
4:55:59entry is when the price breaks below the
4:56:01neckline or the support level. The idea
4:56:04is to wait for a breakout candle to
4:56:06close below the neckline and then take a
4:56:08short entry below the close or the low
4:56:11price of the breakout candle. Now
4:56:12waiting for the candle to close will
4:56:14ensure that the candle closes below the
4:56:16neckline and suggest that it is not a
4:56:19false breakout. The other advantage of
4:56:21this technique is that you'll be able to
4:56:23enter into a trade at a very early
4:56:25stage. But the drawback is that the size
4:56:27of the breakout candle can be too large
4:56:29sometimes which can badly reduce your
4:56:32reward to risk ratio. In some cases, it
4:56:34is always beneficial to wait for a price
4:56:36buildup to form near the neckline which
4:56:39acts as a support level in this pattern.
4:56:41Now, we will take a short trade when the
4:56:43price breaks below the neckline after
4:56:45the buildup. This will ensure a higher
4:56:47probability of success because the
4:56:49trader who are long near the neckline of
4:56:51the support will have their stop-loss
4:56:53orders placed below the support level
4:56:56and this will cut their losses if the
4:56:58market continues to head lower. And once
4:57:00price breaks below the support level,
4:57:02all these sell stop-loss orders will be
4:57:04hit which will add further selling
4:57:06pressure thereby increasing the
4:57:08probability of success. On top of that,
4:57:10this trade will ensure a more favorable
4:57:12reward to risk ratio as you will have a
4:57:14much tighter stop-loss. Anyway, the
4:57:17problem with this approach is that the
4:57:18breakout candle can be too large and
4:57:20also the fact that only a limited number
4:57:22of trades are available. Now, what if
4:57:25you miss the breakout trade? Is it the
4:57:27end? Not really. You can still enter a
4:57:30trade if the prices form a primary
4:57:32pullback in the form of a flag or a
4:57:34penent pattern. A primary pullback is
4:57:36nothing but a temporary up move of
4:57:38prices with weak candles, most probably
4:57:41due to profit booking. And a good
4:57:43pullback is always shallow and is
4:57:45associated with weak candles. But what
4:57:48if we get a steep pullback with large
4:57:50bowl candles? What will we do then? Yet
4:57:53again, we can look for a retest of
4:57:55prices back to the neckline which will
4:57:57now behave like a resistance level where
4:57:59we can expect to find the sellers to
4:58:01come in. So if the price do the retest
4:58:03then we will wait for a price rejection
4:58:05from the neckline in the form of bearish
4:58:07reversal candlesticks like shooting star
4:58:10bearish engulfing pattern evening star
4:58:12etc. And if you find there is a price
4:58:14rejection you can back yourself to take
4:58:17a short entry as the price begins to
4:58:19move lower. The retest entry provides a
4:58:22better entry price than any other entry
4:58:24methods. But the downside is that the
4:58:26prices don't always give a retest and
4:58:28especially in strong trending markets.
4:58:30You don't expect pullbacks or retest.
4:58:33Above all, make sure to confirm the
4:58:36breakouts with higher than average
4:58:37volumes and using other momentum
4:58:39indicators like RSI, MACD, etc.
4:58:44Your stop loss should be at a level that
4:58:46if breached will invalidate your trading
4:58:48setup. Since we are trading a double top
4:58:51pattern, our stop loss should be at a
4:58:53level that invalidates the pattern
4:58:55altogether. In that sense, if the price
4:58:57moves above the swing high of the
4:58:59pattern, the pattern will be
4:59:01invalidated. But there is a small twist.
4:59:04Number one, if we do this, the stop loss
4:59:06can be too large and so the reward risk
4:59:09will be very low. Secondly, the market
4:59:11can move up to the top of the resistance
4:59:13level and then reverse lower after
4:59:15hitting your stop- loss just to form a
4:59:17triple top pattern and then move lower
4:59:20completing the pattern which can be
4:59:22really frustrating. So, what I recommend
4:59:24is to either place your stop loss at
4:59:2650%age level between the swing top and
4:59:29the neckline or if this distance is too
4:59:31large then set your stop loss with an
4:59:34adequate buffer using the ATR indicator
4:59:36just above the breakdown candle high.
4:59:38This could be your stop loss. Your entry
4:59:40was very aggressive. That is you went
4:59:42short as and when the price broke below
4:59:44the neckline. Now what if you took a
4:59:46short entry after a buildup near the
4:59:48neckline. Then you get the freedom to
4:59:50place a much tighter and hassle-free
4:59:52stop-loss preferably just above the
4:59:55buildup or consolidation which will
4:59:57boost your reward to risk ratio. Now
4:59:59let's say you miss both these entries
5:00:01and you shorted the market after the
5:00:03prices formed a primary pullback. Then
5:00:05you set your stop loss above the highest
5:00:08price in the group of the pullback
5:00:10candles or just above the neckline if
5:00:12the pullback is formed very close to the
5:00:14neckline. Now the last method is if you
5:00:17are entering after a retest. In such a
5:00:19scenario, the stop loss can be placed
5:00:21just above the highest wick of the group
5:00:23of retest candles or you can be more
5:00:26conservative and place the stop loss at
5:00:2850%age of the width of the pattern. Now
5:00:31how to set your targets? As you may have
5:00:33guessed, there are three techniques to
5:00:36exit your trades. Price projection,
5:00:37trailing stop-loss, and a combination of
5:00:39these two methods. Let me explain each
5:00:41one of them. The price projection
5:00:43focuses on price exertion. The idea is
5:00:46that prices will move an equal distance
5:00:48to the highest width of the pattern
5:00:50after the breakout. Now, the highest
5:00:52width of this pattern is from the
5:00:54neckline to the swing top or the swing
5:00:57high. So, all you have to do is to
5:00:59identify the distance from the swing top
5:01:01to the neckline. Then project this
5:01:03distance from the neckline towards the
5:01:06downside. This will give you your
5:01:08desired profit target. The second method
5:01:10of trailing your stop- loss is to write
5:01:13big moves. We will make use of moving
5:01:15averages of different periods to do
5:01:17this. And the selection of moving
5:01:18averages will depend on the time frame
5:01:20that you're trading on. So for capturing
5:01:23shortterm trends, you use a 20 period
5:01:26moving average. For a medium-term trend,
5:01:28you use a 50 moving average. And for a
5:01:31long-term trend, we use 100 or 200
5:01:33moving average. And we will exit the
5:01:36trade only when the price moves below
5:01:38the trailing stop-loss. Now, the last
5:01:40method uses a combination of both these
5:01:42methods. The idea is to exit half your
5:01:45positions at the price projection level
5:01:47and then ride the rest of the move using
5:01:49a trailing stop-loss. By doing this,
5:01:51you'll be able to lock into some good
5:01:53profits and not fall prey to the market
5:01:55reversals. Now there is one more
5:01:58important piece of information that I
5:02:00want to share which is associated with
5:02:02finding and trading double tops with a
5:02:05high level of accuracy and win rate
5:02:07which involves the use of multiple time
5:02:09frame analysis. The concept is rather
5:02:12simple. The first step is to identify a
5:02:14downtrending market or a downtrending
5:02:16price action on a higher time frame
5:02:18depending upon your trading style. I
5:02:20have already made a video on time frame
5:02:22selection. You can watch that video to
5:02:24learn more. Now what you need to do is
5:02:26to wait for the price to approach an
5:02:28area of resistance on the higher time
5:02:30frame. Now if you find such a setup,
5:02:33move down to your lower time frame, then
5:02:35look for a double top pattern on the
5:02:37lower time frame. This is a very simple
5:02:39yet effective technique that allows you
5:02:41to time your trade entries at the
5:02:43absolute highs of the double top
5:02:45pattern, which by the way is the best
5:02:47possible price level that you can get
5:02:49and is also a professional way of
5:02:51trading this pattern. So please keep in
5:02:53mind that if you're not comfortable
5:02:55using this then you would be better off
5:02:57ignoring it. You don't necessarily have
5:02:59to consider all the options just choose
5:03:02one or two that work well for you. Now
5:03:04we will focus on what a double bottom
5:03:06pattern is, how does it work and how to
5:03:09approach it while trading it. A double
5:03:11bottom pattern is a bullish trend
5:03:13reversal pattern and it is the exact
5:03:15opposite of a double top. This pattern
5:03:18also has three parts. It has a first low
5:03:20or first price rejection followed by a
5:03:22second low or second price rejection and
5:03:25also a neckline which is an area of
5:03:27resistance connecting the swing high in
5:03:29between. Now what do this part of the
5:03:31pattern indicate? A first low is formed
5:03:34and the market declines lower forming a
5:03:36swing low and then moving higher. At
5:03:38this point it is likely a retracement in
5:03:41the downtrend but then a second swing
5:03:43low gets formed when the market rejects
5:03:45the previous swing low level and
5:03:47retraces higher again. So we can now
5:03:49assume that there's buying pressure. But
5:03:52it is too early to tell if the market
5:03:54could continue higher. We can only
5:03:55confirm the strength of the buying
5:03:57pressure when the price breaks above the
5:03:59neckline. Now when the price breaks
5:04:01above the neckline or resistance level,
5:04:03it signals the interest in buying and
5:04:05the possibility of the market moving
5:04:07higher. So in short, the double bottom
5:04:10pattern signals that the downtrend has
5:04:12possibly bottomed out and the price is
5:04:14about to move higher. Many traders make
5:04:17this mistake of buying the break of the
5:04:19neckline after a double bottom pattern
5:04:21is formed. But this won't always work in
5:04:24your favor because if the market is in a
5:04:26strong downtrend and it forms small
5:04:28double bottoms every now and then, the
5:04:30chances are the market is likely to
5:04:32continue lower. In addition to this, not
5:04:34all double bottoms are made the same.
5:04:36The time frame that we use for spotting
5:04:38the pattern and the space between the
5:04:40swing lows or the swing bottoms are also
5:04:43important factors worth considering. So
5:04:46a double bottom pattern formed on a
5:04:47higher time frame is more significant
5:04:50than one formed on a smaller time frame.
5:04:55Moving on to the entry criteria for
5:04:57trading. So an aggressive entry is when
5:04:59the price breaks above the neckline or
5:05:01resistance. The idea is to either enter
5:05:04a long position on the breakout which
5:05:06can often cause the force breakout
5:05:08problem or you can wait for the breakout
5:05:10candle to close above the neckline and
5:05:12then take a long entry above the close
5:05:14or the high price of the breakout
5:05:16candle. The advantage of this technique
5:05:18is that you'll be able to enter into the
5:05:20trade early and might even get the best
5:05:23possible entry price. But the drawback
5:05:25is that the breakout candle could be too
5:05:27large or even the price could reverse
5:05:29and give a false breakout and hit your
5:05:31stop- loss. The second entry technique
5:05:33is a breakout with buildup near the
5:05:36neckline. This happens when we observe a
5:05:38tight consolidation of prices near the
5:05:41resistance level or neckline. So when
5:05:43you see a buildup at the resistance, it
5:05:45tells you there's buying pressure and
5:05:47people are willing to buy at higher
5:05:49prices despite profit taking or short
5:05:51selling from the level. Also traders who
5:05:54short from the level are likely to have
5:05:56their buy stop-loss orders placed above
5:05:58the resistance level. So when the price
5:06:01eventually breaks out of the resistance,
5:06:03all these clusters of buy stop-loss
5:06:05orders will be hit and it will provide
5:06:07the boost that the price needs to move
5:06:09higher. And if the market breaks out of
5:06:11the neckline, you can enter your long
5:06:13trade just above the close or about the
5:06:15high of the breakout candle. Now the
5:06:17advantage of using this method is
5:06:19obviously the tight placement of stop-
5:06:21loss and an improved reward to this
5:06:23ratio and also a very good entry price.
5:06:26But the drawback is that the range of
5:06:28the breakout candle can be huge and you
5:06:30will be buying at a much higher price.
5:06:32Now what if the market does not form a
5:06:34buildup or it forms a huge breakout
5:06:36candle and still continues to head
5:06:38higher. So if you missed both the above
5:06:40entries, the third method is to look for
5:06:43a primary pullback in prices to happen.
5:06:46This technique helps you to catch the
5:06:47price move even after a breakout. So if
5:06:50the market breaks out without forming a
5:06:52buildup, then we will wait for a primary
5:06:54pullback to occur which is a temporary
5:06:56down move of prices with weak candles.
5:06:59And if the market does a pullback, then
5:07:01you can look to go long on the break of
5:07:03the previous swing high or enter right
5:07:05away when the prices start rising. Now
5:07:07the best pullback should have a shallow
5:07:09retracement with small bodied candles.
5:07:12But sometimes we get a steep pullback to
5:07:14the neckline. This is called as a
5:07:16retest. So when the price retest to the
5:07:18neckline or now a support level, we
5:07:21expect buyers to come in. So we need to
5:07:23observe if price retests the neckline.
5:07:26And if it does, then we wait for a price
5:07:28rejection from the neckline in the form
5:07:30of bullish reversal candlesticks like
5:07:32bullish hammer, bullish engulfing
5:07:34pattern, morning star, etc. And if you
5:07:36find there is a price rejection, then
5:07:38you can go long on the next candle. Now,
5:07:40the retest technique lets you time your
5:07:43trade entry and even take up positions
5:07:45at far better prices. But the downside
5:07:47is that there is no guarantee that the
5:07:49price will retest to the level,
5:07:51especially in a strong uptrend, and you
5:07:53might miss out on the trade altogether.
5:07:56Yet another important point to keep in
5:07:58mind is that the volume should increase
5:08:00during the breakout confirming and
5:08:02increasing the buying pressure. So, make
5:08:04sure you use the right entry techniques
5:08:06at the right times. Now let us talk
5:08:09about the placement of stop- losses with
5:08:11respect to our entry criteria. The
5:08:13double top pattern becomes invalid when
5:08:15the price reverses from the neckline and
5:08:18closes below the swing low of the
5:08:20pattern. And if you were to place your
5:08:22stop loss based on this idea, then the
5:08:24stop loss would be too large and you
5:08:26will incur huge losses and moreover the
5:08:29price could reverse from the swing low
5:08:31and move higher again forming a triple
5:08:33bottom pattern. So where exactly should
5:08:35you place your stop loss? Now what I
5:08:38recommend is to either place your stop
5:08:40loss at 50%age level between the swing
5:08:42bottom and the neckline or if this
5:08:44distance is too large then set your stop
5:08:46loss with adequate buffer using the ATR
5:08:49indicator just below the low of the
5:08:51breakout candle. This could be our stop
5:08:53loss if your entry was very aggressive.
5:08:56That is you went long as and when the
5:08:58price break out of the neckline. Now
5:09:00what if you took a long entry after a
5:09:02buildup near the neckline? Then you have
5:09:04the convenience of placing a much
5:09:06tighter stop- loss preferably below the
5:09:09buildup which will in turn improve your
5:09:11reward to risk ratio. Now let's say you
5:09:13have missed both these entries and you
5:09:15have entered a position in the market
5:09:17after the price has formed a primary
5:09:19pullback. Then you can set your stop
5:09:21loss below the lowest price in the group
5:09:23of pullback candles including the wick
5:09:26or you can place it just above the
5:09:27neckline if the pullback is formed very
5:09:30close to the neckline. And the last
5:09:31method is if you have entered after a
5:09:33retest. In this scenario, the stop loss
5:09:36can be placed just below the lowest wick
5:09:39of the group of retest candles. Or you
5:09:41can be more conservative and place the
5:09:43stop loss at 50%age of the distance
5:09:46between the swing low and the neckline
5:09:48of the pattern in order to save yourself
5:09:50from long wicks. And finally, we will
5:09:52discuss how to exit from our trade for
5:09:55maximum profits. And as always, there
5:09:57are three methods that we can make use
5:09:59of the price projection, trailing
5:10:02stop-loss and a combination of both. The
5:10:04price projection calculates the distance
5:10:06between the swing bottom and the
5:10:08neckline. So in the price projection
5:10:10method, you have to calculate the
5:10:12distance between the swing bottom and
5:10:14the neckline. Then project this distance
5:10:16upward from the breakout point or
5:10:18neckline. The projected price point or
5:10:21level is where you exit the trade. This
5:10:24technique will help you decide whether
5:10:25it is too late to enter a trade or not.
5:10:28For instance, if the price is close to
5:10:30reaching its price projection, then
5:10:32there's probably not much meat left in
5:10:34the move and you might want to skip the
5:10:36trade. But unlike the price projection
5:10:38technique, a trailing stop-loss method
5:10:40does not have a fixed target. Instead,
5:10:42we trail our stop-loss as the price
5:10:44moves in favor so that we can write the
5:10:47entire trend. So, the first step is to
5:10:49decide on the type of trend you want to
5:10:51capture, whether it's a short-term,
5:10:53medium-term, or long-term trend. Then
5:10:55you can trail the stop loss with the
5:10:57appropriate moving averages like 20
5:10:59period, 50 period or 200 period moving
5:11:01averages respectively. And we will exit
5:11:04our trade only when the price crosses
5:11:06below these moving averages. The final
5:11:09method combines both these methods. You
5:11:11exit half your positions at the price
5:11:13projection level and write the rest
5:11:15using the trading stop-loss so that
5:11:17you'll be able to lock in some profits
5:11:19and not lose money if the market
5:11:20reverses. Now, same with the double top.
5:11:23You can use multiple time frames to
5:11:25filter for high probability double
5:11:27bottom setups. All you have to do is to
5:11:29identify a higher time frame support
5:11:31area. Then move down to your preferred
5:11:33lower time frame and look for a double
5:11:35bottom pattern that leans against the
5:11:38higher time frame support level. By
5:11:39doing this, you can take a trade from
5:11:41the absolute low of the swing bottom.
5:11:44But do keep in mind that this is a more
5:11:46professional entry technique. So don't
5:11:48use it if you can't completely digest
5:11:50it.
5:11:52If you have understood the double top
5:11:54and double bottom patterns properly,
5:11:56then triple tops and triple bottoms are
5:11:58just a piece of cake. These are just
5:12:00extensions of the previous two patterns.
5:12:03The entry, exit, and stop losses are the
5:12:06same. But what matters most is the
5:12:08formation of the third swing high or
5:12:10swing low respectively. Let's find out
5:12:12what these patterns signify. A triple
5:12:14top is a bearish reversal chart pattern
5:12:17that signals that the sellers are in
5:12:19control. The pattern starts with buyers
5:12:21in control as the price makes a swing
5:12:23high followed by a pullback. But the
5:12:25first sign of selling pressure appears
5:12:28as the price fails to break out of the
5:12:30prior high and the market makes a
5:12:32pullback again and forms a
5:12:34consolidation. This looks like a double
5:12:36top. But this time instead of breaking
5:12:38below the neckline, the market attempts
5:12:40to break out higher once again and fails
5:12:42again. So there are three spikes visible
5:12:45or three failed attempts to break out
5:12:47higher. This looks like a triple top and
5:12:49is confirmed only when the price breaks
5:12:51below the low of the consolidation or
5:12:54the neckline support level. I won't be
5:12:56discussing the entry, stop-loss and
5:12:58target criteria because you can follow
5:13:00the same rules as with the double top
5:13:02pattern. Keep in mind that no patterns,
5:13:05strategies or techniques work all the
5:13:07time. This includes even the triple top
5:13:09pattern. But the good news is that
5:13:11before the pattern fails, it usually
5:13:14leaves some clues. For instance, if the
5:13:16higher time frame trend is still an
5:13:18uptrend, then the triple top pattern
5:13:20formed on a lower time frame is most
5:13:22likely to fail. Now, when talking about
5:13:24a triple bottom pattern, a triple bottom
5:13:27is a bullish reversal chart pattern and
5:13:29is quite the opposite of the triple top
5:13:31pattern and it signals that the buyers
5:13:34are dominant. Now, the pattern begins
5:13:36with sellers pushing the prices down as
5:13:38the price makes a swing low followed by
5:13:40a pullback. But the first sign of buying
5:13:43pressure appears as the price fails to
5:13:45break out of the previous swing low. Now
5:13:47the market made another pullback and
5:13:49looked like a consolidation. This looks
5:13:51like a double bottom pattern. But
5:13:53instead of breaking above the neckline,
5:13:55the market attempts to move lower once
5:13:58again and fails to break the low once
5:14:00again. So there are three lows visible
5:14:02or three failed attempts to break out
5:14:04lower. Now, this looks like a triple
5:14:07bottom pattern and is only confirmed
5:14:09when the price breaks above the high of
5:14:11the consolidation or the neckline
5:14:13resistance level. The entry, stop-loss,
5:14:16and target criteria are similar to the
5:14:18rules of the double bottom pattern
5:14:20itself. Now, moving to the last category
5:14:22of patterns, the wedges. We'll start off
5:14:25with the rising wedge. A rising wedge is
5:14:28a popular bearish pattern. This pattern
5:14:31starts wide at the bottom and then
5:14:33contracts as the price move upwards and
5:14:35the trading range gets smaller towards
5:14:37the top. This pattern forms when the
5:14:39price consolidate between upward sloping
5:14:41support and resistance lines where the
5:14:43slope of the support line is much more
5:14:46steeper than that of the resistance
5:14:48slope. What this implies is that the
5:14:50higher lows form much faster than the
5:14:52higher highs leading to a wedgelike
5:14:55formation. This also means that the
5:14:57selling activity is gaining more
5:14:59traction and the buying activity is
5:15:01getting weaker. Also, the contraction of
5:15:03the trading range from left to right
5:15:05indicates a weakening of the existing
5:15:07trading activity. But the rising wedge
5:15:10can be one of the most difficult chart
5:15:12patterns to accurately recognize and
5:15:14trade. While it is a consolidation
5:15:16formation, like most other patterns, the
5:15:19loss of the upside momentum on each
5:15:21successive swing high gives the pattern
5:15:24its bearish bias. However, the series of
5:15:27higher highs and higher lows leaves the
5:15:29traders guessing that the trend is still
5:15:31bullish. This is where the contracting
5:15:33range helps us the most. Moreover, to
5:15:36identify it as a rising wedge, the price
5:15:38should test the upward sloping support
5:15:40and resistance lines at least twice
5:15:42each. Now a shocking fact about rising
5:15:45wedge pattern is that it can be both a
5:15:47reversal or a continuation pattern. Now
5:15:49it depends on its position in the price
5:15:51chart. But the more important
5:15:54information is that regardless of the
5:15:56pattern being a reversal or continuation
5:15:58in nature, pricing wedges are bearish.
5:16:01This is what we will focus on. The added
5:16:04advantage is that we can spot this
5:16:06pattern at the end of an uptrend or as a
5:16:08consolidation due to a short-term profit
5:16:11booking during a downtrend. But actually
5:16:14the bearish confirmation of the pattern
5:16:16does not come until the upward sloping
5:16:18support line is broken in a convincing
5:16:20fashion. Ideally, we expect the volume
5:16:23to decline as the prices rise and as the
5:16:25wedge forms and there should be an
5:16:27expansion or rise in volumes on the
5:16:29support line break which can be taken as
5:16:32a bearish confirmation. Now you can also
5:16:34use momentum indicators like RSI or MACD
5:16:38to spot the shift in momentum. Anyways,
5:16:40when the price does break the support
5:16:42line convincingly, our bias is always
5:16:44towards selling on the breakdown. With a
5:16:47consolidation in prices, traders know
5:16:49that a big slash is on its way. So they
5:16:51expect a breakout either to the top or
5:16:54the bottom. So when the rising wedge is
5:16:56formed after an uptrend, it is referred
5:16:58to as a bearish reversal pattern. But if
5:17:01it is formed during a downtrend, it
5:17:03could mean a continuation of the down
5:17:05move. Now that we have learned how to
5:17:08identify a rising wedge, we can discuss
5:17:10how to trade the pattern. So I will
5:17:12discuss the entry methods where to place
5:17:14the stop loss and how to set the
5:17:16targets. Now starting with the entry
5:17:18criteria as it is a bearish pattern we
5:17:21are only interested in the break below
5:17:22the upward sloping support trend line.
5:17:25You can take a short entry following a
5:17:27breakout of this level. That is you can
5:17:29enter at the moment when the price
5:17:31breaks below the support trend line or
5:17:33you can look to sell below the low price
5:17:35or even at the closing price of the
5:17:37breakout candle after it closes. The
5:17:40second method is to wait for a pullback
5:17:42or retest back to the breakout level and
5:17:44then take a short entry when the price
5:17:46moves lower or when the price moves
5:17:48below the breakout candle low. Now you
5:17:50are probably wondering which one is
5:17:52better. Well, there is no best approach.
5:17:55If you enter the break of the loss, it
5:17:57could be a force breakout. But if it is
5:17:59a real breakout, it is the best possible
5:18:02price you can get. Alternatively, if you
5:18:04wait for a close below the lows, then
5:18:07you will reduce the chances of a false
5:18:09breakout. But if the breakout is too
5:18:11strong, you will end up entering at a
5:18:13much lower price. The same is the case
5:18:16with waiting for a pullback or retest,
5:18:18which may not happen often if the market
5:18:20is trending strongly and as a matter of
5:18:22fact, you will miss out on the trade
5:18:24completely. So, it is up to you to
5:18:26decide the entry strategy and continue
5:18:28practicing it over a large number of
5:18:31trades. It is always recommended to
5:18:33confirm the validity of the breakout
5:18:35using volumes and other momentum
5:18:37indicators. So a higher than average
5:18:39volume can validate a breakout most of
5:18:42the time as it shows the interest of the
5:18:44market participants and low volume
5:18:46breakouts are most likely to fail. Also
5:18:48using momentum indicators like MACD RSI
5:18:52can also help you identify a true
5:18:54breakout. I have made videos on all
5:18:56these topics so you can check them out.
5:18:58Let's now focus our attention on the
5:19:00criteria for setting the stop- losses.
5:19:02How to set your stop- loss when trading
5:19:04the rising wedge pattern. Now, you don't
5:19:06want to set your stop-loss at obvious
5:19:09levels like support and resistance,
5:19:11swing highs or swing lows, etc. And why
5:19:14is that? Because you'll get stop-loss
5:19:16100 easily because these are as obvious
5:19:18a level to you as it is to others
5:19:21including the smart money. So, how do
5:19:23you get a proper stop-loss setup? And
5:19:25it's very simple as I have mentioned
5:19:27over and over again. Your stop loss
5:19:29should be at a level that if crossed
5:19:32invalidates your trading setup. So we
5:19:34are trading a rising wedge pattern here.
5:19:36And the pattern is invalid if the price
5:19:38breaks and closes above the top trend
5:19:40line resistance. So you have to keep
5:19:43your stop loss above this resistance
5:19:45level. So there are still chances of
5:19:47long wicks which can take out your stop-
5:19:49loss and then move in the desired
5:19:51direction. So to be extra safe, you have
5:19:54to give your trades more breathing space
5:19:56by setting your stop loss some distance
5:19:58away from the market structure using an
5:20:01indicator like ATR. So you have to set
5:20:03your stop loss ATR above the most recent
5:20:06swing high level. Let's learn how to set
5:20:09a target for the rising match pattern.
5:20:11Now there are many ways you can cash in
5:20:13your winners and one of the most common
5:20:15approaches is to have a predetermined
5:20:18profit target. Now the target can be
5:20:20measured by taking the distance of the
5:20:22back of the wedge or the widest portion
5:20:25of the wedge from the support to the
5:20:27resistance level and then extending this
5:20:29distance down from the trend line
5:20:32breakout point. You can also choose to
5:20:34trail your stop- loss until the market
5:20:36takes you out of the trade. Now why is
5:20:38this a better option? Think about this.
5:20:40The rising wedge pattern usually appears
5:20:42in a downtrending market or at the end
5:20:45of an uptrend. In such conditions, there
5:20:47is a lot of potential for the trend to
5:20:49continue and the only way to ride it is
5:20:52to trail your stop- loss. Now, to trail
5:20:54your stop- loss in the best possible
5:20:56manner, you can use moving averages or
5:20:58Chandler stops and only exit the trade
5:21:01if the market closes above it. Moreover,
5:21:03it is much better if you use a
5:21:05combination of both the price projection
5:21:07method and the trailing stop-loss method
5:21:10so that you can gauge the move using the
5:21:12price projection method so as to lock in
5:21:14part of your profits there and then
5:21:16write the rest of the position using
5:21:18your trailing stop-loss thereby not
5:21:20impacting your psychology and avoiding
5:21:22any losses due to reversals. Now moving
5:21:25on to the final chart pattern of this
5:21:27video the falling wedge. Falling wedge
5:21:30chart pattern is like a counter pattern
5:21:31to the rising wedge. It is created when
5:21:34a market consolidates between two
5:21:36converging support and resistance lines.
5:21:38For a falling wedge, the support and
5:21:41resistance lines have to point in the
5:21:43downward direction or they should be
5:21:45sloping down and the resistance level
5:21:47have to be steeper than the support
5:21:49level. The pattern generally starts wide
5:21:52at the top and contracts towards the
5:21:54bottom as the price moves lower. This
5:21:56sort of price action forms a cornlike
5:21:58shape that slopes down as the swing
5:22:01highs and swing lows converge. As the
5:22:03price continues to slide down, it will
5:22:05lose momentum and it signals that the
5:22:08buyers are beginning to step in and are
5:22:10slowing the rate of the price decline.
5:22:12Now, in contrast to patterns like
5:22:13symmetrical triangles which have no
5:22:15definitive slope or bias, the falling
5:22:18wedges should slope down and we have a
5:22:20bullish bias. Now, as with rising
5:22:23wedges, the falling wedges is also one
5:22:25of those challenging patterns to trade.
5:22:28The falling wedge is seen as both a
5:22:30bullish continuation and a bullish
5:22:32reversal pattern which give rise to some
5:22:35confusion in the identification of the
5:22:37pattern. Now, both scenarios contain
5:22:39different market condition that must be
5:22:41taken into consideration. But the
5:22:43differentiating factor that separates
5:22:46the continuation and reversal pattern is
5:22:48the direction of the trend when the
5:22:50falling wedge appears. A falling wedge
5:22:52is a continuation pattern if it appears
5:22:55in an uptrend and it is a reversal
5:22:57pattern if it appears in a downtrend.
5:22:59However, this bullish bias cannot be
5:23:02realized or confirmed until the downward
5:23:04sloping resistance line breakout occurs
5:23:06convincingly. By convincing I mean the
5:23:09volume should decline as the pattern
5:23:11progresses from left to right or simply
5:23:14the volume should contract with
5:23:16contracting prices showing a weakening
5:23:18of the existing price trend and the
5:23:21breakout above the resistance line
5:23:23should be accompanied by higher than
5:23:25average volumes indicating a rise in the
5:23:27interest among market participants. Now
5:23:29you can also make use of momentum
5:23:31indicators like RSI, MACD etc to confirm
5:23:35the reliability of the pattern.
5:23:38Now we will talk about the entry
5:23:40criteria. So how do you better time your
5:23:42entry? The first approach is to go long
5:23:45when the price breaks above the
5:23:47resistance trend line. All you need to
5:23:49do is to place a buy order above the
5:23:51resistance line and you'll be
5:23:53immediately long when the price breaks
5:23:54out above the level. And if the breakout
5:23:56is real, this is one of the best prices
5:23:59to enter. But this is a very risky
5:24:01method and chances are it might be a
5:24:03false breakout. Now this next method is
5:24:06similar to the previous approach. The
5:24:08only difference is that you wait for the
5:24:10price to break and close above the trend
5:24:13line resistance. You can take a long
5:24:15entry above the breakout candle highs
5:24:17once the candle closes. Now this will
5:24:19reduce the likelihood of a false
5:24:21breakout. But if the price momentum is
5:24:24strong, you will enter your trade at a
5:24:26much higher price. Now, if you are an
5:24:28experienced trader, then you can even
5:24:30enter the market as the price pull back
5:24:33or retest back to the upper trend line
5:24:35of the pattern. This can help you enter
5:24:37the trade even if you missed the
5:24:39breakout move and it offers a better
5:24:41price entry than waiting for the close
5:24:43of the breakout candle. But the issue
5:24:45with this approach is that market may
5:24:47not give a pullback or retest every
5:24:49time. So once again, you can choose the
5:24:51entry type that you like based on
5:24:53whether you are conservative or
5:24:55aggressive in your approach. But make
5:24:57sure to validate the breakout with
5:24:59volumes and other momentum indicators to
5:25:01see if there is actually an interest in
5:25:03the market participants to take the
5:25:05prices higher. Now how to set a proper
5:25:08stop-loss so that you don't get stopped
5:25:10out too early. Now it doesn't matter
5:25:12whether you're trading breakouts or
5:25:14pullbacks because the concept is the
5:25:16same. Your stop loss must be at a
5:25:18location that if breached will
5:25:20invalidate your trading setup. This
5:25:22means if the market hits the stop loss,
5:25:25you'll automatically know that you are
5:25:27wrong. So a stop loss below the
5:25:29resistance level is not a good idea.
5:25:32Where else then think about it. Where is
5:25:34the ideal place to set your stop loss so
5:25:36that if the market reaches it, you know
5:25:38the falling edge pattern is invalidated.
5:25:40Since the pattern forms higher swing
5:25:42lows and if the price moves below the
5:25:45recent swing low or break below the
5:25:47downward sloping resistance trend line
5:25:49then we can be sure that our analysis
5:25:52was wrong. So this is exactly where you
5:25:55need to keep your stop loss that is just
5:25:57below the swing low or the support
5:25:59level. Now you can give the price some
5:26:01breathing space by adding 180R buffer
5:26:04below the recent swing low or the
5:26:06support. I hope this is clear. Now, how
5:26:09to cash in your winners? One of the most
5:26:12common approaches is to have a
5:26:13predetermined profit target. Target can
5:26:16be measured by taking the width of the
5:26:18top of the wedge or the widest portion
5:26:21of the wedge from the support to the
5:26:22resistance level and then extending this
5:26:25distance upward from the trend line
5:26:28breakout point. You can also decide to
5:26:30trail your stop- loss. Now, the trailing
5:26:32stop-loss helps you ensure you ride the
5:26:34entire trend. Now to trail your stop
5:26:37loss in the best possible manner, you
5:26:38can use moving averages or shandler
5:26:41stops and only exit the trade if the
5:26:43market closes below it. And if you are
5:26:46using the moving averages, use 20, 50 or
5:26:49200 period moving averages depending on
5:26:51whether you have a short-term,
5:26:53medium-term or long-term trade
5:26:55objective. Moreover, it is much better
5:26:57if you use a combination of these two
5:26:59methods so that you can gauge the
5:27:02potential of the move beforehand using
5:27:04the projection method. so as to lock in
5:27:06part of your profits there and then ride
5:27:08the rest of the position using the
5:27:10trailing stop-loss method thereby not
5:27:12impacting your psychology and avoiding
5:27:15any potential losses due to reversals.
5:27:17Now that is all the major reversal
5:27:20patterns in a single video.
5:27:27In the previous two episodes we have
5:27:29discussed the most important
5:27:32continuation and reversal patterns. how
5:27:34to identify them and how to trade them
5:27:37in a very detailed manner. When dealing
5:27:39with both continuation and reversal
5:27:41patterns, we have a clear idea or maybe
5:27:44we have a directional bias towards where
5:27:47the breakout will happen. That is in the
5:27:49case of continuation patterns, we will
5:27:51look to trade in the direction of the
5:27:53previous trend before consolidation. And
5:27:55for reversal patterns, we will look to
5:27:58initiate trades in the opposite
5:28:00direction of the prior market trend. But
5:28:02the third type of pattern that we are
5:28:04going to discuss doesn't have a
5:28:06directional bias associated with it when
5:28:08it comes to the breakout or the trade
5:28:10direction or in simple terms the
5:28:13breakout of the pattern can be in either
5:28:15direction and we cannot judge the
5:28:17direction of the breakout before it
5:28:19happens. This category of chart patterns
5:28:22is called as neutral chart patterns or
5:28:25bilateral chart patterns. Since we
5:28:27cannot be sure of a possible breakout
5:28:29direction, these patterns can be
5:28:31dangerous because of false breakouts.
5:28:34More often than not, you'll find
5:28:36yourself entering a breakout above or
5:28:38below the pattern consolidation only to
5:28:41see yourself fall prey to a false
5:28:43breakout. I have already made videos on
5:28:46breakouts and false breakouts in my
5:28:48price action course. You can check those
5:28:50videos to know more. In this part, we
5:28:53are going to discuss three bilateral
5:28:55patterns, how they work and how to take
5:28:57trades including the entry, targets and
5:29:00stop- losses. Now, the three bilateral
5:29:03patterns under discussion are number
5:29:05one, the symmetrical triangles followed
5:29:07by the symmetrical expanding triangles
5:29:10or broadening triangles and finally
5:29:12channel patterns that is rising channel
5:29:15and falling channel patterns. If these
5:29:17series of videos are helping you become
5:29:19better at trading then please do like
5:29:21and share this video and support our
5:29:24efforts to build a healthy trading
5:29:26ecosystem. So let us start our
5:29:28discussion with symmetrical triangles.
5:29:30We have talked about ascending and
5:29:32descending triangles. The ascending
5:29:35triangle indicates a weakening of
5:29:36sellers with a contraction in volatility
5:29:39from left to right of the pattern. while
5:29:42a descending triangle signals a
5:29:43weakening of buyers and a decline in
5:29:46volatility which leads to a strong
5:29:48breakout. Now the working of a
5:29:50symmetrical triangle chart pattern is
5:29:52quite similar to these two triangle
5:29:54patterns. The symmetrical triangle is
5:29:57also a volatility contraction pattern
5:30:00but here we are not sure who is the weak
5:30:03player. A contraction in volatility
5:30:05means that the price volatility in the
5:30:08market is shrinking and it is a strong
5:30:11signal that the market is likely to
5:30:13break out soon. Now before we get into
5:30:15the breakout part, let's first learn how
5:30:17to identify a symmetrical triangle
5:30:19pattern in the charts. I hope you're
5:30:21familiar with the fact that for an
5:30:23ascending triangle, there is an
5:30:25ascending trend line support and a flat
5:30:27resistance line. While for a descending
5:30:29triangle there is a descending trend
5:30:32line resistance and a flat support line.
5:30:34Now when it comes to a symmetrical
5:30:36triangle and as the name suggest the
5:30:39sides of the triangle slope equally
5:30:41which means the slope of the ascending
5:30:43trend line support and the descending
5:30:45trend line resistance happens to have
5:30:48the same slope. Now it is within these
5:30:50trend lines that the actual
5:30:52consolidation of prices happens and both
5:30:54of these trend lines meet at a common
5:30:57point called the apex. Now the triangle
5:31:00should comprise of at least two lower
5:31:02highs and two higher lows each to be
5:31:05considered as a valid symmetrical
5:31:07triangle pattern. The pattern looks like
5:31:09a funnel with the price squeezing from
5:31:12left towards the right with a
5:31:13contraction in volatility which is
5:31:15associated with weakening of
5:31:17candlesticks and price action. Now what
5:31:19does the price action indicate? It
5:31:22simply means that neither the buyers nor
5:31:24the sellers are interested in buying or
5:31:27selling. This is evident from the lower
5:31:29highs forming the upper trend line
5:31:31resistance showing a lack of buying
5:31:33pressure while the higher lows into the
5:31:35lower trend line support signals a
5:31:38decline in selling pressure. As you can
5:31:40see the pattern started with big swings
5:31:43which got shorter and shorter as the
5:31:45pattern progressed. The beauty of
5:31:47volatility contraction is that price
5:31:49cannot be squeezed forever. At some
5:31:51point it must break out and when it
5:31:54happens it offers tremendous returns.
5:31:57Now I have seen many experts believe
5:32:00that if a stock is rallying before the
5:32:02formation of a symmetrical triangle it
5:32:04will eventually break out to the upside.
5:32:06On the other hand if a stock falls
5:32:08before a symmetrical triangle
5:32:10consolidation forms, it should continue
5:32:12its decline after the breakout. Now both
5:32:15of these assumptions are not right.
5:32:17These triangles offers little or no
5:32:20indication regarding the direction in
5:32:22which the stock or the index will
5:32:24eventually break out. Keep in mind that
5:32:26there is a lack of volume and price
5:32:28movement which gives rise to a
5:32:30symmetrical triangle pattern and as a
5:32:33result it is impossible to assess the
5:32:34direction of the breakout. Another
5:32:36common mistake traders make is chasing
5:32:39the breakout of a symmetrical triangle
5:32:41pattern only to get trapped in a false
5:32:43breakout. So, how do we eliminate this
5:32:46mistake? A great trading tool that you
5:32:48can use for identifying breakouts is
5:32:51volume. Real breakouts usually occur
5:32:54with high trading volumes and high
5:32:56volatility, while fake breakouts are
5:32:58usually associated with low volumes and
5:33:01look more like a range than a breakout.
5:33:04Since the levels of the triangles are
5:33:06inclined, it sometimes brings the price
5:33:08outside the frame of the triangle. This
5:33:10usually gets traders tempted and they
5:33:13assume that there is a breakout on the
5:33:15chart. So always make sure to confirm
5:33:17the breakouts. Another important point
5:33:19that you can keep in mind is that the
5:33:21closer the price gets to the apex of the
5:33:23pattern and the tighter the price
5:33:26consolidation becomes, the greater the
5:33:28chances of a real breakout and the price
5:33:31will quickly move in favor of your
5:33:32trade. Moving on, we will now focus on
5:33:35how to trade this pattern. that is how
5:33:37to time your entry, set your stop-loss
5:33:40and determine targets or exits. Let's
5:33:43start with the entry criteria first.
5:33:45Now, wherever this pattern forms, we
5:33:47have to consider two scenarios. First is
5:33:50a breakout above the descending trend
5:33:52line resistance and the second scenario
5:33:54is a breakout below the ascending trend
5:33:56line support level. Let's say the price
5:33:59breaks the upper trend line resistance
5:34:01level. Then you have four possible long
5:34:03entries available. The first approach is
5:34:06very aggressive and the idea is to go
5:34:08long as soon as the price breaks above
5:34:11the resistance trend line and all you
5:34:13need to do is to place a limit buy order
5:34:16above the resistance level and you'll be
5:34:18immediately long when the price breaks
5:34:20out above the level and if the breakout
5:34:22is real this is one of the best prices
5:34:25to enter but this method is very risky
5:34:28and there are high chances that it might
5:34:30be a false breakout. The second method
5:34:33is similar to the previous approach. The
5:34:35only difference is that you wait for the
5:34:37price to break and close above the
5:34:40descending trend line resistance. You
5:34:42can enter long above the breakout candle
5:34:44highs once the candle closes. This
5:34:47method reduces the likelihood of a false
5:34:49breakout. But if the price momentum is
5:34:51strong, then you will be probably
5:34:53entering at a much higher price. Now if
5:34:56you have missed both these entries then
5:34:58you can even enter the market as the
5:35:00price pulls back or retest the
5:35:02resistance line of the pattern. This
5:35:04method can help you enter a trade even
5:35:07if you missed the breakout move. In this
5:35:09method we have to wait for the prices to
5:35:11form a primary pullback or even retest
5:35:14the resistance support level and then
5:35:17move in the direction of the breakout.
5:35:19So you can take a long position when the
5:35:22price begins to move higher. The retest
5:35:24entry offers a better price than waiting
5:35:26for the close of the breakout candle.
5:35:28Also, keep in mind that pullbacks and
5:35:30retest are usually associated with
5:35:33smaller candles. But the issue with this
5:35:35approach is that the market may not
5:35:37always give a pullback or retest,
5:35:40especially if there is a strong momentum
5:35:42backing the price move. So, I leave it
5:35:44up to you to decide the entry type that
5:35:46you like based on whether you are
5:35:47conservative or aggressive in your
5:35:49approach. Also make sure to validate the
5:35:52breakout with volumes and other
5:35:54indicators to see if there is actually
5:35:57an interest among the market
5:35:58participants to take the prices higher.
5:36:01The entry techniques for a breakdown
5:36:03below the ascending trend line support
5:36:05are also similar but here our bias is
5:36:08bearish and we will look to enter a
5:36:10short position. So you can either choose
5:36:13to go short on the breakdown or you can
5:36:15wait for a primary pullback or retest
5:36:17back to the support turned resistance
5:36:19level and then go short when the price
5:36:22starts to decline lower. But make sure
5:36:24to validate the breakout first using
5:36:26volumes and other momentum indicators to
5:36:28save yourself from being trapped in a
5:36:30false breakout. Now how to set a proper
5:36:33stop-loss so that you don't get stopped
5:36:35out too early. Now the concept is
5:36:38simple. Your stop loss must be at a
5:36:40location that if reached will invalidate
5:36:43your trading setup. This means that if
5:36:45the market hits the stop loss, you will
5:36:47automatically know that your analysis
5:36:50was wrong. So if we talk about the
5:36:52stop-loss placement for a breakout above
5:36:54the resistance level, do you think
5:36:56setting your stop loss just below the
5:36:58resistance level is a good idea? Well, I
5:37:01don't think so, considering the chances
5:37:03of fake outs or even deep wicks. So
5:37:06where else should you place it? Think
5:37:07about it. Where is the ideal place to
5:37:10set your stop- loss so that if the
5:37:11market reaches it, you know the breakout
5:37:14is invalidated. Now since the pattern
5:37:16forms higher swing lows and if the price
5:37:19moves below the recent swing low and
5:37:21forms a lower low then we can be sure
5:37:24that our analysis was wrong. So it is
5:37:27exactly the place where you need to keep
5:37:29your stop loss that is just below the
5:37:31recent swing low. We can give the price
5:37:33some breathing space by adding 180R
5:37:36buffer below the recent swing low to
5:37:38compensate for the deep stop-loss
5:37:40hunting wicks. Now, the same idea
5:37:42applies to a breakdown below the
5:37:44ascending trend line support. You can
5:37:46place your stop loss just above the most
5:37:48recent swing high level formed or you
5:37:50can give 180R buffer above the swing
5:37:53high level to be extra safe. Now, where
5:37:56to exit your winning trades for maximum
5:37:59profits. You may already be familiar
5:38:01that there are two techniques that you
5:38:03can consider. The trailing stop-loss
5:38:06method and the price projection method.
5:38:08Now, how to exit your trade at the price
5:38:10projection level. Now, price projection
5:38:13techniques helps to project where the
5:38:15price momentum will exhaust itself. So,
5:38:18here's how it works for a symmetrical
5:38:20triangle pattern. All you have to do is
5:38:22to take the distance between the highest
5:38:24and lowest points of the symmetrical
5:38:27triangle. that is the widest distance of
5:38:29the pattern. Then depending on the
5:38:31breakout direction, copy and paste this
5:38:34distance or project this distance at the
5:38:36breakout point. For example, in case of
5:38:39a bullish breakout, project this
5:38:41distance to be above the resistance
5:38:43level from the breakout point. And for a
5:38:45bearish breakdown, project the same
5:38:48distance to be below the support level
5:38:50from the breakdown point. Now, this will
5:38:52give you the price projection or the
5:38:54expected target level. Now the concept
5:38:57of trailing stop-loss is that we have no
5:39:00idea how long the trend will last. So we
5:39:02will trail our stop-loss to ride the
5:39:04trend as far as possible to lock in
5:39:07gains as the market moves in our favor.
5:39:10So how do you actually trail your stop-
5:39:12loss? Well, you can use an indicator
5:39:14like a moving average. For example, you
5:39:17can trail your stop loss using a 20
5:39:19period, 50 period, or even 200 period
5:39:22moving average depending upon whether
5:39:24you are considering a shortterm,
5:39:26medium-term, or long-term position in
5:39:28the market. This means you will hold
5:39:30your position until the market breaks
5:39:32and closes above or below the moving
5:39:34average depending on the direction of
5:39:36the breakout. A more robust technique is
5:39:39if you make a trailing stop-loss and
5:39:42price projection combo. that is you
5:39:44combine both these techniques. This
5:39:46means if the market moves in your favor
5:39:48but it has not reached your price
5:39:50projection level, you can use the moving
5:39:52average to lock in your profits. So even
5:39:55if there is a sudden reversal, you still
5:39:58protect what you have and do not give
5:40:00everything back to the market. Moving on
5:40:02to the second category of neutral
5:40:04patterns. This particular pattern is
5:40:06known by different names. Be it a
5:40:09symmetrical expanding triangle or a
5:40:11broadening triangle pattern or a
5:40:13broadening bottom or top pattern etc.
5:40:16The pattern looks exactly like a mirror
5:40:18reflection of a symmetrical triangle
5:40:20pattern. Now instead of the price
5:40:22squeezing from the left towards the
5:40:24right, it actually expands with each
5:40:27swing. This is one of the reason why
5:40:29this pattern is tougher to trade than
5:40:31other chart patterns as the lows and
5:40:33highs get taken out one by one. It is
5:40:36also called a megaphone pattern because
5:40:38of the expanding shape of the
5:40:40consolidation. Now when it comes to the
5:40:42identification of this pattern, the
5:40:44pattern can be formed during an uptrend
5:40:46or a downtrend and it is referred to as
5:40:49a broadening top when it is formed
5:40:51during an uptrend and a broadening
5:40:53bottom when it is formed during a
5:40:55downtrend. When the two trend lines
5:40:57connecting the widening highs and lows
5:40:59of the prices diverge from each other,
5:41:02it is an indicating of a broadening
5:41:04triangle pattern. It shows the
5:41:06nervousness and indecisiveness of
5:41:08traders. Even though the price action is
5:41:11evident after each price swing, there is
5:41:13no clear dominance by a single player.
5:41:16That is the buyers and sellers are
5:41:18trying to force their dominance. But
5:41:20each attempt is countered resulting in a
5:41:22state of indecision. Moreover, there
5:41:25should be at least two price swings
5:41:27along the sloping trend lines. That is
5:41:29there should be at least two higher
5:41:32highs into the ascending trend line
5:41:34resistance and two lower highs into the
5:41:37descending trend line support to
5:41:39consider it as a valid pattern. Now
5:41:41similar to a symmetrical triangle
5:41:42pattern in the broadening triangle
5:41:45pattern too the breakout determines the
5:41:48direction of future price movement.
5:41:50Please note that there are a few
5:41:51categories of broadening patterns. be it
5:41:54broadening wedges, broadening tops with
5:41:57a flat support line or broadening
5:41:59bottoms with a flat resistance line. But
5:42:02I will not be discussing these patterns
5:42:04because most of these broadening price
5:42:05action patterns occur rarely in the
5:42:08market. So I will always urge you to
5:42:10follow three to four strong patterns
5:42:12rather than running after each and every
5:42:14pattern on the charts. The more focused
5:42:16you become, the better the results will
5:42:18be. Now let's talk about the trading
5:42:21criteria and let's start with the entry
5:42:23techniques first. As I have just
5:42:25mentioned the breakout determines the
5:42:27future price direction and dominance of
5:42:30a single player in the market. This
5:42:32pattern does not come with a directional
5:42:34bias. So we have to focus completely on
5:42:37the breakouts to determine our position.
5:42:39So it all comes down to identifying a
5:42:42real breakout. As discussed earlier, one
5:42:44of the factors that will help determine
5:42:46a proper breakout is the volume. So a
5:42:50higher than average volume can be a good
5:42:52indication of a probable breakout.
5:42:55Moreover, you can make use of momentum
5:42:57indicators like RSI, MACD, etc. to
5:43:00validate a breakout from a false
5:43:02breakout. So with that in mind, let's
5:43:04talk about all the possible entries.
5:43:07When a breakout happens above the upper
5:43:09trend line resistance, you can take a
5:43:11long entry as soon as the price breaks
5:43:13above the resistance as this will give
5:43:15you a good entry price. But the downside
5:43:18is that it could be a false breakout and
5:43:20you could get trapped. So a better
5:43:22alternative would be to wait for the
5:43:25breakout candle to close above the
5:43:27resistance trend line and then enter at
5:43:30the opening of the next candle or above
5:43:32the high of the breakout candle. Now the
5:43:34problem with this approach is that if
5:43:36the breakout is associated with a good
5:43:38momentum then you will find yourself
5:43:40buying at a very higher price. In
5:43:42addition to this you can take a long
5:43:44position after a price pull back or
5:43:46retest back to the ascending trend line.
5:43:49As you may all know a pullback or a
5:43:51retest is usually associated with weak
5:43:54candles. So you can take a long trade
5:43:56and the price begins to move in the
5:43:58direction of the breakout once again.
5:44:00The advantage of these methods is that
5:44:02you could get into a trade even if you
5:44:04missed the breakout. But on the
5:44:06downside, a pullback or retest does not
5:44:08happen every time, particularly if there
5:44:10was a strong price momentum during the
5:44:12breakout. Now, the same entry methods
5:44:15are applicable in case the price breaks
5:44:17down below the lower trend line support
5:44:20of the pattern. In that case, you can
5:44:22take a short entry on the breakdown or
5:44:25after the breakdown candle closes below
5:44:27the support level. You can also enter a
5:44:29trade after a pullback or retest to the
5:44:32lower trend line support. Now talking
5:44:34about stop- losses, placing stop- losses
5:44:36for this pattern is actually a hard
5:44:39task. If you were to go by the general
5:44:41idea of placing the stop loss, it can be
5:44:44set below the top resistance line or
5:44:47below the lower support line in case of
5:44:49a bullish breakout. And on the other
5:44:51hand, a stop loss could be placed above
5:44:54the lower support line or above the
5:44:56upper trend line resistance for a
5:44:58bearish breakdown. But think about it,
5:45:01one of the stop loss is too tight and
5:45:04any price swing with long wicks can take
5:45:06out your stop- loss while the other stop
5:45:08loss is too wide which will give you a
5:45:11poor risk-to-reward. So what will we do?
5:45:14One way to counter this issue is to
5:45:16place your stop loss in the middle of
5:45:18the pattern. That is at the center of
5:45:20the widest point of the pattern. So if
5:45:23you are very aggressive with your stop
5:45:24loss, you could even place the stop-
5:45:26loss with respect to the breakout candle
5:45:28provided you give enough breathing room
5:45:31for the price action to happen. This can
5:45:33be achieved if you place your stop loss
5:45:35by adding some buffer with anywhere from
5:45:371 to three times the ATR value. Now
5:45:40finally we will be talking about the
5:45:42targets for this pattern. I won't be
5:45:45really interested in trading my targets.
5:45:47I'm satisfied with the projected
5:45:49targets. So you can set two targets
5:45:51using the price projection method. The
5:45:54first target would be equal to the
5:45:56distance of the smallest swing between
5:45:58the top and bottom trend lines. This
5:46:00distance is further projected above or
5:46:03below the trend line depending on
5:46:05whether it was a breakout or a
5:46:06breakdown. The second target level will
5:46:09be equal to the distance of the widest
5:46:11swing between the trend lines which is
5:46:13projected from the breakout point. Now
5:46:15let's move on to the final type of
5:46:17bilateral pattern which are channel
5:46:20patterns namely the rising and falling
5:46:23channels. The channel pattern is also
5:46:25known as the price channel. The
5:46:27formation of the pattern is quite
5:46:28interesting and it is related to market
5:46:31trends. You can learn all you need to
5:46:33know about market trends in my price
5:46:35action course. Now let's talk about the
5:46:38rising channel first. The rising channel
5:46:40is formed by two lines. A bottom trend
5:46:43line support and an upper trend channel
5:46:46line resistance. So clearly the price is
5:46:48in an uptrend. And as you may already
5:46:51know during an uptrend price forms
5:46:53higher swing highs and higher swing
5:46:55lows. And when we connect all the swing
5:46:58lows together using a line we get the
5:47:01uptrend line which will act as a support
5:47:03for the prices. And if we connect all
5:47:06the higher highs, it will give us the
5:47:07trend channel line which will act as a
5:47:10resistance level for the future prices.
5:47:12Moreover, we need at least two price
5:47:14swings on each of these lines to
5:47:16consider it as a trend line. And to
5:47:18confirm it as a valid line, we need at
5:47:21least three swings on each of them. Now,
5:47:23another important thing to keep in mind
5:47:25is that the lines should be parallel to
5:47:27each other or in simple terms, the slope
5:47:30of both the upper and lower lines should
5:47:33almost be equal. And if the slopes are
5:47:35different, we know what it means, right?
5:47:37It will be a different price action
5:47:38altogether and it will form a rising
5:47:41wedge pattern. Let's now talk about the
5:47:43falling channel pattern. The existing
5:47:45trend is a downtrend with lower highs
5:47:48and higher lows. By connecting all the
5:47:50lower highs together, you will get a
5:47:52downtrend line which will act as a
5:47:54resistance level for the future price
5:47:56movements. On the other hand, if you
5:47:58connect all the lower lows, you will get
5:48:00a trend channel line which will function
5:48:03as a support level for prices. Also,
5:48:05keep in mind that the slopes of both
5:48:07these lines should be almost equal or in
5:48:11simple terms, the line should be
5:48:12parallel. Now, let's talk about how to
5:48:15trade a rising channel pattern. So, you
5:48:17can take two types of trades when it
5:48:19comes to rising channel patterns. You
5:48:21can either take breakout trades when the
5:48:24price breaks out of the channel or else
5:48:26you can trade the impulse price swings
5:48:28in the direction of the existing trend
5:48:30from the trend line. When it comes to
5:48:32breakout trading, the rising channel
5:48:34pattern is a bilateral pattern. Meaning
5:48:37that a breakout can happen in either
5:48:39direction. But what I have observed is
5:48:41that the slope of the channel to some
5:48:44extent gives us the information on
5:48:46whether it will be a breakout or a
5:48:48breakdown. Let me explain. A channel
5:48:50with a very high slope or a very steep
5:48:53price action will mostly break down
5:48:55below the support trend line while a
5:48:57channel with a medium or lower slope
5:49:00will have equal chances of breaking out
5:49:02or breaking down. Anyway, this is just
5:49:04an observation but we should enter a
5:49:07trade only after a breakout has
5:49:09happened. Let's say the price broke
5:49:11below the support trend line. Now, if
5:49:13you are very aggressive, you can take a
5:49:15short position as soon as the price
5:49:17breaks below the support trend line. But
5:49:19this is risky as it could end up being a
5:49:22false breakout and you will get trapped.
5:49:24So it is always ideal to wait for the
5:49:26breakout candle to close below the trend
5:49:28line and then enter on the opening of
5:49:30the next candle or below the low of the
5:49:33breakout candle. Now the downside is
5:49:35that if the breakdown is strong, you
5:49:37will end up selling at a much lower
5:49:39price. So yet another method would be
5:49:41when the price pulls back or retest back
5:49:43to the trend line. So both the pullback
5:49:46and retest are associated with small
5:49:48boded candles. So when the price starts
5:49:50to move lower after the pullback or
5:49:52retest, you can take a short entry.
5:49:54Sometimes there could even be a price
5:49:56build up near the support trend line
5:49:58which is a very good signal that the
5:50:00price would break down lower and it
5:50:02provides a much better reward to risk
5:50:04because of a tighter stop-loss. Now all
5:50:07these breakdown entry techniques are
5:50:09applicable even if the price manages to
5:50:11break out above the resistance trend
5:50:13line. In such a scenario, we will look
5:50:16for long trading opportunities either
5:50:18after the breakout and close above the
5:50:20resistance or after a buildup near the
5:50:22resistance trend channel line or even
5:50:24after a pullback or retest back to the
5:50:26trend channel line after the breakout.
5:50:29And one of the most important factors to
5:50:31check out is the volume. So if you want
5:50:33to know more about analyzing volumes,
5:50:36you can check it out in my free price
5:50:38action playlist. Anyway, there should be
5:50:40a higher than average volume during
5:50:42breakouts. You can even use momentum
5:50:44indicators like RSI to validate the
5:50:46breakout. Moving on, let's learn how to
5:50:49place your stop- loss. We will discuss
5:50:51the stop- loss for a breakdown below the
5:50:53support level. The stop-loss of the
5:50:55channel pattern will depend upon the
5:50:57width of the channel. If the channel is
5:51:00too narrow, then we can think about
5:51:02placing the stop- loss just above the
5:51:04upper trend channel line. But if the
5:51:06channel is too wide, then we need to
5:51:08think about a different stop-loss.
5:51:10Because if we place it above the trend
5:51:12channel line like before, the reward to
5:51:15risk ratio will be severely affected. So
5:51:17what can be done for a breakdown entry?
5:51:20We can place the stop- loss just above
5:51:22the midpoint of the channel from where
5:51:24the breakout happened. But if you have
5:51:26taken a short entry after a buildup near
5:51:29the support trend line, then you can
5:51:30keep your stop- loss just above the
5:51:32buildup or consolidation. And finally,
5:51:35if you have taken a position after a
5:51:37pullback or retest, then you can set
5:51:39your stop loss above the highest wick of
5:51:41the pullback or retest candles with some
5:51:44buffer for price action. Now, in case of
5:51:47a breakout above the resistance trend
5:51:49line, similar stop-loss conditions can
5:51:51be applied there also. But in this case,
5:51:53we'll be placing the stop- loss below
5:51:55the midpoint of the channel from the
5:51:58breakout point if you have taken a
5:52:00breakout entry. Or you can place the
5:52:02stop loss below the consolidation for a
5:52:05breakout after buildup entry. And
5:52:07finally, you can set your stop loss with
5:52:09some buffer below the lowest wick of the
5:52:11pullback or latest candles for a
5:52:13pullback or retest entry. Now let's
5:52:16discuss the targets and as always we can
5:52:19follow three methods. Price projection,
5:52:21trailing stop-loss and a combination of
5:52:23both. For price projection, we follow a
5:52:26price exhaustion concept. For a channel
5:52:29pattern, we measure the distance between
5:52:31the upper and lower trend lines and
5:52:33project this distance above or below the
5:52:36line depending on the direction of the
5:52:39breakout. This will give you your
5:52:40projected price target. Now, one
5:52:43interesting observation of the rising
5:52:45channel pattern when the price breaks
5:52:47down below the support trend line is
5:52:49that all the previous swing levels will
5:52:51act as price action areas. So you will
5:52:54have to closely watch what type of price
5:52:56action is occurring and then decide
5:52:59whether to hold your trades for more
5:53:00profitability or just exit your
5:53:02positions. Now the other method is to
5:53:05use a trailing stop-loss using moving
5:53:07averages of different periods depending
5:53:10on the type of trading style that you
5:53:11follow. The central idea of this concept
5:53:13is that when a price breakout or
5:53:15breakdown forms a channel or simply a
5:53:18consolidation, there is a good chance
5:53:20that the trend will continue for a
5:53:22longer period and you can benefit
5:53:24enormously if you trail your stop- loss.
5:53:26You will exit the trade only when the
5:53:28price crosses the moving average. So for
5:53:31short-term trends, you can use 20 period
5:53:33moving average. For medium-term trends,
5:53:36you can use 50 period moving averages.
5:53:38And for longerterm trends, you can use
5:53:40100 or 200 moving averages. But it is
5:53:43always a good practice if you use a
5:53:45combination of both price projection and
5:53:47trailing stop-loss methods so that
5:53:49you'll be able to lock into profits
5:53:51whatever the outcome is. Now let's look
5:53:53at the second method of trading a rising
5:53:56channel pattern. This idea is only valid
5:53:58if the channel formed is wide enough.
5:54:00That is there should be enough points
5:54:03between the support and resistance line.
5:54:05The idea here is to trade the impulse
5:54:07move or simply to trade in the direction
5:54:10of the trend. All you have to do is to
5:54:12look for buying opportunities from the
5:54:14trend line support level to write the
5:54:16impulse moves because impulse moves are
5:54:19associated with stronger momentum
5:54:21candles and you will be trading along
5:54:23with the market price flow. You can also
5:54:25make use of bullish reversal
5:54:27candlesticks like bullish pin bars from
5:54:29the support level to take a long entry.
5:54:32You can place your stop loss below the
5:54:34support trend line with ample buffer or
5:54:37below the lowest wick of the rejection
5:54:39candle from the support level. Your
5:54:41target will obviously be the resistance
5:54:43trend channel line. You can also trade
5:54:45the correction move from the uptrend
5:54:47line, but I don't generally recommend
5:54:49doing so. Now, let's briefly discuss the
5:54:52trading criteria for a falling channel
5:54:54pattern. Now, similar to a rising
5:54:56channel, you can take two types of
5:54:58trades. When it comes to falling channel
5:54:59patterns, you can either take breakout
5:55:02trades when the price breaks out of the
5:55:04channel or you can trade the impulse
5:55:05price swings in the direction of the
5:55:07existing downtrend from the trend line.
5:55:10When it comes to breakout trading, the
5:55:12falling channel line is a bilateral
5:55:14pattern indicating that breakout can
5:55:16happen in either direction. But same as
5:55:19before, the slope of the channel to some
5:55:21extent gives us the information on
5:55:23whether it will be a breakout or a
5:55:25breakdown. So a falling channel with a
5:55:28very high negative slope or a very steep
5:55:31price action will most probably break
5:55:33out above the resistance trend line
5:55:36while a channel with a medium or lower
5:55:38slope will have equal chances of
5:55:40breaking out or breaking down. Anyway,
5:55:42this is just an observation but you
5:55:44should enter the trade only after the
5:55:46breakout has been confirmed. Let's say
5:55:48the price broke above the resistance
5:55:50trend line. Now, if you're a very
5:55:52aggressive trader, you can take a long
5:55:54position as soon as the price breaks
5:55:56above the resistance trend line. But
5:55:58this is a risky business as it could end
5:56:00up being a false breakout and you'll be
5:56:03trapped. So, it is always ideal to wait
5:56:05for the breakout candle to close above
5:56:07the trend line and then enter on the
5:56:10opening of the next candle or above the
5:56:12high of the breakout candle. The
5:56:14downside is that the breakout could be
5:56:16too strong and you will end up buying at
5:56:18a much higher price. So yet another
5:56:20method would be when the price pulls
5:56:22back or retest to the trend line. So
5:56:24when the price starts to move higher
5:56:26after the pullback or retest of the
5:56:29consolidation, we can take a long entry.
5:56:31Sometimes there could even be a price
5:56:33build up near the resistance trend line
5:56:35which is a very good signal that the
5:56:37price could break out higher and it
5:56:39provides a much better reward to risk
5:56:41because of a tighter stop-loss. All
5:56:44these breakout entry techniques are
5:56:46applicable even if the price manages to
5:56:48break below the support trend channel
5:56:50line. In such a scenario, we will look
5:56:52for short trading opportunities either
5:56:54after the breakout and close below the
5:56:56support trend channel line or after a
5:56:59build up near the support line or even
5:57:01after a pullback or retest back to the
5:57:04trend channel line after the breakdown.
5:57:06And one of the most important factors to
5:57:08check out is the volume. You can
5:57:10validate a real breakout using higher
5:57:13than average volumes during the breakout
5:57:15and you can even use momentum indicators
5:57:17like RSI, MACD, etc. to validate the
5:57:20breakout. Moving on, let's look at how
5:57:22to place your stop losses. So, we will
5:57:25discuss the stop- loss for a breakout
5:57:26above the resistance level. As mentioned
5:57:29earlier, the stop loss of the channel
5:57:31pattern will depend upon the width of
5:57:33the channel. If the channel is too
5:57:35narrow, we can think about placing the
5:57:37stop loss just below the lower trend
5:57:39channel line. But if the channel is too
5:57:41wide, then we need to think about a
5:57:43different stop-loss because if we place
5:57:45the stop loss below the trend channel
5:57:47line like before, the reward to risk
5:57:49will be poor. So for a breakout entry
5:57:52can place the stop- loss just below the
5:57:54midpoint of the channel from where the
5:57:56breakout happened. But in case you have
5:57:58taken a long entry after a buildup near
5:58:00the resistance trend line, then you can
5:58:02keep your stop loss just below the
5:58:04buildup or consolidation. And finally,
5:58:07if you have taken a position after a
5:58:09pullback or retest, you can set your
5:58:11stop- loss below the lowest wick of
5:58:13pullback or retest candles with some
5:58:15buffer for ample price movement. Now, in
5:58:18case of a breakout below the support
5:58:20trend channel line, similar stop-loss
5:58:22conditions can be applied there also.
5:58:25But in this case, you will be placing
5:58:26the stop loss above the midpoint of the
5:58:29channel from the breakdown point if you
5:58:31have taken a short entry. Or you can
5:58:33place the stop loss above the
5:58:34consolidation for a breakout after
5:58:37buildup entry. And finally, you can even
5:58:40set your stop- loss with some buffer
5:58:42above the highest wick of pullback or
5:58:44retest candles for a pullback or retest
5:58:46entry. Now, finally, let's discuss the
5:58:49targets. Setting the targets can be done
5:58:51the same way as with the rising channel
5:58:53pattern. could be price projection,
5:58:56trailing stop-loss or a combination of
5:58:58both. So, please do refer the previous
5:59:00session if you have any doubts. Now,
5:59:02let's look at the second method of
5:59:04trading the following channel pattern.
5:59:06As mentioned earlier, the idea is only
5:59:08valid if the channel formed is wide
5:59:10enough. There should be enough points
5:59:11available between the support and
5:59:13resistance trend lines. Now, the idea
5:59:15here is to trade the impulse move or
5:59:17simply to trade in the direction of the
5:59:19existing market trend. So all you have
5:59:21to do is to look for selling
5:59:23opportunities from the trend line
5:59:25resistance level to write the impulse
5:59:27move because the impulse moves are
5:59:30associated with stronger momentum
5:59:32candles and you'll be trading along with
5:59:34the market price flow. You can also make
5:59:36use of bearish reversal candlesticks
5:59:38like bearish pin bars from the
5:59:40resistance line to take a short entry.
5:59:42You should place your stop loss above
5:59:44the resistance trend line with ample
5:59:46buffer or above the highest wick of the
5:59:49rejection candle from the resistance
5:59:51line. Your target for this case will
5:59:54obviously be the support trend channel
5:59:56line. So you can also trade the
5:59:58correction move if you want from the
6:00:00lower trend channel line but I generally
6:00:02don't recommend doing it. Now there are
6:00:05a hell lot of other patterns that you
6:00:07can find with the markets from rounding
6:00:10bottoms and tops or saucer patterns
6:00:12followed by diamond tops and diamond
6:00:14bottoms we top bottoms broadening wedges
6:00:18island reversal patterns etc. The
6:00:20patterns that I have discussed over the
6:00:22course of three videos are more than
6:00:24sufficient to trade profitably in the
6:00:26market if you follow them correctly. Now
6:00:28it doesn't mean that all the trades will
6:00:30become profitable but the probability of
6:00:32your trading success can be vastly
6:00:35improved. Moreover, the time frames that
6:00:37you select for trading these patterns
6:00:39also form an integral variable for the
6:00:42success of these patterns. And mostly
6:00:44the win rate of chart patterns tends to
6:00:46improve quite a lot if you trade them at
6:00:48higher time frames.
6:00:54We went from discussing continuation
6:00:56chart patterns followed by reversal
6:00:58chart patterns and finally we have
6:01:00talked about neutral or bilateral chart
6:01:03patterns. Now I am assuming you know how
6:01:05to identify and trade these chart
6:01:07patterns in the market. But one of the
6:01:09hardest things about chart patterns is
6:01:12spotting them on charts across different
6:01:14stocks and indices. Think about it.
6:01:16Chart patterns show up in different time
6:01:18frames from intraday time frames to
6:01:21daily or weekly or even monthly time
6:01:23frames and that too across different
6:01:25stocks and indices. So as a trader you
6:01:28have two jobs. First you have to
6:01:31identify suitable patterns of your
6:01:33liking. Maybe you like trading triangle
6:01:35patterns or maybe you like penance and
6:01:37flags and so on. So identify the pattern
6:01:40of your liking. I will suggest you
6:01:42follow two to a maximum of three
6:01:44reliable patterns rather than going
6:01:46after every pattern you find in the
6:01:48books. Trust me, it will do more harm
6:01:51than good. And if you ask me my personal
6:01:54favorites, then I would say triangles,
6:01:56rectangles, channels, and sometimes I
6:01:59even bet on head and shoulder patterns
6:02:00also. Now, the next step is to filter
6:02:03out the good trades from the not so
6:02:06reliable ones. But trust me, it is an
6:02:08exhausting job to look for chart
6:02:10patterns over each and every stock, draw
6:02:13them, analyze them, and finally filter
6:02:15them for trading. So in this video, I
6:02:18will discuss three methods that you can
6:02:20use to spot chart patterns in the
6:02:22market. So watch the video till the end
6:02:25because the methods for finding the
6:02:27patterns get easier as we proceed
6:02:29through the video. Before we discuss the
6:02:31different methods, let me make something
6:02:33clear up front. Let me explain the
6:02:35reasons why spotting chart patterns is a
6:02:38difficult task. Number one, most charts
6:02:41are uneven and noisy. Most stocks and
6:02:44index chart consist of deep wicks, price
6:02:46gaps, false breakouts, overshoots, and
6:02:49undershoots all resulting in making the
6:02:51pattern determination a hard task. This
6:02:54is particularly true when we move to the
6:02:56lower time frames. What this means is
6:02:58that on a higher time frame like daily,
6:03:01weekly etc. The chart pattern
6:03:03determination is fairly easy and forms
6:03:06slowly so that we get enough time to
6:03:08plan our trades appropriately. But this
6:03:11is not the case in lower time frames
6:03:13like 5 minutes or 15 minutes or even 30
6:03:16minute charts where the chart patterns
6:03:18get formed very often. But it is always
6:03:20tricky to mistake one pattern from
6:03:22another as it happens quickly and often
6:03:25we won't be able to plan our trades
6:03:27adequately. Another point to keep in
6:03:29mind is that the more fluid the market
6:03:31price movements, the easier it is to
6:03:33spot these patterns. The point that I
6:03:35want to make is that forex markets which
6:03:38are open all week long are one of the
6:03:41best markets for pattern trading unlike
6:03:43Indian indices like Nifty or Bank Nifty
6:03:46where there are big price gaps and
6:03:48backlashes due to aftermarket
6:03:50sentiments. Due to this very reason, you
6:03:53can get good entries and exits due to
6:03:55regular price moves in forex. Unlikes
6:03:57stocks or indices which can sometime
6:04:00affect your trades due to unpredictable
6:04:02price gaps. But most of us like trading
6:04:04in stocks and indices. So it is
6:04:07important that we identify the pattern
6:04:09correctly and plan our trades
6:04:11beforehand. So let's discuss the very
6:04:14first method of doing this. The first
6:04:16method uses the inbuilt trading view
6:04:19indicators for spotting chart patterns.
6:04:22This feature is only available in
6:04:24trading view charts. So make sure you
6:04:26have at least a free account in trading
6:04:28view. All you have to do is to select
6:04:30the chart of your liking be it a stock
6:04:33or an index or a currency pair and then
6:04:36select the time frame that you intend to
6:04:39trade the pattern in. So if you are an
6:04:41intraday trader, select an intraday time
6:04:43frame anywhere between 3 minutes to 30
6:04:46minutes or if you are a swing trader, go
6:04:48with a much higher time frame like 4
6:04:50hours or 1 day time frame. Once you are
6:04:53done with these steps, go to the
6:04:55indicator section on the top toolbar
6:04:57section of trading view. Click on it and
6:05:00as you can see on the left hand side
6:05:02there are different options like
6:05:04favorites, community scripts, my scripts
6:05:07etc. And you need to select the
6:05:10technical section and once you do that
6:05:12you'll find a lot of indicators to
6:05:14choose from but the ones that we are
6:05:16looking for are related to chart
6:05:18patterns. On the top section of this
6:05:21popup, you can see multiple options like
6:05:24indicators, strategies, volume profiles,
6:05:27etc. So, click on the one that says
6:05:29auto. Now, as soon as you scroll down,
6:05:32you'll be able to see most of the chart
6:05:34patterns that we have already discussed
6:05:36from flags, penance, rectangles, both
6:05:38bullish and bearish to double and triple
6:05:41tops and double and triple bottoms to
6:05:44triangles. And finally we have head and
6:05:46shoulders and inverted head and shoulder
6:05:48patterns. Now you might be wondering
6:05:50where are the ascending, descending and
6:05:52symmetrical triangle patterns. Don't
6:05:54worry because all the triangle pattern
6:05:56variants are included under the same
6:05:59indicator. But unfortunately this
6:06:01indicator section actually lacks
6:06:03patterns like channels, broadening
6:06:05wedges and triangles etc. The next step
6:06:08is to click on the pattern that you want
6:06:10to check on the chart. Let us say I want
6:06:13to check triangle patterns. Then I will
6:06:15simply click on the triangle patterns.
6:06:17And if we zoom out a little, you'll be
6:06:19able to spot all the triangle patterns
6:06:21which are formed. And as you can see
6:06:23there is no triangle formation as of
6:06:25now. But there was a triangle formed
6:06:28some time back which gave decent enough
6:06:30returns. Even though the indicator plots
6:06:33the patterns automatically, you are the
6:06:35one who is ultimately in control. So in
6:06:38order to change the parameters, just go
6:06:40to the settings of the indicator and
6:06:42click on it. Now a pop-up appears which
6:06:45gives a parameter called permissible
6:06:47deviation and by default it is set to
6:06:5010. And if you want to know what this is
6:06:54just place the cursor over the i symbol
6:06:56just to the right of the parameter. Now
6:06:58this particular parameter is used to
6:07:00determine how accurate the pattern
6:07:02formed should be. So if you reduce the
6:07:05permissible deviation to let's say zero
6:07:07or even five then the number of triangle
6:07:10patterns displayed by the indicator
6:07:12reduces and if you increase the
6:07:14deviation to let's say 25 or 40 then the
6:07:18number of patterns displayed will be
6:07:20more but some of them will be
6:07:22inaccurate. So either stay with the
6:07:24default value or just play with the
6:07:27numbers and see what works best for you.
6:07:29Now just below the deviation parameter
6:07:31you will find a tick box saying in
6:07:34progress. Once again move the cursor
6:07:37over the I simple. What it is asking you
6:07:40is that do you want the indicator to
6:07:42spot incomplete patterns or those
6:07:45patterns which are in the process of
6:07:47formation. Now it is most important to
6:07:50always turn this checkbox on. Only then
6:07:53you'll be able to track the upcoming
6:07:55patterns and plan and trade them with
6:07:57ease. And another thing is that when you
6:08:00move from a higher time frame to a lower
6:08:02time frame, the number of patterns
6:08:04spotted increases but the accuracy of
6:08:07the patterns working out in your favor
6:08:09actually reduces. Now let us look at one
6:08:12more example. This time we will consider
6:08:14a double top pattern and as you can see
6:08:17once we have clicked on the pattern it
6:08:19automatically displays all the potential
6:08:21double top formations. And another
6:08:24interesting thing to note is that this
6:08:26indicator will also give you the
6:08:28projected profit target beforehand. We
6:08:31know that the projected target is equal
6:08:33to the height of the double top pattern
6:08:35from the neckline to the top. Now this
6:08:38is exactly the target being displayed.
6:08:40Now let's select the setting icon of
6:08:42this indicator. And as you can see there
6:08:45are more options available like the
6:08:48trend height, second top and finally the
6:08:50permissible deviation. Now the trend
6:08:53height parameter is asking you for the
6:08:55minimum height of the prior uptrend.
6:08:57Since we know that double top is a trend
6:09:00reversal pattern particularly a bearish
6:09:03trend reversal pattern. So on a strong
6:09:05uptrend a double top could be a minor
6:09:08retracement while during a weak uptrend
6:09:11it could be the start of a potential
6:09:13reversal. So play with the values to
6:09:16find the best combination. Now the next
6:09:18parameter is the second top which means
6:09:21where do you want the second top to be
6:09:23formed? Do you want it exactly at the
6:09:26same height or higher or lower?
6:09:29Depending on this parameter different
6:09:31double tops will be displayed on the
6:09:32chart. Now the final parameter is the
6:09:35permissible deviation which refers to
6:09:37the extent to which the second top
6:09:40should vary from the first top. Now more
6:09:42this deviation the more results will be
6:09:45displayed by the indicator but with a
6:09:47lower accuracy. So try to maintain a
6:09:50tight deviation and always make sure to
6:09:52tick the in progress box to display
6:09:55ongoing pattern formations. So it is
6:09:58clear that different patterns have
6:10:00different settings or parameters. So it
6:10:03is your job now to select the indicator
6:10:05based on the pattern of your liking and
6:10:08fine-tune the parameters to achieve the
6:10:10best results. Now this method works
6:10:13well. It helps to identify patterns
6:10:15faster on different time frames and on
6:10:18different charts. But it is still a
6:10:20manual job and let's say you need to
6:10:22check all the Niftyund stocks for
6:10:25potential chart patterns. How long do
6:10:27you think this process will take? Maybe
6:10:29hours, right? So this is exactly the
6:10:32drawback with these trading view
6:10:33indicators as it has limited
6:10:36applications. shows lesser results on
6:10:38the chart because sometimes the
6:10:40indicator can be seen missing out on
6:10:42some of the patterns. So it is less
6:10:44reliable. So how to counter this problem
6:10:47of finding all the patterns on different
6:10:50charts on different time frames. Now one
6:10:52of the great contender for this part is
6:10:55our method number two which is top stock
6:10:58research pattern scanner. This is an
6:11:00automatic screener that looks for chart
6:11:02patterns. Once you're in the website, go
6:11:05to the option that says pre-screened and
6:11:08a drop-own menu appears. From the
6:11:10drop-down, select chart patterns. This
6:11:13will take you to the chart pattern
6:11:15screens. And when you scroll down, you
6:11:17get a lot of patterns from double and
6:11:20triple tops, double and triple bottoms,
6:11:23head and shoulders, inverse head and
6:11:25shoulders, triangle patterns. But unlike
6:11:27trading view chart patterns indicators,
6:11:29here you get the variance of triangle
6:11:31patterns sorted under different sections
6:11:34followed by rectangles and channels. But
6:11:37here also a few patterns are missing
6:11:39like flags, penance, wedges, broadening
6:11:43patterns etc. But I think this is more
6:11:45than enough because I majorly focus on
6:11:48triangles, channels, rectangles and
6:11:51sometimes head and shoulder patterns. So
6:11:54if you are someone who is interested in
6:11:56the patterns not mentioned in this
6:11:58screener then you can skip to the next
6:12:00section of the video but trust me this
6:12:03scanner will make life easier for you.
6:12:05As you can see each pattern has
6:12:07subsections based upon different trading
6:12:10periods like short-term, medium-term and
6:12:13long-term and under each subsection
6:12:16there are different time frames from 5
6:12:18minutes to daily through monthly. Now
6:12:21depending on your trading style that is
6:12:23how long you intend to hold a position
6:12:26and what time frame you trade on select
6:12:29an option that suits your requirement.
6:12:31So it may be a shortterm trade on a 15
6:12:34minutes time frame or a medium-term
6:12:37trade on a 2-hour time frame or even a
6:12:40long-term trade on a daily or weekly
6:12:42time frame. So once you have fixed the
6:12:44duration and time frame, select it on
6:12:47the chart pattern you wish to scan for.
6:12:49And once you click on it, you will get a
6:12:51list of stocks that satisfies the
6:12:54criteria. But in the free version, you
6:12:56will only get a maximum of three
6:12:58results. And if you want more results,
6:13:01you need to purchase the premium plan,
6:13:03which cost around 2,000 rupees for any.
6:13:06But I suggest you use the free version
6:13:08for a while and see if you really need
6:13:10it. Now, let's get back to the
6:13:12discussion. Once the result comes up,
6:13:14you get to see all the necessary details
6:13:16regarding the pattern, namely the prices
6:13:19at which the pattern formation took
6:13:20place. This is particularly useful
6:13:23because it helps you check for the
6:13:25pattern in the charts quite easily as
6:13:27you already know the price points to
6:13:29look for. But there is already a
6:13:31built-in chart feature in the screener.
6:13:34You can find this to the extreme right
6:13:36on the table. Once you click on the
6:13:38icon, it will take you to the chart
6:13:40which is by default a line chart which
6:13:42shows the pattern's necessary price
6:13:45point with orange stars which makes it
6:13:48easier to spot. You can change the
6:13:51charts to candlestick by simply
6:13:53selecting from the drop-down menu on
6:13:55top. You even get the option to change
6:13:57the time frames and also the periods
6:13:59under consideration. You can also find
6:14:02some useful indicators like volumes,
6:14:05moving averages, RSI, Fibonacci, etc.
6:14:08which you can make use of or else you
6:14:10can always go back to your preferred
6:14:12charting tool like trading view which is
6:14:14much more powerful and easier to operate
6:14:16on. So this is how you can use this
6:14:19scanner for spotting potential chart
6:14:21patterns. You can check all other
6:14:23pattern screens in the same manner. Also
6:14:26keep in mind that this scanner will only
6:14:28scan for ongoing patterns and it will
6:14:31not show any data of previous patterns
6:14:33formed which is necessary for back
6:14:35testing. Now the drawback that I found
6:14:38out was that top stock research is not
6:14:41flexible enough to sort which category
6:14:44of stocks to consider. For example, I
6:14:46can't just run a scan on only Nifty50 or
6:14:50Niftyund stocks. Due to this, the
6:14:52scanned result can sometimes come out to
6:14:54be penny stocks or small gaps which is
6:14:57very risky and illquid. Also, it lacks
6:15:00some good patterns but it is somewhat
6:15:02compensated by the pattern breakout
6:15:04scans which give result of those
6:15:06patterns which have just broken out of
6:15:09the consolidation range. Okay. Now let's
6:15:11get on to the final method which
6:15:14revolves around screeners itself. But
6:15:16here you have more control. I'm talking
6:15:19about charting and zeroda streak. Both
6:15:22these are powerful screeners which are
6:15:24easy to use as there is no need to learn
6:15:27any custom codes but you still need to
6:15:29input the logic that you want to run on
6:15:31the chart. But this process is quite
6:15:34easy and userfriendly. Let me talk about
6:15:37charting first. One advantage with
6:15:39charting is that it has been around for
6:15:41a while. So most of the chart pattern
6:15:44screens are already available. So all
6:15:46you have to do is to search for the
6:15:48particular chart pattern that you want
6:15:50to scan on the chart. Now how should you
6:15:52do this? I will explain. In the top of
6:15:55the homepage of charting you will find a
6:15:57screener menu. Just click on that
6:15:59option. Now a lot of scans just show up
6:16:02from fundamental scans to top loud to
6:16:05candlestick pattern scans. But the one
6:16:07we are looking for are chart pattern
6:16:09scans. But we won't find any in this
6:16:11section. So what you can do is that you
6:16:14can search for the required scan. Let's
6:16:16say I want to scan for a descending
6:16:18triangle pattern. Just type it and hit
6:16:21search. A large number of scans show up.
6:16:24Now which one to select? Usually the
6:16:26ones shown the start of the results are
6:16:28the most loud scans. So always try to
6:16:31stick with the first top 10 scans. For
6:16:34now, let me just click on the first
6:16:36result. and it will take me to another
6:16:39page where I can see the logic written
6:16:41in simple and understandable manner. Now
6:16:44if you notice the first line says stock
6:16:47passes all of the below filters in cash
6:16:50segment. Now this is where you can
6:16:52filter out stocks based on your
6:16:54requirement. All you have to do is to
6:16:57click on the word before segment which
6:16:59in this case is cash and you will see a
6:17:02drop-own list of all the available
6:17:04segments that you can choose from. So if
6:17:07you want only those stocks from future
6:17:09segment or only from Nifty 100 or Nifty
6:17:13500, just select it and move down the
6:17:16cursor to the run scan button and click
6:17:19on it. A new scan will run and it will
6:17:22give us the required shortlisted stocks
6:17:25under the segment that we have
6:17:26considered. You can analyze every chart
6:17:29by clicking on the stock name. But I'm
6:17:31not really big fan of charting's
6:17:34charting tool. So I would rather do my
6:17:36analysis on trading view or my trading
6:17:38terminal. Now if you have noticed the
6:17:41charting free version data is delayed by
6:17:44some 15 minutes. So in rad chart pattern
6:17:47trading opportunities using the free
6:17:50version of charting won't really work
6:17:52out because the signals come late. But
6:17:54if you're someone who is into swing
6:17:56trading or someone who uses end of the
6:17:58day data then this is not a big deal if
6:18:01the data is delayed. Also, other
6:18:03features like alerts are only available
6:18:05on the premium version where you can set
6:18:08a lot of alerts for the setup you're
6:18:10looking for. But I don't feel like you
6:18:12should pay money for premium version
6:18:14because first of all the charting is
6:18:16poor and you have to run the scans
6:18:18manually for new stocks and you can't do
6:18:20an automated trading and so on. Now that
6:18:23brings us to our next screener come
6:18:25strategy duster come algo trading site
6:18:28by streak which is a part of the zeroda
6:18:30ecosystem. You need to have an account
6:18:33with any of the following brokers. I
6:18:36already have an account with Zeroda. So
6:18:38I will login with Zeroda. And once you
6:18:41log in, you will be welcomed with a neat
6:18:43homepage where you can see a discover
6:18:45section with the wellperforming
6:18:48strategies. But for now, we are only
6:18:50interested in scanners. So on the top,
6:18:53click on the option that says scanners
6:18:56and a drop-down appears. Just click on
6:18:58the disco option and it will take us to
6:19:01a new page. And as you scroll down, you
6:19:04will be able to see a lot of custom
6:19:06scans. Now we will have to look for
6:19:08chart pattern scans. For that, click on
6:19:10the search scanner box on the left side.
6:19:14Then you can search for the pattern that
6:19:16you like. But the problem with streak is
6:19:18that there aren't much chart pattern
6:19:21scans available. A few of those already
6:19:23available scans includes triangle
6:19:26patterns, double dots, double bottoms,
6:19:28triple bottoms, rectangle patterns, and
6:19:31that is very much it. So the only way to
6:19:34get other patterns is to make them by
6:19:36your own. You can do this by going to
6:19:38create new on the right side panel or
6:19:40you can even find this on the top
6:19:43scanners drop-down which goes by the
6:19:45name create scanners. Just click on any
6:19:48of them and you will be taken to a new
6:19:50scanner creation page. It gives you the
6:19:53option to select the segment of stocks
6:19:55that you want to run the scan on. Now
6:19:57the interesting thing is that you can
6:19:59even scan options contracts of different
6:20:02expiries. Now the next option is to
6:20:05select the time frame that you want to
6:20:06run the scan for. You get time frames
6:20:08from 1 minute to 1 day. The next option
6:20:11is to choose the chart type. You can
6:20:13select between candlesticks and
6:20:15hyenashi. Then there is a condition
6:20:18section where we will enter the required
6:20:20conditions for the pattern. So what I
6:20:22recommend is that you go to charting,
6:20:25search for the pattern you wish to
6:20:27trade, then select the most loud scan of
6:20:30that particular pattern, copy or
6:20:32screenshot the code logic and then come
6:20:35back to str and fill the conditions into
6:20:37the condition section. And once you're
6:20:39done, give it a name and run the scan.
6:20:42Right now I don't have a premium plan
6:20:44for streak. So I can't run a scan. But
6:20:47if you have a regular or ultimate plan,
6:20:50you can run a large number of scans
6:20:52every day. And you can even do a lot
6:20:54more than that. You can back test most
6:20:57of your trading strategies, analyze them
6:21:00and even trade these strategies
6:21:02virtually using paper trading or you can
6:21:04do realtime trading using your broker. I
6:21:07think it is a value for money. So you
6:21:09can check it out. But this is not a
6:21:11recommendation or promotion. I'm talking
6:21:13based on my experience because I have
6:21:15used this for back testing my strategies
6:21:18and paper trading automatically before I
6:21:20trade with real money. So I think that
6:21:23is all the three methods that I wanted
6:21:25to share. All of them have their own
6:21:27pros and cons. So try all of them and
6:21:30choose the one that works well for you.
6:21:39Supply and demand is one of the most
6:21:41popular trading systems among traders.
6:21:44It can be regarded as one of the most
6:21:46profitable strategies that one can use
6:21:48to trade the market if done right. As
6:21:50you all know, the stock market is where
6:21:53traders buy and sell assets. The
6:21:55movement of the prices is due to supply
6:21:57and demand forces. Now once you
6:21:59understand the dynamics of these two
6:22:01forces namely supply and demand, you'll
6:22:04be able to anticipate almost every price
6:22:06movement on any price chart, you will be
6:22:09able to track the smart money without
6:22:11doing extensive quantitative analysis
6:22:13and crunching all those data in your
6:22:15Excel. This video aims to give you all
6:22:18the necessary tools you'll need to
6:22:20master supply and demand in the market.
6:22:22This topic will have two video parts. In
6:22:25this video, you will learn the core
6:22:27ideas on how to identify, draw, and
6:22:29trade market imbalances like
6:22:31professional traders. And in the
6:22:33upcoming video, we will learn how to
6:22:35filter supply and demand zones using odd
6:22:37enhancers, which will help you eliminate
6:22:39low probability zones and keep only
6:22:42those with high odds of success. Now,
6:22:44the objective of this video is to help
6:22:46you implement this particular trading
6:22:49concept correctly so that you can become
6:22:51profitable in the long run. Now the
6:22:53video will cover the following topics.
6:22:56We'll start with what exactly is supply
6:22:59and demand and we will understand what a
6:23:01market balance and imbalance is. Then we
6:23:04will talk about how to identify supply
6:23:06and demand zones in the chart and what
6:23:08are the different structures of supply
6:23:10and demand zones that you will see in
6:23:12the chart. Then we will learn how to
6:23:14draw the supply and demand zones and how
6:23:16to trade these zones. And finally we
6:23:19will identify the supply and demand
6:23:20curves and also learn about why it is
6:23:23important to identify the curve in the
6:23:25first place. So without wasting any time
6:23:27let's jump right on it. So what exactly
6:23:30is supply and demand? The supply and
6:23:33demand concept states that if the supply
6:23:35of a stock or a commodity is high and
6:23:37its demand is low, this will generate
6:23:40excess supply which will drive the
6:23:42prices down. And if the supply of a
6:23:44stock or a commodity is low and the
6:23:46associated demand is high then this will
6:23:49create a scarcity in the supply which
6:23:51will push the prices even higher. For
6:23:53example, during times of uncertaintity
6:23:55and fear similar to one with Ukraine
6:23:57Russia war the investors will reduce
6:24:00their exposure in the equity markets and
6:24:02start buying safe heaven currencies or
6:24:05they turn to low-risk investment options
6:24:07like gold, government bonds etc to
6:24:10protect their investment. So in such a
6:24:12situation the demand for these asset
6:24:14classes like gold and safe haven
6:24:16currencies will drive their prices even
6:24:18higher. Another example is when the Fed
6:24:21or the Federal Reserve decides to
6:24:23increase the interest rates. What it
6:24:25does is that it will make the US dollar
6:24:27more attractive to the investors because
6:24:29of the increased interest yield. This is
6:24:31also known as a carry trade where
6:24:34traders buy the currencies with high
6:24:36interest rates and sell those currencies
6:24:38with low interest rates. We have seen
6:24:40this recently when Indian rupee traded
6:24:42against USD at an all-time high. Now
6:24:45having understood the supply and demand
6:24:47concept, we need to define supply and
6:24:49demand zones and understand how prices
6:24:52moves on the chart. Basically, a supply
6:24:55zone is located above the current price
6:24:57where there's a strong selling interest.
6:25:00At a supply zone, sellers exceeds buyers
6:25:02and price moves down as unfilled orders
6:25:05get absorbed. So when price reaches this
6:25:08level or zone, the orders get filled and
6:25:10the prices starts to move down. And
6:25:12traders are usually selling at these
6:25:15supply zones. And as you can see on the
6:25:16chart, the price rallies to a certain
6:25:19level or a zone, then it pauses for a
6:25:21little time and then retraces back down.
6:25:24So as long as unfilled orders are
6:25:26sitting in this zone, prices will keep
6:25:28coming back to this supply zone until
6:25:30all these orders are filled. Now talking
6:25:33about a demand zone. Demand zone is a
6:25:36price area below the current market
6:25:38price where there is a strong buying
6:25:40interest and at the demand zone the
6:25:42buyers exceeds the sellers and the
6:25:44prices goes up as unfilled orders get
6:25:46absorbed. So we can see a lot of buying
6:25:49interest in the demand zone. This is
6:25:51most likely caused by a large number of
6:25:52buying orders at that level and the
6:25:55traders are buying at demand zones. Most
6:25:57often when the price reaches the demand
6:25:59zone, some of these orders get executed
6:26:01and what you will see in the chart is a
6:26:03sharp move towards the upside as these
6:26:06orders get filled. Now when it comes to
6:26:08trading the market, many traders rely
6:26:10heavily on technical indicators and
6:26:13market sentiment to spot the shift in
6:26:15momentum. While there are other traders
6:26:17who simply trade the market imbalances
6:26:19by searching for supply and demand
6:26:21zones. Now this term is very important
6:26:24imbalance. I will talk about it in a
6:26:26short while. Now these zones that I have
6:26:28discussed are actually price levels
6:26:31created by banks and institutions where
6:26:33unfilled orders are waiting to get
6:26:35filled. Now the whole concept of supply
6:26:38and demand is centered around finding
6:26:40the smart money orders on a price chart.
6:26:42It is simply because they have the power
6:26:44to move the prices and they are the ones
6:26:46you should trade with.
6:26:49The basic pattern associated with stock
6:26:52market is balance, imbalance, balance,
6:26:54imbalance, etc. And the market trades
6:26:57between an established excessive level
6:26:59until it trades above the high of the
6:27:02excess that is a breakout above the
6:27:04resistance level or it trades below the
6:27:06low of the excess that is a breakdown
6:27:08below the support level. Now it may seem
6:27:10confusing but we will clear it out as we
6:27:12move further in this video. So talking
6:27:14about a balance area, if the market is
6:27:17balanced, it means that there are equal
6:27:20amounts of buying and selling activities
6:27:22and the prices keep moving up and down
6:27:24within a particular sideways range. Now
6:27:27when it comes to an imbalance area, it
6:27:29is when the buyers or sellers are in
6:27:31control and the market is imbalanced and
6:27:34it will move in the direction of the
6:27:36predominant players. So if the sellers
6:27:38are in control the market will move down
6:27:41and if the buyers are in control the
6:27:43market will move up. Now to understand
6:27:45this concept of balance and imbalance
6:27:47let's move to the chart and see how we
6:27:49can apply these key points. As you can
6:27:52notice in the chart, the blue colored
6:27:54boxes show balanced areas and these
6:27:56areas are areas where both buying and
6:27:58selling activities occur at the same
6:28:00time or simply the supply is equal to
6:28:03the demand because both the buyers and
6:28:05sellers are comfortable around this
6:28:08particular price range. And you can
6:28:09notice the price move horizontally or in
6:28:11a sideways range. Now once the market
6:28:14moves from a balanced state to an
6:28:17imbalanced state, the price leaves the
6:28:19area with large candles and this
6:28:22represents an imbalance which means that
6:28:24one of the players either the buyers or
6:28:27the sellers exceeds or dominates the
6:28:29other. So on the chart we can see that
6:28:31the sellers exceeds the buyers and the
6:28:34prices drop with a very quick momentum
6:28:36and with strong candles. Once again the
6:28:39market enters a balanced state waiting
6:28:41for the price to take a directional move
6:28:43to either the upside or the downside
6:28:45area and this cycle will continue over
6:28:48time. So in general the cycle of the
6:28:50market is associated with balance
6:28:52imbalance balance imbalance etc. So in a
6:28:56supply and demand strategy we will be
6:28:58focusing on spotting these areas of
6:29:01balance. The reason being we want to
6:29:03place our buy or sell orders in these
6:29:06areas and we want to profit from the
6:29:08imbalance that will move the price in a
6:29:10directional point of view. But in order
6:29:12for you to trade the market imbalances,
6:29:15you first need to identify the supply
6:29:17and demand zones correctly. And to do
6:29:19that, there are a set of rules that you
6:29:21have to follow that will help you find
6:29:23these zones on any assets that you want
6:29:25to trade. But before that let me talk
6:29:27about the different patterns associated
6:29:29with this strategy that we need to be
6:29:31aware of. Actually there are two types
6:29:33of structures or patterns that we need
6:29:35to learn. The first type is reversal
6:29:38patterns and the second type is
6:29:40continuation patterns. So when it comes
6:29:42to reversal patterns as you may already
6:29:44know reversal patterns are chart
6:29:46patterns that are formed when the trend
6:29:48reverses its direction that is from an
6:29:50up to down or a down to uptrend. Now
6:29:53when it comes to reversal patterns, we
6:29:55have two structures. The first one is a
6:29:58drop base rally structure. In this
6:30:00structure, the price is moving in a
6:30:02downtrend creating a drop in price which
6:30:04is followed by a base structure and then
6:30:07a rally in the price towards the upside.
6:30:09The second structure associated with
6:30:11reversal pattern is the rally base drop
6:30:14structure. So in this structure the
6:30:16price rallies up and it creates a base
6:30:18structure and it is followed by a big
6:30:20drop in price towards the downside.
6:30:23Actually these reversal patterns are
6:30:24very strong and the price tends to
6:30:26respect them over time. The second
6:30:29category includes continuation patterns
6:30:31which actually signals a trend
6:30:32continuation. Here also two price
6:30:34structures are formed. The first type is
6:30:37the drop base drop structure. In this
6:30:39structure, the price drops and then it
6:30:42forms a base structure and then it
6:30:44continues moving down breaking through
6:30:46the base and second structure is a rally
6:30:49base rally. Here the price rallies up at
6:30:52first and then it forms a base structure
6:30:55which will then continue moving up
6:30:56forming another rally. Now these
6:30:58continuation patterns are found inside
6:31:00the trend and most of the time when the
6:31:03price tests these structures the price
6:31:05tends to break through them and that is
6:31:07why we will focus only on reversal
6:31:09patterns because they have good odds of
6:31:11success compared to the continuation
6:31:13patterns. Now with that information let
6:31:16us move on to identifying the supply and
6:31:18demand zones on the chart following a
6:31:20simple three-step process. The first
6:31:22step is to identify the current market
6:31:24price level. So this is the easiest
6:31:26step. All we have to do is to start off
6:31:29by identifying the current market price.
6:31:31The second step is to look to the left
6:31:33from the current market price to find
6:31:35extended range candles in the last drop
6:31:38or rally. So in this step we need to
6:31:40find ERC type of candles. So ERC stands
6:31:43for extended range candles and it is
6:31:46actually a candle that has a very large
6:31:48body with little or no wicks. So if the
6:31:51body's length is equal to the length of
6:31:53the wicks, it is not actually an ERC
6:31:55candle. And then we have to find the
6:31:57origin of the move. So once we have
6:32:00identified an ERC type of candle, we
6:32:02have either a drop or a rally in price.
6:32:04Now we have to find the origin of that
6:32:07move. The origin will actually form the
6:32:09base of our supply or demand zone. And
6:32:12the base is what we require to draw the
6:32:14zones as we will see later on this
6:32:16video. Now let us look an example of the
6:32:18entire identification process. So in
6:32:21this example, we will start at the
6:32:22current price and we will look to the
6:32:24left to find a drop or a rally in price
6:32:27with at least one ERC type of candle and
6:32:30once we identified an extended range
6:32:32candle, we will have to identify the
6:32:34origin of the move. The origin is
6:32:36actually what we call the base. Now that
6:32:38we know how to identify the supply and
6:32:40demand zones, we need to learn how to
6:32:43draw our supply and demand zones. But
6:32:45before that since the market these days
6:32:47is highly volatile and on most days we
6:32:50see the market gaps up or down in the
6:32:52morning it is important to include gaps
6:32:55in our training. Market gaps are
6:32:57extremely useful price action structures
6:33:00that enables us to identify the supply
6:33:02and demand zones. So they can act as if
6:33:04they are indicators of the market
6:33:06imbalances as they indicate clearly
6:33:08where the market is going so that we can
6:33:10trade accordingly. So from my point of
6:33:12view, gaps are actually leading
6:33:14indicators for trading supply and demand
6:33:16imbalances. So I have made a video on
6:33:18how to trade gaps from a price action
6:33:20perspective in my free price action
6:33:22trading course. You can check that out
6:33:24to know in-depth about market gaps. So a
6:33:27general reminder, a gap is an empty
6:33:29space between two candlesticks where the
6:33:32price either rises or falls from the
6:33:34previous candle's close with no trading
6:33:36occurring in between them. What this
6:33:38represent is a big supply and demand
6:33:40imbalance where either the supply
6:33:42exceeds the demand or the demand exceeds
6:33:45the supply. This is extremely important
6:33:47for us as it shows exactly where the
6:33:50market imbalance is located on a price
6:33:52chart. So for your information, a gap up
6:33:54is a gap that occurs when the lowest
6:33:56price of a candle is above the highest
6:33:59level of the previous candle. Similarly,
6:34:01a gap down develops when the highest
6:34:04price of a candle is below the lowest
6:34:06price of the previous candle. Now, when
6:34:08we talk about gap fill, a gap is
6:34:10considered to be closed or filled. When
6:34:13the price comes back and fills the
6:34:15entire range of the gap and once the
6:34:17price fills the gap, it generally
6:34:19reverts to the direction of the
6:34:20prevailing market trend. Now, based on
6:34:22the types of gaps, we can anticipate
6:34:25either the beginning of a new trend or a
6:34:27reversal of a previous trend. So in
6:34:29supply and demand there are actually two
6:34:31types of gaps that are important to us.
6:34:34Number one is the professional gap and
6:34:36number two are the novice gaps. Now
6:34:38talking about the professional gap, it
6:34:40is a gap that occurs in the opposite
6:34:42direction of the prevailing trend. Take
6:34:44a look at this example. We have a
6:34:45professional gap that is formed in the
6:34:47opposite direction of the prevailing
6:34:49trend and the price retraces back to
6:34:51fill the professional gap and we can see
6:34:53the price reverses up from there. Now
6:34:55this kind of gap signals a market
6:34:57imbalance is created by professional
6:34:59traders and it gives us a great demand
6:35:02zone to trade once the price returns to
6:35:04fill the gap. Now the second category of
6:35:06gaps are novice gap. It is a gap that
6:35:09occurs in the direction of the
6:35:10prevailing trend itself. So a novice gap
6:35:13tends to form at the end of the trend
6:35:15which will in turn lead to a reversal of
6:35:17the trend. For example in this chart it
6:35:19shows how the novice gaps are formed on
6:35:21the chart. You can see the price rallied
6:35:24creating a gap in the same direction of
6:35:26the prevailing trend but then suddenly
6:35:28it reversed back down and as we have
6:35:30mentioned now gaps are located at the
6:35:32end of the move and in the chart we can
6:35:34clearly see that the move ended and the
6:35:36price moved in the opposite direction.
6:35:38We can also notice that there is a zone
6:35:40where the reversal actually started.
6:35:42Now, it is very important to understand
6:35:43these two types of gaps when trading
6:35:45supply and demand because they give us
6:35:47important piece of information as to
6:35:49where the market is willing to go next.
6:35:52And finally, we will now learn how to
6:35:54draw the supply and demand lines on the
6:35:56chart. In order to draw the supply and
6:35:58demand zones, we use two lines that we
6:36:01place around the base of the zones. The
6:36:03first line is called as a distal line
6:36:05and the second line is called as a
6:36:07proximal line. As I have mentioned, both
6:36:09these lines are placed around the base
6:36:11to form our supply and demand zones. The
6:36:14distal line is the outer line of the
6:36:16zone which is placed away from the
6:36:18current price and the proximal line is
6:36:20the inner line of the zone which is
6:36:21placed near the current price. Now let
6:36:23me talk about a few things that you
6:36:25should keep in mind when drawing the
6:36:27supply and demand zones. The first and
6:36:29foremost thing is that you should have
6:36:31an idea about the structure of the base.
6:36:33The base must actually have less than
6:36:35six candles. And the candle's body
6:36:37should be less than or equal to 50%age
6:36:40of the candle's total range. And the
6:36:42price leaving the base should have at
6:36:44least two extended range candles. And
6:36:47the base should not have the following
6:36:49things. That is it should not have more
6:36:51than six candles. It should not only
6:36:53have dodgey candles. And we won't accept
6:36:56candles with very long tails or wicks.
6:36:59And we don't accept stairst step candles
6:37:01in our base. So there are reasons for
6:37:03this. For example, if the base has more
6:37:06than six candles or only has dogey
6:37:08candles, we ignore it. The reason being
6:37:10more than six candles and only dogey
6:37:12candles can simply mean that the supply
6:37:14is equal to the demand and most of the
6:37:17orders are getting filled. Now having
6:37:19less than six candles and not a lot of
6:37:21dogey candles shows a great imbalance
6:37:24and more unfilled orders are still
6:37:26waiting for the price to retrace back
6:37:28and fill them. So the zone will remain
6:37:30valid for them. Now what will happen if
6:37:32the base has candles with very long
6:37:34tails or wicks? It simply means that the
6:37:36level is a reaction to the previous
6:37:38supply or demand zone. Now these tails
6:37:41shows that the market participants went
6:37:43all the way down to look for unfilled
6:37:45orders and they kept going back and
6:37:47forth until they got enough strength to
6:37:50push the prices higher. So most of the
6:37:52liquidity in that area would have
6:37:54already been absorbed. Also a base
6:37:56structure that has a stairst step
6:37:58candles is actually a low probability
6:38:00zone. What I mean by a stairstepping
6:38:02structure is that one candle is closing
6:38:05below the close of the previous candle
6:38:07in case of a supply zone and one candle
6:38:09is closing above the close of the
6:38:10previous candle in case of a demand
6:38:12zone. Now when it comes to drawing
6:38:14supply and demand zones, there are a lot
6:38:16of different options to choose from
6:38:18depending upon a person's risk appetite.
6:38:20In general, there are three methods of
6:38:22drawing your proximal and distal lines
6:38:24based on your risk appetite and how
6:38:26conservative are you in your trading.
6:38:29I'll show you all the three methods that
6:38:30you can use to draw the supply and
6:38:32demand zones properly and you can choose
6:38:34the right method that better suits your
6:38:36trading according to your risk
6:38:38tolerance. We have already discussed
6:38:40that supply zones can either have a
6:38:43rally based drop or a drop base drop
6:38:45structure. To correctly identify a
6:38:47supply zone, we have to start and leave
6:38:49from the current market price to find
6:38:52strong bearish candles with large bodies
6:38:54or bearish ERC's. In this chart, we can
6:38:57see the price rallied up in a nice
6:38:59uptrend and it paused for a short time
6:39:01creating a nice base structure with a
6:39:03few candles. Then the price dropped
6:39:06creating long bearish ERC candles
6:39:09confirming to a strong market imbalance
6:39:11around this supply zone. And once you
6:39:14identify the zones you want to trade,
6:39:16you can now draw your lines around the
6:39:17base or the origin of the move. Now, as
6:39:20I have mentioned, there are three ways
6:39:21of drawing your supply zone. The first
6:39:24is the conservative method where the
6:39:25distal line is placed at the highest
6:39:28wick of the base and the proximal line
6:39:30is at the lowest of the body in the
6:39:32basing structure. The second method is
6:39:34the high risk method where the distal
6:39:37line is placed at the highest wick of
6:39:39the base and the proximal line is placed
6:39:41at the lowest wick of the basing
6:39:43structure. Now if you decide to include
6:39:45both the high and low of the wick, you
6:39:47have in turn increased your risk by
6:39:49making your stop losses larger than it
6:39:51should be. Now the third method is the
6:39:53lowrisk method where the distal line is
6:39:56placed at the highest wick of the base
6:39:58and proximal line is drawn at the
6:40:00highest body in the basing structure. So
6:40:02in a similar manner you can draw the
6:40:04lines on a draw base drop structure but
6:40:06frankly speaking I'm not a great fan of
6:40:08it. So I leave it up to you for the
6:40:10study. Now as the price keep retracing
6:40:13back to the supply zone we can take
6:40:14advantage of these retracements to place
6:40:17our trades around the base area. You
6:40:19will notice how the price retraces up
6:40:21and drops as soon as it approaches the
6:40:23supply zone without even piercing the
6:40:25proximal line. This means that large
6:40:27piles of unfilled orders are placed
6:40:29around the supply zone. Now the idea is
6:40:31to place your orders and wait for the
6:40:34price to return and trigger them. Now in
6:40:36order to identify a demand zone, we need
6:40:39to start from the current market price
6:40:41and move to the left to find a nice
6:40:44rally in the price or a group of bullish
6:40:46ERC candles and also a base with less
6:40:49than six candles. Now we are going to do
6:40:51the same thing as we did for supply
6:40:53zones but in the opposite manner. We
6:40:55will start by identifying the basic
6:40:57structure to draw our zone. Then we draw
6:40:59the proximal line and the distal line
6:41:01using the three methods of drawing. In
6:41:04the conservative method, the distal line
6:41:06is placed at the lowest of the wick of
6:41:08the base and the proximal line is placed
6:41:10at the highest body in the basing
6:41:12structure. In the higher risk method,
6:41:14the distal line is placed at the lowest
6:41:16wick of the base while the proximal line
6:41:19is placed at the highest wick of the
6:41:21basing structure. And finally, in the
6:41:23low-risk method, the distal line, as
6:41:25usual, is placed at the lowest wick of
6:41:27the base, while the proximal line is
6:41:29placed at the lowest body in the basing
6:41:32structure. Now, as the price keeps
6:41:34retracing back up to this demand zone,
6:41:36we can take advantage of these
6:41:38retracements to place our trades around
6:41:40the base area. And you will notice how
6:41:42the price retraces down and rallies as
6:41:45soon as it approaches the demand zone
6:41:47without even piercing the proximal line.
6:41:49This means that a large piles of
6:41:51unfilled orders are placed around this
6:41:53demand zone. And the idea is to place
6:41:55your orders and wait for the price to
6:41:57return to trigger. Then if you decide to
6:42:00include only the highest wicks for
6:42:01supply zone and only the lowest wicks
6:42:04for the demand zone, you're decreasing
6:42:06your odds of getting your orders filled
6:42:08by the market price. Now that is why we
6:42:10include a second line which largely
6:42:12improves our odds of entering into the
6:42:14position as well as keeping an eye on
6:42:17the risk factor also. Again, when
6:42:19drawing supply and demand zones, you
6:42:21have to keep in mind both your risk
6:42:23exposure and your odds of making money.
6:42:25Now, when I talk about gaps, gaps are
6:42:27actually strong price action structures.
6:42:29So, when it comes to drawing supply and
6:42:31demand zones that have gaps, it is
6:42:33important to know where we need to place
6:42:35our distal and proximal line. Now, as a
6:42:38rule of thumb, we always draw our zones
6:42:41at the origin of the gap and not after
6:42:43it. That is we place the distal and
6:42:46proximal lines at the highs and lows of
6:42:48the previous day's closing prices
6:42:50accordingly. Now we come to the most
6:42:52important part. How do we trade supply
6:42:55and demand zones? We buy at the demand
6:42:57zones and we sell at the supply zones.
6:43:00This strategy is pretty straightforward.
6:43:02All you have to do is to identify fresh
6:43:04supply and demand zones to trade. Then
6:43:06place your limit orders either buy or
6:43:08sell orders at or beyond the proximal
6:43:11line and set your stop- losses at or
6:43:13beyond the distant line and then wait
6:43:16for the price to return to your supply
6:43:18or demand zone to trigger your orders.
6:43:20Now take a look at this chart for the
6:43:22supply zone. The price rallied up,
6:43:24paused for a little while and dropped
6:43:26with big ERC candles. So we have a great
6:43:29imbalance at this price level. We draw
6:43:32our supply zone and we wait for the
6:43:34price to come back and retest this zone
6:43:36and we also place our order. When the
6:43:39price comes back the second time into
6:43:40the zone, our sell order gets executed
6:43:43and as you can see it will be a great
6:43:45success. Now take a look at another
6:43:47example where the price drop then pause
6:43:50for a while and rallied again with big
6:43:53ERC candles thereby creating a demand
6:43:55zone on its way up. Now we place our buy
6:43:58orders in the proximal line expecting
6:44:00the price to return back to the demand
6:44:02zone to absorb the unfilled orders. Now
6:44:05each time the price tested our demand
6:44:07zone, it triggers our buy orders. We can
6:44:10see how the price is attracted to the
6:44:12zone like a magnet. Now there are times
6:44:15when you're not sure if the zone will
6:44:17yield a successful trade. So what you
6:44:19can do is to wait for the price to test
6:44:22the zone and give you some bullish or
6:44:23bearish evidence before placing your
6:44:25order. By that way you could decrease
6:44:28your chances of entering a losing trade.
6:44:30Again I prefer reversal structures for
6:44:33trading because they are powerful and
6:44:34the chances of success are high compared
6:44:37to the continuation trend structures.
6:44:41We will talk about the supply and demand
6:44:43curves. How to identify supply and
6:44:45demand curves and how to trade
6:44:47profitably using the curve. So, I need
6:44:49at least 500 likes on this video because
6:44:52it takes a lot of time and effort to
6:44:54provide quality content free of charge.
6:44:56And if you're new to the channel, make
6:44:58sure to subscribe and enable the bell
6:45:00notification so that you won't miss out
6:45:02on any upcoming videos. Okay, then let's
6:45:05get started.
6:45:08Supply and demand are the two dynamic
6:45:11forces that establish market prices.
6:45:14These forces are driving prices up or
6:45:16down based on who's in control over the
6:45:19market. For instance, if supply exceeds
6:45:22the demand, prices tends to go down as
6:45:24more sellers are interested in selling
6:45:26instead of buying the asset. On the
6:45:28contrary, if the demand exceeds the
6:45:30supply, prices tend to go up as more
6:45:32buyers are interested in buying instead
6:45:35of selling the asset or stock. So the
6:45:37curve is basically a tool that traders
6:45:39can use to determine whether the price
6:45:41is located near a higher time frame
6:45:44supply or demand zone. Now this is very
6:45:46important as we want to buy low and sell
6:45:49high in order to make a profit. Now you
6:45:51may ask me why I should take the trouble
6:45:54of drawing the curve when I can just
6:45:56trade using the zones and odd enhancers
6:45:58to get a high probability trading setup.
6:46:00As I have mentioned just now, the reason
6:46:02why we determine the curve is to avoid
6:46:05buying high and selling low or in other
6:46:07words to avoid buying at the supply zone
6:46:10or selling at a demand zone. Now, this
6:46:12step is very crucial and trading the
6:46:14markets using supply and demand because
6:46:16our goal is to trade with the trend and
6:46:19not against it. So, let's start off by
6:46:21identifying the supply and demand zones
6:46:23first. To identify the supply and demand
6:46:25zones, we will use yet another simple
6:46:27three-step process. First, we will use a
6:46:30larger time frame to draw our zones in
6:46:32control and then determine the location
6:46:34of the current market price on the
6:46:36curve. So, the first step is to choose
6:46:38your higher time frame. As you may know
6:46:40by now that multiple time frame analysis
6:46:43or multi-time frame analysis is a method
6:46:45of analyzing at least two or three
6:46:48different time frames of a particular
6:46:50stock or an instrument to construct a
6:46:52bigger picture of the long-term trend.
6:46:54Now the whole idea is to trade with the
6:46:56trend and the multi-time frame analysis
6:46:59allows us to align our trades with the
6:47:01higher time frame trend. Now always
6:47:03remember that the larger the time frame
6:47:05the better the chances of a successful
6:47:08trade. I have already made a video on
6:47:10the selection of time frames and
6:47:12multiple time frame analysis. So if you
6:47:13want you can check that out. Now in that
6:47:16video I stated a rule on how to select
6:47:18time frames based on trading styles. The
6:47:21rule says that when you choose your time
6:47:23frame combination, the higher time frame
6:47:25needs to be at least 3 to six times
6:47:27greater than your intermediate time
6:47:29frame and so on. For example, if you
6:47:31want to take a swing trade, your higher
6:47:34time frame would be a weekly chart. The
6:47:36intermediate time frame would be a daily
6:47:38chart because there are 5 days in a
6:47:40trading week and when considering a
6:47:42factor of five, the time frame becomes 1
6:47:44day. The even lower time frame would be
6:47:46the 1 hour chart. However, in this
6:47:48video, we are going to take a positional
6:47:50trading approach and we are going to use
6:47:52the monthly chart as our higher time
6:47:54frame. The weekly chart will be our
6:47:56intermediate time frame and finally the
6:47:58daily chart will be our lower time
6:48:00frame. Now, you can use any combination
6:48:03of time frames based on the type of
6:48:05trading style that you follow. The
6:48:07second step, however, is to identify the
6:48:09supply and demand zones under control.
6:48:11Now, the idea of the second step is to
6:48:13determine who's in control of the
6:48:15market. Is it the buyers or the sellers?
6:48:18Now after we open the monthly chart, we
6:48:20have to start by locating the current
6:48:22market price. Then we need to identify
6:48:24the closest supply and demand zones to
6:48:26the current market price. In this chart,
6:48:28we can clearly see that the price is
6:48:30near the higher time frame demand zone.
6:48:32Now take a look at another chart where
6:48:34the current price is located almost in
6:48:36the middle of the supply and demand zone
6:48:38under control. The reason why we look
6:48:40for the location of the price with
6:48:42respect to the zones is that we can
6:48:44still take a trade entry as long as the
6:48:46longer time frame gives us a good profit
6:48:48margin to make money. Otherwise, we
6:48:50don't generally look to take a trade in
6:48:52the middle of the zone and one of the
6:48:54reasons being the difficulty in the
6:48:55placement of a proper stop-loss. Now
6:48:57moving on the third and final step
6:49:00drawing the curve. So the third step is
6:49:02to divide the area between the proximal
6:49:04lines of the supply and demand zones
6:49:06under control into three equal areas.
6:49:08Now the idea is that after identifying
6:49:11the closest supply and demand zones we
6:49:13have to divide the distance between them
6:49:15by three and we will get a high area a
6:49:18low area and an equilibrium area. There
6:49:20are two methods to divide the curve
6:49:22area. The first option is simply to
6:49:24count how many points there are between
6:49:26the two proximal lines of the zones
6:49:28which are under control and divide them
6:49:30by three. Now the second option is to
6:49:32use a Fibonacci retracement tool. To
6:49:35identify the supply and demand curves
6:49:37without having to divide the area
6:49:38manually to draw the curve areas using
6:49:41the Fibonacci tool, you have to modify
6:49:43the settings to get exactly three equal
6:49:45areas on the chart. So all you have to
6:49:47do is to change the Fibonacci levels to
6:49:49the following that is 0 percentage,
6:49:5233%age, 66%age, and 100%age. And you can
6:49:56uncheck all other levels. Now that you
6:49:58have changed the Fibonacci settings, you
6:50:00can draw the curve from the proximal
6:50:02line of the supply zone to the proximal
6:50:04line of the demand zone. The Fibonacci
6:50:06tool will divide the area into three
6:50:08equal zones automatically. I hope things
6:50:10are clear. Now you may ask me why is it
6:50:13important to identify the curve in the
6:50:15first place. Now this is actually what
6:50:18separates the winners from losers in the
6:50:20big game. The professional traders know
6:50:23that when the price is high on the
6:50:24curve, they need to sell to the retail
6:50:26traders who are actually excited to see
6:50:29an uptrend move continue. So the retail
6:50:31traders jump onto the trade and start
6:50:33placing buy orders and professional
6:50:35traders actually use this high liquidity
6:50:38provided by the retail traders to
6:50:40actually short the market and move the
6:50:42prices even lower. Now similarly, when
6:50:44the retail traders see the prices
6:50:46dropping very rapidly, they think this
6:50:48is a great chance to short the market.
6:50:51Once again, the professional traders
6:50:53jump onto the opportunity to place their
6:50:55buy orders as the price enters new low
6:50:58terries on the curve signaling a nice
6:51:00bullish reversal to the upside. This is
6:51:03why it is important to identify the
6:51:05curve before placing any order. Now
6:51:07let's move to the most important section
6:51:10that is how to trade using these curves.
6:51:12So on the larger time frame that we have
6:51:14analyzed the curve serves as an
6:51:16indicator as to whether the price is
6:51:18high, low or in the middle with respect
6:51:21to the supply and demand zones in
6:51:22control. Now based on this information
6:51:25we can decide whether to buy, sell or do
6:51:28nothing. Now there can be different
6:51:29trading scenarios based on the curve.
6:51:32When the price is very high in the curve
6:51:33usually inside the supply zone our
6:51:36trading bias is to sell only. Now if the
6:51:38price is high in the curve that is just
6:51:40below the supply zone but higher than
6:51:42the equilibrium zone we will still look
6:51:45to sell only. On the opposite when the
6:51:47price is very low in the curve typically
6:51:49inside the demand zone we will look to
6:51:52buy only. And as you may have already
6:51:54guessed when the price is low in the
6:51:56curve that is just above the demand zone
6:51:58but lower than the equilibrium area we
6:52:00will still look to buy. Now what happens
6:52:02when the price is at the equilibrium
6:52:04area then we will have two options that
6:52:07is either to trade with the prevailing
6:52:09trend or do not trade at all. Now it
6:52:11actually depends on how aggressive you
6:52:13are with your trading style. Now let's
6:52:15put everything together and see how we
6:52:17can identify the supply and demand
6:52:19curves and plan our trade accordingly.
6:52:21So the first thing we do is to begin
6:52:23with the larger time frame to determine
6:52:25the location of the current market price
6:52:28within the supply and demand zones in
6:52:29the control. This will actually give us
6:52:31the framework to look for trading
6:52:33opportunities. Once we have identified
6:52:35the supply and demand zones in control,
6:52:37we can use the Fibonacci tool to divide
6:52:39the area into three equal levels or
6:52:41zones as shown in the monthly chart. So
6:52:44as a general rule of thumb, we buy when
6:52:47the price is low on curve and at the
6:52:48demand zone and we sell when the price
6:52:51is high on the curve and at the supply
6:52:53zone. So when the price is at an
6:52:54equilibrium, we either trade with the
6:52:56prevailing trend or we don't trade at
6:52:58all. Now in the chart, the current
6:53:00market price is located between the low
6:53:03and the equilibrium areas of the curve.
6:53:05Which means that our bias is only to buy
6:53:07as long as the trend is up. But when we
6:53:10zoom in on the weekly chart, we can
6:53:12observe how the price broke the trend
6:53:14line and created a new supply zone. The
6:53:17price then moved down and created a new
6:53:19demand zone which is actually nested
6:53:21inside the monthly demand zone. So what
6:53:23we have on the monthly chart is that the
6:53:25price is at the low or the equilibrium
6:53:27area in the curve and the overall market
6:53:29is uptrending. But on the weekly chart
6:53:31the price is moving sideways with a
6:53:34weekly demand zone nested inside a
6:53:36monthly demand zone. So if you think of
6:53:38selling when the price test the weekly
6:53:40supply zone then you're actually trading
6:53:42against the higher time frame trend
6:53:44which is not our objective. So as we
6:53:46said in the beginning the higher time
6:53:47frame always prevails. Hence, we should
6:53:50avoid selling from the weekly supply
6:53:52zone because the trend is uptrending and
6:53:54on top of that the reward to risk is not
6:53:57satisfactory. Instead, the ideal thing
6:53:59to do is to wait until the prices hit
6:54:01the monthly or the weekly demand zone
6:54:04and then look to go along. At this
6:54:06level, the buyers will be interested in
6:54:08buying more and hence pushing the prices
6:54:10higher. And as we can clearly see the
6:54:12prices went back down to the weekly or
6:54:14monthly demand zone and then rallied to
6:54:17the monthly supply zone which actually
6:54:19provided a lowrisk highreward trade. So
6:54:22as long as we trade with the long-term
6:54:24trend we are safe. Now let's take a look
6:54:26at another example. On the monthly chart
6:54:29the current market price is high on the
6:54:31curve. This means that our bias is only
6:54:33to sell from the fresh supply zones on
6:54:36lower time frames. Now zooming in on a
6:54:38weekly chart, we can observe that the
6:54:40price is moving up and creating new
6:54:42higher highs and new higher lows. We can
6:54:45also draw a trend line connecting the
6:54:47two higher lows together which indicates
6:54:49that the trend is towards the upside. On
6:54:51the same weekly time frame chart, we
6:54:53will draw our supply and demand zones to
6:54:56align with our views with the monthly
6:54:57chart which is the higher time frame
6:54:59here. So when we do that, we get a
6:55:01weekly supply zone which is nested
6:55:03inside the monthly supply zone. This
6:55:05means that this weekly supply zone will
6:55:08have a higher probability of success
6:55:10because it overlaps with a higher time
6:55:12frame zone. Now, the same thing applies
6:55:14to the demand zone down at the bottom of
6:55:16the chart. Now, these nested or
6:55:18overlapping zones have a higher
6:55:20probability of success because the
6:55:22higher time frame zones are more
6:55:23powerful than the lower ones. Now that
6:55:26we know the price is high in the curve
6:55:28and the trend is up, we need to find a
6:55:30supply zone to place our entry and stop
6:55:33loss accordingly. So we don't just buy
6:55:35in the demand zone because the price is
6:55:37high in the curve. Also we have to
6:55:39notice that the price is near the
6:55:40monthly supply zone which means that
6:55:43soon the price will reverse down and
6:55:45pierce all the demand zones that are up
6:55:47in the curve. So in order to buy we can
6:55:49either use the weekly chart or use an
6:55:51even lower time frame like the daily to
6:55:54find a suitable entry zone. So if the
6:55:56weekly zone is obvious as in this
6:55:58example, we can just stop our analysis
6:56:00here and place our entry right at the
6:56:03proximal line of the weekly supply zone.
6:56:05But if the weekly supply zone gives us a
6:56:07larger stop- loss that we cannot handle
6:56:10or if the zone is not giving us a clear
6:56:11entry point, then moving down to a lower
6:56:14time frame is the ideal thing to do. So
6:56:16on the lower time frame chart, we have a
6:56:19nested daily supply zone within the
6:56:21weekly supply zone. Now this has become
6:56:23a high probability zone to trade in. We
6:56:26can place our entry at the proximal line
6:56:28and place our stop- loss above the
6:56:30distal line. To exit the trade, we can
6:56:33place our target at the opposite demand
6:56:35zone. The profit margin is good as we
6:56:37have at least a 3 is to1 reward to risk
6:56:40ratio in this particular trade. And as
6:56:42you can see, the price hit our entry
6:56:44level at the proximal line and dropped
6:56:46all the way down to our target giving us
6:56:48a very good trade. From this particular
6:56:51example, you can also notice how the
6:56:53risk changes from monthly to daily
6:56:55supply zones. So, if you were to trade
6:56:57the monthly zone, we would have placed a
6:57:00larger stop-loss and the price would
6:57:02almost pierce half of the zone before
6:57:04reversing back down compared to the
6:57:06weekly and daily supply zones. So, it is
6:57:09always a great idea to use multiple time
6:57:11frames and trade on a particular time
6:57:13frame that gives you the best trading
6:57:15setup. You can use any set of time frame
6:57:18as you wish. So if you are an intraday
6:57:20trader, you can use a combination of
6:57:22daily, hourly and and 15-inut charts to
6:57:24conduct the analysis and find the zones
6:57:26in control, draw the curve and identify
6:57:29if there is a trade opportunity in the
6:57:31direction of the existing market trend.
6:57:35In the first part of the video series,
6:57:37we discussed the supply and demand zones
6:57:40in greater detail from identifying,
6:57:42drawing, and trading these zones. In
6:57:45this video, we will fine-tune all what
6:57:47we have learned to make a proper setup
6:57:50with a higher probability of success and
6:57:52a better risk management. In that sense,
6:57:55we will talk about the odd enhancements
6:57:58and the scoring of these supply and
6:58:00demand levels. So, in order to trade the
6:58:03market with supply and demand strategy,
6:58:05you must use some essential odd
6:58:07enhancers to help you select only those
6:58:10zones that have a higher probability of
6:58:12success. Remember that not all supply
6:58:14and demand zones work. You can't just
6:58:16buy every demand zone and sell every
6:58:19supply zone. For that, you need to learn
6:58:21how to filter them properly using odd
6:58:23enhancers to evaluate your zones. So,
6:58:26basically, there are 21 odd enhancers
6:58:28that have to be considered. But all of
6:58:30them are not important to make a note
6:58:32of. But I will still post a link in the
6:58:34description of this video if you want to
6:58:36learn more about it. In this video,
6:58:38however, I will talk about five
6:58:40important odd enhancers that you can
6:58:42make use of. This will definitely
6:58:44increase your odds of success and
6:58:46minimize your potential losses in the
6:58:48market. If you have been trading the
6:58:50markets using supply and demand for a
6:58:52while or you have just started with it,
6:58:54you probably found yourself stuck not
6:58:57knowing which zone to choose, especially
6:58:59if you have at least two zones which are
6:59:01very close to each other and you know
6:59:03that it's either this one or that one.
6:59:05but which one to choose and based on
6:59:07what criteria you make your decision to
6:59:09stick to one. Often this will lead you
6:59:12to enter a trade earlier than you should
6:59:14or you might even place an order in a
6:59:16zone that the price won't visit at all.
6:59:18This can really be frustrating because
6:59:20sometimes you have to wait for a longer
6:59:22period of time for the price to return
6:59:24to your zone and trigger your orders. By
6:59:27choosing the wrong supply and demand
6:59:28zones, you're leaving some of the good
6:59:30trades on the table. So how can you
6:59:33filter out these supply and demand zones
6:59:34you have identified so that you only
6:59:37pick those which presents a high
6:59:39probability of success. Remember the
6:59:41goal is always to stack the odds in your
6:59:44favor and not the other way around. The
6:59:46solution is to have a scoring system or
6:59:48a filtering system. Now the scoring
6:59:50system is based on analyzing four or
6:59:53five major odd enhancers that I will
6:59:55discuss and to give a final score to
6:59:58each one of them so that it all adds up
7:00:00on a scale of 1 to 10 in total and this
7:00:03system will help you score the supply
7:00:05and demand zones to let you decide which
7:00:08ones to trade. Okay. Now let us visit
7:00:11each of the five order enhancers one by
7:00:13one and set a criteria for scoring on
7:00:16each one.
7:00:18The first and foremost enhancer is the
7:00:20strength of price move from the base.
7:00:23Now the first thing to look at is the
7:00:25strength of the move out of the origin
7:00:27or the basing structure. In other words,
7:00:29we look at how the price leaves the
7:00:31supply or demand zone. Was it actually a
7:00:34strong move or a weak move? A strong
7:00:36move is one that is comprised of big
7:00:39candles and sometimes even gaps are
7:00:41formed as the price leaves the zone. On
7:00:43the contrary, a weak move has many small
7:00:46candles and the drop or the rally
7:00:48doesn't go far from the zone itself or
7:00:50simply the price action is weak. In this
7:00:53chart, you can see that the price left
7:00:55the supply zone with strong bearish
7:00:57candles to the downside making them very
7:01:00strong zones to trade. You'll also
7:01:02notice how the price did not go all the
7:01:04way up to test the supply zones to move
7:01:06down in a strong manner. This shows how
7:01:09great an imbalance is at this supply
7:01:11zone. Now let us take a look at an
7:01:13example where the move out of the base
7:01:15is weak. This demand zone is considered
7:01:18weak because the price left the zone
7:01:20with very small candles. The move out of
7:01:23the demand zone is actually weak. And as
7:01:25a trader, you should avoid trading such
7:01:27weak zones because the price will ignore
7:01:29it and most probably the price will pass
7:01:32through it the next time it test it. In
7:01:34short, if the price leaves the zone with
7:01:37long candles, this means that the
7:01:39imbalance is strong and more unfilled
7:01:41orders are still available at the zone.
7:01:43But if the move from the zone is weakly
7:01:45represented by small candles, this means
7:01:48that probably no more unfilled orders
7:01:50are still there for us to trade. Now,
7:01:52based on this first order enhancer, we
7:01:54can give a score from zero to a maximum
7:01:57of two points. So when we have a supply
7:01:59zone where the price leaves the zone
7:02:01with big candles, this zone shows a high
7:02:04probability of success because of the
7:02:06strength of the price move out of the
7:02:08basing structure. Now the score we will
7:02:10give to this zone is actually two points
7:02:12which is the maximum score. And you will
7:02:14notice how the price drops when it
7:02:16returns to test the zone again. Now when
7:02:18it comes to a weak supply zone where the
7:02:20price left the supply zone with weak and
7:02:23small candles, what this means is that
7:02:25there are no more unfilled orders that
7:02:27are left to be traded and the sellers
7:02:29are losing interest in selling at this
7:02:31price level. Soon they will be
7:02:33outnumbered by the buyers who will take
7:02:35the control of the market and move the
7:02:37prices beyond the supply zone. So this
7:02:40zone will attract a score of zero based
7:02:43on our first criteria. Now the same is
7:02:45applicable to the demand zones also. Now
7:02:47coming to our second order enhancer that
7:02:50is the time spent at the base. Here we
7:02:53will look at how many candles are in the
7:02:55basing structure. In general the best
7:02:58zones have between one to a maximum of
7:03:01six candles in the base. Now beyond six
7:03:03candles the zone is considered weak and
7:03:05the price might ignore it the next time
7:03:07and therefore it can result in a losing
7:03:10trade. So this clearly means that if the
7:03:12imbalance is important enough to
7:03:14generate a directional move, the price
7:03:16has to spend less time at the basing
7:03:18structure. That is why we should limit
7:03:21the number of candles between 1 to a
7:03:23maximum of six at the base. Now take a
7:03:25look at this chart. We have a rally base
7:03:28drop structure but with only one basing
7:03:31candle at the supply zone. This is a
7:03:33very strong basing structure. So we will
7:03:35give a maximum score of two for this
7:03:38supply zone. While in case of this
7:03:40demand zone, the price spend a little
7:03:42more time and created a few more candles
7:03:44at the basing structure. So we can give
7:03:46a score of one to this demand zone. Now
7:03:48another thing to consider while
7:03:50analyzing your basing candles is the
7:03:52tails of the wicks. Now basing candles
7:03:54with long wicks or tails are a sign of a
7:03:57weak zone. So in this example, the price
7:03:59spent too much time at the base creating
7:04:02more than six candles. This is a weak
7:04:04zone because the price did react but
7:04:07failed to move higher and finally it
7:04:09went through the zone to look for
7:04:11another demand imbalance. Now the score
7:04:13for this demand zone is therefore zero.
7:04:15Now let us move on to the third odd
7:04:17enhancer that are fresh zones. Now a
7:04:20fresh zone is a supply or demand zone
7:04:23that the price has not tested yet. The
7:04:25first retracement tends to be the
7:04:27strongest and the most reliable one to
7:04:30trade. So as a trader you should always
7:04:32choose fresh untested zones to stack the
7:04:35odds in your favor after a second
7:04:37retracement to the zone. It is better
7:04:39not to consider it because there might
7:04:41not be enough supply or demand to move
7:04:43the prices as most of the orders might
7:04:45be absorbed during the two initial
7:04:47retracements. Now look at this chart. We
7:04:49have supply zone that the price has not
7:04:51tested yet. These are actually good
7:04:53zones to short once the price retraces
7:04:55back to this zone. Now the same thing
7:04:57goes for a fresh demand zone. If the
7:04:59price returns to test it, we look to go
7:05:01long. In the first retracement, the
7:05:04price tested the supply zone and moved
7:05:06down. The same thing happened in the
7:05:08second and the third retracements. But
7:05:10after the third retracement, the price
7:05:12broke above the supply zone which
7:05:15indicates that no more supply was found
7:05:17there. Similarly, you can notice how the
7:05:19price left the supply zone after the
7:05:21second and third retracement. The
7:05:23strength of the last two moves are
7:05:26weakening which in turn signals a
7:05:28potential shift in the market imbalance
7:05:30as more buyers are stepping in thereby
7:05:33creating a breakout above this supply
7:05:35zone. Now consider another example where
7:05:37the price broke the demand zone after
7:05:39the second retracement. You can notice
7:05:41how the price penetrates deeper inside
7:05:44the demand zone with each retracement.
7:05:46This is a very good signal that the
7:05:48supply zone is no more valid and a
7:05:50potential breakthrough is expected. Now
7:05:53after the second retracement, the demand
7:05:55zone is no longer valid as the market
7:05:57imbalance shifted from demand to supply.
7:06:00Now in terms of scoring a fresh zone
7:06:03that has not been tested, you can give a
7:06:05score of maximum three points. This is
7:06:08the one we need to focus on when trading
7:06:10supply and demand zones in the market.
7:06:12We need to stack the odds in our favor
7:06:14by choosing fresh untested zones to
7:06:17trade. Now, if the price retraces back
7:06:20to our zone for a second time, we can
7:06:22give it a score of 1.5 points. Now, we
7:06:25can still consider this zone, but again,
7:06:27we will always be looking for high
7:06:29probability trading setups. Now, if the
7:06:31price retraces back again for a third
7:06:34time, we will give it a score of zero as
7:06:36it has less probability of success. At
7:06:39this point, most of the unfilled orders
7:06:41are already gone and the price might
7:06:43pierce the zone and move away to find
7:06:45another supply or demand zone. The
7:06:47fourth odd enhancer is reward to risk
7:06:50ratio. The reward to risk ratio, as you
7:06:52may already know, gives us a good idea
7:06:54of whether we have a chance of making
7:06:56money trading on a particular supply or
7:06:58demand zone or not. So, we need to
7:07:00choose those trading opportunities that
7:07:02offer us at least a 3:1 reward to risk
7:07:05ratio. A ratio of 3 is to1 is a perfect
7:07:08ratio because we are risking one point
7:07:11to gain three times. For example, if a
7:07:13trade has a 10point stop-loss, then the
7:07:16target should be at least 30 points away
7:07:18from my entry point. So, if the market
7:07:21does not give you a 3 is to1 ratio, then
7:07:23it is better to stay away from this
7:07:25trade and we will look for another
7:07:26opportunity which offers us a 3 is to1
7:07:28reward to risk ratio. But you can also
7:07:30scale it down if you want. A 2 is to1
7:07:33ratio is also a good ratio and the
7:07:35trades could work just fine. But again
7:07:37we are always looking for high
7:07:39probability setups and we leave those
7:07:41with a low rate of success and a 1 is
7:07:44to1 ratio or less is considered a
7:07:46nonvalid entry since the market does not
7:07:48offer a good opportunity to make money.
7:07:51If the zone gives us at least a 3 is to1
7:07:53ratio we give a score of three points
7:07:56which is the maximum score to this
7:07:58particular zone. Now if the zone gives
7:08:00you a 1.5 is to1 or a 2 is to1 ratio
7:08:03then we will give it a score of 1.5
7:08:05points and finally if the zone gives us
7:08:08a ratio of 1 is to1 or less then we will
7:08:11give it a zero score because we will
7:08:13ignore the zone and we will wait for
7:08:15another opportunity. Now the last and
7:08:17final odd enhancer that I will be
7:08:18talking about are the overlapping zones.
7:08:21These are also called as nested zones.
7:08:23Now the idea here is to look for
7:08:25overlapping zones from different time
7:08:27frames. For example, if you have a
7:08:29supply zone on a daily time frame that
7:08:31is located inside a monthly supply zone,
7:08:34this daily supply zone is considered
7:08:36strong and it presents a high
7:08:38probability of success. So, as a thumb
7:08:41rule, higher time frame zones are much
7:08:43more powerful than smaller ones. So, if
7:08:46your lower time frame zone is nested
7:08:48inside a higher time frame one, it is
7:08:50actually a strong zone. So here in this
7:08:53example we have a daily zone indicated
7:08:55in blue that is nested inside a higher
7:08:58time frame monthly supply zone which is
7:09:00represented in red. But how to find them
7:09:03and draw them? To find the nested zones
7:09:05you start with the higher time frame.
7:09:07Now in this example the higher time
7:09:09frame is monthly. So we draw the monthly
7:09:12supply zone. Then we will move to the
7:09:13daily time frame to look for supply
7:09:15zones within the monthly zone that we
7:09:18have already marked. You can also have a
7:09:20daily demand zone nested inside a weekly
7:09:22demand zone and so on and so forth. I
7:09:25hope you get the basic idea. Now I won't
7:09:27be including this odd enhancer in my
7:09:29scoring criteria because not all levels
7:09:32present such an opportunity and the
7:09:34chances of missing out will be higher if
7:09:36we make it a strict criteria to follow.
7:09:39Now that we have a scoring system in
7:09:41place to help us score the supply and
7:09:43demand zones, we need to interpret the
7:09:45final score to either execute the trade
7:09:48or wait for more confirmations. Now let
7:09:51us say a zone has a score of 10 points.
7:09:53So a final score of 10 point mean that
7:09:56we can place a limit order at the supply
7:09:58or demand zone that we want to trade
7:10:00beforehand. So that you will not change
7:10:02your mind for some reason. Now this
7:10:04order will get executed once the price
7:10:06reaches 10point level namely the
7:10:08proximal level of the zone. But make
7:10:10sure you place the stop-loss order at or
7:10:13beyond the distal line to protect your
7:10:15position. Now this score of 10 shows
7:10:17that the zone is a strong zone fresh
7:10:20with less than six candles at the base
7:10:22and giving us a good reward to risk
7:10:24ratio to make money. Now what if a zone
7:10:27has a score between eight and n points.
7:10:29Now if the score is between 8 and 9
7:10:32points, we can think about a
7:10:33confirmation order. Actually a
7:10:35confirmation order is an order placed
7:10:38when the price first dips into the zone
7:10:40of interest and crosses above or below
7:10:43the proximal line of the supply or
7:10:46demand zone. So the idea is to confirm
7:10:48that the price is moving in our
7:10:50preferred direction of trade. So any one
7:10:52candle has to close inside the zone
7:10:55first and the second candle on its way
7:10:57out has to pierce the proximal line of
7:10:59our zone. Now the moment the price
7:11:01pierces the proximate line, we place a
7:11:04market order. Here we don't place a
7:11:06limit order because the odds are not
7:11:08completely in favor of us. The stop-loss
7:11:10order setting is standard as always. And
7:11:13finally, what if we get a score of less
7:11:15than eight points. Now if the final
7:11:18score is below eight points it simply
7:11:20means that there is no trade. The supply
7:11:22or demand zone with a score below eight
7:11:25points is actually weak zone that has a
7:11:27low probability of success. So it is
7:11:29better you avoid taking the trade. As I
7:11:32have mentioned earlier, you can read
7:11:34more about other enhancers in the link
7:11:37provided in the description and you can
7:11:39be flexible enough to change the
7:11:41criteria and scoring according to your
7:11:43convenience. Now with that being said,
7:11:45the odd enhancers we discussed here are
7:11:47very important tools to help you filter
7:11:50the supply and demand zones. In addition
7:11:52to that, the four odd enhancers used in
7:11:55this filtering system are what you need
7:11:57to score your supply and demand zones.
7:11:59This will further help to fine-tune your
7:12:01filtering system. But remember that
7:12:03these odd enhancers don't guarantee the
7:12:06success of your trade. Instead, what it
7:12:08does is that they give you a better
7:12:10chance of taking the right trades when
7:12:12they show up and leaving the ones that
7:12:14have a low probability of success. So,
7:12:16it is up to you to do your research,
7:12:18learn more, back test on multiple
7:12:20charts, and finally implement it in your
7:12:23trading to see if it really works for
7:12:25you.
7:12:31So, here I am thrilled to present you
7:12:33with this new video course on smart
7:12:35money concept. The course is designed in
7:12:38an orderly manner to provide you with
7:12:40the most comprehensive understanding of
7:12:42the principles and strategies associated
7:12:45with smart money concepts. I'll be
7:12:47taking a very conventional approach
7:12:49assuming that all of you are complete
7:12:51beginners to this topic. Keeping that in
7:12:54perspective, I will discuss the main
7:12:56concepts in greater detail which is
7:12:58actually essential to build a solid
7:13:00foundation so that we can have a good
7:13:03understanding about the strategies that
7:13:05we can implement as a trader. This will
7:13:07in turn enable us to plan our proper
7:13:09entries, stop-loss and targets thereby
7:13:12generating high reward to risk trades
7:13:14which is the highlight of this entire
7:13:16SNC concept. I'm not even joking when I
7:13:20say higher reward to risk ratio. We are
7:13:22literally talking about 10 is to1 or 20
7:13:24is to1 or sometimes even a whooping 40
7:13:27is to1 reward to risk ratio which is
7:13:30absolutely insane and that tells you how
7:13:32powerful these concepts are by now I
7:13:35have mentioned smart money concepts
7:13:37numerous times but what exactly are
7:13:39smart money concepts I don't want to
7:13:42bore you by giving the same old answer
7:13:44that these are techniques or methods
7:13:45used by large institutions hedge funds
7:13:48banks etc who are referred to as smart
7:13:50money due to the reason that they make
7:13:52smart decisions in the market and most
7:13:55of these concepts are purposefully kept
7:13:57away from the reach of uninformed retail
7:13:59traders. But my outlook on smart money
7:14:02concepts is different. I like to view
7:14:04them as traps set by the big
7:14:06institutions to use retail orders,
7:14:09usually the stop-loss orders, to
7:14:11generate enough liquidity so as to buy
7:14:13at discount and sell at premiums. Think
7:14:16of these methods as manipulations or
7:14:19stop-loss hunting or liquidity grabbing
7:14:22or simply the inducement of retail
7:14:24traders to enter into wrong trades at
7:14:27the wrong time or wrong locations. I
7:14:29know these terms are a little over your
7:14:32head. But fear not because we are going
7:14:34to deal with all these terms in the
7:14:36upcoming episodes and I guarantee that
7:14:39you will love it. A lot of research,
7:14:42learning, preparation and hard work has
7:14:44been put into making a very relevant
7:14:46course and that too absolutely free of
7:14:48cost. I doubt if anyone would take all
7:14:51the pain to make genuine content for my
7:14:53retail trader brothers. So I request you
7:14:55to wholeheartedly like this video and
7:14:58support the upcoming videos also and
7:15:00share all the episodes with all those
7:15:02who are willing to learn and improve
7:15:04their trading but don't have the money
7:15:06or means to do so. Also make sure to
7:15:08subscribe to this channel because it's
7:15:10free and also enable the bell icon so
7:15:12that you will receive notifications when
7:15:14I upload the new episodes. So in this
7:15:17video I would like to give an idea about
7:15:19the course structure and why you should
7:15:21learn these concepts. Then I will answer
7:15:24the evergreen questions like which is
7:15:26the best market to trade SMC techniques.
7:15:28Will it work in the Indian markets?
7:15:30Which is the best time frame to analyze
7:15:32and trade smart money concepts or should
7:15:35we use the multi-time frame analysis
7:15:37approach. But before all that I would
7:15:40like to take this opportunity to thank
7:15:42Wikov theory developed by Mr. Robert
7:15:44Vikov during the early 20th century. So
7:15:47you can think how old these concepts
7:15:49are. Actually the whole wikov method is
7:15:52based on the premise that the market is
7:15:54manipulated by a small group of traders
7:15:57or so-called the smart money who have
7:15:59the ability to influence market
7:16:01movements. These smart traders or
7:16:03institutions use their knowledge and
7:16:05resources which include data about
7:16:07retailer orders and retailer behavior
7:16:09and they use this information to
7:16:11accumulate or distribute assets before
7:16:13the public is even aware of their
7:16:15intentions. or in simple layman terms
7:16:18they manipulate the market to trap
7:16:20retailer liquidity. Smart money concepts
7:16:23or institutional concepts theory is
7:16:25improved by the works of inner circle
7:16:28trader, Tom Williams, Steve Morrow and a
7:16:31few others. Every now and then these
7:16:33concepts are given a new look and some
7:16:35flashy names but the concept still
7:16:37remains the same. Think of it like
7:16:40companies introducing their old product
7:16:42in a new exciting packaging inducing you
7:16:45to buy these courses. So I urge you not
7:16:47to spend a lot of money on these
7:16:49expensive courses because these series
7:16:51of episodes will be more than sufficient
7:16:53to understand the concepts and
7:16:55strategies. But I have an advice. I
7:16:58would like you to watch my courses on
7:17:00price action and supply and demand. The
7:17:03reason why I'm suggesting this is
7:17:04because smart money concepts, price
7:17:06action and supply and demand theory are
7:17:09all interconnected and have a lot of
7:17:11similarities. It is just the terminology
7:17:13that changes. Most of the underlying
7:17:16ideas are the same. The crux of smart
7:17:18money concept is simply this. Markets
7:17:21are manipulated by big institutions and
7:17:23funds and they use the liquidity of
7:17:25retail traders against them. Now coming
7:17:28to the second question. Why do you as a
7:17:30retail trader need to learn about these
7:17:32concepts and is it necessary? Actually I
7:17:35can give an answer to this question in a
7:17:37single sentence. It is just that if you
7:17:40don't know where the liquidity is then
7:17:42you are the liquidity. Every move in the
7:17:45market is in some way a trap set for the
7:17:48uninformed retail traders. Most of the
7:17:51retail traders blindly follow certain
7:17:53strategies, patterns and some even call
7:17:56themselves breakout traders while other
7:17:58identify themselves as reversal traders
7:18:00and so on. But until and unless you
7:18:03don't understand how and why a price
7:18:05move was triggered, you will remain as a
7:18:08tiny fish in the ocean being hunted over
7:18:10and over again by the big institution of
7:18:12the smart money. So having a good grab
7:18:14of these techniques can give you a boost
7:18:17to your understanding on how to track
7:18:19the liquidity and how to capitalize on
7:18:21it just like the institutions. You will
7:18:24definitely start thinking differently
7:18:26and view charts with a broader
7:18:27perspective because I strongly believe
7:18:30that every move or even each candle
7:18:32formed in the market has a meaning or a
7:18:34logic behind it. If learned and
7:18:36implemented in the right manner, these
7:18:38concepts will definitely take you to the
7:18:40next level. Now another doubt that most
7:18:43of you might have will be regarding the
7:18:45type of markets in which these concepts
7:18:47can be applied. To be frank these
7:18:49concepts can be applied on all those
7:18:52markets which have ample liquidity. So
7:18:54liquidity in simple terms is the ease of
7:18:57buying and selling of an asset without
7:18:59much slippages. Meaning that there are
7:19:01enough buyers and sellers available for
7:19:03the smooth transaction of assets. Now
7:19:06the more difficult it becomes to buy or
7:19:08sell an asset, the asset is said to be
7:19:11less liquid. Now how do you know if the
7:19:14market or chart you are looking at is
7:19:16liquid or not? Now there are a few ways
7:19:18to find this out. The most simple method
7:19:20is to look for trading volumes. As you
7:19:23may all know, trading volume refers to
7:19:25the number of shares traded in a
7:19:26particular time frame or period. It
7:19:28could be for 15 minutes or 1 hour or a
7:19:31day or a week. A high trading volume
7:19:34indicates that there is a lot of
7:19:35interest in the stock or an asset and it
7:19:38is highly liquid. With this we can say
7:19:40that most indexes are highly liquid. So
7:19:44to answer your question, these concepts
7:19:46will work well in indices like Nifty,
7:19:48Bank Nifty etc. But when it comes to
7:19:51stocks, you will have to compare the
7:19:53volume of a stock with its competitors
7:19:54to get an idea. And along with that we
7:19:57also need to look at the bid ask spread
7:19:59and the market capitalization of the
7:20:01stock. In simple terms the market
7:20:04capitalization of a stock is the total
7:20:07value of all outstanding shares. So a
7:20:10higher market capitalization generally
7:20:12indicates a more liquid stock as there
7:20:15are more shares available for trading.
7:20:17On the other hand, the bit ask spread is
7:20:20the difference between the highest price
7:20:22that a buyer is willing to pay for a
7:20:24stock or it is called the bid price and
7:20:27the lowest price that a seller is
7:20:29willing to accept or the ask price. So a
7:20:32narrow bit spread indicates that the
7:20:35stock is highly liquid as there is a lot
7:20:38of activity in the market and the buyers
7:20:40and sellers are very close in their
7:20:42pricing. But if the bid r spread is wide
7:20:45then the stock is less liquid or there
7:20:48is less activity taking place. So if you
7:20:50are trading in the Indian markets I
7:20:52recommend you stick with the top nifty50
7:20:55stocks or maybe just select the top 10
7:20:57stocks that you like from the nifty50
7:20:59range of stocks from different sectors.
7:21:02And if you are a beginner try your best
7:21:04to avoid midcaps and small caps because
7:21:07the price action may not always be that
7:21:09smooth and sometimes things may not work
7:21:11out. But the best markets to trade smart
7:21:14money concepts are forex and crypto
7:21:16markets which are open for almost the
7:21:19entire week thereby providing a much
7:21:22smoother price action. But this does not
7:21:24mean that all forex pairs and
7:21:26cryptocurrencies are equally liquid.
7:21:29There is eurousd USD JPY etc which are
7:21:32highly liquid currency pairs and cryptos
7:21:35like Bitcoin, Ethereum etc. are highly
7:21:38liquid. On the other hand, there are
7:21:40other currency pairs like CADCHF or PL
7:21:43and JPY or even cryptos like Kcoin or
7:21:46Gatecoin etc. which are not liquid. So
7:21:49in short, you can use the smart money
7:21:51concepts to trade forex markets, crypto
7:21:54markets, indices and stocks all of which
7:21:58having high liquidity. Now moving on to
7:22:00the second most popular question, which
7:22:03time frame should I choose to trade
7:22:05smart money concepts? To be absolutely
7:22:08frank, we need to follow a top-down
7:22:10approach. That is we need to start our
7:22:12analysis from the higher time frames or
7:22:15the trend time frames to identify the
7:22:18larger market trend and mark the areas
7:22:20of values and then move down to an
7:22:23intermediate time frame to spot nested
7:22:26areas of interest for refining our
7:22:28higher time frame analysis and also to
7:22:31identify the market liquidity. and
7:22:33finally move down to a lower time frame
7:22:36to take a proper entry, set a stop-loss
7:22:39and place a suitable target. Now, SMC
7:22:42technique will work for all trading
7:22:44styles. Whether you are a swing trader
7:22:46or intraday trader or BTS trader, it
7:22:49doesn't matter what your trading style
7:22:50is. I have already made a detailed video
7:22:53on how to select the proper set of time
7:22:55frames based on your trading style that
7:22:57you follow. So, you can watch that video
7:23:00to know more about multi-time frame
7:23:02analysis.
7:23:06Let's say you are a curious kid and you
7:23:08ask me to explain what smart money
7:23:10concepts are in a single sentence. Then
7:23:13I would say smart money concepts are a
7:23:15few methods of identifying, planning and
7:23:18executing trades on the basis of where
7:23:21the majority of market orders are and
7:23:23what the major market direction is. So
7:23:26in a nutshell, it all comes down to
7:23:28figuring out the market direction and
7:23:30where the major liquidity is there for
7:23:32taking. So as you might have already
7:23:35guessed, the initial step is to identify
7:23:38the market behavior at a particular time
7:23:40period or to be more precise, we are
7:23:43interested in identification of a proper
7:23:46market structure so that we can plan our
7:23:49trades based on the dominant market
7:23:51direction. So in this video we are going
7:23:54to deal with the idea of market
7:23:56structure with respect to smart money
7:23:58concepts. Now you may ask me haven't we
7:24:01already discussed the concepts of market
7:24:03structure and market trends in the price
7:24:05action course. Actually yes we did. But
7:24:09when it comes to smart money concepts,
7:24:11market structure identification involves
7:24:13a lot more abbreviations, new terms and
7:24:16stuff like bows, chalk, strong highs,
7:24:19strong lows, weak highs, weak lows, etc.
7:24:22But the overall idea remains the same. I
7:24:25personally think that with smart money
7:24:27concepts, you will get to understand
7:24:29market structure and its working in a
7:24:31much greater detail. And in addition to
7:24:34this, we will also get a clarity on the
7:24:36major market structure and the minor or
7:24:39internal market structures. And we will
7:24:42also talk about the nature of pullbacks
7:24:44for both these structures. So let's get
7:24:47going right away. Now you may be
7:24:49familiar with the fact that a liquid
7:24:51market or a stock or any asset goes
7:24:54through several market phases majorly
7:24:57the accumulation phase, the markup
7:24:59phase, the distribution phase and the
7:25:01markdown phase. Now there can also be
7:25:04subfases like the reaccumulation or
7:25:07redistribution phases. But my point is
7:25:10that even though there are several
7:25:12phases of the market, the overall market
7:25:14structure boils down to three main
7:25:16stages or trends namely the uptrend
7:25:19structure, the downtrend structure and
7:25:21the sideways or rangebound market
7:25:24structure. Now, as you may already
7:25:26learned from the price action course, an
7:25:28uptrend is characterized by higher swing
7:25:30highs and higher swing lows. While
7:25:33downtrend forms when price forms lower
7:25:36highs and lower lows and when it comes
7:25:38to sideways market, there is no clear
7:25:41trend or price action or simply the
7:25:43price remains within a range. Now, this
7:25:46is a very basic way of understanding
7:25:48market structure and trends. But in this
7:25:51video, let's build on top of this basic
7:25:53idea. So in smart money concepts we are
7:25:56mostly interested in trending price
7:25:58action when compared to sideways or
7:26:01rangebound price action. But this does
7:26:03not mean that we can completely avoid
7:26:05sideways ranges and it is not the right
7:26:07way to think about it because further
7:26:09forward in this course we will
7:26:11definitely talk about how to deal with
7:26:13or trade on range price action.
7:26:16Meanwhile let us now focus on the two
7:26:18main structures based on SMC technique.
7:26:21Now these are the bullish market
7:26:22structure and the bearish market
7:26:24structure. So think of a bullish
7:26:26structure as an uptrend with many more
7:26:30constraints and on the opposite think of
7:26:32a bearish structure as a downtrend but
7:26:35with a lot more constraints or factors
7:26:38to consider. First let us take a look at
7:26:40a typical bullish market structure. And
7:26:42yes you are right. We need to look for
7:26:44higher highs and higher lows. But market
7:26:47structure is not always that easy to
7:26:49identify. It is more complicated and
7:26:52challenging that we think. I personally
7:26:54believe that if you get this particular
7:26:56step right then you'll be able to get
7:26:58most of your trade analysis correctly.
7:27:01In fact, this is the step where most
7:27:03people make mistakes. So when you commit
7:27:05a mistake at the start of your analysis
7:27:07itself, then naturally the rest of the
7:27:09process will obviously amplify the
7:27:11initial mistake and finally you'll be
7:27:13left with a corrupted and incorrect
7:27:16analysis in hand. And guess what? All of
7:27:18this will result in a wrong trade at the
7:27:21wrong time and the wrong location with
7:27:24you making huge losses and at the end of
7:27:26the day you will have no idea where
7:27:28things went wrong. So my request is that
7:27:31you strengthen your basics first. Now
7:27:33with that out of the way let us
7:27:35understand a bullish market structure.
7:27:38See as mentioned just now market
7:27:40structure will not always be very easy
7:27:42to identify and mark. Sometimes it can
7:27:45be confusing and complicated. Take a
7:27:47look at this chart. At a single glance,
7:27:49can you determine the overall market
7:27:51structure? Well, most of you would not
7:27:54be able to. Actually, this is a bullish
7:27:56market structure. And why do you think
7:27:58you are not able to identify this? The
7:28:00simple reason is that your eyes are not
7:28:03trained to look for specific details.
7:28:05Let me explain this. Now, you might have
7:28:07learned that market moves in the form of
7:28:10waves. And during a trending move, there
7:28:13is an impulse move and a corrective
7:28:16move. This is true and I don't have any
7:28:18problems with this idea. But what needs
7:28:21to be added in this context is that a
7:28:23market structure comprises of two
7:28:25structures. That is there is a major
7:28:28structure and there is a minor or
7:28:30internal structure and as the name
7:28:33suggest the major structure is the
7:28:35dominant structure or it is the major
7:28:37structure that determines the dominant
7:28:39player in the market. Now the minor or
7:28:42internal structure is the less important
7:28:44structure that gets formed within the
7:28:46major structure. So if you are planning
7:28:48to be an SMC trader then you should
7:28:51train your eyes to spot these major
7:28:53market structures in comparison to the
7:28:55minor structures because it is the major
7:28:58structure that majority of our trades
7:29:00will be concentrated on. Now you may ask
7:29:02me which time frame we should look for
7:29:05the major structures. Now we will get to
7:29:07this topic of time frames in a later on
7:29:09video but for the time being keep in
7:29:11mind that we have to look for the major
7:29:14structures on the higher time frames for
7:29:16our analysis. You can check out my
7:29:18detailed video on time frame selection
7:29:20to learn more about how to select proper
7:29:22time frames based on our trading styles.
7:29:25Moving on, let's learn how to map the
7:29:28major market structure and also discuss
7:29:30what the breakoff structure and change
7:29:32of character is. Now this is important
7:29:35because it helps you confirm the major
7:29:37swing points. That is it lets you
7:29:40confirm the higher highs and the higher
7:29:42swing lows in a major bullish market
7:29:44structure from the minor swings which
7:29:47actually behaves like noise in our
7:29:49analysis. Similarly, it can help to
7:29:52confirm the lower swing highs and the
7:29:54lower swing lows in a bearish market
7:29:57structure from the minor or internal
7:29:59structures. Now take a look at this. The
7:30:02market momentum is bullish. The market
7:30:04created a low and a high. Then the price
7:30:07made a retracement or a pullback. Then
7:30:11once again the price moves higher and
7:30:13breaks and closes above the previous
7:30:15high. Now this is called a break of
7:30:18structure or simply boss or spelled as B
7:30:21O S. It is also called as a continuation
7:30:24break as the price resumes in the major
7:30:27trend direction. So technically a
7:30:29bullish breakoff structure happens when
7:30:31the price breaks and closes above the
7:30:34previous swing high or the higher high.
7:30:36Please do note that the price has to
7:30:39close above the previous swing high
7:30:40level for this to be considered as a
7:30:43valid breakoff structure. Just a
7:30:45liquidity sweep or simply a false
7:30:47breakout associated with a long wick
7:30:50does not qualify as a breakoff
7:30:52structure. In addition to this, only
7:30:54when a bullish breakoff structure
7:30:56happens, then only the higher swing low
7:30:58level is confirmed. And as you may know,
7:31:01a higher low is the lowest swing point
7:31:04which is higher than the previous swing
7:31:06low level in a bullish trending market
7:31:08structure. Now, what happens after a
7:31:10bullish breakup structure? How do we
7:31:12confirm a higher high? Now, listen to me
7:31:15carefully. Price rarely moves in a
7:31:17straight line. If you observe within a
7:31:20larger trend, there are almost always
7:31:22counter trend moves. These countertrend
7:31:24moves are the results of lower time
7:31:27frame liquidity hunting. So once the
7:31:30price bounce or get rejected from a
7:31:32level, then normally it will target a
7:31:34previous short-term high or low before
7:31:36continuing in the same direction as the
7:31:39longerterm trend. And for some of you,
7:31:41this might be a very new concept. And by
7:31:44the way, this is called as an
7:31:46inducement, which is a very important
7:31:48topic in SMC. And we will discuss this
7:31:51concept in our upcoming episodes. And
7:31:54once we get used with all these small
7:31:56topics, we will combine all these
7:31:58concepts to finally understand what a
7:32:00true SMC structure looks like and how it
7:32:03works in a very practical manner. But
7:32:06for the time being, let us go ahead and
7:32:08understand how a higher high of a major
7:32:11bullish structure gets formed using a
7:32:14concept that most of us are already
7:32:16aware of. It is none other than
7:32:18pullbacks. So the price breaks the
7:32:21previous high and it moves higher. But
7:32:24it cannot go higher indefinitely. At
7:32:26some point it has to come down which we
7:32:30call as a corrective move. So we can say
7:32:32that a bullish market structure is a
7:32:35combination of bullish impulse moves and
7:32:37corrective pullbacks. Now you can ask me
7:32:40do all these pullbacks or corrections
7:32:43matter? The answer is no. We are more
7:32:46interested in those deeper pullbacks.
7:32:49Now how do we know if a pullback is deep
7:32:52enough? For this purpose we can make use
7:32:54of the Fibonacci retracement tool. So a
7:32:57deeper pullback is a retracement that
7:32:59goes beyond the 38.2 percentage to
7:33:0350%age or even lower Fibonacci levels
7:33:06without closing below the previous swing
7:33:09low or higher low levels. The reason why
7:33:12we require a deeper pullback is because
7:33:14there is a lot of liquidity available
7:33:16below these internal pullback levels.
7:33:19And for the market to make a meaningful
7:33:21move, it has to tap into these retailer
7:33:23orders and then use these orders as a
7:33:26fuel to move higher. This is a very
7:33:28simple explanation of a much complicated
7:33:31concept. I hope you guys have understood
7:33:33what I'm trying to explain. Anyways,
7:33:36once we have identified a deeper
7:33:38pullback using Fibonacci retracement
7:33:40tool, we can now mark the highest point
7:33:43after the previous breakoff structure as
7:33:45the higher higher level. And now once
7:33:47again if the price moves higher and if
7:33:50it manages to break and close above the
7:33:52recent higher high formed then again we
7:33:55have a bullish breakoff structure and
7:33:57this step will confirm the higher low
7:33:59level which is in fact the deepest
7:34:01pullback before the breakoff structure
7:34:03has happened. So in short, a new higher
7:34:06high is confirmed only after a deeper
7:34:08pullback has happened which will
7:34:10actually sweep all the previous retailer
7:34:13liquidity below the internal or minor
7:34:16swing lows. And on the contrary, a new
7:34:18higher low is confirmed only when a
7:34:20valid bullish breakoff structure
7:34:22happens. Now what happens when the
7:34:24market fails to make a new higher high?
7:34:27that is the break of structure fails but
7:34:30instead the price breaks and close below
7:34:33the previous higher low level. So if you
7:34:35have watched my price action course
7:34:37carefully then you know that this is the
7:34:40first sign of a change in the market
7:34:42structure from bullish to bearish or in
7:34:45other words we can say that this is the
7:34:47start of a new trend reversal. And in
7:34:50smart money terms this shift in the
7:34:52market structure is called as a change
7:34:55of character or simply chalk. But do
7:34:58keep in mind that the price has to break
7:35:00and close below the previous higher low
7:35:03for the chalk to get confirmed. This is
7:35:06very important as many traders make
7:35:08mistake in this part as just a liquidity
7:35:11sweep or a false breakout with a deep
7:35:14wick projecting below the higher low
7:35:16does not qualify. Once a change of
7:35:18character takes place, we will now focus
7:35:20our analysis towards the formation of
7:35:23either a bearish market structure or a
7:35:26sideways market structure. We should
7:35:28consider the possibility of both these
7:35:30structures until and unless we get a
7:35:32solid confirmation for the continuation
7:35:35of the bearish market structure. Let me
7:35:37explain this in greater detail. We know
7:35:39that during a downtrend or a bearish
7:35:42market structure, we expect the price to
7:35:44form lower swing highs and lower swing
7:35:47lows. So if you want to be an SMC
7:35:50trader, you have to train your eyes to
7:35:52find these important levels. But trust
7:35:54me, it is not as easy as you think
7:35:56because in most trading textbooks, we
7:35:59will find a very simple and
7:36:01straightforward method of identifying
7:36:03market structures. But in real market
7:36:05scenario, it is much more complex. So
7:36:08listen to me carefully. In order to
7:36:10confirm a lower low in comparison to the
7:36:13previous swing low, the price has to do
7:36:15a pullback. Not just any pullback, but a
7:36:18deeper pullback taking out the liquidity
7:36:20of the previous internal swing high
7:36:23levels. Now you can identify if it is a
7:36:25deeper pullback or not by using a simple
7:36:28Fibonacci retracement tool and check if
7:36:30the pullback is over 38.2%age
7:36:34or 50%age or even higher levels. But as
7:36:37long as it does not break and close
7:36:39above the previous major swing high
7:36:41level, we are okay with it. Now, what is
7:36:43the significance or maybe what is the
7:36:46logic behind wanting a deeper pullback?
7:36:48Now, the logic is quite simple and it is
7:36:51associated with the retailer mentality.
7:36:54So, as a retailer, what will you do when
7:36:57you spot a breakout or a breakdown?
7:36:59Obviously, you will take a trade in the
7:37:01direction of the market break. Right?
7:37:04Now where will you place your stop loss?
7:37:06Quite clearly you will place it beyond
7:37:08the breakout level. So in case when a
7:37:11retailer sees a bullish breakout
7:37:13structure most probably he will place
7:37:15his stop loss below the previous minor
7:37:18swing low level. And if he spot a
7:37:20bearish change of character, he will
7:37:22take a short position and he will place
7:37:24the stop loss just above the previous
7:37:27minor swing high level. Right? Clearly,
7:37:30these swing levels just before a
7:37:31breakout or a breakdown or in other
7:37:34words, these swing levels just before a
7:37:36break of structure or a change of
7:37:38character have a lot of stop-loss orders
7:37:40available. These stop-loss orders are in
7:37:43fact retailer liquidity which the smart
7:37:45money is so keen to exploit and these
7:37:48clusters of stop-loss orders helps the
7:37:50smart money to buy low and sell high.
7:37:53Now coming to the reason why these
7:37:55deeper pullbacks are important. It is
7:37:57quite evident that these deeper
7:37:59pullbacks are actually searching for
7:38:01retailer liquidity and once the
7:38:03liquidity is absorbed the market usually
7:38:06tends to continue strongly in the major
7:38:08trend direction. So we have to look for
7:38:10a deeper pullback after a change of
7:38:12character has taken place so as to
7:38:14confirm if the low formed is actually a
7:38:18lower low or not. Don't worry if you
7:38:20have not understood this concept
7:38:22completely you can either watch this
7:38:24concept multiple times and still if the
7:38:27doubt persist you can wait for the
7:38:29upcoming episodes where I will talk
7:38:31about inducements order blocks etc so
7:38:34that you will get a deeper understanding
7:38:36on the smart money concept structure
7:38:38mapping. Now moving on. After the deeper
7:38:41pullback taking out the retailer
7:38:43liquidity and confirming a lower low,
7:38:45the price moves lower and it breaks and
7:38:48closes below the recent lower low level.
7:38:51This is called a bearish breakup
7:38:53structure or simply boss. I'm stressing
7:38:56the point that the price needs to break
7:38:59and close below the previous low level
7:39:01to confirm a valid breakup structure.
7:39:04Just a liquidity sweep or a force
7:39:06breakout with a deep wick projecting
7:39:08below the lower low level won't count as
7:39:11a valid breakoff structure. Now only
7:39:13when a valid breakoff structure happens
7:39:15can we actually confirm the lower high
7:39:18level. So long story short a lower swing
7:39:21high is confirmed only when there is a
7:39:23valid bearish breakoff structure. And on
7:39:25top of that the lower swing high is the
7:39:28highest point before the boss and the
7:39:30previous lower low level. And all the
7:39:33other swing highs are just the internal
7:39:35or minor structures. And we don't have
7:39:38to give much importance to these. As an
7:39:40SMC trader, the major structure matters
7:39:42to us the most. And we conduct the
7:39:44analysis for our major structure on our
7:39:47higher time frames to get the best
7:39:49possible results because in the lower
7:39:51time frames charts are more random and
7:39:54noisy. Now once again the price has to
7:39:57search for liquidity in these
7:39:58intermediate or internal swing highs and
7:40:01in doing so it forms a deep pullback
7:40:04which sweeps the liquidity in those
7:40:06levels and then moves lower. Now once
7:40:08the liquidity is absorbed by a deeper
7:40:11pullback which can be measured using a
7:40:13Fibonacci retracement tool. We can
7:40:15confirm the new lower low level. Then
7:40:18again the price has to move lower and
7:40:21break and close below the new lower low
7:40:24formed to confirm a valid breakoff
7:40:26structure. And in turn the highest point
7:40:29before the boss and lower low will be
7:40:32marked as the new lower high level. And
7:40:34this process continues until the price
7:40:37fails to break and close below the
7:40:39previous lower low level and instead it
7:40:42breaks and closes above the previous
7:40:44lower swing high level. Now what does
7:40:46this indicate? This actually signals a
7:40:49change in the sentiment or it can be
7:40:51thought of as the first indication of a
7:40:54reversal. That is the trend might change
7:40:56from bearish to bullish. So this shift
7:40:59in the market structure is called as a
7:41:02change of character. So now we have to
7:41:04change our perspective and we have to
7:41:06look for a bullish structure or a
7:41:08sideways market structure. And by now
7:41:11you might already be familiar as to how
7:41:13to identify a bullish market structure,
7:41:16right? But hey, I haven't talked about
7:41:18the sideways market structure, right?
7:41:20But you may already be familiar with the
7:41:22accumulation or distribution phases from
7:41:25my price action video. These are phases
7:41:27where the market takes a break or where
7:41:30the big institutions start building
7:41:31their position which is actually
7:41:33represented by the accumulation phases
7:41:36or where they start selling their
7:41:38holdings which is called as the
7:41:39distribution phase. Anyways the sideways
7:41:42market structure can be any of them.
7:41:44Think of it as market taking a pause or
7:41:47a breather and only when the price
7:41:50breaks and close above or below the
7:41:53constraints of this phase are we really
7:41:55interested in making a move. So as an
7:41:57SMC trader or a price action trader, it
7:42:00is always ideal to wait out the sideways
7:42:03market and focus more on the trending
7:42:05market faces for your trades. Let me
7:42:08briefly talk about the concept of strong
7:42:11and weak swing points in a structure. To
7:42:14identify strong and weak highs and lows,
7:42:17we obviously need to identify our
7:42:19structure correctly. Are we bullish or
7:42:22are we bearish? In this case, we are
7:42:25bullish. Now, keep in mind this idea
7:42:28that the job of a high is to take out a
7:42:31low. Likewise, the job of a low is to
7:42:34take out the high. It is as simple as
7:42:37that. So if a low succeeds in taking out
7:42:40a high, that low becomes a strong low.
7:42:44In a bullish trending market structure,
7:42:46the market forms consecutive higher
7:42:48highs and higher lows. Here the lows
7:42:51always manage to take out the highs.
7:42:54Therefore, the higher lows act as strong
7:42:57lows. Most of the time these lows are
7:43:00protected and as a result when price
7:43:03gets to these lows it will be met with
7:43:06some resistance causing the market to
7:43:08move higher. On the contrary these
7:43:11higher swing highs fail to take out the
7:43:14previous swing low levels. Therefore
7:43:16these levels are weak highs. Most of the
7:43:19time it is not going to hold and
7:43:22eventually price breaks through these
7:43:24highs. The only time it holds is when
7:43:27there is a market structure shift. That
7:43:29is if the high manages to take out the
7:43:32low thereby creating a bearish change of
7:43:34character. In this scenario, the
7:43:37previous low gets taken out and it
7:43:40represents a shift in control from
7:43:42buyers to the sellers. So now this high
7:43:45will become a strong high. Now there
7:43:47can't be two strong levels at the same
7:43:49time. Now this high is strong.
7:43:52Therefore, this low is already
7:43:54considered weak. It's like that saying
7:43:57innocent until proven guilty. This low
7:43:59is weak until it is proven strong. This
7:44:02low right here would have to break this
7:44:05high to regain its status of being a
7:44:08strong swing level. Only when this high
7:44:11is taken out will the buyer be back in
7:44:14control over the market. But assume that
7:44:17didn't happen and the market moved lower
7:44:19forming a bearish market structure. In
7:44:22this case, the lower swing lows were not
7:44:25able to take out the highs suggesting
7:44:27these are weak lows. On the contrary,
7:44:30the lower highs did their job by
7:44:33breaking through the lows suggesting
7:44:35that these highs are strong highs and
7:44:38there is a very high probability that
7:44:40they will hold or in other words price
7:44:43could face a strong resistance from
7:44:46these highs and the market could return
7:44:48lower. Understanding this concept will
7:44:51help us trade according to the market
7:44:53sentiment. It tells us when to switch
7:44:56between trends. So the entire idea of
7:44:59strong and weak swing points revolve
7:45:01around the concept of liquidity and
7:45:04shift between the control of power
7:45:05between buyers and sellers. Now let's
7:45:08talk about another interesting aspect of
7:45:10the market which is the fractal market
7:45:13structure. It is one of those key
7:45:15concepts that helps you find high reward
7:45:18rates. This concept lets you refine your
7:45:21trade entries using a multi-time frame
7:45:23approach. It is known as lower time
7:45:26frame refinement or LTF refinement. You
7:45:29might already know this, so it's nothing
7:45:31new, but anyways, let's break this down.
7:45:34What you see here is a 15-minut time
7:45:37frame chart. Now, I will bring up a
7:45:39series of zigzag candlesticks layered
7:45:42over the 15-minut chart. These
7:45:44candlesticks represents the 1 minute
7:45:46time frame. What you have to understand
7:45:48is that every time you have a very clean
7:45:51move like this on the higher time frame,
7:45:54a noisy price run like this is taking
7:45:56place on the lower time frame. For
7:45:58example, let's say in the 15 minutes,
7:46:00the market printed five candles like
7:46:03this. Then in the 1 minute time frame,
7:46:06it's going to print a lot more candles,
7:46:08precisely 75 of them. And these are
7:46:11going to be a lot more erratic. So the
7:46:14first step to follow is to identify our
7:46:17bias based on the major structure
7:46:19direction. If the major structure is
7:46:21bullish, our trade bias will be to trade
7:46:24long positions. And if the higher time
7:46:27frame bias is bearish, our whole
7:46:29objective would be to trade short
7:46:31positions. Okay. Now take a look at this
7:46:3415-minut time frame structure. The
7:46:36market formed a low then a high followed
7:46:39by a higher low and then a higher high
7:46:41with a bullish break of structure. At
7:46:44this point we are bullish. Then price
7:46:47break below the previous low forming a
7:46:50lower low suggesting a change of
7:46:52character. So now we are bearish. That
7:46:55is what the 15-minut swing structure
7:46:57tells me. So keep in mind that as of now
7:47:00the 15-minut structure is bearish and
7:47:04these are our four major swing points.
7:47:06Okay. Now let's bring in the 1 minute
7:47:08time frame structure. You can see the 1
7:47:10minute chart printing consecutive higher
7:47:12lows and higher highs during the initial
7:47:15impulsive move in the 15-minut time
7:47:17frame. It formed minor bullish breakup
7:47:19structures. Then in the higher time
7:47:22frame the price made a pullback. This is
7:47:25how the market moves. It moves as waves
7:47:28with impulse and corrective moves within
7:47:31it. But if you look at the one minute
7:47:32chart structure during this pullback
7:47:34phase, you will notice that the lower
7:47:37time frame structure is printing lower
7:47:39highs and lower lows. And as you can
7:47:41see, the price formed an internal change
7:47:44of character. This change of character
7:47:46or market structure shift in the lower
7:47:49time frame structure will give you a
7:47:51heads up about the pullback in the
7:47:5315-minut structure. So if you were
7:47:56already in a long position, this minor
7:47:59change of character will help you exit
7:48:01from the trade. Now again the 1 minute
7:48:04lower time frame structure formed minor
7:48:07bearish breakoff structures. Then as you
7:48:09can see the 15minut higher time frame
7:48:11structure reversed higher forming an
7:48:15external bullish breakoff structure. But
7:48:17if you notice carefully you'll find that
7:48:20the 1 minute structure has already given
7:48:22clues of a reversal. The lower time
7:48:24frame structure made a minor bullish
7:48:27change of character here. So this is a
7:48:29great sign for traders to enter into
7:48:32long trade positions. So the idea is to
7:48:34mark the higher time frame price of
7:48:36interest in the 15-minut chart. Then go
7:48:39down to the lower time frame 1 minute
7:48:41chart and then plot the lower time frame
7:48:44prices of interest areas to refine your
7:48:46analysis with a confluent setup. that is
7:48:49to look for overlapping areas in the
7:48:52prices of interest. Now once there is a
7:48:55change of character in the internal
7:48:56structure, you can take trade entries in
7:48:59the trend direction from these
7:49:01confluence areas inside the price of
7:49:03interest. So, a lower time frame fractal
7:49:06analysis will not only give you a heads
7:49:08up about the expected trend, but it will
7:49:11also help you refine your trade entries,
7:49:14thereby improving your reward potential
7:49:16and reducing your potential losses. With
7:49:19that idea in mind, let's quickly run
7:49:21through the rest of the chart and wind
7:49:23up this video. Look what happened next.
7:49:25In the 15 minutes time frame, there was
7:49:27a change of character towards
7:49:29bearishness. The price broke and closed
7:49:32below the previous swing low to form a
7:49:34lower low. Now focus on what has
7:49:36happened on the 1 minute structure. Just
7:49:39like the previous case, there is an
7:49:40internal change of character towards
7:49:42bearishness thereby printing lower highs
7:49:45and lower swing lows. It continued lower
7:49:48forming minor bearish prick of
7:49:49structures. Eventually, instead of the
7:49:52price making a pullback and reversing
7:49:54back from any price of interest, the
7:49:57price actually broke through the
7:49:59previous major swing level. After that,
7:50:01the market once again moved higher
7:50:04forming a pullback on the higher time
7:50:05frame structure. This pullback is
7:50:08identified much earlier on the lower
7:50:10time frame structure when it formed an
7:50:13internal bullish change of character.
7:50:15Now, if you have followed me through
7:50:17this video, you can easily predict what
7:50:20is going to happen next. It's simple.
7:50:22There is a good chance that the higher
7:50:24time frame swing high is going to be
7:50:26protected and that the price is going to
7:50:29reverse after it mitigates any price of
7:50:31interest. This reversal can be predicted
7:50:34when the price forms an internal bearish
7:50:37change of character in the 1 minute
7:50:39structure. You can look for short trade
7:50:41entries and trade in the direction of
7:50:44the higher time frame structure
7:50:46direction. Your target could be the next
7:50:48bearish break of structure level. I hope
7:50:50this concept is clear.
7:50:56I would like to introduce you to a
7:50:58completely new topic. It is known in
7:51:01different names in SMC be fair value
7:51:04gaps, imbalance, inefficiency etc. But
7:51:07the overall concept remains the same.
7:51:10What you need to keep in mind is that
7:51:12such imbalances in the market happens
7:51:14due to irregular or disproportionate
7:51:17price movements. These price movements
7:51:20may deviate from what is considered
7:51:22normal or expected based on historical
7:51:24price patterns, fundamental analysis or
7:51:27technical indicators. Such
7:51:30inefficiencies or imbalances can create
7:51:33potential trading opportunities for both
7:51:35investors and traders. But imbalances in
7:51:38price behavior can take different forms.
7:51:41Just think about it. Could be in the
7:51:43form of gaps, volume balances, spikes,
7:51:46lack of liquidity, displacement, etc.
7:51:49Now, I will try to explain each one very
7:51:51briefly to get a general idea of what is
7:51:54what. Let's start with gaps. Price gaps
7:51:58occur when the opening price of a candle
7:52:00is significantly different from the
7:52:02previous candle's closing price. So a
7:52:04gap has a complete absence of trading
7:52:07activity between two candles. Now these
7:52:09gaps can be caused by various factors
7:52:12such as overnight news, earnings reports
7:52:15or other market moving events. And gaps
7:52:18can be of different types. It can be
7:52:20breakaway gaps, runaway gaps, exhaustion
7:52:23gaps, and professional gaps. Depending
7:52:26on the type of gap, you can choose to
7:52:28adopt a particular strategy to
7:52:30capitalize on the imbalance. I have
7:52:32already made a detailed video on gaps
7:52:35and how to trade them in my complete
7:52:37price action course. You can check that
7:52:39out to learn more. Next up is volume
7:52:42imbalances. A volume imbalance is a gap
7:52:45between the closing and opening price of
7:52:47two candles and the difference in
7:52:49between. A volume imbalance in fact has
7:52:51a trading activity happening or there is
7:52:54an overlap between the high and low
7:52:56prices when compared to a price gap. Now
7:52:58a quick example of a volume imbalance
7:53:00would be from this closing price to this
7:53:03opening price and also we have a gap.
7:53:05However, the price did manage to trade
7:53:08through these areas. So, it is indeed a
7:53:10volume imbalance and not really a price
7:53:13gap. Moving on, price spikes refer to
7:53:16sudden and sharp movements in a
7:53:18securities price, often resulting from
7:53:21an unexpected event or a large surge in
7:53:24trading volume. Now, these spikes can be
7:53:27caused by different factors such as
7:53:29market orders, stop-loss triggers, or
7:53:32algorithm trading activity. Now in some
7:53:34cases low trading volume and liquidity
7:53:37in a particular stock can lead to
7:53:39inefficiencies as it may result in a
7:53:42wider bid spread and difficulty in
7:53:44executing trades at desired prices. So
7:53:47traders need to be cautious when dealing
7:53:50with illlquid stocks as it can be
7:53:52challenging to enter and exit their
7:53:54positions without causing significant
7:53:56price impacts. Now all these are in some
7:53:59form or the other a type of imbalance in
7:54:01the market. But when it comes to smart
7:54:03money concepts, we are only concerned
7:54:06about the imbalances caused due to
7:54:08displacements. So displacement in short
7:54:11is a very powerful move in price action
7:54:13resulting in strong selling or buying
7:54:16pressure. Generally speaking,
7:54:17displacement will appear as a single
7:54:19candlestick or a group of candles that
7:54:22are all positioned in the same
7:54:24direction. Now these candles typically
7:54:26have large real bodies with very short
7:54:29wicks which suggests that there is a
7:54:31very little disagreement between buyers
7:54:33and sellers or in other words only one
7:54:36party has a clear dominance over the
7:54:38other. Most often a displacement will
7:54:40occur just after a liquidity level has
7:54:42been breached where there are clusters
7:54:44of orders and this will often result in
7:54:47the creation of both a fair value gap
7:54:50and a market structure shift. Now we
7:54:52have already discussed market structure
7:54:54mapping and terms like boss, chalk etc
7:54:58in the first episode. So make sure you
7:55:00have a proper knowledge of the same but
7:55:02right now what we are concerned about
7:55:04are fair value gaps or inefficiencies or
7:55:08simply imbalances. So after the price
7:55:10reaches a particular liquidity level
7:55:13where large numbers of orders are
7:55:15accumulated and when price reverses
7:55:17after absorbing the liquidity from this
7:55:20area often what will come next is
7:55:22displacement. So these fair value gaps
7:55:25are usually created within these
7:55:27displacement modes which means that
7:55:29these are instances in which we can spot
7:55:32inefficiencies or imbalances in the
7:55:34market. I have talked about liquidity
7:55:37levels where most of the orders are
7:55:39accumulated. But how to identify these
7:55:41levels? There is a simple rule to spot
7:55:44these areas. So the last bearish candle
7:55:47or selling momentum before an up move is
7:55:50referred to as a bullish order block
7:55:53where a large number of buy orders are
7:55:55assumed to be located. Similarly, the
7:55:58last bullish candle or the last buying
7:56:01momentum before a down move is referred
7:56:03to as a bearish order block where a
7:56:06large number of sell orders are assumed
7:56:08to be clustered. Just keep this in mind
7:56:11and don't stress a lot because we will
7:56:13learn all this in great detail in the
7:56:15upcoming episodes. Now you can ask me
7:56:18why is an imbalance or fair value gap
7:56:20for that matter considered as an
7:56:22inefficiency? The reason is simple and
7:56:26straightforward. When price moves
7:56:28strongly in one direction and that too
7:56:30by means of large bodied candles, there
7:56:32is a clear discrimination between the
7:56:34buyers and sellers. Let me explain.
7:56:37Imbalance as the name suggest is an area
7:56:39of unequal market moves where there are
7:56:42only buyers or only sellers which exist
7:56:45in the market. The reason we call this
7:56:47an imbalance is not only because it is
7:56:50an imbalance between buyers and sellers
7:56:52because there is literally an imbalance
7:56:54in the market. Trading volume is tilted
7:56:56either towards the bid or asset too
7:56:58quickly. So there are still a lot of
7:57:00unexecuted orders in the market. So if
7:57:03you have an impulsive move to the
7:57:04upside, it is because there are no
7:57:06sellers to absorb the buying pressure of
7:57:08the bulls. This means that there is no
7:57:11resistance from sellers to stop the
7:57:13buyers from pushing the price up
7:57:14rapidly. On the other hand, if we have
7:57:17an impulsive move to the downside, it
7:57:19means there are no buyers to absorb the
7:57:21selling pressure of the beers. This
7:57:23means that there is no resistance from
7:57:25buyers to stop the sellers from pushing
7:57:28the price down rapidly. Simply put,
7:57:30imbalances occurs when there are many
7:57:33orders of the same type with buy, sell
7:57:35or limit orders and also a lack of
7:57:38liquidity or counter orders in the
7:57:40market. For example, if there are many
7:57:42more buyers of a stock than sellers,
7:57:45then the balance can tilt in the favor
7:57:47of buyers. And on the chart, this
7:57:49imbalance look like a price gap within
7:57:51which only a part of the volume has been
7:57:53traded. This is an unhealthy price
7:57:56action because it shows the
7:57:58disequilibrium between buyers and
7:58:00sellers. So, an imbalance means unfair
7:58:03price action where the market will
7:58:05almost always come back to fill. Another
7:58:07thing to note is that the wicks do not
7:58:09fill each other and if they do then it
7:58:12is healthy price action or efficient
7:58:14price action and not really an
7:58:15imbalance. So to put it simply market
7:58:18inefficiency occurs when the wicks are
7:58:20separated by a distance or a gap and
7:58:23they do not meet while an efficient
7:58:25market on the other hand is one in which
7:58:27the wicks do not have a gap between them
7:58:29and they actually meet. This brings us
7:58:32to the next important point. How to
7:58:34identify or spot an imbalance or a fair
7:58:37value gap within a particular
7:58:39displacement mode. To be absolutely
7:58:42clear, an imbalance can be defined as an
7:58:45imbalance between buyers and sellers. So
7:58:47a bullish imbalance has more buyers
7:58:50behind it and obviously a bearish
7:58:52imbalance has more sellers behind it. So
7:58:54when you see an impulsive move to the
7:58:56upside or downside in the market with no
7:58:58wicks overlapping full bodied candles,
7:59:01this is where imbalance in the market
7:59:03are formed. These can happen on all time
7:59:06frames. Now when looking for an
7:59:08imbalance in the market, simply look for
7:59:11any candle which has a full real body
7:59:14and look for the part of this candle
7:59:16that is not over overlapped by the
7:59:17previous and next candle sweep. This
7:59:20signifies an imbalance in the market
7:59:22because there were only a few
7:59:24transaction going on between buyers and
7:59:26sellers. We can clearly say that one
7:59:28party has overpowered the other
7:59:31depending on the direction of the price.
7:59:33Now if you think about it, wicks usually
7:59:35represent price oscillating up and down
7:59:37within the time it takes to print an
7:59:39entire candle showing that the price is
7:59:41efficient because there were continuous
7:59:44transaction happening between buyers and
7:59:46sellers. So it shows us that price is
7:59:48giving both buyers and sellers a fair
7:59:51chance at accessing the liquidity. So
7:59:53when the wicks meet, it provides the
7:59:55buyers and sellers and access to get
7:59:58into the market and profit on the price
8:00:00move. But on the contrary, when you see
8:00:02a fullbodied candle with no wicks
8:00:04overlapping it, it is obvious that you
8:00:07have identified a clear imbalance in
8:00:09price. This may seem very complicated
8:00:11and over the rope. So let me break this
8:00:14down further and help you understand it
8:00:16better. Now a very simple method to keep
8:00:18in mind is to think of a fair value gap
8:00:21as a three candlestick pattern where the
8:00:24first candle's low does not overlap with
8:00:26the third candle's high in case of a
8:00:29down move or where the first candle's
8:00:31high does not overlap with the third
8:00:33candle's low in case of an up move with
8:00:36the condition that the middle candle has
8:00:38to be a largebodied candle with little
8:00:41or noix. But there can be some
8:00:43exceptions to this rule which we will
8:00:45look at. But first let's take a deep
8:00:48dive into this concept. As I have
8:00:50mentioned just now, these imbalances on
8:00:52price chart are visualized by a three
8:00:54candlestick sequence containing one
8:00:57large middle candle whose bordering
8:00:59candles upper and lower wicks do not
8:01:01overlap. Now take a look at this
8:01:03example. The middle candle is a large
8:01:05bearish candle with little or no wicks.
8:01:08Now number the candles as 1 2 and three
8:01:11from left to right. Then consider the
8:01:14first candle's low and mark a horizontal
8:01:16line out. And do the same for the third
8:01:18candle's high and extend out and
8:01:20horizontal line. You can notice that
8:01:22there is a clear gap between the wicks
8:01:24on the first candle and the third
8:01:26candle. And the wicks do not meet or the
8:01:28high does not overlap with the low.
8:01:30Therefore, this can be identified as an
8:01:32imbalance or an inefficient price action
8:01:35or simply a fair value gap. Now consider
8:01:38another example. Here the middle candle
8:01:40is a large bullish candle with little or
8:01:42no wicks. Now number the candles as 1 2
8:01:453 from left towards right. Then extend a
8:01:48horizontal line from the first
8:01:50candlestick high and do the same from
8:01:52the third candlesticks low. And you can
8:01:54clearly notice that the high and low
8:01:56wicks do not overlap with one another.
8:01:58So we can say this price action is
8:02:01inefficient or not healthy. So this is a
8:02:04fair value gap. Now let's take a look at
8:02:06some of the tricky situations which you
8:02:09could encounter in the charts. On some
8:02:11occasions, you'll not be able to apply
8:02:13this rule directly and you might need to
8:02:15focus on some more important factors
8:02:18before plotting a fair value gap.
8:02:20Observe this over here and tell me how
8:02:22will you mark the imbalances in this
8:02:24case. So if you look at this diagram,
8:02:27this candle here is our last bullish
8:02:29candle or the last buying momentum
8:02:31before the price drop. So most of you
8:02:34will mark this bearish candle's low
8:02:36which formed after the last bullish
8:02:38candle as number one and some people
8:02:40might even mark the bullish candles low
8:02:42as number one and then mark the third
8:02:45candle's high. Now in either case this
8:02:47is not a valid imbalance and why is it
8:02:51so? If you look at the left side there
8:02:53is a bearish candle before this up move
8:02:55and you will notice that the high and
8:02:57low of this bearish candle is protected.
8:03:00Meaning that the candles high and low
8:03:02are not broken by the up move. So if the
8:03:04market creates anything between the high
8:03:06and low of this bearish candle, all
8:03:08those moves are considered as internal
8:03:11moves only. So in such scenarios, first
8:03:13of all, you have to check if the
8:03:15previous candle's highs and lows are
8:03:17broken or not. Then only you have to
8:03:19number the candles as 1 2 and three. So
8:03:22here this bearish candle has to be
8:03:24numbered one and this candle's low is to
8:03:27be marked or extended using a horizontal
8:03:29line. The next candle which has broken
8:03:32the bearish candle low is our second
8:03:34candle and finally we will also mark the
8:03:37high of the third candle. Now this
8:03:39becomes our valid imbalance which the
8:03:42market might return to fill or absorb.
8:03:44So keep in mind that internal price
8:03:46moves are not to be considered while
8:03:48marking proper imbalances. Now a lot of
8:03:51people will wait for the price to fill
8:03:53this particular imbalance and they will
8:03:55look for short trading entries. But this
8:03:58is not a valid imbalance. This would
8:04:00have been a valid imbalance if the
8:04:02market would have broken this bearish
8:04:04candle slow. So now the bearish candle
8:04:07is no longer considered. Now when you
8:04:09mark the imbalance, you can consider the
8:04:11bullish candle slow and number it as
8:04:13one. But the next bearish candle is not
8:04:16taken into account because it is an
8:04:18inside candle which was unable to break
8:04:21the highs and lows of the bullish
8:04:23candle. So our second candle in this
8:04:25case would be this bearish candle which
8:04:28has broken the low of the bullish candle
8:04:30and then the third candle high is also
8:04:32marked and the difference will become
8:04:34our imbalance. Now there can be another
8:04:37scenario when the high of the last
8:04:39bullish candle has been broken. Now how
8:04:41will you mark the imbalance in this
8:04:43case? So here this bearish candle is no
8:04:46longer an inside candle and thus we can
8:04:48number it as one and mark its low and
8:04:51subsequently we can number the other
8:04:53candles as two and three and mark the
8:04:55high of the third candle and thereby we
8:04:57can observe the imbalance. I hope you
8:05:00guys have understood all these different
8:05:02scenarios. Now I want you to mark the
8:05:05imbalances for these three scenarios on
8:05:08your own. Just pause the video and do it
8:05:10by yourself. The answer will appear on
8:05:13the screen after 5 seconds. So try it
8:05:16right away.
8:05:22So now that you have understood what a
8:05:24fair value gap look like, let's also
8:05:26make sure what it does not look like.
8:05:28Like before, extend a horizontal line
8:05:31from the first candle's low and another
8:05:33line from the third candle high to see
8:05:35if there is a gap. When dragging the
8:05:37high and low across, you can see that
8:05:39they overlap. This means that the low
8:05:42from the first candle is lower than the
8:05:44high from the third candle. So there is
8:05:47no gap or inefficiency there and thus
8:05:50this is not a fair value gap. Similarly
8:05:52over here if you were to extend the
8:05:54first candle's high using a line and
8:05:57also extend a line from the third
8:05:59candle's low. You can see that there is
8:06:01an overlap between the first candle's
8:06:03high and the third candle's low. Meaning
8:06:05there is no imbalance or fair weather
8:06:07gap. So now just to clarify a gap
8:06:10between the first candle's low and the
8:06:12third candle's high or the first
8:06:14candle's high or the third candle's low
8:06:16is what creates a fair value gap. Now I
8:06:19want you to find such imbalances or fair
8:06:21value gaps on different charts and mark
8:06:23them on your own by this simple method.
8:06:26The next thing we are going to look at
8:06:28are CBS and BC's. These are nothing new.
8:06:31It's just the same concept in a new name
8:06:34and packaging just to induce curiosity.
8:06:37So a CB stands for a sellside imbalance
8:06:40and buy side inefficiency. What does
8:06:42this mean? It means that the sell side
8:06:44was offered but the buy side wasn't. So
8:06:47it is inefficient or simply put it
8:06:50represents a bearish fair value gap
8:06:52where the bears have overpowered the
8:06:54bulls. It is also known as undervalued
8:06:57fair value gap. What it means is that
8:06:59the price of the asset is lower than its
8:07:02fair value gap. In this case, the price
8:07:04might increase in the future to balance
8:07:07this inefficiency in price. Now, a BC
8:07:10stands for buy side imbalance and
8:07:12sellside inefficiency. This means that
8:07:15the buy side was offered but the sell
8:07:17side wasn't offered. So, it is
8:07:19inefficient or it represents a bullish
8:07:22fair value gap where the bulls have
8:07:24overpowered the bears. It is also known
8:07:27as overvalued pair value gap. What this
8:07:29means is that the price of the asset is
8:07:32higher than its fair value gap. Now in
8:07:34this case, the price might decrease in
8:07:36the future to balance this inefficiency.
8:07:39So if you look at this price action
8:07:40right here, we have a bearish fair value
8:07:43gap where the sell side is offered but
8:07:45the buy side is inefficient. So this
8:07:48creates a CB. If you look over to the
8:07:50right, you can see that the price has
8:07:52made a bullish fair value gap or the C
8:07:55because it offered the buy side but not
8:07:57the sell side. And that's all about
8:07:59BCNCB and I hope that clarifies some
8:08:02things for you guys. Now another
8:08:03relevant question worth asking is why do
8:08:06market imbalances occur? The emergence
8:08:09of persistent price imbalances in one
8:08:12direction after long periods of stable
8:08:15or efficient pricing indicates that
8:08:17institutions are accumulating positions.
8:08:20Now these institution can be funds,
8:08:22banks and other financial institutions
8:08:25that we call smart money. But do keep in
8:08:28mind that the market is influenced not
8:08:30only by institutions but also by market
8:08:32makers, investors and traders with large
8:08:35capital. For example, smart money can
8:08:37place many orders and then modify or
8:08:41cancel them to bring the market back to
8:08:43an equilibrium state. These market
8:08:45makers, traders, and investors can
8:08:48oppose each other and they can also act
8:08:50in the same direction. In most
8:08:52occasions, imbalances in the market can
8:08:54occur after the release of an economic
8:08:56or geopolitical news. The reasons can
8:08:59vary on whether you are dealing in forex
8:09:01or in other markets. It could be the
8:09:03publication of financial statement. For
8:09:05example, a very positive quarterly
8:09:08report can lead to an imbalance towards
8:09:10buyers. Similarly, it can be corporate
8:09:12announcement of bankruptcy, management
8:09:15changes, takeovers, business purchases,
8:09:17etc. It could also be governmental and
8:09:20regulatory actions, industry changes,
8:09:23etc. which could contribute to the
8:09:24imbalance. It could even be political
8:09:27problems, natural disasters, etc. Now,
8:09:30since you have understood what a fair
8:09:32value gap or imbalance is, now you can
8:09:34ask me how is it useful for traders like
8:09:37you and me. Now as mentioned earlier
8:09:39imbalances in the market can be viewed
8:09:41as inefficiency in price behavior
8:09:43telling us that maybe banks or big
8:09:46financial institutions are involved in
8:09:48the aggressive movements of prices that
8:09:50we are seeing. Again if you think about
8:09:52it most impulsive moves and imbalances
8:09:55in the market happen as a result of
8:09:57there being no liquidity in the form of
8:09:59counter orders to stop the price from
8:10:02being met with resistance and thereby
8:10:05slowing down. Now if you consider an
8:10:07efficient market, we get to see the
8:10:09price trade within a range of fair value
8:10:11for that particular asset where the
8:10:13sellers will sell when they perceive
8:10:15that the price of the asset is high or
8:10:17the price is trading at a premium and
8:10:19the buyers will buy when they perceive
8:10:21that the price of the asset is low or is
8:10:23trading at a discount. This is not the
8:10:26case of an inefficient market. The big
8:10:28institutions will create a high momentum
8:10:30move and an imbalance in the market that
8:10:33is much like a gap in price. In most
8:10:35cases, this price manipulation can be a
8:10:38part of institutions plan to generate
8:10:40liquidity to buy low and sell high. And
8:10:43therefore, we may see the price coming
8:10:45back to fill that imbalance or close the
8:10:48price gap before pushing back into the
8:10:50same direction that the price made the
8:10:52impulse move from. And now to answer the
8:10:54question, how can we as traders benefit
8:10:57from such imbalances? Imbalance is a
8:11:00type of trading opportunity for both
8:11:02intraday and swing traders. In trading,
8:11:04imbalances are used to identify zones of
8:11:07interest. We will talk about these zones
8:11:09of interest, which is more commonly
8:11:11known as order blocks in the upcoming
8:11:13episodes. The zone from which the
8:11:15imbalance originated is characterized by
8:11:18a higher level of probability. This zone
8:11:20is suitable for analyzing and
8:11:22identifying potential trade entry
8:11:24points. The entry points can be selected
8:11:26with the help of technical analysis
8:11:28within the selector trading methodology.
8:11:30In this case, imbalances act as an
8:11:33additional factor in favor of the trade.
8:11:35So naturally, most imbalances in the
8:11:38market represents an inefficiency in
8:11:40price and therefore there is usually a
8:11:42good chance that the price will return
8:11:44to fill that imbalance in order to make
8:11:46the price efficient again. Now I cannot
8:11:49guarantee that the price will always
8:11:50come back to fill the imbalance but in
8:11:52most scenarios the price will return to
8:11:55fill the imbalances that form in the
8:11:57market because it is a rule of nature
8:11:59that everything wants to come to rest or
8:12:02to be balanced. In the same way the
8:12:04price also wants to remain in balance.
8:12:07So when an imbalance is created the
8:12:09price tries to balance it and the
8:12:11imbalance gap between the wicks of the
8:12:14neighboring candles acts as a price
8:12:16magnet. It means that as the liquidity
8:12:18fills the price will close the
8:12:20imbalance. This is what we call as
8:12:23mitigation in smart money concepts or
8:12:25when we say that the price has mitigated
8:12:28the imbalance it means the imbalance has
8:12:30been filled and efficient price action
8:12:33has been restored and the market will
8:12:35most likely continue in the direction of
8:12:37the bul move. But do keep in mind that
8:12:40mitigation is more a general term which
8:12:43can be used to indicate a filling of a
8:12:45price gap. filling of an order block
8:12:47etc. We will talk about this topic in
8:12:49more detail in the upcoming episodes of
8:12:51this course. As you are aware by now,
8:12:54imbalances represent price inefficiency.
8:12:57Therefore, there is a high probability
8:12:58that the market will come back to fill
8:13:00the imbalance. For example, if a large
8:13:03bidder has manipulated the market, a
8:13:05correction might occur afterwards.
8:13:07Typically, price tends to mitigate the
8:13:10imbalance or the area from which it
8:13:12originated. Therefore, we can look to
8:13:14take a trade in the direction of the
8:13:16imbalance in order to profit from the
8:13:18price movement. In this way, we'll be
8:13:21able to buy low and sell high like the
8:13:23institutions. However, there are times
8:13:25when the price would just continue to
8:13:27push back against the imbalance that are
8:13:29forming in the market. I won't go deeper
8:13:31into the trading aspects of this concept
8:13:33in this video. We will discuss different
8:13:36SMC trading techniques once we have
8:13:38covered all the basic concepts that
8:13:40guides the SMC theory. Now I want to
8:13:43talk about some advanced concepts
8:13:44regarding fair value gaps. I won't force
8:13:47you to learn this but it is worth
8:13:49knowing as it would help you to trade
8:13:51with better conviction and accuracy. Now
8:13:54there are three things to look out for
8:13:56within a fair value gap. The first being
8:13:58the start of the fair value gap, the
8:14:00second being the consequent encroachment
8:14:02or the 50%age of the fair value gap and
8:14:05lastly where the price completely fills
8:14:07the fair value gap. We can make use of
8:14:10the Fibonacci tool to mark these levels
8:14:12within these fair value gaps. When the
8:14:15price returns to the fair value gap, we
8:14:17should look for a few different things.
8:14:19This will give us a better idea if the
8:14:21fair value gap is respected by the price
8:14:23or should it be considered invalid. I
8:14:26will be considering a bearish fair value
8:14:28gap or a CB for this purpose. So first
8:14:31the price can either reach up into the
8:14:33fair value gap but close outside the
8:14:35fair value gap and continue lower. price
8:14:38can also reach up into the consequent
8:14:40encroachment or 50%age of this fair
8:14:42value gap. In this case, we would like
8:14:45to see the candle close outside the fair
8:14:47value gap. But as long as the price is
8:14:50respecting the consequent encroachment,
8:14:52we can be pretty flexible with the price
8:14:54closing just below the consequent
8:14:55encroachment. Sometimes the price can
8:14:58also reach up to fill the fair value gap
8:15:00and in such cases it is preferable to
8:15:02see the price closing outside the
8:15:04consequent encroachment of this fair
8:15:06value gap. The most important thing to
8:15:09look for then invalidating a fair value
8:15:12gap is where the price closes. So when
8:15:14the price start to close over the
8:15:16consequent encroachment or outside of
8:15:18the fair value gap, it is an indication
8:15:21that the price is not respecting the
8:15:23fair value gap and most of the time
8:15:25price will not reverse back down and the
8:15:27CB is deemed invariant. Now let's look
8:15:30at a few examples to understand this
8:15:32concept better. So we have a CB right
8:15:35here. Let's mark out the consequent
8:15:37encroachment using Fibonacci tool and
8:15:39see what happens. So you can see when
8:15:42price reaches up into this fair value
8:15:44gap does not close over the consequent
8:15:46encroachment or in other words price
8:15:48respect the fair value gap and it is
8:15:50still valid for a reversal to happen.
8:15:53Now let's take a look at another CB
8:15:55right here. Let's mark out the
8:15:56consequent encroachment. You can see
8:15:58that the price did not respect the CB at
8:16:00all and close right through it. This is
8:16:03when we will invalidate a fair value gap
8:16:06because the price is not respecting it.
8:16:08Now if you look at a BC or a bullish
8:16:10fair value gap right here and mark out
8:16:12the consequent encroachment to see what
8:16:14happens. The price reaches into the fair
8:16:16value gap and closes out. So it is
8:16:19currently respecting the BC and it is
8:16:21still deemed valid. Another case is when
8:16:24the price breaks out and close below the
8:16:26BC and in that case we can confirm that
8:16:29the price is not respecting the BC and
8:16:31it can be regarded as invariable. The
8:16:34next thing we are going to look at is
8:16:36fair value gap inversion. To explain
8:16:38this in simple terms, inversion happens
8:16:41when a fair value gap fails or when the
8:16:44price closes through it and then this
8:16:46fair value gap can be used as a support
8:16:49or resistance for future price
8:16:51movements. What this means is that I
8:16:53would expect price to return back to
8:16:55this old CB to use it as support and
8:16:59move away. Similarly, price could return
8:17:01back to an old BC to use it as a
8:17:04resistance and then move lower. Another
8:17:06thing to note is that this does not have
8:17:09to happen back to back meaning that this
8:17:11can occur later on after a period of
8:17:13consolidation. Let's look at some
8:17:15example to clear things up. So, we have
8:17:18a CB right here and the price closes
8:17:20through it. So, it is considered
8:17:22invalid. But that does not make it
8:17:24useless. We can then look to see if the
8:17:26CB supports the price and we can clearly
8:17:29see that this old CB acted as a support
8:17:32for prices before getting a move higher.
8:17:34Here's an example of what I mean when I
8:17:36say that the fair value gap inversion
8:17:39does not need to occur back to back. So
8:17:41we have considered another BC and right
8:17:43here we get a close below this fair
8:17:45value gap. So it is deemed invalid. Now
8:17:48let's see what happens when price
8:17:50returns to this old BC. You can see that
8:17:52the price returns to this old BC. It
8:17:55uses it as resistance to go lower. But
8:17:58this did not happen suddenly and the
8:18:00price took a while to return back to
8:18:02this BC. For our next example, we have a
8:18:05CB right here. So let's see how the
8:18:07price reacts to it. And you can see the
8:18:10price has filled this fair value gap,
8:18:12but the price closes out of it. So it is
8:18:14currently respecting the CB. But right
8:18:17after this we can see that the price
8:18:19closes over the CB invalidating it. Now
8:18:22let's see if an inversion happens when
8:18:24the price return. And you can clearly
8:18:26see how the CB was used as support and
8:18:29the price return.
8:18:36We are going to discuss two important
8:18:38concepts in SMC. These are liquidity
8:18:41voids and vacuum blocks. So in this
8:18:44video I will talk about liquidity voids
8:18:47and how they are different from a fair
8:18:49value gap. Then we will talk about
8:18:51vacuum blocks and their formation. We
8:18:53will also investigate the reasons why
8:18:56liquidity voids and vacuum blocks are
8:18:58formed on the charts. We will also look
8:19:00at the different types of liquidity
8:19:01voids and vacuum blocks. And finally we
8:19:04will briefly discuss what to expect from
8:19:07these areas.
8:19:10I have mentioned that fair value gaps
8:19:13and liquidity voids are related
8:19:15concepts. Let us understand this first.
8:19:18So if you have watched my video on fair
8:19:20value gaps and imbalances, you already
8:19:23know what this is. In that video I have
8:19:26mentioned that after the price reaches a
8:19:28liquidity level and then reverses from
8:19:31it after sweeping the liquidity from
8:19:33that level, what will often come next is
8:19:35displacement. The fair value gaps are
8:19:38created within this displacement and are
8:19:40defined as instances in which there are
8:19:43inefficiencies or imbalances in the
8:19:45market. These imbalances are visualized
8:19:48on the chart by a three candle sequence
8:19:51containing one large middle candle whose
8:19:53bordering candles upper and lower wicks
8:19:56do not overlap. So a bullish fair value
8:19:58gap is a three candle pattern where the
8:20:01high of the first candle does not
8:20:03overlap with the low of the third candle
8:20:05leaving a gap in between. Similarly, a
8:20:08bearish fair value gap is a three candle
8:20:10formation where the low of the first
8:20:12candle does not overlap or cross the
8:20:15high price of the third candle thereby
8:20:17leaving an imbalance in between. In this
8:20:19definition, what you have missed is the
8:20:22term displacement. Displacements are
8:20:24nothing but liquidity voids. So
8:20:26displacement in short is a very powerful
8:20:29move in price action resulting in strong
8:20:31selling or buying pressure. Generally
8:20:33speaking, displacement will appear as
8:20:36two or more strong candles that are all
8:20:38positioned in the same direction. These
8:20:40candles typically have large real bodies
8:20:43and very short wicks suggesting very
8:20:46little disagreement between buyers and
8:20:48sellers or in other words there exist an
8:20:51inefficiency in prices. Often a
8:20:54displacement or liquidity void will
8:20:56occur just after a liquidity level has
8:20:58been breached and will often result in
8:21:00the creation of fair value gaps and a
8:21:03market structure shift. We can also
8:21:05think of displacements in relation to
8:21:07fair value gaps. At least two
8:21:09backto-back fair value gaps will
8:21:12indicate a strong push in prices
8:21:14resulting in a displacement. Usually
8:21:17these liquidity voids or displacement
8:21:19moves form after a period of
8:21:22consolidation and then the price
8:21:24suddenly moves up or down very strongly
8:21:27printing one or more largebodied
8:21:29candles. This means liquidity voids are
8:21:32areas on the price chart which is
8:21:34characterized by a lack of significant
8:21:36trading activity or volume. They
8:21:38typically occur after a rapid price
8:21:40movement, leaving behind a region in the
8:21:43chart where the trading was thin or
8:21:45almost non-existent. This phenomenon
8:21:48often happens because most market
8:21:50participants were not interested or were
8:21:52not able to trade at these levels either
8:21:54due to a lack of perceived value or
8:21:57because the market moved too quickly for
8:21:59them to react. You can see this
8:22:01phenomenon every now and then across all
8:22:03different time frames. The peculiar
8:22:06thing about liquidity voids is that they
8:22:08almost always fill up. And by filling I
8:22:11mean that the price will return to the
8:22:13origin of the void. The reason for this
8:22:16is that during the void formation an
8:22:18imbalance or inefficiency is created in
8:22:21prices that has to be balanced. The
8:22:23eraser of this imbalance is what we call
8:22:26filling of the void. And while some
8:22:28liquidity voids waste no time in
8:22:30filling, some others take multiple
8:22:32periods before they get filled. Now
8:22:35let's take a look at bullish and bearish
8:22:37liquidity void formation. Here you can
8:22:40observe how prices crashed down from a
8:22:42consolidation area. The price formed a
8:22:45group of big bearish candles with large
8:22:48real bodies and little wicks as it moved
8:22:50lower. Clearly the selling pressure is
8:22:52the dominant force here. There was
8:22:54literally no buying activity here. This
8:22:57means there is an inefficiency in the
8:22:59market. This is a typical case of
8:23:01sellside imbalance and buy side
8:23:04inefficiency or in short CB. I know I
8:23:07have asked you to relate CB and BC to
8:23:10fair value gaps. But the definition of
8:23:12CB and BC holds true for liquidity voids
8:23:15also. This means there were not enough
8:23:18buying transactions to counter the
8:23:20selling pressure leading to a sellside
8:23:22imbalance and the lack in buying
8:23:24pressure remains as an inefficiency that
8:23:26needs to be filled. So we can expect the
8:23:29price to return back and fill this
8:23:31bearish liquidity void that was created.
8:23:34Do not expect the price to fill the
8:23:35inefficiency all at once. It will
8:23:38generally take time. At the first stage,
8:23:41we can expect the price to return back
8:23:43to fill the 50%age of the liquidity
8:23:45void. Then it might come back again to
8:23:48fill the rest of the imbalance. So a
8:23:50typical example of this bearish
8:23:52liquidity void can be observed on the
8:23:55one month time frame of nifty chart
8:23:57during the corona crash. You can see two
8:24:00big candles crashing lower generating an
8:24:02imbalance. But over the course of the
8:24:05next few months you can see how the
8:24:07price returned back to mitigate the
8:24:09imbalance caused by the liquidity void.
8:24:11I won't be giving you any trade entry
8:24:13methods or strategies in this video.
8:24:16This is just a conceptual video to get
8:24:18your SMC basics right. We will talk
8:24:21about different strategies and risk
8:24:22management techniques in the second
8:24:24season of the SMC course. Anyways, in a
8:24:27similar manner, we can identify bullish
8:24:29liquidity voids. Here you can see how
8:24:32the prices explosively moved up higher
8:24:34from an area of consolidation. As you
8:24:37can see, the price formed a group of big
8:24:40bullish candles with large real bodies
8:24:42and tiny wicks. as it moved upwards. It
8:24:45is obvious that the buying pressure is
8:24:47the dominant force here. There was no
8:24:49effective selling activity to counter
8:24:51this price rally. This means there is an
8:24:54inefficiency in the market. This is a
8:24:56clear case of buyside imbalance and
8:24:59sellside inefficiency or BC. What this
8:25:02means is that there are not enough
8:25:04sellers or selling transactions to
8:25:07counter the immense buying pressure
8:25:09leading to a buyside imbalance and a
8:25:12lack in the selling pressure remains as
8:25:14an inefficiency in the market that needs
8:25:16to be mitigated. So we can expect the
8:25:19price to come back and fill this bullish
8:25:21liquidity void that was generated. As
8:25:24mentioned before, this void filling
8:25:26won't have to happen abruptly, but over
8:25:29time, these liquidity imbalances will be
8:25:32dealt with. If we draw a Fibonacci
8:25:35retracement containing only the 0%, 50%
8:25:38and 100% levels connecting the high and
8:25:41low of the liquidity void, then we can
8:25:43anticipate the price to fill at least
8:25:45till the 50%age of the imbalance in the
8:25:48first stage. Eventually, the price will
8:25:50fill the void entirely. You can take a
8:25:53look at this example to see how the
8:25:54buyside imbalance was completely filled
8:25:57over the course of time. The great thing
8:25:59about trading liquidity voids is that
8:26:01they are present across all time frames
8:26:04and so they can be used across all these
8:26:06time frames. The implication of this is
8:26:09that traders of all trading styles can
8:26:12hope to benefit from it. Intraday
8:26:14traders can go down to 15-minut chart to
8:26:16trade them. Scalpers can even go as far
8:26:18down as one minute chart and swing
8:26:21traders can also take advantage of
8:26:23liquidity voids on the 4hour and even
8:26:25higher time frames. Now let's just
8:26:28briefly talk about how to approach our
8:26:30trades to benefit from these voids. If
8:26:33you have understood what liquidity voids
8:26:35are, you may already have an idea of how
8:26:38to trade them. You know that since the
8:26:40void almost always get filled, your hope
8:26:43is in trading the fill. And how do you
8:26:45trade the fill? Or how do you know when
8:26:48the price is about to reverse to fill
8:26:50the void? So the first thing to look out
8:26:52for when attempting to predict where the
8:26:54price may start the void filling
8:26:56reversal is to look for liquidity zones
8:26:59before the void. These liquidity zones
8:27:01or pools are often in the form of
8:27:04supports and resistances. This is where
8:27:06you can expect the price to reverse from
8:27:08and fill the gap. Another way to spot
8:27:11areas of potential reversal for filling
8:27:14of the void is to look for liquidity
8:27:16zones that have developed after the
8:27:18void. Now you will find the price going
8:27:21up and down around this zone. However,
8:27:23you can only use this method when the
8:27:25filling of the void does not happen
8:27:27abruptly. That is the price consolidates
8:27:30for some time creating a liquidity zone
8:27:32that can be tapped into. Now let's move
8:27:34on to the second concept which are
8:27:37vacuum blocks. As the word vacuum
8:27:39suggest, there is a complete absence of
8:27:42trading activity. By definition, it
8:27:44refers to a specific area on price chart
8:27:47where rapid price movements has
8:27:49occurred, leaving a noticeable gap or
8:27:52vacuum in the market. Unlike liquidity
8:27:54voids where there was either a dominant
8:27:57buying or selling pressure resulting in
8:27:59an imbalance in prices, vacuum blocks
8:28:02are associated with no trading or
8:28:04transaction in between leading to gaps
8:28:07in the charts. In the price action
8:28:09context, these are called price gaps and
8:28:12in SMC it is known as vacuum blocks.
8:28:15Just like liquidity voids, vacuum blocks
8:28:18also represent inefficient price action.
8:28:21These vacuums are crucial in predicting
8:28:23future price movements as they often act
8:28:26as magnets, drawing the price back to
8:28:28these zones for a retest or to fill the
8:28:31gap. Let me explain this. In practical
8:28:34trading, a vacuum block operates by
8:28:36leveraging the market psychology behind
8:28:38sudden price movements. When price
8:28:41rapidly moves away from a certain level,
8:28:43it often leaves behind a region with
8:28:46little or no trading activity. This is a
8:28:49vacuum block. These are formed as a
8:28:51result of any high volatility event or
8:28:54news or even during session openings.
8:28:57Most experienced traders would monitor
8:28:59these areas as they can act as magnets
8:29:02for future price action. So when the
8:29:04price revisits or retest these zones, it
8:29:07can trigger a strong reaction either
8:29:09continuing the initial trend or
8:29:11reversing it. The price revisits this
8:29:14vacuum block to fill the inefficiency in
8:29:16price action. But keep in mind that not
8:29:19all gaps are filled completely and some
8:29:21gaps take a lot of time to get filled.
8:29:24Vacuum blocks are also classified into
8:29:27two types based on its formation. These
8:29:29are bullish vacuum blocks and bearish
8:29:32vacuum blocks. A bullish vacuum block is
8:29:34a gap created in price action when price
8:29:37opens way higher than the previous
8:29:39candle. To mark the vacuum block, we
8:29:42have to consider those two candles
8:29:44between which the gap was formed. Then
8:29:47we need to mark the highest point of the
8:29:49first candle and the lowest point in the
8:29:51second candlestick. This will be our
8:29:54bullish vacuum block or simply a gap up.
8:29:57Now a bearish wackom block is a gap
8:29:59created in prices when the market opens
8:30:02lower than the previous candle. To mark
8:30:04a bearish wackom block, we have to
8:30:06consider these two candles between which
8:30:09the gap formation took place. So all we
8:30:12need to do is to mark the low of the
8:30:14first candle and the high of the second
8:30:16candlestick. This will be our bearish
8:30:18vacuum block or simply a gap down. These
8:30:22gaps are formed due to liquidity vacuum
8:30:25which is directly related to any events.
8:30:28You can see these sorts of gaps forming
8:30:30every now and then in our Indian indices
8:30:33which is primarily due to overnight
8:30:35sentiments following some global or
8:30:37domestic events or news. Occurrence of
8:30:40such vacuum blocks are comparatively
8:30:42rare in case of forex markets because
8:30:45these markets function almost 24/7. So
8:30:48every news is factored in. Due to this
8:30:51we might see a lot more liquidity voids
8:30:53getting formed rather than vacuum blocks
8:30:55in forex markets. This is another area
8:30:58where liquidity voids and vacuum blocks
8:31:00are related. Both these areas are formed
8:31:03as a result of some volatile event in
8:31:05the market. Usually these are related to
8:31:08some news that induces a lot of buying
8:31:10or selling. This increased number of buy
8:31:13or sell orders at any given prices will
8:31:16result in price skipping certain price
8:31:18levels resulting in a vacuum block in
8:31:21case there is a time delay between the
8:31:22market close and the market open. And in
8:31:25other cases, if this surge in buy and
8:31:28sell interest happens during the market
8:31:30hours, it will result in large candles
8:31:32in the same direction, resulting in an
8:31:34imbalance or a liquidity void. I hope
8:31:38things make sense. Now, if you want to
8:31:40know how to make use of this vacuum
8:31:42block concept to take your trades, you
8:31:45can watch my video on price gaps in my
8:31:47free price action course or you can wait
8:31:50for the next season of this SMC course.
8:31:52Moving on, vacuum blocks and liquidity
8:31:55voids can be classified into four major
8:31:57categories depending on where they
8:31:59appear on the chart. And of these four,
8:32:02only two tend to get filled quickly. The
8:32:04others take some time to fill up. These
8:32:07include common liquidity voids and
8:32:09common vacuum blocks, exhaustion
8:32:11liquidity voids and exhaustion vacuum
8:32:13blocks, breakout liquidity voids and
8:32:15breakout vacuum blocks, and finally we
8:32:18have runaway liquidity voids and runaway
8:32:20vacuum blocks. Let's briefly look into
8:32:23each one of them. Common liquidity voids
8:32:25and common vacuum blocks appear randomly
8:32:28on the chart. Often there is nothing
8:32:30more to their formation on the chart
8:32:32beyond their mere appearance. These are
8:32:34formed at random locations or in other
8:32:37words they have no underlying price
8:32:39action meaning in the market or maybe
8:32:41not something that I know of. But one
8:32:43observation that I have made is that
8:32:45these common voids and blocks are formed
8:32:48within ranges. That is when the market
8:32:50trades between a certain range you will
8:32:52come across them and 80 to 90%age of the
8:32:55time these liquidity voids and vacuum
8:32:57blocks get filled. Now moving to exorion
8:33:00liquidity voids and exhaustion vacuum
8:33:03blocks. These happen at the end of the
8:33:05trend. As the name suggest these get
8:33:08formed when the market loses steam and
8:33:10is nearing an end of a particular trend.
8:33:12And when this happens, the market forms
8:33:15a vacuum block or a liquidity void
8:33:18indicating a trend reversal. Now talking
8:33:20about breakout liquidity voids and
8:33:22breakout vacuum blocks. As the name
8:33:25suggest, breakout voids and blocks
8:33:27happen when the price breaks out of a
8:33:29support resistance or a liquidity zone.
8:33:32After the formation of a breakout vacuum
8:33:34block or a liquidity void, price will
8:33:37most probably return to fill the
8:33:38imbalance and then move in the direction
8:33:41of the breakout. Finally, let's talk
8:33:43about runaway liquidity voids and
8:33:45runaway vacuum blocks. These are
8:33:47considered as continuation voids and
8:33:50blocks because of where they appear on
8:33:52the chart. These happen in a market with
8:33:54an already established trend and they
8:33:57appear in the direction of that trend.
8:33:59Runaway liquidity voids and runaway
8:34:01vacuum blocks don't fill on time as they
8:34:04often serve as continuation of the
8:34:06trend.
8:34:10Take a look at these two figures. Can
8:34:12you identify what these are? Write down
8:34:15your answers in the comment section.
8:34:23So the first figure represents a price
8:34:26gap or vacuum block while the other one
8:34:29shows a volume imbalance. We have
8:34:31already learned in detail about vacuum
8:34:34blocks. So in this episode we will focus
8:34:37on volume imbalances. It is a subtle but
8:34:40a very powerful concept that helps
8:34:43understand where institutional orders
8:34:45may have caused inefficiencies in the
8:34:47price delivery. It is a visible
8:34:49inefficiency in trading volume between
8:34:52buyers and sellers often identified by
8:34:54aggressive buying or selling within a
8:34:56short time. The market often revisits
8:34:59these imbalanced areas using them as
8:35:01critical support and resistance levels
8:35:03that influence future price behavior.
8:35:06Price often reacts at these levels which
8:35:09indicate accumulation of orders and
8:35:12these areas or zones are typically used
8:35:14by smart money traders to identify
8:35:16potential entry and reaction points. So
8:35:20in this video I will talk about volume
8:35:22imbalances, its significance in trading
8:35:25and I will also provide actionable
8:35:27strategies to leverage this concept for
8:35:30improving your trading outcome. So
8:35:32without wasting any more time, let's get
8:35:34started in the market. Gaps and volume
8:35:37imbalances are key indicators of market
8:35:40inefficiencies. These two concepts
8:35:43revolve around the key notion of SMC
8:35:45concepts that markets are driven by
8:35:48institutional order flow and it is
8:35:50constantly moving between states of
8:35:53balance and imbalance. And as you may
8:35:55all know a gap or vacuum block
8:35:58represents a price area on chart where
8:36:01little or no trading activity has
8:36:02occurred. In candlestick terms it is an
8:36:05area between the closing price of one
8:36:07candlestick and the opening price of
8:36:10another candlestick. But for practical
8:36:12purposes, we will only consider the
8:36:14highs and lows of two consecutive
8:36:16candles. These gaps are a result of
8:36:19sharp price movements, low liquidity and
8:36:22order imbalance. And one such gap
8:36:24formation is the volume imbalance. A
8:36:28volume imbalance occurs when there is a
8:36:30distinct separation between the bodies
8:36:32of two consecutive candles on a chart
8:36:34with no visible overlap between them.
8:36:37What this means is that the wicks of
8:36:39these candles may or may not intersect,
8:36:42but the candle bodies themselves do not
8:36:45touch. This separation represents a gap
8:36:48in price action signaling that the
8:36:50market did not efficiently deliver the
8:36:52price between these two points. This
8:36:54creates a volume imbalance or it is also
8:36:57known as a microfair value gap. The
8:37:00formation of such gaps in charts can be
8:37:03attributed to various market conditions.
8:37:06For instance, the market may close for
8:37:08the weekend and reopen with a gap due to
8:37:10new information or developments that
8:37:13occurred during the weekend. Other than
8:37:15that, sudden and unexpected market
8:37:18movements such as economic
8:37:19announcements, geopolitical developments
8:37:22or even large institutional trades can
8:37:25lead to rapid price movements creating
8:37:27such gaps. But inefficiencies such as
8:37:30volume imbalances are not like these
8:37:32traditional gaps or backup blocks. These
8:37:35imbalances are also found within live
8:37:37price action and it happens during rapid
8:37:40delivery phases. These imbalance zones
8:37:43are the areas where the buy and sell
8:37:45orders could not match efficiently which
8:37:48in turn leaves a void in the form of
8:37:50bodyto- body gap between candlesticks.
8:37:53Just like vacuum blocks or fair value
8:37:55gaps, volume imbalances play a critical
8:37:58role in market behavior. Because volume
8:38:00imbalance represents an inefficient
8:38:03delivery of price, these inefficient
8:38:05zones often act like magnets attracting
8:38:08the price back to these areas before
8:38:11continuing in the intended direction.
8:38:13Here the underlying idea is that the
8:38:16market is driven by institutional
8:38:18algorithm and smart money. So price
8:38:21often return to these areas to fill the
8:38:23gap and rebalance the order flow. This
8:38:26means volume imbalance can either serve
8:38:28as a continuation area or a reversal
8:38:31area. But this is highly dependent on
8:38:33the broader market context or what the
8:38:36major market structure is doing.
8:38:38Therefore, understanding how these
8:38:40imbalances form and how they can
8:38:42influence future price movements is
8:38:44essential for developing a robust
8:38:46trading strategy. Now let's learn to
8:38:49identify a volume imbalance properly.
8:38:51The formation of volume imbalance is
8:38:54slightly different from the formation of
8:38:56a fair value gap. In order to identify a
8:38:59volume imbalance correctly, we need to
8:39:01analyze two candles properly. Unlike
8:39:03three candles in case of a fair value
8:39:05gap, let's start with a bullish
8:39:07scenario. So in a bullish market
8:39:10scenario, the first candlestick
8:39:12represents the price level before the
8:39:14impulse move begins. We can mark the
8:39:16close price of this candle. For a
8:39:18bullish volume imbalance, the second
8:39:20candlestick needs to open higher than
8:39:22the previous candle's close. Just like
8:39:25this, we can mark the second candle's
8:39:27open price. This bodyto- body gap is our
8:39:31bullish volume imbalance. The opposite
8:39:33case is applicable for a bearish
8:39:36scenario. In the bearish scenario, we
8:39:38will closely examine the close of this
8:39:40first bearish candlestick. For a bearish
8:39:43volume imbalance, the second candlestick
8:39:46needs to open lower than the previous
8:39:48candlestick. There should be a visible
8:39:50bodyto- body gap between these two
8:39:52candlesticks. So the key to volume
8:39:54imbalance is the gap between the bodies
8:39:57of the first and second candlestick.
8:39:59There is a possibility that the wicks of
8:40:01these two candlesticks may overlap. But
8:40:03the bodyto body separation is what
8:40:06defines the volume imbalance. But what
8:40:09is more important is understanding the
8:40:12context and confluence surrounding a
8:40:14price imbalance. While volume imbalances
8:40:17or other types of gaps may visually
8:40:19appear attractive, not all of them carry
8:40:22the same level of probability. So I will
8:40:24now be talking about high probability
8:40:27and low probability volume imbalances.
8:40:30So let's talk about high probability
8:40:32volume imbalances first. A high
8:40:34probability volume imbalance is one
8:40:37which is backed by supporting structures
8:40:39or elements from the PD array. These
8:40:41arrays usually include key SMC tools
8:40:44like order blocks, breaker blocks, fair
8:40:47value gaps, liquidity voids, etc. So
8:40:50when a volume imbalance aligns with one
8:40:53or more of these concepts, it implies
8:40:55that the imbalance is not just a random
8:40:58inefficiency but it is a strategic zone
8:41:01where smart money has participated. This
8:41:04will significantly increase the weight
8:41:06of the imbalance and thereby increase
8:41:08the probability of the volume imbalance.
8:41:11For example, a volume imbalance is
8:41:13considered as high probability when it
8:41:15is aligned with any of the reference
8:41:17areas of a PDA supports the current or
8:41:20developing institutional order flow and
8:41:22it is aligned with the market structure
8:41:24context. On the other hand, a low
8:41:27probability volume imbalance exists in
8:41:30isolation. There may not be any
8:41:32significant supporting structure on its
8:41:34left hand side or any surrounding
8:41:36context. If it is just a gap that
8:41:38appears in the middle of the price
8:41:40action without any PDR elements like
8:41:43order blocks, fair value gaps or breaker
8:41:45blocks nearby then it is considered as
8:41:47weak and it is unlikely to hold any
8:41:50importance for the smart money players.
8:41:52These low probability imbalances may
8:41:55simply be the result of the retail
8:41:57driven volatility, short-term liquidity
8:41:59hunts or structural noise in the market.
8:42:02Acting on such gaps without confluence
8:42:05can lead to poor trade entries and
8:42:07losses. So the key difference between
8:42:10high probability and low probability
8:42:12volume imbalances lies in their market
8:42:15positioning, its alignment within the
8:42:17PDA and their confluence with other SMC
8:42:21tools. Moving on, I will now tell you
8:42:24why volume imbalances matter in trading.
8:42:27See, a volume imbalance is not merely a
8:42:30visual gap on the chart. Instead, it
8:42:32represents a deeper understanding of the
8:42:34market dynamics that can significantly
8:42:37influence your trading decisions. So,
8:42:39here are some of the reasons that make
8:42:41volume imbalances highly significant.
8:42:44First of all, it is very helpful in
8:42:46predicting market reversals. You see,
8:42:49volume imbalances often precede market
8:42:51reversals acting as an early signal to
8:42:54the changes in the trend direction. The
8:42:56magnetic nature of these imbalances draw
8:42:59the price back to the key levels of
8:43:01supply or demand before the market
8:43:03reverses to continue its existing trend.
8:43:06So these imbalances will allow you to
8:43:09anticipate potential turning points in
8:43:11the market and thereby adjust your
8:43:13strategies to take advantage of these
8:43:15moments. The second feature is that
8:43:18volume imbalances can act as supports
8:43:20and resistances for prices. For example,
8:43:23if a volume imbalance serves as a
8:43:26support level, the price may revisit
8:43:28this area and then move upwards.
8:43:30Conversely, if it serves as a
8:43:33resistance, the price may struggle to
8:43:35break through and could potentially
8:43:36reverse leading to a downward movement.
8:43:39But do keep in mind that this idea
8:43:42should not be used in isolation. Rather,
8:43:44you need to look for confluence setups
8:43:47that improve the probability of success.
8:43:50The third benefit is that traders can
8:43:52utilize volume imbalances as entry
8:43:55points by treating them as microfair
8:43:57value gaps. Once these gaps are filled,
8:44:00they can reinforce the market support or
8:44:02resistance levels. Additionally, volume
8:44:05imbalances can draw price towards them,
8:44:08thereby providing a clear target for
8:44:10price movement, which is particularly
8:44:12useful when exiting trades. This will
8:44:15result in better trade execution and
8:44:17higher probability. Another associated
8:44:20benefit of volume imbalances is that it
8:44:23will support your risk management. These
8:44:25volume imbalances can offer clear price
8:44:27levels for setting your stop-loss
8:44:29orders. When a trade moves against your
8:44:32position, these imbalances can provide
8:44:34logical exit points, thereby minimizing
8:44:37potential losses and enhancing overall
8:44:40risk management. Now, let's talk about
8:44:42the strategy part. See, trading is not
8:44:46just about drawing lines and marking
8:44:48zones on the chart. Likewise, it is not
8:44:50just about spotting a fair value gap or
8:44:53order block on any random time frame.
8:44:56Trading with SMC or in fact trading in
8:44:58general is all about building a logical
8:45:01narrative around the market structure,
8:45:03liquidity, and institutional behavior.
8:45:06To do this effectively, you must
8:45:08incorporate your higher time frame bias,
8:45:11PDR confluence, and market structure
8:45:13shift across multiple time frames. If
8:45:16you want to become an effective SMC
8:45:18trader, then using these concepts
8:45:20together to filter out weak setups and
8:45:23thereby enhancing your trade accuracy in
8:45:25both bullish and bearish conditions is
8:45:27the proper way to go about it. Always
8:45:30keep this in the back of your mind. So
8:45:32the first and most influential thing is
8:45:35understanding multiple time frames and
8:45:38their alignment. This involves using a
8:45:40top-down approach where you begin your
8:45:42analysis from your higher time frames.
8:45:45This will help you to understand the
8:45:46broader market context and structure. So
8:45:49higher time frames like weekly, daily,
8:45:524hour or even 1 hour can be used for
8:45:54analyzing the market structure and trend
8:45:57bias. Once the higher time frame bias is
8:45:59set, then you can shift to your lower
8:46:02time frames like 15minut, 5 minute or
8:46:05even 1 minute charts to find entry
8:46:07confirmations around these imbalances.
8:46:10But you need structural confluences for
8:46:13your entries. PDAs will help provide
8:46:15them. When multiple elements of SMC
8:46:18concepts align with your higher time
8:46:20frame structure and directional bias,
8:46:23the setup becomes high probability. For
8:46:25example, take a look at this bullish
8:46:27market scenario. I have considered this
8:46:29particular bullish swing leg. I have
8:46:31also plotted the premium and discount
8:46:33zones of this swing move. Here you can
8:46:36see a bullish volume imbalance
8:46:38formation. Now, if you observe closely,
8:46:41you can see that a bullish fair value
8:46:43gap sits closer to this volume imbalance
8:46:46inside a discount zone. There could also
8:46:48be situations where you can get an order
8:46:50block also along with a fair value gap
8:46:53and volume imbalance thereby offering
8:46:55triple confluence like this. This
8:46:58particular setup constitutes an
8:47:00inefficiency, institutional interest and
8:47:04discount pricing. This stacked alignment
8:47:07will give you a precise zone to take
8:47:09your entries from. Since volume
8:47:11imbalances can act as microfair value
8:47:14gaps or a support level. In this
8:47:16particular case, we expect the price to
8:47:18retrace back into this zone. Once price
8:47:21returns to this zone, you need to wait
8:47:23for a price action confirmation like a
8:47:26change of character or market structure
8:47:28shift on your lower time frame before
8:47:30taking an entry. Now, a lower time frame
8:47:32market structure shift can be used as a
8:47:35powerful confirmation tool in SMC that
8:47:37can present a transition in control. So
8:47:40in this case we can see a transition
8:47:43from sellers to buyers because in the
8:47:45lower time frame chart the corrective
8:47:47move will look like a bearish trend. The
8:47:50opposite is also true. A market
8:47:52structure shift represents the
8:47:54transition from buyers to sellers in a
8:47:56bearish scenario. So market structure
8:47:59shift will help you avoid taking
8:48:01premature entries. So in short, a higher
8:48:04time frame bias paired with a lower time
8:48:06frame bullish market structure can tell
8:48:09you that the market is transitioning
8:48:11into a delivery phase and it is ready to
8:48:14continue in the previous trend
8:48:15direction. And finally, we can place a
8:48:18long trade entry when the lower time
8:48:20frame bullish market shift happens or
8:48:23you can wait till the market makes
8:48:25another breakup structure before an
8:48:27entry for additional confirmation. You
8:48:29can set your stop loss below the lowest
8:48:31point before the change of character
8:48:33happened. Your primary target would be
8:48:35the next draw on liquidity which in this
8:48:38case would be the previous swing high
8:48:40level on the higher time frame
8:48:41structure. This is a higher reward to
8:48:44risk setup. And as you can see prices
8:48:46rallied higher after reacting from our
8:48:48zone of interest. Now even though volume
8:48:51imbalances are a powerful tool, they're
8:48:54not completely foolproof. For consistent
8:48:56high probability trades, it is important
8:48:59to use them in conjunction with other
8:49:01SMC tools for better and mature trade
8:49:04entry and exits. These concepts work
8:49:07across all liquid markets and it
8:49:09provides you with a structured and
8:49:11disciplined framework for navigating the
8:49:13market like smart money.
8:49:19Take a look at these two figures. Can
8:49:21you identify the difference between the
8:49:23highlighted portions? Obviously both of
8:49:26them are fair value gaps. There is no
8:49:29doubt about it. But let's see what the
8:49:31price does next. And this is what
8:49:34happened. Now tell me what do you
8:49:36observe. In the first scenario, price
8:49:40respects the fair value gap and it
8:49:42reverses. While in the second scenario,
8:49:44price mitigates the imbalance and breaks
8:49:47below the fair value gap which was
8:49:49unable to hold the price. A broken fair
8:49:52value gap like this is not trash or
8:49:55useless. Instead, it is equally useful
8:49:58like a fair value gap for prices but in
8:50:01the opposite direction. So this is what
8:50:03we are going to learn today. In this
8:50:05episode, we will learn in detail about
8:50:08inverse fair value gaps from its
8:50:10formation to identification and how to
8:50:13use them for our trading. This is going
8:50:16to be a very informative video. Let's
8:50:18begin with a brief introduction on what
8:50:20a fair value gap is. Basically, a fair
8:50:24value gap is a three candle structure
8:50:26indicating a gap between the high and
8:50:29low of the first and third candlestick
8:50:31as shown on the screen. It could be a
8:50:33bullish fair value gap or a bearish fair
8:50:36value gap depending on the direction of
8:50:38its formation. A fair value gap as you
8:50:41may already know by now represents an
8:50:44imbalance or inefficiency in prices in
8:50:46the market. And imbalance as the name
8:50:49suggest represents an area of unequal
8:50:52market movement where there are either
8:50:55only buyers or only sellers existing in
8:50:58the market. There is an unhealthy price
8:51:00delivery because it shows disequilibrium
8:51:03between buyers and sellers. So an
8:51:06imbalance means unfair price action.
8:51:09Another important thing to note is that
8:51:11the wicks do not fill each other and if
8:51:14they do then it is healthy price action
8:51:17or efficient price delivery and not
8:51:19really an imbalance. An efficient market
8:51:22is one in which the wicks do not have a
8:51:25gap between them and they actually meet.
8:51:28So to put it simply market inefficiency
8:51:31occurs when the wicks are separated by a
8:51:34distance or a gap and they do not meet
8:51:37or overlap. So when there is an
8:51:39imbalance in prices, the market always
8:51:42tries to balance it. Therefore, fair
8:51:44value gaps acts as price magnets always
8:51:48attracting the market towards it. Now
8:51:50that's a quick recap on fair value gaps
8:51:53and imbalances. Now let us understand
8:51:56what an inverse fair value gap is. An
8:51:59inverse fair value gap also known as
8:52:01inversion fair value gap is a failed
8:52:04fair value gap which is not respected by
8:52:06the price. In other words, an inverse
8:52:09fair value gap forms when a fair value
8:52:12gap gets run through or it fails to hold
8:52:14the price and the price goes beyond
8:52:17breaking the fair value gap. Now to
8:52:19identify an inverse fair value gap is
8:52:21very easy. At first you need to identify
8:52:25a fair value gap formed in prices. After
8:52:28identifying a fair value gap, look for a
8:52:30price retracement back to this fair
8:52:32value gap. But instead of respecting
8:52:35this fair value gap and reversing in the
8:52:37prior direction, price should close
8:52:40beyond the fair value gap, thereby
8:52:42forming a break in the opposite
8:52:44direction. So when a fair value gap is
8:52:46broken, you can mark it as an inverse
8:52:49fair value gap or an IFVG and you can
8:52:52use it to trade in the opposite
8:52:54direction. In fact, an inverse fair
8:52:57value gap signals the most initial shift
8:53:00in the price momentum. You see, on most
8:53:02occasions, when price returns to balance
8:53:05a fair value gap, it respects the fair
8:53:08value gap, reverses, and then continues
8:53:11its move in the ongoing trend direction.
8:53:14But when a fair value gap gets violated
8:53:16or run through, it acts as an inverse
8:53:19fair value gap and usually it signals
8:53:22the first shift in momentum of price
8:53:24which can result in a short retracement
8:53:27or a change in direction later. This is
8:53:30most significant when you move down to
8:53:32your lower time frames like 1 minute or
8:53:343 minutes. You can also see this happen
8:53:37during the manipulation phase in the
8:53:39market. I will talk about this soon
8:53:41enough. But first let me discuss the
8:53:44different types of IFVG.
8:53:46Since fair value gaps are of two types.
8:53:49So the inverse fair value gaps also has
8:53:52two types. There are bullish inverse
8:53:54fair value gaps and bearish inverse fair
8:53:57value gaps. So a bullish IFVG is
8:54:00basically a bearish fair value gap which
8:54:03is violated by the price by breaking and
8:54:06closing above it. So first of all you
8:54:08have to identify a bearish farewell
8:54:10value gap and when price breaks and
8:54:13close above the bearish fair value gap
8:54:15it becomes a bullish inverse fair value
8:54:17gap. So the key points to keep in mind
8:54:20is that a bullish inverse fair value gap
8:54:22gets formed from a bearish farewell
8:54:24value gap. Secondly we need a proper
8:54:28break and close of a candle above this
8:54:31bearish farewell value gap to be
8:54:32considered a bullish IFVG. A candle wick
8:54:36popping just above the bearish fair
8:54:38value gap like this won't suffice. We
8:54:41need to make sure that the candle body
8:54:43closes above the bearish fair value gap.
8:54:46Now once your bullish inverse fair value
8:54:48gap is identified, it could now act as
8:54:51an area of support for prices.
8:54:53Therefore, we could expect the prices to
8:54:56push higher from this area of support.
8:54:58In other words, a bullish inverse fair
8:55:01value gap indicates the losing strength
8:55:03of sellers and an initial shift in the
8:55:06momentum towards the buy side. And there
8:55:08is a reason why I say this. You see, a
8:55:10bearish fair value gap is also called a
8:55:13CB. It means there is a sellside
8:55:16imbalance and a buyside inefficiency. It
8:55:19means that the sell side was offered but
8:55:22the buy side wasn't. So, it is
8:55:24inefficient. or simply put it represents
8:55:27a fair value gap where bears have
8:55:30overpowered the bulls. It is also known
8:55:32as undervalued fair value gap. Now in
8:55:35most of the cases the price would
8:55:38increase in the future to balance this
8:55:40buyside inefficiency. But when it comes
8:55:42to these bullish IFVGs the price carried
8:55:45on higher despite balancing out the
8:55:48inefficiency associated with the bearish
8:55:50farewell value gaps. This shows bullish
8:55:53intent. I have plotted some more
8:55:55examples of bullish IFVG and how it
8:55:58support prices to move higher. You can
8:56:00pause the video and check this out if
8:56:03you want. Now, a bearish IFVG is just
8:56:06the opposite. So, a bearish inverse fair
8:56:09value gap is primarily a bullish fair
8:56:12value gap which fails to hold price and
8:56:15price breaks and closes below it. In
8:56:18this case, at first you have to look for
8:56:20a bullish fair value gap and when price
8:56:23violates it by breaking and closing
8:56:25below it, it becomes a bearish inverse
8:56:27fair value gap. Here also make sure that
8:56:31it is not just the wick projecting below
8:56:33but the candle body has to completely
8:56:35close below the bullish fair value gap
8:56:37under consideration. Now once your
8:56:40bearish inverse farewell value gap is
8:56:42identified, it could act as an area of
8:56:45resistance for further price movements
8:56:47and we can expect this resistance area
8:56:50to push price towards the downside. In
8:56:52other words, a bearish IFVG signals the
8:56:56dropping strength of buyers and an
8:56:58increasing strength of sellers. Now,
8:57:01just like the previous case, there is a
8:57:03reason why this happens. So a bullish
8:57:06fair value gap is also known as a BC. BC
8:57:09stands for buy side imbalance and sell
8:57:12side inefficiency. This means that the
8:57:15buy side was offered but the sell side
8:57:17wasn't. So it is inefficient or it
8:57:20represents a fair value gap where the
8:57:23bulls have overpowered the beers. It is
8:57:25also known as an overvalued fair value
8:57:28gap. It means that the price of the
8:57:30asset is higher than its fair value. Now
8:57:33in most of the cases the price might
8:57:35decrease in the future to balance this
8:57:38sellside inefficiency. But when it comes
8:57:40to these bearish IFVGs the price
8:57:44declined even lower despite balancing
8:57:46out the inefficiency associated with the
8:57:49bullish fair value gaps. Now this shows
8:57:51strong bullish intent in the market. Now
8:57:54here are some more real chart examples
8:57:56of bearish IFVG and how it acts as
8:58:00resistance for prices. Now before I get
8:58:03to the next part, there is one concept
8:58:05that I need you to revise. It is the
8:58:08concept of consequent encroachment
8:58:10associated with the fair value gaps. Now
8:58:13don't let the name scare you. The idea
8:58:15is very simple. Consequent encroachment
8:58:18is nothing but the 50%age of the fair
8:58:20value gap. So if I draw a Fibonacci
8:58:23retracement from this high of the first
8:58:25candle to this low of the third candle
8:58:28forming a bullish fair value gap, then
8:58:30the 50%age level is the consequent
8:58:33encroachment level. Likewise, you can
8:58:35plot the 50%age consequent encroachment
8:58:37level of a bearish fair value gap using
8:58:40a Fibonacci tool starting from the low
8:58:42of the first candle to the high of the
8:58:44third candle. Now once you draw the
8:58:47consequent encroachment level for a fair
8:58:49value gap, you don't need to redraw it
8:58:51for an inverse fair value gap because
8:58:53the 50%age level remains the same. This
8:58:5750% level is very important when it
8:59:00comes to trading fair value gaps and
8:59:02inverse fair value gaps alike because
8:59:04our trade entries, risk management, and
8:59:07reward to risk potential relies heavily
8:59:10on this level. Now inverse fair value
8:59:12gaps can appear just about anywhere on
8:59:15the chart and if you go after each and
8:59:17every single one of them as they
8:59:19appeared you would end up losing a lot
8:59:21of money in the process. So not all the
8:59:24inverse fair value gaps are worth our
8:59:27time and attention. So the next
8:59:29important thing you need to understand
8:59:31is how do you identify the high
8:59:33probability inversion fair value gaps
8:59:36and when do you use the inverse fair
8:59:38value gap for your trades. Starting off,
8:59:40inversion fair value gaps that appear
8:59:43after sweeps of liquidity tend to have a
8:59:46higher chance of holding the price. The
8:59:49areas of liquidity that I'm talking
8:59:50about can be in the form of daily highs
8:59:53or lows, equal highs or lows, supports
8:59:56and resistance zones or any lows and
8:59:58highs clearly sticking out with deep
9:00:00wicks. You also need to keep the larger
9:00:03market context in mind to make a good
9:00:05prediction of the high probability
9:00:07inverse fair value gaps. For instance,
9:00:10if you are on a bearish trend with lower
9:00:12highs and lower lows forming like this
9:00:15on your 15-minut time frame, the lower
9:00:17highs can serve as areas of liquidity
9:00:20that the price could sweep before
9:00:22continuing the bearish run. Now move
9:00:24down to a lower time frame chart like 1
9:00:27minute or 3 minute chart. Now look for
9:00:29an inverse fair value gap that gets
9:00:31formed when the price starts moving
9:00:33lower. Most probably this could act as a
9:00:36resistance area for the further decline
9:00:38in prices. You could take trades from
9:00:41the consequent encroachment or at the
9:00:43lowest level of this bearish IFVG
9:00:46depending on your risk appetite. Now
9:00:49this could turn out to be a very
9:00:50profitable strategy if you combine it
9:00:53with a power of three or accumulation
9:00:55manipulation distribution setup. We will
9:00:58talk about this in our upcoming
9:00:59episodes. Another way to spot high
9:01:02probability inverse fair value gaps is
9:01:04to mark out premium and discount areas
9:01:06of price swings on your higher time
9:01:08frame chart. Now, as you may already
9:01:11know, in a bullish price leg or a
9:01:13bullish price swing, the discount zone
9:01:16is the lower half of the leg and the
9:01:18premium zone is the upper half of the
9:01:20swing above the equilibrium line. The
9:01:22idea behind premium and discount zones
9:01:25is that price will likely retrace at
9:01:27least to the 50%age Fibonacci level
9:01:30during the pullback or corrective move
9:01:32before it continues in the ongoing trend
9:01:35direction. So during a bullish trend,
9:01:37any demand zone like a bullish fair
9:01:39value gap or a bullish order block
9:01:41within the discount zone is more likely
9:01:44to hold the price. Now, when the price
9:01:46taps into the demand area in the
9:01:48discount zone and starts moving higher,
9:01:51switch to your lower time frame chart
9:01:53and look for a bullish inverse fair
9:01:55value gap on the way up. This could be
9:01:57the first sign that the retracement is
9:02:00complete and that the trend is about to
9:02:02continue higher. Such IFVGs tend to be
9:02:05stronger in nature. You can use the
9:02:07consequent encroachment of this inverse
9:02:10fair value gap for taking your long
9:02:12trade entry by placing your stop- loss
9:02:14just below the IFVG or below the lowest
9:02:17candles wick based on how much risk you
9:02:20are willing to take. Yet another way to
9:02:22spot high probability inverse fair value
9:02:24gaps is during a failed market structure
9:02:27shift. It is very common for traders to
9:02:30switch into the lower time frame when
9:02:32the market reaches a higher time frame
9:02:34supply or demand level. These traders
9:02:37move down to their lower time frame
9:02:39structure and they try to catch a market
9:02:41structure shift on this lower time frame
9:02:44and then get into a trade on a fair
9:02:46value gap that gets formed during the
9:02:48market structure shift. Even though a
9:02:50fair value gap can be a good trade entry
9:02:53point, it can also act as a good
9:02:56inducement level for a further off
9:02:58supply or demand if it fails to hold the
9:03:01price. Now take a look at this case. The
9:03:03market came into a supply zone in the
9:03:054hour time frame. In the lower 15
9:03:08minutes time frame, we can see a market
9:03:10structure shift being formed with a fair
9:03:13value gap breaking lower. Now, most
9:03:15traders would plan to take a short trade
9:03:18from this fair value gap. But instead of
9:03:20price respecting this fair value gap and
9:03:23moving lower, price violates this fair
9:03:25value gap and starts moving higher
9:03:28towards the nearby higher time frame
9:03:30liquidity zone. So this becomes a
9:03:32bullish inverse fair value gap that
9:03:34could support future price movements.
9:03:36You could use this inverse fair value
9:03:38gap to trade into the higher time frame
9:03:40liquidity zone. You can use the
9:03:42consequent encroachment of this inverse
9:03:45fair value gap for taking your long
9:03:47trade entries by placing your stop- loss
9:03:50below the IFVG. So these are all the
9:03:53important things that you need to know
9:03:55about inverse fair value gaps.
9:04:03We will discuss the most important
9:04:05concept in the whole smart money concept
9:04:08approach or maybe it is one of the
9:04:10keystone topics when it comes to trading
9:04:12as a whole. It is none other than
9:04:15liquidity. We retail traders like to get
9:04:18things done the easier way. Therefore,
9:04:20we usually focus on indicator signals
9:04:22for taking trades. We are least bothered
9:04:25about why the price moved in a
9:04:27particular manner that triggered the
9:04:29indicator to give a buy or a sell
9:04:31signal. Almost all indicators are
9:04:33derived from fundamental elements of the
9:04:35market which are price and volume.
9:04:38Further price and volumes are a result
9:04:41of the post-processing of basic market
9:04:43data. So the point that I want to
9:04:45elaborate is that indicators can to some
9:04:48extent do a good job in generating
9:04:50winning trades. But most indicators fail
9:04:53to work in all market conditions and the
9:04:56signal provided by a single indicator
9:04:58cannot be trusted completely. And to top
9:05:01it all off, almost all indicators are
9:05:04lagging in nature and they give a trade
9:05:06signal after the move has already
9:05:08started which result in more risk and
9:05:10thereby lowers your reward to risk
9:05:12ratio. So one way to stay on top of the
9:05:15market is to play the game like the
9:05:17market makers, big institutions or banks
9:05:20or simply the smart money who feeds on
9:05:22the retailer orders to make a living.
9:05:25The big price moves or momentum moves
9:05:27that you witness in the market are a
9:05:29result of the smart money trapping the
9:05:31uninformed traders or should I say the
9:05:34illinformed traders because retail
9:05:36education as we all know is based on
9:05:39patterns like candlestick patterns,
9:05:42chart patterns, trend lines, support
9:05:44resistance zones etc. And eventually
9:05:47they hope on to taking trades on the
9:05:49signals given by conventional indicators
9:05:52or price patterns. I'm not saying that
9:05:54these patterns and indicators don't work
9:05:56at all. But there are high chances that
9:05:59most of these can be engineered by the
9:06:01big players. These big institutions or
9:06:04smart money are always trying to trap us
9:06:06and take our stop- losses. So when new
9:06:09traders come fresh onto the markets,
9:06:11they can easily be manipulated and money
9:06:14can be taken away from them because they
9:06:16are easy prey for the big boys. The
9:06:19retail traders lack of knowledge as to
9:06:21where the majority of market orders are
9:06:23accumulated makes them vulnerable to
9:06:25these institutional traps. This is the
9:06:28major reason why most of the retailers
9:06:30lose money. They remain as prey to these
9:06:33banks and institutions or in other words
9:06:36they are liquidity for the big players.
9:06:38In essence, this is a cat and mouse
9:06:41game. In order for one person to win,
9:06:43someone else needs to take a loss. So
9:06:46the question is what do you want to be
9:06:48the cat or the mouse? Now there is a
9:06:51popular saying in the market that if you
9:06:53don't know where the liquidity is then
9:06:55you are the liquidity. So in this
9:06:57episode and the upcoming episode we will
9:07:00talk extensively about this prime
9:07:02concept of liquidity to stay ahead of
9:07:05the majority of retailers and also to
9:07:07stay clear of most of the smart money
9:07:10traps. I can guarantee you that once you
9:07:13understand the entire concept of
9:07:14liquidity, you will think more clearly
9:07:17as to how the market functions and it
9:07:19will also open up new trading
9:07:21possibilities for you. So let's get
9:07:23started right away. For some of you,
9:07:26there might still be this doubt as to
9:07:28what exactly is meant by liquidity. So
9:07:30in simple terms, a market with high
9:07:33liquidity is one where there is a large
9:07:35number of buyers and sellers willing to
9:07:38trade in that particular asset. This
9:07:40means that there is a high availability
9:07:42of buy and sell orders allowing
9:07:44transactions to be executed quickly and
9:07:47with minimal impact on prices. So think
9:07:50of liquidity as an area where there is
9:07:52stop- losses and pending orders waiting
9:07:54to be filled. We can find liquidity in
9:07:56areas or zones where many people place
9:07:58their stop- losses be it buy or sell
9:08:01stops. Usually retail traders are
9:08:04impulsive and they tend to buy at highs
9:08:06when greed kicks in and they sell at
9:08:09lows when panic kicks in. But at all
9:08:11times when there is a buyer in the
9:08:13market there is always a seller and vice
9:08:16versa and that's how the markets work.
9:08:19Now the smart money aka institutions use
9:08:22this retailer liquidity that is the
9:08:24orders of the retail traders against
9:08:26them. For example, the institution buys
9:08:29at lows when retail traders sell after a
9:08:32breakout of that low. Similarly, they
9:08:34sell at highs when the retail traders
9:08:37buy after the breakout of a high. So, in
9:08:40a sense, we are all liquidity in the
9:08:42market. However, that does not mean
9:08:44every single order which is being placed
9:08:46in the market must be targeted and taken
9:08:48out by these big players as some areas
9:08:50are simply not liquid enough for it to
9:08:53be worth the grab for these
9:08:54institutions. So in short, liquidity is
9:08:57like fuel or it acts as a driver to move
9:09:00the market in a specific price zone.
9:09:03Smart money will try to manipulate the
9:09:04price in order to break through these
9:09:06obvious zones and seize or absorb the
9:09:09liquidity. To sum it all up, every
9:09:12market has retail traders and
9:09:13institutions. The retail mindset is
9:09:16almost same across all the markets and
9:09:19liquidity in smart money concepts enable
9:09:21us to understand where these retail
9:09:23traders are being manipulated and where
9:09:25the smart money is entering or exiting.
9:09:28Now another question can pop up in your
9:09:30mind where to find these liquidity zones
9:09:33or order clusters. Now there are two
9:09:36types of liquidity based on direction.
9:09:38They are buyside liquidity and sellside
9:09:40liquidity. The buy side liquidity
9:09:43represents a level on the chart where
9:09:45the short sellers will have their
9:09:46stop-loss positioned. So essentially
9:09:49these stop-loss orders set by the short
9:09:51sellers who sold from the resistance or
9:09:53the swing highs are essentially buy
9:09:56orders. And the buy side liquidity will
9:09:58also include buy limit orders set by all
9:10:01those buyers who were waiting for a
9:10:03breakout above the resistance or the
9:10:04swing high. When it comes to sellside
9:10:06liquidity, it is just the opposite. It
9:10:09represents a level on the chart where
9:10:11long bias traders will place their stop-
9:10:13losses. So essentially this cluster of
9:10:16orders will include stop-loss orders set
9:10:19by buyers who went long from the support
9:10:21level or swing low level which in turn
9:10:24is a sell order and sellside liquidity
9:10:27will also include sell limit orders
9:10:29which were set by those sellers who were
9:10:32anticipating a breakdown below the
9:10:34support or swing low. In both these
9:10:36cases, these levels are often found at
9:10:39or near extremes as the tops and bottoms
9:10:43of the ranges. Meaning that these points
9:10:45are found at the highs and lows of
9:10:47ranges. This is because at these points
9:10:50many people are waiting for the zone to
9:10:52act as a support or resistance or for
9:10:55the price to break the zone to continue
9:10:57in its direction. So you can always use
9:10:59higher time frames like daily, weekly
9:11:02and monthly time frames to identify
9:11:04these zones. Now if you want to
9:11:06understand where to find liquidity even
9:11:08simply then understand that whenever
9:11:11there is a trend line, support or
9:11:13resistance level, double top or double
9:11:15bottom patterns, channel patterns,
9:11:17rectangular ranges, swing levels, etc.,
9:11:20there are the lot of retail stop- losses
9:11:23and pending orders available meaning
9:11:25that there is enough liquidity to be
9:11:27taken. Therefore, these are popular
9:11:30areas where retail traders tend to
9:11:32execute their trades. So there will be a
9:11:34lot of stop- losses making it a nice
9:11:37level of liquidity for the big players
9:11:39to target. But before all that let us
9:11:41understand why liquidity is important on
9:11:44our price chart. So if you think about
9:11:46it, liquidity is extremely important
9:11:49because it is the direction in which the
9:11:51price moves. The price will always move
9:11:54towards these points to attract
9:11:55liquidity to the market. Without
9:11:57liquidity, financial markets cannot
9:12:00function. Let me explain this so that
9:12:02you will have a better idea. See, big
9:12:05players in the markets aim for the best
9:12:07prices, but usually they face challenges
9:12:10finding sufficient counter orders to
9:12:12fill their large orders. For example, if
9:12:14an institution is looking for long
9:12:16positions, they will place buy orders at
9:12:19limit prices. But for the order to get
9:12:21executed, there needs to be enough sell
9:12:24orders. Right? Now think about what
9:12:26happens if they enter the market at low
9:12:28liquidity areas where there are only
9:12:31fewer orders available to counter the
9:12:33institutional orders. This will create
9:12:36much more volatile markets which will
9:12:38negatively impact the average price of
9:12:40the big players which is actually a risk
9:12:43they are not willing to take. Now on the
9:12:45contrary entering at a high liquidity
9:12:47area where there are a lot of counter
9:12:49orders available will result in less
9:12:52volatile markets ensuring a better
9:12:54average price for the institutional
9:12:56position and these high liquidity zones
9:12:59are where most of the retail orders are
9:13:01placed. Smart money players understand
9:13:03the nature of this concept and they will
9:13:06commonly accumulate or distribute their
9:13:08large positions near levels where many
9:13:11stop- losses resides. This concept of
9:13:14absorbing retail orders by taking
9:13:16advantage of all available liquidity at
9:13:19multiple price levels is called as
9:13:21liquidity grab or liquidity sweep and it
9:13:25comes from the need for big players to
9:13:27enter the market in these zones to take
9:13:29their large positions and it ensures
9:13:32that their orders are filled at the best
9:13:34possible prices by breaking up their
9:13:36order into smaller suborders and then
9:13:39spreading them across multiple price
9:13:41levels. So institutional traders and
9:13:43highfrequency trading firms commonly use
9:13:46liquidity sweeps for efficient and quick
9:13:49execution of large trade volumes. And
9:13:51the sheer amount of stop-loss orders
9:13:54available at these key levels allows a
9:13:57large player to fully realize their
9:13:59positions. And once this level where
9:14:01many stop losses have been placed has
9:14:03been traded through, it is often seen
9:14:05that the price will reverse its
9:14:07direction and head in the opposite
9:14:08direction seeking liquidity at the
9:14:11opposite extreme. Now think about the
9:14:13result when a large number of stop-
9:14:14losses are triggered. If price
9:14:17experience higher volatility on more
9:14:19orders hitting the market, such
9:14:21volatility in price generates
9:14:23opportunities for participants to either
9:14:25enter a trade in a favorable environment
9:14:28or protect their positions. The fact
9:14:31that too many orders were triggered all
9:14:33at once result in sharp price moves in
9:14:35the market. So without ample liquidity
9:14:38to play with, we will never see such big
9:14:40directional moves in the market. In
9:14:42fact, how will a car be able to move
9:14:44without fuel? Similarly, it is liquidity
9:14:47zones and liquidity sweeps that helps to
9:14:50run the markets smoothly. Now, I hope
9:14:53this clear things up. Next up, let's
9:14:56briefly touch upon the different types
9:14:57of liquidity areas within the market
9:15:00structure. Based on this, liquidity can
9:15:02be classified into external liquidity
9:15:04and internal liquidity. Now, as the name
9:15:07suggest, liquidity associated with major
9:15:10market structure is referred to as the
9:15:12external liquidity. It is also known as
9:15:15major liquidity and the liquidity
9:15:17associated with minor or internal
9:15:19structures in the market is named as
9:15:22internal liquidity or minor liquidity.
9:15:24In this video however I will only talk
9:15:26about external liquidity and how to spot
9:15:29external liquidity. So to understand
9:15:32what external liquidity is, we need to
9:15:34have a fair understanding about market
9:15:36structure predominantly the major market
9:15:39structure. I have already made a video
9:15:41on market structures and how to properly
9:15:44mark the swing points namely the swing
9:15:46highs and lows and also to identify and
9:15:49mark breakup structure change of
9:15:51character etc. So if you haven't watched
9:15:54the video I urge you to pause this video
9:15:56right away and watch the first episode
9:15:58of this course right now to get a better
9:16:01understanding as to how major liquidity
9:16:04functions. To briefly summarize things,
9:16:06a bullish market structure will have
9:16:09higher swing highs and higher swing
9:16:11lows. A higher high is confirmed only
9:16:14after a valid pullback. And a higher
9:16:16swing low is confirmed only after a
9:16:19valid break of structure. And a change
9:16:21of character happens when the price
9:16:23break and close below the previous swing
9:16:26high or higher high thereby shifting the
9:16:28market sentiment towards bearishness.
9:16:30Now when it comes to a bearish market
9:16:33structure, it comprises of lower swing
9:16:35highs and lower swing lows. A lower high
9:16:38is only confirmed after a break of
9:16:41structure and a lower low is confirmed
9:16:43only after a valid pullback. And a
9:16:46bullish change of character happens when
9:16:48price manages to break and close above
9:16:51the previous swing high or lower high
9:16:53indicating a shift in the sentiment from
9:16:56bearish to bullish. Now these are
9:16:58basically the things that you need to
9:17:00keep in mind while learning the major
9:17:02market structures. Now let me ask you
9:17:05which are the most important points when
9:17:08it comes to major structure. Quite
9:17:10clearly these points are higher highs
9:17:13and lows and lower highs and lower lows
9:17:16or simply these are the major swing
9:17:18highs and major swing lows. Now let me
9:17:22ask you another question. Why do you
9:17:24think the market does a break of
9:17:26structure or a change of character and
9:17:28then does a pullback? What do you think
9:17:30about this particular behavior of the
9:17:32market? Okay, let me explain. Let's take
9:17:34the case of a bullish breakup structure
9:17:36and a bearish change of character. Now,
9:17:39what are they? These are basically
9:17:41simple breakouts, right? But if you
9:17:43think about it on a much deeper level,
9:17:45what exactly is taking place here? As we
9:17:48are aware, a bullish break of structure
9:17:50happens when price breaks and closes
9:17:53above the previous swing high or higher
9:17:55high. So, one must focus on the swing
9:17:57high level. The swing high is considered
9:18:00as a strong resistance level or a supply
9:18:02zone. There can be at least two types of
9:18:05participants waiting in this area. The
9:18:07former would be sellers who are
9:18:09obviously trying to take short trades
9:18:11from the swing high or the so-called
9:18:13potential resistance level. And where
9:18:15will they put their stop- losses? Quite
9:18:18obviously, they will set their stop-
9:18:19losses, which is actually a buyback
9:18:21order above the swing high. Now, the
9:18:24second group involves buyers who are
9:18:26anticipating a breakout of prices above
9:18:28the swing high level because the current
9:18:30market trend is bullish. So, what will
9:18:33these buyers do? They will look to buy
9:18:35on the breakout and they will place
9:18:37their stop-loss, which is a sell order
9:18:40just somewhere below the swing high
9:18:42level. So as you can see there is a
9:18:44large cluster of orders available above
9:18:47and below the swing high level. So this
9:18:50is a highly liquid area. So now what
9:18:52will happen depending on which side has
9:18:54majority of orders the market will move
9:18:57in that direction to absorb or sweep the
9:19:00liquidity. In this case a breakout above
9:19:02the swing high has happened. Meaning
9:19:04that the concentration of buy order was
9:19:07much more than the amount of sell orders
9:19:09available below this level. This is why
9:19:12the market moved higher absorbing all
9:19:14the seller stop- losses and buy limit
9:19:17orders. A similar scenario takes place
9:19:19in case of a bearish change of character
9:19:22which is our level of interest in this
9:19:24case. Yes, you are right. It is the
9:19:26higher low or simply the swing low
9:19:28level. Now applying the same logic here
9:19:31also there are at least two interested
9:19:33players here. The former are buyers.
9:19:35Since the swing low has the potential to
9:19:38act as a support or demand level and
9:19:40since the trend is also bullish, the
9:19:42buyers will look to take long trades
9:19:44from this level. And where do you think
9:19:46they will set their stop- losses? Quite
9:19:48obviously, they will set their stop-
9:19:50losses, which mind you is actually a
9:19:53sell order somewhere below the swing low
9:19:55level. Now, the second group comprises
9:19:57of those sellers who are looking for a
9:20:00breakout below this swing low level. Now
9:20:02if you look carefully you can see a
9:20:04proper trend line and thus they will bet
9:20:07on the breakdown below the trend line as
9:20:09the price has tested the trend line
9:20:11multiple times. So they will look to
9:20:13sell on the breakdown and they will
9:20:15obviously place their stop loss
9:20:17somewhere above the swing low or even
9:20:20above the recent swing high. So quite
9:20:22clearly there are a large number of
9:20:24orders available above and below the
9:20:26swing low level. So this is a highly
9:20:29liquid area. Now what will happen
9:20:31depending on which side has majority of
9:20:33orders the market will move in that
9:20:35particular direction to absorb or sweep
9:20:38the liquidity. In this case a breakdown
9:20:40below the swing low has happened.
9:20:42Meaning that the concentration of sell
9:20:44orders was much more than the amount of
9:20:47buy orders available above this level.
9:20:49This is why the market moved lower
9:20:52absorbing all the buy stop- losses and
9:20:54sell limit orders. I hope you have
9:20:56understood. In a similar manner you can
9:20:58understand what happens during a bearish
9:21:01break of structure or a bullish change
9:21:03of character. Now I hope things are
9:21:05making sense but still a question
9:21:07remains why don't the market just keep
9:21:10going in the direction of the breakout
9:21:12why do price stop and return back or why
9:21:15do prices form pullbacks. So if you have
9:21:17observed closely once the price does a
9:21:20break of structure or a change of
9:21:22character it does not move up or move
9:21:24down indefinitely. If we take the case
9:21:26of a bullish break of structure above
9:21:28this previous swing high, we will come
9:21:31to know that the price will move up only
9:21:33to that extent where the orders are
9:21:35available. Or in other words, as long as
9:21:37liquidity is available above the swing
9:21:40high, the market will move higher. This
9:21:42is because the smart money is absorbing
9:21:45all the buy side liquidity so as to sell
9:21:47high. And once it has absorbed all the
9:21:50orders above this swing high, where do
9:21:52you think the market will go? Now one
9:21:54thing that you must keep in mind is that
9:21:56the market moves from one area of
9:21:59liquidity to the other. So based on this
9:22:01idea, where will the market find
9:22:03liquidity once it has swept all the
9:22:05orders above the previous swing high or
9:22:08once the buy side liquidity is
9:22:10completely taken out? Think about it.
9:22:12There is no liquidity available anywhere
9:22:14higher. So no point in going higher. So
9:22:17where will the market go now? This is
9:22:19where we have to think about why the
9:22:21market does pullbacks after a break of
9:22:24structure or even a change of character.
9:22:26I can just tell you that it is the
9:22:28inherent nature of the market to move as
9:22:31waves forming impulse and corrective
9:22:33moves and just stop the discussion. But
9:22:36understanding the reason behind these
9:22:38pullbacks are very important. Let me
9:22:40remind you that the market needs fuel to
9:22:43move higher or lower. This fuel is none
9:22:46other than liquidity in the form of
9:22:47retailer buy or sell orders as you may
9:22:50already know. Now liquidity is the
9:22:52reason why market forms impulses and
9:22:54corrections. In this case after sweeping
9:22:57out the buy limit orders and buy stops
9:23:00which is actually the buy side
9:23:01liquidity. The market pull back slower.
9:23:04And what is the purpose of this
9:23:05pullback? The pullback is the way in
9:23:07which the market is looking for a
9:23:09sellside liquidity. And where can we
9:23:12find these clusters of sell limit orders
9:23:14and sell stops? This is why you need to
9:23:17have a proper understanding of how the
9:23:19market structure forms and functions. In
9:23:22this particular case, after a bullish
9:23:24break of structure, the market can pull
9:23:26back to a few possible levels where it
9:23:28could find liquidity and only after it
9:23:31has tapped the liquidity from these
9:23:33levels, the market will continue to move
9:23:35higher. These levels could either be
9:23:38internal or minor swings formed within a
9:23:41wave or it could be the major swing
9:23:43level also. Below these minor swings and
9:23:45major swing low levels, there will be a
9:23:48lot of players looking for a trade
9:23:49opportunity. Usually the previous major
9:23:52swing low level is considered to be a
9:23:54strong demand zone or a support level.
9:23:57So most buyers would be interested to
9:23:59take a long trade from this level and
9:24:01they will obviously set their stop
9:24:03losses below this major swing low level.
9:24:05So there will be a lot of sell orders
9:24:07available below this level and so the
9:24:10market could tap into this liquidity
9:24:12pool to sweep all the retailer stop-
9:24:14losses to buy at lower prices and then
9:24:17move up higher. Now the price won't
9:24:19always move all the way down to this
9:24:21major swing low. If you look at the
9:24:23chart, on most occasions, the price will
9:24:26pull back only by 40 percentage or
9:24:2850%age before resuming the main trend.
9:24:31Now, what do you think is the main
9:24:33reason for this? Now, I want you to
9:24:35understand that when price pulls back,
9:24:37it has got a few liquidity options to
9:24:40tap into. I have not discussed some of
9:24:42these terms yet, but bear with me on
9:24:44this. So the first option is to tap into
9:24:47an inducement level which you can
9:24:49consider as a previous minor swing below
9:24:52which you can find liquidity as traders
9:24:54will look to buy from this level
9:24:56assuming a double top formation while
9:24:59some sellers will place sell limit
9:25:00orders anticipating a breakdown of
9:25:02prices. Now both this action will result
9:25:05in a pool of sellside liquidity that the
9:25:08smart money can tap into. The next
9:25:10available options are order blocks or
9:25:12point of interest. And just for the sake
9:25:15of understanding, assume POI as areas
9:25:18where large number of buy or sell orders
9:25:20are placed by institutions for the sake
9:25:22of buying low and selling high. And we
9:25:25can expect the market to reverse from
9:25:27these zones. So the market can tap into
9:25:30either of the two order blocks. The
9:25:32first is a decisional POI which is
9:25:34usually formed after an inducement and
9:25:36there is a 50%age chance that the market
9:25:39will tap into this liquidity area and
9:25:41reverse higher and the other order block
9:25:43is formed near the major swing low level
9:25:46and it is usually called the extreme
9:25:48POI. So the other 50%age chance is that
9:25:51this extreme POI will be tapped to
9:25:53absorb orders. The price will go deeper
9:25:56into these levels to absorb all the
9:25:58available orders. Usually VSMC traders
9:26:01will take buy and sell trades from any
9:26:04of these three mentioned liquidity
9:26:05levels. We will talk about the concepts
9:26:07of inducements, order blocks, POI, etc.
9:26:11in our upcoming episodes. But I hope you
9:26:14have understood the overall concept
9:26:16behind external liquidity. Now let us
9:26:18briefly take a look at where to spot
9:26:20these external liquidity levels or under
9:26:23which circumstances can we observe these
9:26:25levels. So as you may have already
9:26:27guessed the major swing highs and major
9:26:30swing lows especially on higher time
9:26:32frames are high probability areas where
9:26:34we can find major liquidity. You can
9:26:37understand this using a simple example.
9:26:39You can mark the structure on a 1 minute
9:26:42time frame which is a lower time frame
9:26:44and then mark the structure on a 1 hour
9:26:46higher time frame. In which time frame
9:26:49do you think there will be more orders
9:26:51present near the swing highs and lows?
9:26:53Without much thinking, we can say that
9:26:55the higher time frame swing levels will
9:26:57have more liquidity in comparison to the
9:27:00one minute swing levels. Meaning that
9:27:02there will be more meaningful price
9:27:04reactions on higher time frame
9:27:06structures. Another location to find
9:27:08major liquidity is where equal highs or
9:27:11equal lows are formed near the previous
9:27:13swing highs or swing lows respectively.
9:27:15on a higher time frame. There are good
9:27:17chances of finding sellside liquidity
9:27:19below these equal lows and buyside
9:27:21liquidity above these equal highs. The
9:27:24same logic applies to double tops and
9:27:26double bottoms which are formed near
9:27:28these major swing points. Yet another
9:27:30location where you can find major
9:27:32liquidity is below an uptrend line drawn
9:27:35connecting the major swing lows or above
9:27:37a downtrend line drawn connecting major
9:27:40swing lows. These trend lines are quite
9:27:42lucrative places because you can find
9:27:44both buy and sell side liquidity because
9:27:47one party is looking to benefit from a
9:27:49breakout of the trend line while the
9:27:51other party is looking to gain from a
9:27:53reversal from the trend line. Obviously
9:27:56the smart money will target these trend
9:27:58lines and most often you can see fake
9:28:00outs from these trend lines which are
9:28:02none other than the big players sweeping
9:28:04the liquidity to get better entry
9:28:06prices. Now the other important
9:28:08locations where you can spot major
9:28:10liquidity includes the previous monthly
9:28:12highs and lows, previous yearly highs
9:28:14and lows, previous weekly highs and lows
9:28:16and even the previous daily highs and
9:28:18lows. These are all levels that a large
9:28:21number of participants are keenly
9:28:22watching to take a trade and therefore
9:28:25there will be a large number of orders
9:28:27getting accumulated here. These are all
9:28:29prospective locations with very high
9:28:31liquidity. Since we don't have the kind
9:28:33of information that the big players
9:28:36possesses, we cannot determine the
9:28:38strength of a liquidity area and the
9:28:40exact location of liquidity at all
9:28:42times. Therefore, we can only predict
9:28:45where the liquidity can be discovered.
9:28:47But you must understand that the larger
9:28:49the time frame, the greater the
9:28:51liquidity. However, the more we go down
9:28:53onto smaller time frames, the more weak
9:28:56the liquidity will be. So these are all
9:28:58the things that you need to know about
9:29:00liquidity especially external liquidity.
9:29:07Are you one of those traders who gets
9:29:09into a trade near a level of importance
9:29:11or beat a peculiar chart formation but
9:29:13the price goes against your trade takes
9:29:15out your stop- loss and the next thing
9:29:17you see the price reverses its direction
9:29:20and moves in the same direction as you
9:29:22have anticipated in the beginning. I
9:29:24have been there and it's very
9:29:26frustrating and if you are one of them
9:29:28then this video is for you. This video
9:29:31will definitely change the outlook of
9:29:33how you look at the charts. In the
9:29:35previous episode we have talked in
9:29:37detail about liquidity, its importance
9:29:39and we have also discussed in detail as
9:29:42to how major liquidity functions and
9:29:44where to find them. So, if you haven't
9:29:46watched that video, please make sure to
9:29:48watch it right away because it will give
9:29:50you all the basic stuff that you need to
9:29:52know when it comes to the concept of
9:29:55liquidity. But just to brush things up,
9:29:57liquidity is generally known as the fuel
9:30:00in the market, which is usually a
9:30:02cluster of retailer orders. That is it
9:30:05can be limit orders and stop-loss orders
9:30:07which when taken out or swept causes the
9:30:10market to usually reverse in the
9:30:12direction of the existing market trend
9:30:14with a strong momentum. This will
9:30:16usually result in a fake breakout of the
9:30:19previous high or the previous low which
9:30:21can be in the form of deep wicks taking
9:30:23out retail or roders. This is called as
9:30:26liquidity grab or liquidity sweep. Now
9:30:29market always moves from one area of
9:30:31liquidity to another. So when liquidity
9:30:34is taken the market needs to generate
9:30:37liquidity in order to move which means
9:30:39if liquidity isn't already there it will
9:30:41be created and we have also talked about
9:30:44buy side and sellside liquidity. Then we
9:30:47have discussed about major or external
9:30:49liquidity which in short is the
9:30:51liquidity available at or near the major
9:30:54market structure which includes the
9:30:56major swing highs and major swing lows.
9:30:59You will get a good idea on market
9:31:00structures if you watch my video on the
9:31:03same topic on episode one of this
9:31:05course. In addition to this, major
9:31:07liquidity can also be found at or near
9:31:09higher time frame supports and
9:31:10resistances, weekly or daily highs and
9:31:13lows, etc. Now, in the previous episode
9:31:16on liquidity, I have classified
9:31:18liquidity based on market structure as
9:31:21internal and external liquidity. But
9:31:23looking at a much broader perspective,
9:31:26we can categorize liquidity into four
9:31:28types of which the later two of them are
9:31:31actually applicable to the previous two
9:31:33classifications. I will explain this
9:31:35right now. But first of all, the
9:31:37different types of liquidity
9:31:39classifications are external liquidity,
9:31:42internal liquidity, static liquidity and
9:31:46dynamic liquidity. As mentioned just
9:31:48now, external liquidity is the liquidity
9:31:50that can be identified above a range
9:31:53high or a range low, previous high or a
9:31:56previous low or swing high or swing low.
9:31:59Internal liquidity on the other hand is
9:32:01the liquidity created within a range
9:32:03high and range low, previous high and
9:32:06previous low or a swing high or a swing
9:32:09low. Now when it comes to static
9:32:11liquidity, this liquidity is created or
9:32:14it is identified at or near double
9:32:16bottoms or double tops or simply near
9:32:19equal highs or equal lows. And finally,
9:32:22dynamic liquidity is actually identified
9:32:24as the liquidity which is associated
9:32:27with a trend line. So this liquidity is
9:32:29created at both sides of a trend that is
9:32:32above and below a trend line. Now you
9:32:35might have understood how the last two
9:32:37types of liquidity namely the static and
9:32:40dynamic liquidity are related to the
9:32:42first two types. It is simply the fact
9:32:44that trend line liquidity and liquidity
9:32:47associated with equal highs or lows or
9:32:50simply the double tops and double
9:32:51bottoms are observable in both major and
9:32:55minor structures in the market. Now we
9:32:58will understand about internal
9:32:59liquidity. how to read it or how to spot
9:33:02it and how retail people get trapped in
9:33:05these areas. As you may know, minor
9:33:08liquidity is the liquidity associated
9:33:10with the internal market structures.
9:33:12This means all the clusters of retail
9:33:14orders which are getting accumulated
9:33:16between the major market levels like the
9:33:19major swing highs or the major swing
9:33:21lows are known as internal liquidity. So
9:33:25you can anticipate a lot of retail stop-
9:33:27losses and limit orders at or near these
9:33:30minus wing structures. In the screen you
9:33:32can see a few structures. These are all
9:33:35common areas where you can spot internal
9:33:37liquidity. We will first understand each
9:33:39one of them and then take a few examples
9:33:42from real charts. This is not a very
9:33:44difficult topic to understand. All you
9:33:47need to do is to think how a retail
9:33:49trader will respond when provided with a
9:33:52particular situation in charts. So all
9:33:54you have to do is to think like you
9:33:57always have as a retailer and without
9:33:59much efforts you will be able to
9:34:01identify where the minor liquidity is
9:34:04already available. In the first diagram
9:34:06we can easily spot equal lows. So
9:34:09technically we have two lows on the same
9:34:11price level thereby forming a minor
9:34:14support level. It is also known as
9:34:16double bottoms. We have learned that
9:34:19double bottoms are reversal patterns.
9:34:21Right? So what do you think a retail
9:34:24trader will do when he or she spots a
9:34:26double bottom pattern? It is very
9:34:29obvious that they will try to take a
9:34:31long trade either after a breakout above
9:34:34the neckline or some might even take a
9:34:36long position from the support level
9:34:38connecting the lows. Now comes the
9:34:40important question where will they set
9:34:42their stop losses? Almost all of them
9:34:45will place their stop losses somewhere
9:34:48below the support level. Now you can
9:34:50imagine that there will be a large
9:34:52cluster of stop-loss orders lying below
9:34:55this support level. These are all
9:34:56stop-loss orders set by the buyers who
9:34:59have taken a long position and these
9:35:02stop- losses are sell orders or sellside
9:35:05liquidity. But what exactly do you think
9:35:08this is? This my friend is retail
9:35:11liquidity that we have been searching
9:35:13for. Now what happens next or what will
9:35:16be the outcome? The smart money will
9:35:19always look to buy at lower prices and
9:35:21they will look to sell at higher
9:35:23valuations. They do not follow any
9:35:25strategy or patterns but they take their
9:35:28positions based on liquidity. So most
9:35:31often or not they will look to tap into
9:35:33these areas of liquidity to execute
9:35:36their positions at the best possible
9:35:38valuations. Now coming back to our
9:35:41discussion on double bottoms, the smart
9:35:43money or institutions will push the
9:35:45prices down and break below the equal
9:35:47lows or support level so as to absorb
9:35:50all the sellside liquidity. And once all
9:35:53the stop- losses are absorbed or swept,
9:35:55the market usually reverse its direction
9:35:58and move higher. This is usually more
9:36:00frustrating for traders than hitting the
9:36:03stop- losses because usually such a move
9:36:05will impact a trader's psychology and it
9:36:09will also question his analysis and
9:36:11learnings. So in short, there is
9:36:13liquidity below equal lows or below the
9:36:16support level connecting the lows of the
9:36:18double bottom which is actually a
9:36:20cluster of sell stop-loss orders or
9:36:22sellside liquidity which gets tapped by
9:36:25the big institutions to buy at lower
9:36:27valuations. Now the second diagram shows
9:36:31equal highs. It means that we have two
9:36:33high points on the same price level.
9:36:36This is also known as a double top
9:36:38pattern. Like a double bottom, this is
9:36:40also a common reversal pattern that you
9:36:43can find on charts. If you have clearly
9:36:45understood how liquidity and retailer
9:36:48mindsets works in case of a double
9:36:50bottom, then understanding the logic
9:36:52behind double tops or equal highs is
9:36:55just a piece of cake. Ask yourselves
9:36:57what will a retailer do when they spot a
9:37:00double top pattern. They will try to
9:37:02take a short trade either after a
9:37:05breakdown below the neckline or they
9:37:07might even sell when the price starts
9:37:09falling from the top resistance level
9:37:11connecting both the tops. Now where will
9:37:13they set their stop- losses? Most
9:37:15commonly retailers will place the stop-
9:37:18losses somewhere above the top
9:37:20resistance level. Now you can imagine
9:37:23that there will be a large cluster of
9:37:25stop- losses lying above this resistance
9:37:28and almost all the stop- losses are
9:37:31placed by short sellers who sold from
9:37:33the resistance or neckline. So
9:37:36technically this cluster of stop- losses
9:37:38are buyback orders or buyside liquidity
9:37:42and this is the liquidity that smart
9:37:44money is keen to tap into. So what do
9:37:47you think will happen next? Smart money
9:37:50will always look to sell at higher
9:37:51valuations and they will try to collect
9:37:54the retailer buy stop-loss orders or the
9:37:56buy side liquidity which is clustered
9:37:58above the double top or the top
9:38:00resistance level. So most often they
9:38:03will push the prices higher and break
9:38:05above the equal highs or resistance so
9:38:08as to absorb all the retail orders to
9:38:10sell their positions at the best
9:38:12possible prices. And once all the stop
9:38:15losses are grabbed or swept, the market
9:38:18will usually reverse its direction and
9:38:20move over which can be really
9:38:23heartbreaking. Now if you have
9:38:25understood both these types of
9:38:26liquidity, then the next few types are
9:38:29going to be really easy. Yes, we are
9:38:31talking about support and resistance
9:38:33liquidity next. So what happens in a
9:38:36support level? Think about it in terms
9:38:38of a retailer. What will be a retail
9:38:41participant's thought process? So when
9:38:44price test a support level few times, we
9:38:46can anticipate two types of market
9:38:48participants around this area. The first
9:38:51group involves buyers who are looking to
9:38:53take a long position at or above the
9:38:56support level to take a reversal trade.
9:38:58The second group are sellers who are
9:39:01looking to profit from a breakdown below
9:39:03the support level. Now how will both of
9:39:05these players act in this scenario?
9:39:08First up are the buyers. They are
9:39:10looking to take a long trade entry. So
9:39:12they will try to buy at or above the
9:39:14support level and they will place either
9:39:16buy limit orders or market orders. Now
9:39:19comes the important question where will
9:39:21they place their stop- loss. They will
9:39:24set their stop loss somewhere below this
9:39:26support level which is actually a sell
9:39:29order and when it comes to short sellers
9:39:32they are looking for a breakdown below
9:39:33the support level. So they will either
9:39:36place a sell limit order or a sell
9:39:38market order at or below the support
9:39:40level when the breakout happens. And
9:39:42these guys will set their stop-loss
9:39:44somewhere above the support level which
9:39:46is actually a buyback order. Now as you
9:39:49can visualize there are a large clusters
9:39:52of buy and sell orders getting
9:39:54accumulated above and below the support
9:39:56level or in other words there is
9:39:58sellside liquidity or clusters of sell
9:40:01orders below the support and buyside
9:40:03liquidity or clusters of buy orders
9:40:06above the support level and this is a
9:40:08golden opportunity for the smart traders
9:40:11to capitalize on. So what do you think
9:40:13will their action plan be? You might
9:40:16have seen and experienced this happening
9:40:18many times in the chart. The smart money
9:40:20will first push the price below the
9:40:22support level to break into the sellside
9:40:25liquidity so as to be able to execute
9:40:27their large buy order positions at the
9:40:30lowest price possible. This will result
9:40:33in retailer sell orders and sell stop-
9:40:35losses being triggered. Now the buyer
9:40:38positions will automatically be exited
9:40:40when their stop- losses gets hit while
9:40:42the sellers are still in their trade and
9:40:45thereby buy stop- losses are still
9:40:47active above the support level. Now once
9:40:50all the smart money orders are executed
9:40:52by the retail sell orders which was
9:40:54accumulated below the support they will
9:40:56push the price higher and what will
9:40:58happen now? Now all the buy stop orders
9:41:01which were set by the sellers will get
9:41:03triggered and they will also be out from
9:41:05their trades. This will lead to the
9:41:07market moving higher strongly. This will
9:41:10in turn induce the foromo traders to
9:41:12start buying and thereby pushing the
9:41:14markets even higher. This is a typical
9:41:16case of false breakout and liquidity
9:41:19grab in the market. And even now a
9:41:21majority of retail traders are unaware
9:41:24of this smart money trap. The same
9:41:26action plan happens in the case of
9:41:28resistance levels also. Here also there
9:41:31are two players. There are sellers who
9:41:33look to take advantage of a reversal
9:41:36from the resistance level so as to
9:41:38initiate a short position at or below
9:41:40the resistance. They will set their
9:41:42stop- losses somewhere above the
9:41:44resistance level. Then there are buyers
9:41:46who are looking to benefit from a
9:41:48breakout above the resistance so as to
9:41:50buy above the resistance. These guys
9:41:53will set their stop- losses below the
9:41:55resistance in the event of a breakout.
9:41:58So there is buy side liquidity above the
9:42:00resistance and sellside liquidity below
9:42:02it. And as you might have guessed the
9:42:05smart money will try to manipulate both
9:42:07these players. They will first push the
9:42:09price above the resistance so as to
9:42:11execute their sell orders at higher
9:42:13valuations by absorbing the buy orders
9:42:16or buy stop-loss orders thereby taking
9:42:19out the short sellers out of their
9:42:21trades. But the breakout buyers are
9:42:23still active in their trades and their
9:42:26stop-loss orders are still live below
9:42:28the resistance level. Or in other words,
9:42:30the sellside liquidity is still
9:42:32available below the resistance. And once
9:42:34all the large smart money positions are
9:42:37filled, they will push the prices lower,
9:42:39thereby absorbing the sellside liquidity
9:42:42and taking out the breakout buyers. This
9:42:45will cause the price to fall rapidly
9:42:47which will encourage the former
9:42:49participants to start selling and
9:42:51thereby causing the market to decline
9:42:53even lower. This is another typical case
9:42:56of false breakout associated with a
9:42:58liquidity grab. A similar approach is
9:43:01seen during consolidations especially
9:43:03the rectangular ranges. When it comes to
9:43:06rectangle patterns we have a bottom
9:43:08support level and a top resistance
9:43:10level. So most often the false breakout
9:43:13happens in the opposite direction of the
9:43:16market trend. For instance, if the
9:43:18market structure is bullish, then most
9:43:20probably we might see price absorbing
9:43:22the retail liquidity available below the
9:43:25bottom support level and then push
9:43:27higher to form a real breakout above the
9:43:29resistance level. On the contrary, if
9:43:31the market structure is bearish, then
9:43:34most probably we might see a false
9:43:36breakout above the top resistance level
9:43:38so as to absorb all the buy side
9:43:41liquidity and then the price might move
9:43:43lower and form a real breakdown below
9:43:46the support level. Now this analysis is
9:43:49not 100%age accurate because we cannot
9:43:52predict the occurrence of a false
9:43:54breakout perfectly since there is
9:43:57liquidity available on both sides of
9:43:59support and resistance. It can lead to
9:44:01more than one fake outs or in some cases
9:44:04there might not even be a fake out. Now
9:44:06let's talk about the next category of
9:44:08internal liquidity which is the trend
9:44:10line liquidity. Now trend line liquidity
9:44:12is one of the most common types of smart
9:44:14money manipulations that you can
9:44:16encounter on charts especially when
9:44:19there is a predominant trend involved.
9:44:21Technically there are two types of trend
9:44:23lines uptrend lines and downtrend lines.
9:44:27Another important thing to keep in mind
9:44:28is that for a line to be considered as a
9:44:31trend line there should be at least two
9:44:34touches on it. And to confirm a valid
9:44:36trend line there needs to be at least
9:44:38three touches on it. Now this concept is
9:44:41easy to understand if we compare it to
9:44:43support and resistance. So consider the
9:44:46uptrend line as a support level for
9:44:49prices and downtrend line as a
9:44:51resistance level for prices. Now it is
9:44:53easier to visualize the events better.
9:44:56So let's start with an uptrend line. As
9:44:58I have mentioned an uptrend line acts as
9:45:01a support for prices. So we can expect
9:45:04two types of participants waiting to
9:45:06take a position. There are buyers
9:45:08looking to go long from the support
9:45:10trend line. Then there are those short
9:45:12sellers searching for a breakdown below
9:45:14the support trend line. Thus, there lies
9:45:16buyside liquidity above the uptrend line
9:45:19and sellside liquidity below the trend
9:45:21line. This means most often both retail
9:45:24buyers and sellers stand to lose their
9:45:27stop- losses. The big institutions will
9:45:29first push the prices down to break
9:45:31below the uptrend line. This means all
9:45:34the sell stop orders of buyers and sell
9:45:36limit orders of short sellers will be
9:45:38triggered. The smart money will try to
9:45:41absorb all the retail liquidity to
9:45:43ensure that their large buy positions
9:45:45are executed at the lowest prices
9:45:47possible. Now only the short sellers are
9:45:50active in their positions with their buy
9:45:52stop- losses live above the trend line.
9:45:55Once all the smart money orders are
9:45:57filled, they will take the prices
9:45:58higher, revisiting the buyback orders
9:46:01placed above the support trend line. By
9:46:03doing so, the short sellers will also be
9:46:06taken out of their positions once their
9:46:08stop- losses are triggered. This will in
9:46:10turn push the prices higher. So, you can
9:46:13see how both retail sellers and buyers
9:46:15are equally affected by such a
9:46:17manipulation. A similar scenario persist
9:46:20when it comes to downtrend lines. also
9:46:22there will be buyside liquidity above
9:46:24the resistance trend line and sellside
9:46:27liquidity below it. The smart money will
9:46:29create a false breakout above the trend
9:46:31line sweeping all the buyside liquidity
9:46:34in order to execute their sell positions
9:46:37at the best possible valuation. And once
9:46:39all their orders are filled, they will
9:46:41reverse the prices to move lower which
9:46:44then takes out the sellside liquidity
9:46:46and then combine it with the new form of
9:46:48sellers coming in. The market will fall
9:46:51even more. Finally, there are people who
9:46:54look to trade prominent chart patterns
9:46:56like flag patterns which unfortunately
9:47:00is yet another internal structure
9:47:01formation that is prone to liquidity
9:47:04manipulations. You might know about flag
9:47:06patterns, how it forms and how to trade
9:47:09them. If you don't, you can watch it in
9:47:11my chart patterns course video.
9:47:13Basically, there are two types of flags.
9:47:15Bullish flags and bearish flags. Let's
9:47:18start with the bullish flags first.
9:47:20Flags are continuation patterns, meaning
9:47:22that the possibility of the existing
9:47:25trend to continue is fairly high. When a
9:47:28bullish flag consolidation is spotted,
9:47:30the retail traders will look for a
9:47:32bullish breakout above the top
9:47:34resistance line. Now, majority of this
9:47:37group includes buyers who are looking to
9:47:40take a breakout trade and they will
9:47:42usually set their stop- losses below the
9:47:44bottom support level. This is the usual
9:47:47practice. Now, the manipulation
9:47:49happening here is very exciting. First,
9:47:52the smart money will create a small
9:47:53reaction above the top resistance level
9:47:56of the flag. This minor reaction above
9:47:58the resistance will induce a lot of
9:48:00former retailers to take the bait. That
9:48:03is they will think it is a breakout and
9:48:06these traders would rush in and place
9:48:09their buy market orders and buy limit
9:48:11orders above the resistance in order to
9:48:13buy and they will in turn set their
9:48:16stop- losses below the bottom support
9:48:18level. But most probably this reaction
9:48:20would be a false breakout to trap the
9:48:23retailers into taking a trade. Now the
9:48:26price would move lower and break below
9:48:28the bottom support level where lies a
9:48:30large clusters of sellside liquidity and
9:48:33this institutions will ensure that all
9:48:36their buy orders are executed at the
9:48:39lowest prices possible. Sweeping the
9:48:41sellside liquidity means that all the
9:48:43buy stop- losses are triggered and they
9:48:45are taken out of their trades. Now what
9:48:48happens afterwards? Quite clearly the
9:48:51market will bounce back higher and this
9:48:53time creating a real breakout instead of
9:48:56a minor reaction and once a strong
9:48:58breakout with high volume appears more
9:49:01traders would join in and the prices
9:49:03would rise even higher. A similar
9:49:06scenario takes place in case of a bare
9:49:08flag but here instead of buyers the
9:49:11former sellers would get trapped. A bare
9:49:13flag as you may already know is a
9:49:15bearish continuation pattern. So most of
9:49:18the retailers would look for a breakdown
9:49:20of prices below the bottom support line
9:49:23so as to take a short trade position
9:49:25while setting the stop- losses above the
9:49:27top resistance line. So the smart money
9:49:30will create a sudden price reaction
9:49:33below the support line which will induce
9:49:35a lot of retailers to enter into short
9:49:38trades. This activity causes a lot of
9:49:40buy stop orders getting accumulated
9:49:42above the resistance line. This is
9:49:45actually buy side liquidity and the
9:49:47market will create a false breakout and
9:49:49it will move higher to grab this
9:49:52liquidity in order for the smart money
9:49:54to execute their sell orders at higher
9:49:56prices. Now almost all the buy stop-loss
9:49:59orders above the resistance level will
9:50:01be triggered and those traders will be
9:50:04taken out of their positions. And once
9:50:06all the smart money orders are executed,
9:50:08the market will once again reverse and
9:50:10move lower. And this time the market
9:50:13will form a real breakdown below the
9:50:15flag support to which more short sellers
9:50:17would respond by selling aggressively
9:50:20and the market will fall even lower. Now
9:50:23there are other patterns and other
9:50:25situations in the market where internal
9:50:27liquidity is available for the taking
9:50:30within the major structure. Some of them
9:50:32are symmetrical triangles, price
9:50:34channels, supply and demand zones etc.
9:50:38But the ones that I have discussed here
9:50:40are the most important types and it is
9:50:43more than enough to get a fair
9:50:44understanding as to where to find
9:50:46internal liquidity and how to find smart
9:50:49money traps associated with them. Now
9:50:51let's move on to a few quick examples of
9:50:54such internal liquidity manipulations in
9:50:56the real market conditions. Uh take a
9:50:59look at this chart. You can see price
9:51:01making equal lows. So clearly there is
9:51:04sellside liquidity below this level. And
9:51:07what happens next? As you can see the
9:51:09market moves down and absorbs this
9:51:12clusters of orders and then it reverses
9:51:14to go higher. Usually when liquidity is
9:51:17absorbed the price will move quite
9:51:20strongly. Moving on to example two. What
9:51:23we have here is equal highs and you know
9:51:25what that means? It means there is buy
9:51:28side liquidity available above this
9:51:30level. Now the smart money are eager to
9:51:33manipulate or absorb these liquidity
9:51:35areas. And guess what happens? the price
9:51:38breaks into this liquidity area and
9:51:40sweeps out all the retailer orders above
9:51:43it and then it moves down lower. This is
9:51:46a typical manipulation that you can find
9:51:48on charts on a regular basis. You can
9:51:51call it double tops or double bottoms
9:51:53also but the logic remains the same. Now
9:51:56example three is a support level within
9:51:59the major structure and we have talked
9:52:02about how the manipulations takes place
9:52:04around a support level or a demand zone
9:52:06quite clearly. So there is buyside
9:52:08liquidity above it and sellside
9:52:11liquidity below it and look what happens
9:52:13next. The market breaks below the
9:52:15support level gets hold of the retailer
9:52:17stop losses and then reverses and goes
9:52:20higher taking out the buy side
9:52:22liquidity. This price manipulations
9:52:24affects both the players. Now this is
9:52:27example number four which is a
9:52:29resistance level within the external
9:52:32structure. Here also you can anticipate
9:52:35retailer orders stacking above and below
9:52:37the resistance. So there is buyside
9:52:39liquidity above the level and sellside
9:52:42liquidity below it. And as you can see
9:52:45the price broke above the resistance
9:52:47level to sweep the buyside liquidity.
9:52:49And once it is done, the market reversed
9:52:52its direction and in the process it
9:52:54takes out the sellside liquidity and
9:52:56moved lower. Now look at this case. An
9:52:59internal uptrend line has formed within
9:53:01the major structure. From what we have
9:53:04learned, there are both types of orders
9:53:06available above and below this trend
9:53:08line. And look what happened here. The
9:53:10price broke below the trend line thereby
9:53:13taking out the sellside liquidity. And
9:53:15then it did a sharp reversal and moved
9:53:17higher. Now yet another example is of a
9:53:21downtrend line which formed within the
9:53:23major structure. Here the price made a
9:53:25false move higher to grab the retailer
9:53:28liquidity and then reverse lower to
9:53:31continue in the major trend direction.
9:53:33The next example is one of a flag
9:53:35formation. This is a bullish flag
9:53:38formation and as you can see the price
9:53:40made a force breakout or reaction below
9:53:42the support level just to absorb the
9:53:44liquidity available in the form of stop-
9:53:46losses and then the price broke above
9:53:49the flag and moved higher. This is a
9:53:52similar example but this is a bare flag
9:53:55formation. Here you can see the market
9:53:57took out the liquidity above the top
9:53:59resistance line and then the price
9:54:01returned and broke below the lower
9:54:03support and continue to decline. In this
9:54:06manner, using this simple logic, you can
9:54:08spot innumerable liquidity manipulations
9:54:11in the charts. It could even be in the
9:54:14form of recognizable patterns that most
9:54:16retailers are keen to trade from. So go
9:54:19ahead and look for such manipulations
9:54:21and liquidity grabs in the charts and
9:54:24also try to understand what happens
9:54:25next. You will clearly understand how
9:54:28the price movements are engineered in
9:54:30the markets once we have a discussion on
9:54:33a few more topics like order flow, order
9:54:36blocks and inducements.
9:54:41I know most of you have a good idea
9:54:44about what liquidity is. You might know
9:54:46it as the fuel that drives the market.
9:54:49You might even know that market moves
9:54:52from one area of liquidity to another.
9:54:54But if your charts look something like
9:54:57this filled with potential liquidity
9:54:59zones then it could be a problem because
9:55:02first of all there is a lot of noise and
9:55:05unwanted information in the charts and
9:55:08secondly you'll get confused as to which
9:55:10ones to target. So let's fix this. In
9:55:14this video we will talk about liquidity
9:55:16pools and how to identify high
9:55:19probability liquidity pools. So without
9:55:21wasting any more time let's get started.
9:55:24If you have followed the first season of
9:55:26the smart money course then you will
9:55:28have a decent understanding about
9:55:30liquidity that is both external and
9:55:33internal liquidity and where to find
9:55:35them. Basically liquidity refers to
9:55:38money available in the market. These are
9:55:41essentially unfilled retail limit orders
9:55:43and stop-loss orders waiting to be
9:55:45executed. Now, liquidity pool as you can
9:55:48imagine refers to a pool of money or a
9:55:51cluster of limit and stop-loss orders
9:55:54set by the retail traders waiting to be
9:55:56executed. Mostly the retail traders buy
9:56:00or sell at market prices while the smart
9:56:02money buys below the market price and
9:56:05sells above the market price. In other
9:56:08words, they buy at a discount and sell
9:56:11at premiums. The big institutions try to
9:56:14take advantage of these liquidity pools.
9:56:17But not all liquidity pools are worth
9:56:19their time. As I have mentioned,
9:56:22liquidity pools are associated with
9:56:24money. Some liquidity pools have more
9:56:26money associated with them while others
9:56:29have less money associated with them.
9:56:31This has to do with where the liquidity
9:56:34pool gets formed which is none other
9:56:36than the location of the liquidity pool.
9:56:38And it also has to do with the time
9:56:40frame in which the liquidity zone is
9:56:42formed. So the smart money targets
9:56:45different liquidity pools differently.
9:56:48They attack liquidity pools with more
9:56:50money aggressively and they use the
9:56:53other liquidity pools with lesser money
9:56:56as a means to get to these larger pool
9:56:58of liquidity. From this we can
9:57:01understand that a liquidity pool with
9:57:03more money associated with it is a high
9:57:06probability one. So these are the
9:57:08liquidity pools that we must focus on
9:57:10for our trades. Now the question is how
9:57:14can you identify such liquidity pools in
9:57:16the chart. But before that let us try to
9:57:19identify a liquidity pool. The idea is
9:57:22simple. Think from the perspective of a
9:57:25retail trader who uses technical
9:57:27analysis or price action for his trades.
9:57:30Where do you think they will look to
9:57:31place buy or sell orders? And where do
9:57:34you think they will set their stop-
9:57:36losses and target orders? You'll be
9:57:38shocked to notice that retail traders
9:57:41mainly trade near important areas of
9:57:44supply and demand like support or
9:57:46resistance, swing highs or swing lows,
9:57:49equal highs or equal lows from trend
9:57:52lines, etc. they enter into a breakout
9:57:55trade or they enter into a reversal
9:57:58trade near these levels. Either way,
9:58:00they will set their stop- loss beyond
9:58:02these supply or demand areas or based
9:58:05upon a candlestick high or low. Now, the
9:58:08target orders, which are also limit
9:58:10orders, are usually placed at the
9:58:13nearest potential demand or supply area
9:58:15where the price can anticipate a
9:58:18resistance. Since a lot of unfilled and
9:58:21unexecuted orders are accumulated near
9:58:23these levels and since money is
9:58:26associated with these areas, these are
9:58:28liquidity pools. For example, take a
9:58:31look at this impulse swing move. There
9:58:34is a swing high and a swing low formed.
9:58:36Most traders would look to buy above an
9:58:38old high after a breakout and retailers
9:58:41would look to sell below an old low for
9:58:44a breakout trade. Now, if some traders
9:58:46have already bought from the old lows
9:58:49anticipating a reversal, then they will
9:58:52most likely put their stop- loss below
9:58:54the old low to limit their losses. And
9:58:57on the other hand, if some traders have
9:58:59already sold from an old high
9:59:01anticipating a reversal, then they will
9:59:03probably put their buy stop orders above
9:59:06the old high. So, the old highs have a
9:59:09pool of liquidity resting above them in
9:59:11the form of buy stop-loss orders. And
9:59:14there are also the willing buyers with
9:59:16their buy limit orders placed looking to
9:59:18buy after a breakout above the high.
9:59:21These clusters of buy limit orders and
9:59:23buy stop-loss orders placed near the
9:59:26swing high is called buyside liquidity.
9:59:29On the contrary, the old swing lows have
9:59:31a pool of liquidity resting below them
9:59:34in form of sell stop-loss orders. And
9:59:37there are also willing sellers with
9:59:39their sell limit orders placed looking
9:59:41to go short after a breakout below the
9:59:44low. These clusters of sell limit orders
9:59:47and sell stop- losses accumulated near
9:59:49the swing low is called sellside
9:59:52liquidity. Now, the same concept applies
9:59:55to other areas of liquidity also. Now
9:59:58let's head back to determining high
10:00:00probability liquidity pools. As I have
10:00:02already mentioned, there are mainly two
10:00:05factors in play. First is the location
10:00:07of the liquidity formation and the
10:00:10second one is the time frame. In terms
10:00:12of location, a liquidity pool formed
10:00:15near an external structure is high
10:00:17probability. This means major swing
10:00:20highs and lows or equal highs and lows
10:00:23formed on a major structure have high
10:00:25probability liquidity pools near them.
10:00:28In this case, the time frame doesn't
10:00:30matter. If you're analyzing the charts
10:00:32in the 15 minutes time frame, then the
10:00:35liquidity pools form near the major
10:00:37swing highs and lows are high
10:00:39probability ones. While the liquidity
10:00:41pools form near the internal structure
10:00:43formations like the equal highs and
10:00:46lows, order blocks, fair value gaps,
10:00:48liquidity voids, etc. are only low
10:00:51probability liquidity pools which only
10:00:54aids in taking out the major liquidity.
10:00:56These usually act as intermediate
10:00:59stopping points in the market to
10:01:01continue towards these pools of
10:01:03liquidity where more money is
10:01:05accumulated. Now take a look at this
10:01:07bullish structure marked. You can see
10:01:09that I have marked the higher swing
10:01:12highs and higher swing lows. The region
10:01:15near the swing highs consist of a
10:01:17buyside liquidity pool. On the opposite,
10:01:20the area near the swing lows consist of
10:01:22a pool of sellside liquidity. Now why am
10:01:25I seeing an area near the swing high and
10:01:28a low and not exactly seeing above the
10:01:32swing high and below the swing low. This
10:01:35is because according to ICT liquidity
10:01:38starts from where the body of the swing
10:01:41high or swing low candle ends. So for
10:01:44this swing high candle the liquidity
10:01:46pool would start from the end of this
10:01:48body to anywhere above the swing high
10:01:51point. This is the reason why we could
10:01:54see rejections or price push backs
10:01:56happen way before the market comes close
10:01:58to the actual swing high level. But
10:02:01mostly the concentration of orders or
10:02:03liquidity or money would be available
10:02:06above the swing high. The same concept
10:02:09applies to the sellside liquidity
10:02:10available near the swing lows. So for
10:02:13this swing low candle, the liquidity
10:02:15pool would start from the end of this
10:02:17candle's body to anywhere below the
10:02:20swing low point. Now the second factor
10:02:23is the time frame under consideration. A
10:02:26liquidity pool formed in a higher time
10:02:28frame market structure is much more high
10:02:30probability than a liquidity pool formed
10:02:32in a lower time frame structure. This is
10:02:35very self-explanatory. For example, take
10:02:38a look at this 15-minut time frame chart
10:02:40on your left and a 1 minute chart to
10:02:42your right. I have marked the important
10:02:45liquidity pools on both these charts.
10:02:47Now, which out of these two do you think
10:02:50the market will respect more? Quite
10:02:53obviously the liquidity pools in the 15
10:02:55minutes chart. The reason is quite
10:02:57simple. The liquidity pools in the
10:02:5915-minut chart is associated with more
10:03:02money behind it as more traders would be
10:03:05interested in trading these levels.
10:03:07Therefore, they will place more limit
10:03:09orders and stop-loss orders. I hope it
10:03:12is clear. But what is more powerful and
10:03:15extremely high probability is a
10:03:17confluence liquidity pool. The idea is
10:03:20simple. So if a lower time frame
10:03:22liquidity pool overlaps with a higher
10:03:25time frame liquidity pool then the
10:03:27chances of price returning to absorb
10:03:30this liquidity increases. Not only does
10:03:33the chances of a price visit becomes
10:03:35increasingly high but also the trade
10:03:37entries can be refined by moving into
10:03:40the lower time frames. Now the only
10:03:43remaining thing to be understood is how
10:03:45the smart money uses these liquidity
10:03:47pools to their benefit. So these big
10:03:50institutions use these liquidity pools
10:03:53to fill their large positions. In fact,
10:03:56they use the buyside liquidity available
10:03:58near the swing highs to sell at higher
10:04:01prices or at a premium. Likewise, they
10:04:04use the sellside liquidity available
10:04:06near the swing lows to buy at lower
10:04:08prices or at a discount. They use these
10:04:11liquidity pools to manipulate retailers.
10:04:15Now how they access liquidity and
10:04:17manipulate the retail players is a very
10:04:20interesting topic of discussion.
10:04:22Essentially there are two ways in which
10:04:24they do this. It could be a sweep of
10:04:27liquidity or a run through liquidity.
10:04:30They will make use of minor liquidity
10:04:32pools to make this happen.
10:04:38Take a look at this impulse swing move.
10:04:40I have plotted liquidity pools using
10:04:42rectangles. All I want you to do is to
10:04:45determine which are the external and
10:04:48internal range liquidity. Pause the
10:04:50video, take a few seconds and write down
10:04:53your answers in the comment section.
10:05:01Okay, this is the answer. If you have
10:05:04got all of them correctly, congrats. And
10:05:07if you are unable to answer correctly,
10:05:09don't worry because in this video we are
10:05:12going to learn exactly that. We will
10:05:15understand in detail what external and
10:05:18internal range liquidity is and I will
10:05:20try to clear all the doubts you have on
10:05:23this topic. So without further ado,
10:05:25let's get started. Before you learn
10:05:28about anything in the market, you must
10:05:30be familiar with the reason why price
10:05:32movements happen in the market. You
10:05:34could simply say it's because of supply
10:05:36and demand and you're right. But this is
10:05:39a very vague way of explaining it. You
10:05:41can't really use it to your advantage.
10:05:44Essentially, market price moves because
10:05:47of two main reasons. In fact, price does
10:05:50only two things in the market. It either
10:05:53seeks liquidity or offers fair value. In
10:05:57other words, price looks to sweep the
10:05:59liquidity accumulated near the liquidity
10:06:01pools or it tries to balance out the
10:06:04inefficiencies or imbalances associated
10:06:07with the fair value gaps or liquidity
10:06:10voids. This is what all market movements
10:06:13come down to. Now this process where
10:06:16price moves in search of a liquidity
10:06:18pool is called draw on liquidity. It is
10:06:22based on the idea that institutions and
10:06:24smart money seek out liquidity to
10:06:26execute their large orders often leading
10:06:29to price moving towards the external
10:06:31liquidity pools before reversing or
10:06:34continuing its trend. For instance, if
10:06:38there is a buyside liquidity nearby,
10:06:40price will likely move up to grab this
10:06:42liquidity. Similarly, if there is a
10:06:45sellside liquidity nearby, price will
10:06:48likely move down to grab this liquidity.
10:06:51So this draw on liquidity will help you
10:06:54understand the directional bias of
10:06:56prices. It lets you anticipate the
10:06:59upcoming movement of prices. It helps
10:07:01you predict where the price is likely to
10:07:04go next. This is where you need the help
10:07:07of external and internal range
10:07:09liquidity. In the previous episode on
10:07:12liquidity pools, I have given you a
10:07:15heads up on the two types of market
10:07:17liquidity. These are the external range
10:07:20liquidity and the internal range
10:07:22liquidity. External range liquidity or
10:07:25ERL is the liquidity associated with the
10:07:28major swing highs or lows or the old
10:07:31swing highs or lows. Large pools of
10:07:34unfilled buy and sell orders are
10:07:36accumulated near these areas. Now, when
10:07:39talking about the internal range
10:07:41liquidity or IRL, some confusions could
10:07:44arise. One group of SMC traders will
10:07:47only consider a fair value gap as an
10:07:50internal range liquidity. Even ICT
10:07:53himself follows the same. There is
10:07:56another group of SMC traders who
10:07:58considers all the possible internal
10:08:00liquidity pools as IRL. This includes
10:08:04regions near equal highs or lows, fair
10:08:06value gaps, order blocks, liquidity
10:08:09voids, etc. which are formed within the
10:08:12external swing highs and swing lows. As
10:08:15a matter of fact, I belong to the second
10:08:18group and I have a very good reason to
10:08:20think so. I will explain the reason
10:08:22shortly. In the meantime, if you have a
10:08:25convincing reason that you could change
10:08:27my belief, the comment box is open for
10:08:30you. Now, let's take a few cases to
10:08:33understand this. In this first scenario,
10:08:35we have a price swing and I have marked
10:08:38the swing high and swing low points. We
10:08:41all know that there is a pool of
10:08:42liquidity available near these external
10:08:45swing points. Precisely there is buyside
10:08:48liquidity near the swing high and
10:08:51sellside liquidity near the swing low.
10:08:54Now if you observe the price action you
10:08:57could notice a price imbalance. Clearly
10:09:00there is a gap between this candle's
10:09:02high and the third candle's low. This is
10:09:05nothing but a fair value gap. I hope you
10:09:09guys already know how to plot a fair
10:09:11value gap. If you don't, I suggest you
10:09:14watch it from the SMC season 1 playlist.
10:09:17Now remember what we have learned
10:09:19earlier on the reasons why prices move.
10:09:22It is either to seek liquidity or fill
10:09:25an imbalance. And as you can see, it was
10:09:28exactly what the market did. It retraced
10:09:31back to mitigate the fair value gap. And
10:09:34as a next step, price reversed and moved
10:09:37higher to draw on the buyside liquidity
10:09:39available near the swing high. You can
10:09:42see how the price accessed the external
10:09:44liquidity pool and continued higher.
10:09:47While rallying higher, the market formed
10:09:50imbalances or fair value gaps. Now, what
10:09:53do you think will happen? Quite
10:09:55obviously, the market has only two
10:09:57options. Seek liquidity or offer fair
10:10:01value. Let me mark the new swing high
10:10:04and swing low. Let me also plot the
10:10:06external liquidity pools near these
10:10:08swing points. I will also highlight the
10:10:11fair value gaps. Now let's see what the
10:10:13market has done. You can observe that
10:10:16the price has retraced back and
10:10:18mitigated the inefficiency associated
10:10:21with the fair value gap and again it
10:10:24reversed direction and started to move
10:10:26higher to draw on the buyside liquidity
10:10:29available near the swing high level. Now
10:10:32you can ask me a few logical questions.
10:10:35Why did the market only draw on the buy
10:10:37side liquidity? And why did it not sweep
10:10:40the sellside liquidity? Or why did the
10:10:43price reverse after mitigating the fair
10:10:46value gaps? And why did it not sweep the
10:10:49external liquidity pool near the swing
10:10:51lows? The answer to these questions has
10:10:54to do with the market structure. In this
10:10:57case, we have looked at a bullish market
10:10:59structure. During a bullish market,
10:11:02price is mostly drawn towards the buy
10:11:05side liquidity pools. Especially during
10:11:08strong bullish market phases, you won't
10:11:10see prices retracing all the way down to
10:11:13sweep the swing lows. In such scenarios,
10:11:16the market would reverse after
10:11:18mitigating the imbalances or fair value
10:11:21caps. But that doesn't mean it doesn't
10:11:24visit the sellside liquidity. That's not
10:11:26true. There are multiple occasions where
10:11:29the price will retrace even deeper to
10:11:31draw on the sell side liquidity and then
10:11:34reverse higher to draw on the buy side
10:11:36liquidity. We will look at such cases
10:11:38next. Now consider this swing move. The
10:11:41price is in a bullish trend. I will now
10:11:44mark the external liquidity pools and
10:11:46imbalances. Let's see what the market
10:11:49does. The market retraced lower from the
10:11:52swing high and then it came down to
10:11:55mitigate the fair value gap. But instead
10:11:57of reacting and reversing from the fair
10:12:00value gap, the price pushed lower. If
10:12:03you observe closely, you will notice
10:12:05that there is an extreme order block
10:12:07available. The price mitigated the order
10:12:10block and then reversed direction and
10:12:12started moving higher to draw on the
10:12:15buyside liquidity pool. In this
10:12:17scenario, you'll notice that even though
10:12:20price came back to fill this imbalance,
10:12:22the market did not respect the fair
10:12:24value gap. Instead, it moved lower to
10:12:27collect the liquidity available in the
10:12:29extreme bullish order block before it
10:12:32reversed higher to seek the buyside
10:12:34liquidity. Now, take a look at another
10:12:36case. Here also, the market structure is
10:12:40bullish. In this situation, I have
10:12:43already marked the external liquidity
10:12:45poles near the swing highs and lows. I
10:12:48have also highlighted the fair value gap
10:12:50and order block. Let's see what the
10:12:53price does. The market started retracing
10:12:56lower and it filled the imbalance. But
10:12:59instead of reversing from the fair value
10:13:01gap, the price pushed lower. It is
10:13:03hoping to find liquidity elsewhere. It
10:13:06came down to this bullish order block
10:13:08and mitigated it. But it did not stop
10:13:11there. The price pushed below the order
10:13:14block drawing into the sellside
10:13:16liquidity available near the swing low.
10:13:19It has swept the sellside liquidity and
10:13:22then started to reverse and move higher.
10:13:25This is quite evident from the deep
10:13:27rejection bick that bent down hunting
10:13:29for liquidity below the lows. The price
10:13:31moved higher again and grabbed the
10:13:34buyside liquidity available above the
10:13:36swing high. In this scenario, the market
10:13:39grabbed both the sellside and buyside
10:13:41liquidity areas. This is the foundation
10:13:44of another important concept named
10:13:47dealing ranges which we will learn in
10:13:50the upcoming episodes. Now, what did you
10:13:53learn from these three cases? The first
10:13:56and foremost point is that price
10:13:58basically moves from external to
10:14:00internal and then internal to external
10:14:04range liquidity most of the time. So
10:14:06price after taking the external range
10:14:08liquidity moves towards the internal
10:14:11range liquidity to balance the fair
10:14:13value gap and then again price moves to
10:14:16the external range liquidity and this
10:14:19cycle continues. The second point is
10:14:21that price imbalances like fair value
10:14:25gaps or liquidity voids serve as an
10:14:28incentive for prices to return back and
10:14:30fill these price inefficiencies. They
10:14:33act like magnets drawing the price
10:14:35towards them. This is why fair value
10:14:38gaps are considered as the most
10:14:41important internal range liquidity area.
10:14:43But this doesn't mean price will always
10:14:46respect these fair value gaps and
10:14:48reverse its direction. This brings us to
10:14:50the third point. There are occasions
10:14:53where price will fill the fair value gap
10:14:55completely or partially and reverse
10:14:58direction. But then there are other
10:15:00scenarios where the market would break
10:15:02past the fair value gap and search for
10:15:04liquidity elsewhere. These could be near
10:15:07order blocks, areas near equal highs or
10:15:10lows etc. Now this is the reason why I
10:15:13have stated that I belong to the second
10:15:15group who also considers order blocks
10:15:19equal highs or lows etc as internal
10:15:22range liquidity alongside fair value
10:15:24gaps or liquidity voids. But obviously
10:15:27having an imbalance like a fair value
10:15:29gap or liquidity void is crucial. Think
10:15:33about it. If internal range liquidity is
10:15:36all about fair value gaps, then what is
10:15:38the purpose of having order blocks in
10:15:40the internal structure, it will be
10:15:42useless, right? I agree that order
10:15:45blocks are high probability decision
10:15:47areas, but considering them as internal
10:15:50range liquidity would do no harm. I hope
10:15:53things are making sense, but do let me
10:15:55know in the comment section your view
10:15:58about this. And finally, there are
10:16:00occasions where price will just run
10:16:03through all the fair value gaps, order
10:16:05blocks, etc. and sweep the external
10:16:08liquidity pool. The market is full of
10:16:10probabilities. And most likely you have
10:16:13come across such a candle sweeping
10:16:15through the external pool of liquidity
10:16:17and rejecting back and leaving behind a
10:16:20very deep wick. And from there price
10:16:23might reverse direction and continue
10:16:25with the major trend. But at the end of
10:16:27all this keep in mind that while trading
10:16:30our main focus is on the external range
10:16:33liquidity because it lies within the
10:16:36major trend of the market while the
10:16:38internal range liquidities are taken by
10:16:41the price retracements. So if you are
10:16:44planning to trade using this idea
10:16:46consider the following. First of all you
10:16:48need to identify the major market
10:16:50structure in your higher time frame. It
10:16:53could be 15 minutes 1 hour or 1 day.
10:16:56Let's assume the market structure is
10:16:58bullish. Next up, you need to ask where
10:17:01is the most obvious liquidity pool which
10:17:04the market could draw upon or target.
10:17:07For instance, if a major high is
10:17:10untested, price is likely to be drawn
10:17:12towards it. And in case if a large price
10:17:15imbalance exist, the price may fill it
10:17:18before reversing again. The overall idea
10:17:21is to trade in the direction of the
10:17:23liquidity draw until a sweep occurs. So
10:17:27once price sweeps the external liquidity
10:17:29and retraces, look for reversals at
10:17:32order blocks or fair value gaps. You
10:17:35could use candlestick rejection
10:17:36confirmations like pin bars, engulfing
10:17:39candles, etc. to time your trade
10:17:42entries. You could also refine your
10:17:44entries by moving on to your lower time
10:17:47frame charts.
10:17:52Take a look at this figure. Can you take
10:17:54a guess in which direction will the
10:17:56price move after breaking through this
10:17:59level? You don't have to be absolutely
10:18:01certain about it. Just tell me what is
10:18:03the most probable outcome. Will there be
10:18:06a continuation or a reversal after this
10:18:09structure break? Or look at this
10:18:11scenario. What do you think might happen
10:18:14after price breaks past this level? Will
10:18:16it continue the trend or will it
10:18:18reverse? Comment down your answers. And
10:18:21if you can also give reasons or logic to
10:18:25why you think so, then that would be
10:18:27absolutely great.
10:18:34Okay, now these are the answers to the
10:18:37questions. If you got both of them
10:18:39right, congrats. If not, don't worry
10:18:43because this is one of those situations
10:18:45where most traders get confused. When
10:18:48price crosses a liquidity pool, these
10:18:50traders gets confused whether the price
10:18:53will continue or run in the direction of
10:18:56breakout or will it reverse and form a
10:18:59purge or a sweep. So this is one of the
10:19:02most important aspect of trading and the
10:19:05logic to why this happen lies in how
10:19:08liquidity is being used by the
10:19:10institutional players. By now most of
10:19:13you will have a fair idea of what
10:19:15liquidity and liquidity pools are, what
10:19:18external and internal range liquidity
10:19:20are, how and where to find them. But in
10:19:23this episode, I will talk about how the
10:19:26big institutions use liquidity to
10:19:28manipulate and trap retail traders like
10:19:31you and me, inducing retailers to get
10:19:34into trades at the wrong locations and
10:19:37in the wrong directions. In fact, we are
10:19:40going to learn about two liquidity
10:19:42manipulations, namely liquidity sweep
10:19:45and liquidity run. I will help you
10:19:47understand what these are, how they are
10:19:50different from one another and how you
10:19:52can take trades using these concepts so
10:19:55that you won't fall prey to these big
10:19:57players. So, a liquidity sweep is a
10:20:00price move that targets a cluster of
10:20:02stop-loss orders or pending orders at a
10:20:05key level, triggers them, and then
10:20:07quickly reverses direction. In simple
10:20:09price action terms, it is a deliberate
10:20:12stop hunt or fake breakout engineered by
10:20:15the big players to sweep or grab
10:20:17liquidity which are nothing but buy or
10:20:19sell orders lying around any support or
10:20:22resistance or swing highs or lows. So
10:20:25when price sweeps buyside liquidity
10:20:27above a prominent high or sweeps
10:20:30sellside liquidity below a prominent low
10:20:32and then fails to hold and snap back, it
10:20:36indicates a liquidity sweep. This often
10:20:39result in what we call a bull trap or a
10:20:41beer trap which lures breakout traders
10:20:44into taking a trade from a false price
10:20:46move before reversing. This sweep of
10:20:49liquidity provides the fuel for big
10:20:51institutions to enter large positions in
10:20:54the opposite direction with minimal
10:20:57slippages in prices. So for us retail
10:21:00traders, liquidity sweeps are important
10:21:03because they reveal areas where major
10:21:06players are active and it also help us
10:21:08to avoid getting caught in false
10:21:10breakouts. A confirmed liquidity sweep
10:21:13will often give a high probability
10:21:15reversal signal that we can capitalize
10:21:18on. In other words, spotting a sweep in
10:21:21liquidity can give you a heads up that
10:21:24the market may soon move opposite to the
10:21:26breakout as smart money just use those
10:21:28stop- losses to position themselves in
10:21:31the market. Now, let's talk about
10:21:33liquidity run. Basically, a liquidity
10:21:36run forms the opposite outcome of a
10:21:39liquidity sweep. A run in liquidity
10:21:41occurs when price breaks through a key
10:21:43level of liquidity and keeps going in
10:21:46the same direction instead of reversing.
10:21:48In a liquidity run, the breakout is
10:21:51genuine and it is driven by strong
10:21:53momentum because a large cluster of
10:21:55retail orders gets triggered and as a
10:21:58result it fuels a continued trend move
10:22:01rather than a reversal. This often
10:22:04happens when an important support or
10:22:06resistance or swing high or low is
10:22:09broken with a big imbalance candle which
10:22:11is accompanied by strong volumes and a
10:22:14wide range that closes beyond the level
10:22:17signaling that smart money is running
10:22:19the price in that breakout direction.
10:22:22Simply put, a liquidity run happens when
10:22:25the market continues to run after eating
10:22:27up liquidity, confirming a new leg in
10:22:30the trend. For example, breaking above a
10:22:33resistance or a swing high and rallying
10:22:35higher with no immediate pullback would
10:22:38be considered as a buyside liquidity
10:22:40run. While price breaking strongly below
10:22:42a support or a swing low and dropping
10:22:45even further is considered a sellside
10:22:47liquidity run. In price action terms, a
10:22:50liquidity run represents a real
10:22:53breakout. This concept matters for
10:22:55retail traders like you and me because
10:22:58it marks the start of a new trend or a
10:23:00continuation move. Once you recognize a
10:23:03liquidity run, you can join the momentum
10:23:06and trade in the trend direction. It
10:23:08gives us a clue that the market has
10:23:10enough strength and institutional
10:23:13backing to not just grab liquidity but
10:23:16also push price into a new price
10:23:18territory. Now these are the basic ideas
10:23:21associated with a sweep and a run of
10:23:24liquidity. But there is more to this
10:23:26concept than what meets the eye. The
10:23:28hard part is not about understanding
10:23:30this concept. Instead, it is identifying
10:23:33these sweeps and runs in real market
10:23:36conditions. In fact, there are two main
10:23:38challenges that traders typically face
10:23:40with liquidity. The first is knowing
10:23:43which level is actually being targeted.
10:23:46And the second challenge is knowing
10:23:48whether the price is going to make a
10:23:50continuation move or a reversal which
10:23:52involves an understanding of advanced
10:23:55market structure. In hindsight,
10:23:57everything would look easy, but
10:23:59anticipating a liquidity sweep or a run
10:24:01beforehand is what really matters. Now,
10:24:05the most important thing when it comes
10:24:06to figuring out if it's going to be a
10:24:08liquidity sweep or a liquidity run is
10:24:11your trend. You want to make sure you
10:24:14know the existing market trend that is
10:24:16whether the market structure is bullish
10:24:19or bearish. A very basic rule of thumb
10:24:22is that if it is an uptrend structure
10:24:24with higher swing highs and lows and if
10:24:27we are looking at a swing high then most
10:24:29probably we can expect a liquidity run
10:24:32of prices above the swing high and not
10:24:35really a liquidity sweep. That is there
10:24:37are high chances that the price will
10:24:39continue higher. But if it's a bull
10:24:42trend and you're focusing on a swing
10:24:44low, then most probably you can expect a
10:24:47stop hunt or a liquidity sweep below
10:24:50this low and there are good chances that
10:24:52the prices will reverse direction and
10:24:55move higher. Now you can ask me on what
10:24:58basis am I talking about this? Now the
10:25:01logic behind this assumption is simple.
10:25:03It is based on the concept of strong and
10:25:06weak highs and lows. I have talked about
10:25:08this in the recap episode of this season
10:25:11of the course. Essentially, during a
10:25:13bullish market structure, the higher
10:25:16swing lows are considered as strong lows
10:25:19because price respect these swing lows
10:25:21on multiple occasions without breaking
10:25:23and closing below these lows. A higher
10:25:26low becomes a weak low only when the
10:25:28market changes character towards
10:25:30bearishness. Until and unless this
10:25:33market structure shift happens, price
10:25:35will respect or protect these higher
10:25:37lows. Sometimes price might sweep below
10:25:40these lows and on other occasions price
10:25:43won't even pull back deep enough to test
10:25:46these lows. And even if the market does
10:25:48completely change character, a lot of
10:25:50the time price will pop back inside the
10:25:53range for a pullback. You will
10:25:55understand this in the next segment. Now
10:25:58on the other hand, a higher swing high
10:26:00during a bull trend is considered as a
10:26:03weak high because most of the time the
10:26:06market will break through these highs to
10:26:08grab the buyside liquidity thereby
10:26:10forming a break of structure. The only
10:26:13occasion where a higher high becomes a
10:26:15strong high is when price fails to break
10:26:18and close above the swing high thereby
10:26:21not forming a valid bullish break of
10:26:23structure. Of course, prices could sweep
10:26:26through the high, but if the market
10:26:28fails to form a valid bullish structure
10:26:30break, then also the high is considered
10:26:33as a strong one. This could potentially
10:26:35be the beginning of a change of
10:26:36character or a shift in the market
10:26:38sentiment. Now, this will give you a
10:26:40basic framework to identify if you
10:26:43should expect a liquidity sweep or a
10:26:45run. But to predict a continuation or
10:26:48reversal with higher confidence, we need
10:26:50to make use of another important factor.
10:26:53But before that, let me quickly run
10:26:55through a bearish scenario. In a bearish
10:26:58market trend, price forms lower highs
10:27:01and lower lows. If you consider a lower
10:27:04swing low, most probably we can expect
10:27:06the market to break below this low and
10:27:09create a run of liquidity rather than a
10:27:12liquidity sweep. This is because on a
10:27:14bare trend, the swing lows are
10:27:16considered as weak lows and prices
10:27:19usually run through the sellside
10:27:21liquidity to continue the bearish trend.
10:27:23The swing low becomes a strong low if
10:27:26the price fails to break and close below
10:27:29it. Of course, price might sweep the
10:27:31liquidity below the low, but if it fails
10:27:33to form a valid bearish break of
10:27:35structure, then the low is still
10:27:38considered as a strong low. On the other
10:27:40hand, if you target a lower swing high
10:27:43on a bearish market structure, then most
10:27:45probably you can expect a liquidity
10:27:48sweep to happen and there are high
10:27:50chances that the price will reverse
10:27:52direction and drop lower. The reason why
10:27:55this happen is because on a bare market
10:27:58the swing highs are considered as
10:28:00strongs. Usually these highs are
10:28:03protected and on most occasions price
10:28:06won't even test these highs and even if
10:28:09it retraces back higher it might only
10:28:12sweep these levels. A lower swing high
10:28:15will become a weak high if the market
10:28:17breaks and closes above this high
10:28:20forming a change of character or a
10:28:22market structure shift towards
10:28:24bullishness. This is the basic
10:28:26framework. Now let's improve upon it
10:28:29with the help of internal range
10:28:31liquidity. I hope you are already
10:28:33familiar with this topic from the
10:28:35previous episode. Anyways, here we have
10:28:37an uptrend and we know this because the
10:28:40price has created a breakoff structure
10:28:43by pushing through the previous swing
10:28:44high with this new bullish swing that
10:28:47was created. We can plot our current
10:28:49external range liquidity levels. But
10:28:52because we know that this market
10:28:53structure is currently in an uptrend, we
10:28:56should be expecting the price to target
10:28:58the upper buy side liquidity level. But
10:29:01in order to do this, price needs to find
10:29:04some kind of support that can create the
10:29:06next bullish leg. This is when we look
10:29:09within the previous swing leg for
10:29:11bullish internal range liquidity in the
10:29:14form of a bullish fair value gap. This
10:29:17is what the market can use as fuel to go
10:29:19and push through the buy side external
10:29:21range liquidity. Now you can ask me why
10:29:24a bullish fair value gap and not an
10:29:27order block. The answer is in the
10:29:30question itself. You need an associated
10:29:32fair value gap to consider an order
10:29:35block as valid. In fact, a fair value
10:29:38gap represents a price imbalance in the
10:29:40market which attracts prices towards it.
10:29:43It's like a magnet and prices are drawn
10:29:46towards it. This is why fair value gaps
10:29:49are the most crucial of all internal
10:29:51range liquidities. The market could also
10:29:54mitigate an order block. But the point
10:29:56is that there should be a fair value gap
10:29:58close by. That's the whole idea. So what
10:30:01we have just seen happen is the market
10:30:04has used the internal range liquidity to
10:30:07push through the external range
10:30:08liquidity level and this has now given
10:30:11us a new swing with its own external
10:30:14range liquidity levels. If we are
10:30:16expecting the price to continue this
10:30:18uptrend, we should again look within
10:30:20this swing to find a bullish fair value
10:30:23gap or an associated order block that
10:30:26can be used as a support to create the
10:30:28next legup. So in short, during an
10:30:31uptrend, we expect to see the impulse
10:30:34price moves that leave behind internal
10:30:36range liquidity in the form of bullish
10:30:39fair value gaps or an associated bullish
10:30:42order block that can be used in the
10:30:44future to push through the buy side
10:30:46external range to liquidity to create
10:30:49new higher highs. Now for downtrends,
10:30:52it's the same but just reverse the
10:30:54concept. So if you are expecting the
10:30:57price to break through the sellside
10:30:58external range liquidity levels to
10:31:01create a bearish structure break, we
10:31:03want to look within the previous impulse
10:31:05bearish swing move for internal range
10:31:08liquidity that can help progress the
10:31:10price move towards the downside in the
10:31:12form of a bearish fair value gap or an
10:31:15associated bearish order block. So this
10:31:18explains the relationship on how price
10:31:21switches between the internal and
10:31:23external range liquidities. It's vital
10:31:25to always keep in mind when you see an
10:31:28internal range liquidity like a fair
10:31:30value gap or an associated order block
10:31:33get disrespected. It could be an
10:31:35indication that the market is wanting to
10:31:38attack the change of character level
10:31:40which could result in either a liquidity
10:31:42sweep or a complete market structure
10:31:45shift. Now with a clear understanding on
10:31:48how the market interacts, let's get back
10:31:51to business. As I have mentioned
10:31:53countless times, when price attacks an
10:31:56external range liquidity, which could
10:31:58either be a previous swing high or a
10:32:00previous swing low, it can do one of two
10:32:03things. The first option is for the
10:32:05market to continue in the same
10:32:07direction, which we already know as
10:32:09liquidity run. The second option is to
10:32:12create a reversal which is called a
10:32:15liquidity sweep. So let's learn how to
10:32:18track liquidity runs with higher
10:32:20accuracy. So here we have an uptrend
10:32:22structure. This is a bullish price
10:32:25swing. I have marked the swing high and
10:32:27low. In this scenario, it is the swing
10:32:30high which is the current external range
10:32:32liquidity that we are drawing into. We
10:32:35can see price pushes into this swing
10:32:37high level and it closes above the
10:32:39level. But as of now, we can't yet
10:32:42consider this as a liquidity run. It has
10:32:45only created a breakout. It could just
10:32:47be a sweep also. Since the structure is
10:32:50bullish, the chances of this being a
10:32:53liquidity run is very high. Yet, we need
10:32:56additional confirmation. What we are
10:32:58looking for is an additional candle to
10:33:00form after this breakout candle that
10:33:03creates a fair value gap that overlaps
10:33:06with the breakout of the external range
10:33:08liquidity. The reason why this is
10:33:10required is because in order for the
10:33:12bullish move to continue, it needs to
10:33:15create an internal range liquidity which
10:33:18it can use as support during the next
10:33:21retracement. Likewise, if the market
10:33:24were to create this bullish fair value
10:33:25gap above the swing high level, then
10:33:28this is also a valid set. The important
10:33:30thing in this is that the internal range
10:33:33liquidity should be created during or
10:33:36after the breakout because the fair
10:33:38value gap formation represents bullish
10:33:41strength of the buyers by creating an
10:33:44area of imbalance that they can use as
10:33:46support for the next price rally towards
10:33:49the upside. However, if such a bullish
10:33:52fair value gap was created before
10:33:54breakout, we cannot use it for
10:33:56validation of a runon liquidity. In such
10:33:58a situation, we have to wait and see if
10:34:01the chart creates the correct internal
10:34:03range liquidity that favors a trend
10:34:06continuation. So fair value formations
10:34:08like this don't give a strong confidence
10:34:11for liquidity run. Now for liquidity
10:34:14runs on the sell side, we can use the
10:34:17exact same principles but just reverse
10:34:19them. In this case, our focus is on the
10:34:22swing low levels anticipating a bearish
10:34:25structure break to attack the sellside
10:34:28liquidity. This means we are looking for
10:34:30the creation of a bearish fair value gap
10:34:33either within the break of the liquidity
10:34:34level or underneath it. We don't want to
10:34:37consider the bearish fair value gaps
10:34:39that are formed above the swing low
10:34:41level for the very reason that prices
10:34:44might retrace higher after sweeping
10:34:46through the sellside liquidity to fill
10:34:48the price imbalance leading to a fake
10:34:51out. Now let's talk about how to
10:34:53anticipate liquidity sweeps. We will
10:34:56revisit a bullish structure. Here we
10:34:59have a swing high as our draw on
10:35:01liquidity. But this time when price
10:35:04attacks the swing high level after
10:35:06retracing to an internal range
10:35:07liquidity, it fails to push over the
10:35:10swing level and close above it. So a
10:35:12bullish breakup structure has not
10:35:14happened. This shows a massive weakness
10:35:17in the buyer's effort to break through
10:35:19the high creating what we know as a fake
10:35:22out which is a clear indication that the
10:35:24price is creating a liquidity sweep.
10:35:27From here we can expect to see a
10:35:30reversal in prices and possibly a change
10:35:33of character towards bearishness. Now
10:35:35even if we consider a case where the
10:35:37bullish candle does close over the
10:35:39external swing high liquidity level, it
10:35:42doesn't mean we can eliminate the chance
10:35:44of a liquidity sweep. Here we have to
10:35:46focus on where the fair value gap gets
10:35:48formed. In this scenario, if we look at
10:35:51where the last bullish fair value gap
10:35:53was formed, we can see that it's below
10:35:55the external range liquidity. So, if the
10:35:58price were to move down after sweeping
10:36:00the buyside liquidity, there is a high
10:36:02chance that this fair value gap will be
10:36:05completely disrespected, which would in
10:36:07turn give us a signal that the market
10:36:10structure could be switching. But even
10:36:12with that being said, we don't want to
10:36:14consider taking short trades just yet.
10:36:17Ideally, we want to see if the price
10:36:19will push down and break and close below
10:36:22the previous swing low because this
10:36:25could create a bearish change of
10:36:26character which is actually the second
10:36:28signal we require. So the first signal
10:36:31is the liquidity sweep above the swing
10:36:33high itself and the second signal is the
10:36:36market structure shift. But the final
10:36:38confirmation that we are looking for is
10:36:41whether this bearish decline in prices
10:36:43managed to create a bearish fair value
10:36:46gap during or after the breakdown or
10:36:48change of character below the low. This
10:36:51is important because this is what
10:36:53sellers can use as resistance to
10:36:55continue the downward move thereby
10:36:57creating a new breakoff structure which
10:37:00confirms that the market has now
10:37:02transitioned into a bearish trend. This
10:37:06is the typical setup that we usually
10:37:08tend to see when the market creates a
10:37:10liquidity sweep. But focus on the fact
10:37:13that despite a liquidity sweep or run,
10:37:17we should always trade in the direction
10:37:19of the existing trend. If the existing
10:37:22trend changes, change your directional
10:37:24bias. Now, let's look at a top-down
10:37:27approach that you can use for your trade
10:37:29setups. Let's look at a bullish
10:37:31structure with a fair value gap on a
10:37:3315-minut chart. So if you're analyzing
10:37:36your charts on a 15 minutes higher time
10:37:38frame and you have a fair value gap then
10:37:41you should move down into a smaller time
10:37:43frame like 1 minute or 3 minute to
10:37:45analyze whether the market actually
10:37:47respects this 15-minute fair value gap.
10:37:50So here we are looking at the same chart
10:37:52but on a 1 minute time frame. And as
10:37:55expected we can see the current market
10:37:58structure on this lower time frame chart
10:38:00is bearish which we can confirm with
10:38:03this breakoff structure. But remember we
10:38:05want to enter a long trade. So what we
10:38:08are looking for is a reversal on this 1
10:38:11minute time frame so that it aligns with
10:38:13the bullish 15-minut chart. When we mark
10:38:16out the current external range levels on
10:38:18this one minute chart, we can see a
10:38:21sweep of liquidity occur near the swing
10:38:23lows, which as we know by now is the
10:38:26first phase of reversal that we are
10:38:28looking for. Fast forward, we can then
10:38:31see a bearish fair value gap get
10:38:33disrespected followed by a bullish
10:38:35change of character which means all we
10:38:38are waiting for now is the bullish
10:38:40breakup structure to signal that the
10:38:42reversal is complete which in this case
10:38:45didn't take long to happen. Now when a
10:38:47reversal like this takes place the first
10:38:50bullish fair value gap to form
10:38:52afterwards is what is commonly known in
10:38:54SMC as the silver bullet. This
10:38:57represents the highest probability fair
10:38:59value gap that the market can offer. We
10:39:02will learn more about this strategy
10:39:04later in this course. So this bullish
10:39:07fair value gap is what we will use to
10:39:09enter our long trades. And you could
10:39:11place your stop- loss below the lowest
10:39:14point before the change of character
10:39:16happened. Now we can switch back to the
10:39:1815-minut time frame with a good amount
10:39:20of confidence that this 15-minut bullish
10:39:23fair value gap will be respected based
10:39:25on the confirmation signal that we have
10:39:28received as 1 minute time frame trend
10:39:30reversal. From here we want to see the
10:39:33price move higher to draw the buyside
10:39:36liquidity where we can plan to exit our
10:39:39trade or we could of course hold this
10:39:41trade for a longer period if you believe
10:39:43the market will continue in the bullish
10:39:45direction. We can make use of the
10:39:47overall structure analysis and see if
10:39:49price will perform a liquidity run based
10:39:52on whether it forms a structure breakout
10:39:54with associated fair value gap. This
10:39:57trading method applies to both liquidity
10:40:00sweeps and liquidity runs alike. So make
10:40:03sure you learn and implement it
10:40:04properly.
10:40:11We are going to learn another important
10:40:13topic in SMC without the knowledge of
10:40:16which trading in the markets can be
10:40:17tricky as well as risky. It is none
10:40:20other than inducements. Some traders
10:40:22ignore the significance of this topic
10:40:25while many others don't use it in the
10:40:27proper manner. We will try to fix this.
10:40:29So in this video we will understand what
10:40:32inducement is and what its significance
10:40:34is. Then we will learn different methods
10:40:37of identifying and spotting inducements
10:40:40in the market. Further we will discuss
10:40:42about the different types of inducements
10:40:44namely major and minor inducements and
10:40:47finally we will understand the
10:40:49difference between inducements and
10:40:50change of character. Now there are
10:40:53different ways in which you can define
10:40:55an inducement but I would like to think
10:40:57of inducements as an area or level where
10:41:00retail stop- losses can be hunted or
10:41:02simply think of it like a trap in the
10:41:04charts. The proper definition of
10:41:06inducement is that inducement is an area
10:41:09of deception where most traders believe
10:41:11it is the correct and right time to
10:41:13enter a trade leading them to take wrong
10:41:15decisions at the wrong locations and in
10:41:18the wrong direction. So the idea of an
10:41:20inducement level is to induce or
10:41:23persuade traders to buy or sell at the
10:41:26wrong location thereby leading them to a
10:41:28trap. Now inducement is a concept based
10:41:30on liquidity. For example, think of it
10:41:33like a level where retailers find an
10:41:35opportunity to take a trade. But for
10:41:37someone who follows smart money
10:41:39concepts, inducements give them an
10:41:41opportunity to take a counter trade
10:41:43against these retailers. Or in other
10:41:45words, inducements signal SMC traders
10:41:48that it is now feasible to take a trade.
10:41:51It is always advised that until and
10:41:53unless there is a proper inducement in
10:41:55the chart, one should not even think
10:41:57about entering into a trade position.
10:42:00This is because the chances of it being
10:42:01a trap otherwise is very high and you
10:42:04might end up in losses. So the reason
10:42:06why this is particularly important is
10:42:09because of the fact that inducement
10:42:10follows the nature of liquidity. So if
10:42:13you have noticed liquidity follows an
10:42:15accumulation, manipulation distribution
10:42:18cycle also known as the power of three.
10:42:20Let me explain this. Accumulation
10:42:22represents a stage within the market
10:42:24cycle where prices tend to consolidate
10:42:27while engineering liquidity on either
10:42:29side. The manipulation phase follows the
10:42:32accumulation and is often marked by
10:42:34sudden and sharp price movements that
10:42:37catch retailers offguard. Manipulation
10:42:40occurs in the opposite direction of the
10:42:42real move and it is aimed to stop out
10:42:44the retailers and induce the breakout
10:42:46traders. So understanding the intentions
10:42:49behind manipulation phase is very
10:42:51crucial. Smart money uses these moves to
10:42:54acquire more shares or assets at
10:42:56favorable prices. By triggering stop-
10:42:58losses and inducing breakout players,
10:43:01they generate enough liquidity for their
10:43:03positions. They accumulate positions
10:43:05while retail traders are caught on the
10:43:08wrong side of the trade. Now comes the
10:43:10distribution phase. After accumulating
10:43:12at the best possible valuations and
10:43:15manipulating the market to their
10:43:16advantage, smart money begins to unload
10:43:19their positions to those eager retail
10:43:21traders who are late to the game. The
10:43:23distribution phase in SMC is quite a bit
10:43:26different from the distribution phase
10:43:28that we have learned in the price action
10:43:30course. Here during distribution the
10:43:33smart money slowly offloads their
10:43:35holdings typically in a controlled
10:43:37manner. They distribute their shares to
10:43:39the retail traders who are jumping in
10:43:41eager to open new positions at higher
10:43:43valuations. This influx can sustain the
10:43:46rally for a while. This AMD concept
10:43:49emphasizes that recognizing these phases
10:43:52is essential for successful trading. By
10:43:54understanding when smart money
10:43:56accumulates, manipulates and
10:43:58distributes, traders can align
10:44:00themselves with the dominant forces
10:44:02rather than getting caught on the wrong
10:44:04side of things. So this is the whole
10:44:06concept behind inducements also. There
10:44:09are other significance of inducements
10:44:11which we will talk about in a short
10:44:12while. Now how exactly can we find
10:44:15inducements in the charts? What are the
10:44:17things that we need to consider? So
10:44:19there are two methods which you can
10:44:21apply to find inducements. both of which
10:44:24has certain limitations of its own.
10:44:26These are the first pullback method and
10:44:28the trend line method. Let's talk about
10:44:30the first pullback method. This is
10:44:32actually the first pullback after a
10:44:35breakoff structure. The idea is quite
10:44:37simple. An inducement is considered as
10:44:40the first pullback after a valid
10:44:42breakoff structure has happened. These
10:44:44pullbacks are minor pullbacks or
10:44:46internal pullbacks which can be formed
10:44:49using a single candle, a group of
10:44:51candles or even a deep wick. You can see
10:44:54the different types of pullbacks that
10:44:56you can find on charts here. Even though
10:44:58we consider inducements as the first
10:45:00pullback after a valid break of
10:45:02structure, in certain scenarios, we
10:45:04might need to tweak this rule by a
10:45:06little bit. Let us understand this using
10:45:08a few examples. We will first consider
10:45:10some bullish market scenarios on a major
10:45:13market structure. Before that, make sure
10:45:15you have a fair understanding about the
10:45:17market structure mapping. You can watch
10:45:19that video in my SMC playlist. Anyways,
10:45:22here we have four situations. We will
10:45:25take a detailed look at each one of
10:45:27them. In the first case, we can see the
10:45:29price break and close above the previous
10:45:32major swing high. This is our valid
10:45:34breakoff structure. Now, let us see what
10:45:36happened after the breakoff structure.
10:45:38You can notice how the price moved
10:45:40higher and then it formed a minor
10:45:42pullback. As per our definition, the low
10:45:44of this minor pullback is our inducement
10:45:47level. We can draw a small horizontal
10:45:49line at this low to mark the inducement.
10:45:52For easy identification of this line in
10:45:54the future, we can name this line as IDM
10:45:57or you can even use a dollar sign for
10:46:00the same purpose. Now you can see what
10:46:02happened next. The price moved lower and
10:46:04break below this inducement line. This
10:46:06means that the liquidity below the
10:46:08inducement level has been absorbed or
10:46:10the uninformed retail traders are
10:46:12trapped. Only when the inducement level
10:46:14is taken out should we start thinking
10:46:17about a trade. Mostly the market will
10:46:19move in the direction of the existing
10:46:21market trend after taking out the
10:46:23inducement. But this does not have to
10:46:25happen immediately. The price can
10:46:27reverse after sweeping a liquidity area
10:46:30or it can reverse from an order block
10:46:32also. So inducement is a useful concept
10:46:35before taking a continuation trade. But
10:46:37as always, this cannot be said with 100%
10:46:40accuracy. There can be such instances
10:46:42where the market could just fall lower
10:46:45and break below the major swing low and
10:46:47thereby forming a change of character
10:46:49instead. Now moving on to the second
10:46:51example. In this case, we can observe
10:46:53that the price moved higher and it break
10:46:56above the previous swing high level. But
10:46:58the price did not manage to close above
10:47:00the previous higher high. So this is not
10:47:02a valid breakoff structure. Therefore,
10:47:05we cannot spot the inducement yet. And
10:47:07what happened afterwards? The price did
10:47:09manage to break and close above the
10:47:11previous major swing high level. So now
10:47:14we have a valid breakoff structure. Now
10:47:16the price moved even higher and formed a
10:47:19minor pullback. Now we can mark the low
10:47:21of this pullback using a line. This is
10:47:24our inducement level which is denoted by
10:47:26IDM or a dollar sign. But as you can see
10:47:29the price did return back to take out
10:47:31the liquidity below this inducement
10:47:33level. Keep in mind that only after the
10:47:36inducement is taken out should we think
10:47:38about taking trades from an order block
10:47:40or from an area of liquidity. Inducement
10:47:43is also used as an order block filter.
10:47:45The idea is that inducement levels are
10:47:48considered as smart money traps because
10:47:50it induces retail traders to take a
10:47:52short trade from an inducement level
10:47:54which is above the price of interest or
10:47:56demand zone during a bullish market
10:47:58structure thereby making them to trade
10:48:00in the wrong location as well as in the
10:48:02wrong direction. For those who are
10:48:04unaware of what price of interest is,
10:48:07POI or price of interest is a price
10:48:10level or a price zone where there is a
10:48:12very good probability that the market
10:48:14could react with it and respond
10:48:16accordingly. A POI is also called DP or
10:48:19decision point by some experts. So a POI
10:48:22can be any of the following. It could be
10:48:24an order flow, an order block, a supply
10:48:27or demand zone, session highs or lows,
10:48:30daily or weekly or yearly highs and
10:48:32lows, or it could even be price caps. In
10:48:34a similar manner, inducement persuades
10:48:37retail traders to enter into a long
10:48:39trade position from an inducement level
10:48:41which is below a price of interest or
10:48:43supply zone during a bearish market
10:48:45structure thereby making them to trade
10:48:47in the wrong location and in the wrong
10:48:49direction. So most often or not price
10:48:52will break this inducement level and
10:48:54take out the retailer liquidity. So this
10:48:56is a very common smart money trap and
10:48:58this is why it is always recommended to
10:49:01take trades once the liquidity
10:49:02associated with an inducement level is
10:49:04taken out because once the price has
10:49:06swept the liquidity associated with an
10:49:08inducement level, there are good chances
10:49:10that the price can reverse without
10:49:12testing any price of interest or supply
10:49:14or demand zones. I hope things are
10:49:17making sense. Now look at this third
10:49:19example. Where is the inducement in this
10:49:21case? It is clear that the price did
10:49:23form a valid breakoff structure. But as
10:49:26per our definition of inducement, the
10:49:28price did not create any minor pullbacks
10:49:31after the bullish breakoff structure.
10:49:33But the price did form a pullback just
10:49:36before the breakoff structure. So in
10:49:38such instances where there is no
10:49:40pullback formed after the breakoff
10:49:42structure, we will consider the last
10:49:44minor pullback before the breakoff
10:49:46structure as the inducement level and we
10:49:49can mark it using a line and name it.
10:49:51Now look what happened next. The price
10:49:53did return all the way down and took out
10:49:56the liquidity below the inducement level
10:49:58and then it moved higher. So this is a
10:50:00special case where we have to make
10:50:02adjustments and not blindly follow the
10:50:05textbook definition of inducements. Now
10:50:07take a good look at this last example
10:50:09here. The price gave a clean breakout
10:50:11above the previous higher high. So it is
10:50:14a valid bullish breakup structure. Then
10:50:16the price moves higher and forms a minor
10:50:19pullback. So as per our rule, we will
10:50:21draw a line at the low of this pullback
10:50:23and mark it as our inducement. Now did
10:50:26the price return to grab the liquidity?
10:50:28No, the price did not come back.
10:50:30Instead, the market moved higher and
10:50:33then it formed another minor pullback.
10:50:35Now what will we do if such a case takes
10:50:38place? We should shift one inducement
10:50:40level forward to the low of this newly
10:50:42formed pullback. And even if the price
10:50:44don't take out this new inducement level
10:50:46and it moves higher and then create
10:50:48another pullback then without any doubt
10:50:50we should shift our inducement line to
10:50:52this new law formed. This is yet another
10:50:55important concept in connection with the
10:50:57basic rule of first pullback. And as you
10:50:59can see the price returned to sweep the
10:51:01liquidity below the inducement level and
10:51:03then the market continued higher after
10:51:06absorbing all the liquidity. The idea
10:51:08remains same for bearish instances also.
10:51:11Let's quickly look at a few examples for
10:51:13bearish market structure. In the first
10:51:15example, price formed a valid breakup
10:51:18structure. Then it moved lower and made
10:51:20a minor pullback. So as per the rule, we
10:51:23can draw a line at the high of the
10:51:25pullback and mark it as the inducement
10:51:27level. The price did come back and sweep
10:51:30the liquidity above this line. Moving on
10:51:32to the second example. Here the market
10:51:34did not give a valid breakup structure
10:51:36at first. Then price consolidated a bit
10:51:39and then finally it break and close
10:51:41below the previous swing low level
10:51:43thereby forming a valid bearish breakup
10:51:45structure. And then once it moved lower,
10:51:47it formed a minor pullback. We can mark
10:51:50the high of this pullback as our
10:51:51inducement. Then we can see that the
10:51:53price returned to take out the liquidity
10:51:56above the inducement level. So an
10:51:58important point to be noted here is that
10:52:00you should never look for an inducement
10:52:02until there is a valid breakoff
10:52:04structure. Now in this third example,
10:52:06the price created a valid bearish
10:52:08breakoff structure. But the price did
10:52:10not form any minor pullback on the way
10:52:12down. Instead, it formed a corrective
10:52:14move towards the upside. In such cases,
10:52:17we can mark the high of the last
10:52:19pullback before the breakoff structure
10:52:21as our valid inducement level. In this
10:52:24scenario, you can see how the price move
10:52:26higher and took out the liquidity above
10:52:28our inducement level and then fell
10:52:30lower. In the last example, the market
10:52:33formed a minor pullback after a valid
10:52:35breakout structure. Then we can mark the
10:52:38high of this pullback as our inducement
10:52:40level. But the price declined even lower
10:52:42without grabbing the liquidity. Then it
10:52:45formed another minor pullback on the way
10:52:46down. In this case, we can shift our
10:52:49inducement line to the high of this
10:52:51newly formed pullback. And we can notice
10:52:53what has happened afterwards. The price
10:52:55swept the retailer liquidity above this
10:52:57inducement level. Now, let me remind you
10:53:00again that you should never think about
10:53:02taking a trade until and unless the
10:53:04inducement level is not taken out. This
10:53:07is mandatory if you are following smart
10:53:09money concepts. Now always keep in mind
10:53:12that inducements should be marked on the
10:53:14impulse move that caused the breakoff
10:53:16structure. It should not be marked on
10:53:18the corrective move like in this case.
10:53:21This is the wrong approach. The only
10:53:23exception is when the market forms a
10:53:26valid change of character in which case
10:53:28the correction move gets converted into
10:53:30the impulse move of the countertrend.
10:53:32Take a look at the scenario here. the
10:53:34price break and close below the previous
10:53:36higher low level thereby confirming a
10:53:39bearish change of character. In this
10:53:41instance, we have to look for
10:53:42inducements in the price move that has
10:53:45caused the change of character. In that
10:53:47sense, we have to mark the inducement at
10:53:49the high of the first minor pullback
10:53:51after the valid bearish change of
10:53:53character. So, make sure you are marking
10:53:55your inducements in the right manner.
10:53:57Another importance of inducement is that
10:53:59it helps to identify and confirm the
10:54:02higher highs in a bullish market
10:54:04structure and it helps to confirm the
10:54:06lower swing lows in case of a downward
10:54:08market structure. In the market
10:54:10structure mapping episode, I have
10:54:12mentioned that you need a deep pullback
10:54:14after a valid break of structure to
10:54:16confirm your higher highs in case of a
10:54:18bullish trend and also to confirm your
10:54:20lower swing lows in case of a bearish
10:54:23structure. I asked you to use Fibonacci
10:54:25retracements to identify deep pullbacks.
10:54:28But this is a time-consuming process. So
10:54:30a rather simple hack is just to identify
10:54:33the valid inducement level. Then the
10:54:35highest point above this inducement line
10:54:38once its liquidity is taken out will be
10:54:40our higher high in case of a bullish
10:54:42market structure. Similarly, the lowest
10:54:45point below the inducement level once
10:54:47the liquidity above the inducement is
10:54:49grabbed will be our low swing low in
10:54:51case of a bearish market structure. Now
10:54:54let's talk about the second method of
10:54:56identifying and marking inducements
10:54:58which is by using trend lines. The idea
10:55:01is very simple. Let us consider a
10:55:03bullish market scenario. Keep in mind
10:55:06whatever happens we will look for
10:55:07inducements only after a valid break of
10:55:10structure. Here you can see how the
10:55:12price break and close above the previous
10:55:14higher high thereby forming a valid
10:55:16bullish break of structure. Then the
10:55:18market moved higher. What we will do is
10:55:20that we will draw a trend line
10:55:22connecting all the minor lows within the
10:55:25major swing or in other words we will
10:55:27try to connect all the internal swing
10:55:29lows using a trend line as you can see
10:55:32in this figure. Then we will wait for
10:55:34the price to break and close below the
10:55:36trend line which will in turn induce
10:55:38retail traders to sell because of a
10:55:41trend line breakdown. All these
10:55:43retailers will be trapped and their
10:55:45orders will be taken out. Now in a
10:55:47bearish market structure, we should look
10:55:49for a valid bearish breakoff structure
10:55:51below the previous swing low level. And
10:55:53when the price falls lower, we can mark
10:55:55all internal highs formed after the
10:55:57recent swing high and then connect all
10:55:59these minor highs as and when they are
10:56:02formed. And when the price breaks and
10:56:04closes above this downward trend line,
10:56:06we can expect retail traders to take buy
10:56:09positions as they have spotted a trend
10:56:11line breakout. This is our inducement.
10:56:14All these retail traders will be trapped
10:56:16and their orders will be absorbed. Now
10:56:19there are a few problems with this trend
10:56:21line method. First of all, trend lines
10:56:23are subjected to human errors. This
10:56:26means different traders would draw and
10:56:28interpret trend lines differently. So
10:56:30the inducement identification varies
10:56:32vastly from person to person. So this
10:56:34confusion is not a good thing. The
10:56:36second issue is that sometimes even
10:56:38after a breakout below the trend line
10:56:41the price would not move below the
10:56:42inducement low which means the liquidity
10:56:44below this level is not absorbed. This
10:56:47could lead to wrong analysis because as
10:56:50per our pullback method the inducement
10:56:52level gets shifted to newly formed
10:56:54pullback lows as long as the liquidity
10:56:57is not swept by the market. So from my
10:56:59experience it is better if you stick
10:57:01with the first pullback method after
10:57:04valid breakoff structure for marking
10:57:06your inducements. Now let us talk about
10:57:08major and minor inducements. You might
10:57:11have already guessed what these are.
10:57:13Anyways the differentiating factor
10:57:15between the major and minor inducements
10:57:17are the time frames. It will also depend
10:57:20on your trading style. So if you are an
10:57:22intraday trader then your higher time
10:57:24frame can be 15 minutes while your lower
10:57:26time frame can be between 1 minute to 5
10:57:29minutes. So if you were to map your
10:57:31market structure and mark your
10:57:33inducements on a 15minut higher time
10:57:35frame then you are indeed marking the
10:57:38major inducements. Now if you start
10:57:40mapping the structure and mark all the
10:57:42inducements on a 5 minute lower time
10:57:45frame and then consider all the internal
10:57:47price swings and the associated break of
10:57:49structures then you're drawing the minor
10:57:52inducements. On a similar note if you
10:57:54are a swing trader then your high time
10:57:56frame can be 1 day or 4 hours whatever
10:57:59it may be and your lower time frame
10:58:01could be 1 hour. In this scenario, your
10:58:03major inducement is marked on your
10:58:05higher time frame, major or external
10:58:07structure while your minor inducement is
10:58:10marked on your lower time frame
10:58:11structure which is 1 hour. And
10:58:14considering all the internal price moves
10:58:16within the major swing structure. Now
10:58:18the idea of identifying and marking
10:58:21minor inducements are also the same as
10:58:23with major inducements. But because we
10:58:26are making use of lower time frames and
10:58:28also taking into consideration the minor
10:58:31or internal structure, we will be faced
10:58:33with a lot of minor structure breaks.
10:58:35This will result in a lot of inducements
10:58:38getting formed. These minor inducements
10:58:40can be helpful for those traders who
10:58:42wants to collect some quick profits
10:58:44while waiting for the price to take out
10:58:46the major inducement level. But there is
10:58:49a small change in concept when it comes
10:58:51to minor inducements and change of
10:58:53character in a lower time frame internal
10:58:55market structure. So let's clear that
10:58:57out. So this is a bullish market
10:58:59structure on a higher time frame. And to
10:59:01the right is how the lower time frame
10:59:03structure looks like. And as you can
10:59:05clearly see in the lower time frame the
10:59:07internal price swings are quite detailed
10:59:10and visible. Now let us mark the
10:59:11breakoff structures in the minor time
10:59:13frame. Once the breakoff structures are
10:59:16identified, let us find the proper
10:59:18inducements. We will try to mark the
10:59:20inducements as per the first pullback
10:59:22after the break of structure rule. Now
10:59:24since we have marked the bullish
10:59:26breakoff structure, we will have to spot
10:59:28the lows of the first pullback. Here I
10:59:31have marked all the lows of the pullback
10:59:33and we can draw a line at these lows.
10:59:36These are our inducements. Now we can
10:59:38see how the price reacted in these
10:59:40inducement levels. Now let us focus our
10:59:42attention on this last inducement level
10:59:44before the market reversed lower. So
10:59:47before it reversed the price tested a
10:59:49supply zone or a price of interest. So
10:59:52this is not really an inducement but
10:59:54instead this is a change of character or
10:59:57chalk in the minor structure. So the
11:00:00simple difference between an inducement
11:00:02and a chalk in a minor structure on a
11:00:05lower time frame is that inducement is
11:00:07the first pullback after a valid break
11:00:09of structure. But a chalk becomes that
11:00:12inducement level before the market tests
11:00:14a price of interest. Let us look at a
11:00:17bearish case also to help us understand
11:00:19the idea even better. So first you need
11:00:21to go to your higher time frame and map
11:00:23the structure. That is you need to find
11:00:25your lower highs, lower lows, breakoff
11:00:28structures and change of characters if
11:00:29any. Then you need to mark the major
11:00:32inducements in this higher time frame
11:00:33structure. So if you are an intraday
11:00:35trader, map your structure on the 15
11:00:37minutes higher time frame. The next step
11:00:39is to move to your lower time frame
11:00:41which can be between 1 minute and 5
11:00:43minutes. Let's take 3 minute for our
11:00:46purpose. In the 3 minutes chart, you
11:00:48will get more granular details on the
11:00:50internal structure and a lot more of
11:00:53swings. Now start identifying the valid
11:00:56minor breakoff structures when the price
11:00:58break and close below the previous
11:00:59internal lows. Then start identifying
11:01:02the minor inducements which are actually
11:01:04the highs of the first pullback after a
11:01:06valid minor breakup structure. Now this
11:01:08last inducement before the price
11:01:10reversed after testing a price of
11:01:13interest or a demand zone will be our
11:01:16change of character. So in the market
11:01:18change of character can happen on two
11:01:20occasions. First of all, as you may
11:01:23already know, a chalk happens on a major
11:01:26market structure when the price breaks
11:01:28and close below the previous major swing
11:01:30low in case of a bullish market
11:01:32resulting in a bearish change of
11:01:34character or we can say there is a
11:01:36change of sentiment from bullish to
11:01:37bearish. It can also occur when price
11:01:40break and close above a previous major
11:01:42lower swing high level resulting in a
11:01:44bullish change of character. The second
11:01:46scenario where a change of character can
11:01:48be identified is on a lower time frame
11:01:51internal structure where your inducement
11:01:54becomes a change of character when it
11:01:56test a price of interest and reverses. I
11:01:59hope things are clear.
11:02:06We are going to learn two important
11:02:08topics in SMC. They are order flow and
11:02:11order blocks. These are related topics.
11:02:13So it makes sense to make a single
11:02:15comprehensive video on these topics so
11:02:18that we can learn how they are different
11:02:20from one another. Now let me warn you
11:02:22this is going to be the longest video in
11:02:24this entire course. So watch it when you
11:02:27have adequate time because this is one
11:02:29of the most demanded smart money videos.
11:02:32In the previous episodes, we have
11:02:34discussed the concepts of liquidity in
11:02:36great detail which is actually the core
11:02:38of SMC learning. And if you haven't
11:02:40watched these episodes, I strongly urge
11:02:43you to watch them right away. Now, a
11:02:45fair understanding on liquidity will
11:02:47give you a lot of insights into the ways
11:02:49which smart money institutions operate.
11:02:52But that is not enough to convert into
11:02:54profitable trade setups. For getting the
11:02:56best possible trades, you need to have a
11:02:58fair idea as to where to take the
11:03:00entries. This is where order flow and
11:03:03order block come into the equation.
11:03:05These are simple yet effective methods
11:03:08by which you can spot potential areas
11:03:10from which you can hope into a trade
11:03:12position with minimal risk and high
11:03:14chances of profits. So in this episode
11:03:17we are going to start our discussion
11:03:19with order flow. How to identify an
11:03:21orderflow and charts. What are the
11:03:23different types of order flows and how
11:03:25do they work? Then we will discuss about
11:03:28order blocks. Why is it important to
11:03:30have an order block? How to spot an
11:03:32order block? the different types of
11:03:34order blocks and what are all the key
11:03:36points that you need to keep in mind and
11:03:38we will also learn how to identify a
11:03:41valid order block. We will begin with
11:03:43the order flow. I have told you in the
11:03:45liquidity videos that market moves from
11:03:48one area of liquidity to the other. This
11:03:50can either be internal or minor
11:03:52liquidity or external or major
11:03:54liquidity. The market can tap into
11:03:57either of these liquidity areas or zones
11:03:59and then reverse the price direction
11:04:01after sweeping the retailer orders. In
11:04:04the charts, a lot of such liquidity
11:04:05areas are generated and it is obvious
11:04:08that not all of them are worth
11:04:10considering and only a few of them will
11:04:12provide us with highquality trade
11:04:14setups. So how are we going to
11:04:16capitalize on our knowledge in order to
11:04:18make highly probable and profitable
11:04:20trades while reducing the risk of
11:04:22overtrading or simply getting into
11:04:24trades at all these liquidity areas.
11:04:27This is where order flow and order
11:04:29blocks come into the picture. So think
11:04:31of an orderflow as that price move in
11:04:33the chart which to most extent reveals
11:04:36where the smart money hides their
11:04:37positions or where they are most likely
11:04:39to initiate their positions. If you have
11:04:42observed the flow of prices in the
11:04:44market structure, you will notice that
11:04:46the price will not always tap into the
11:04:48external structure before reversing its
11:04:50direction. The market might reverse even
11:04:52before that. This is due to the
11:04:54existence of order flows. Technically,
11:04:56there are two types of order flows.
11:04:59These are bullish orderflow formed
11:05:01during an upward market structure and a
11:05:03bearish orderflow which is formed during
11:05:05a bearish market structure. I have said
11:05:07this many times but I will say it again
11:05:09that you need to have a good
11:05:11understanding as to how to mark the
11:05:13market structure properly in order to
11:05:15make the best use of these concepts. If
11:05:18you get your market structure mapping
11:05:20wrong, everything else will meet the
11:05:22same fate. So make sure to watch the
11:05:24first episode if you haven't already.
11:05:26Now coming back to our discussion, let
11:05:28us consider a bullish market structure
11:05:30and try to spot the order flow. During a
11:05:33bullish market, the major price
11:05:34structure forms higher highs and higher
11:05:36lows. But if you observe the corrective
11:05:39moves, you will notice that it forms
11:05:41lower highs and lower lows. So a bullish
11:05:44order flow is represented by the last
11:05:46selling price before the bullish price
11:05:49momentum or in simple terms, the last
11:05:51selling move before the buy is called as
11:05:54the bullish order flow. Therefore, all
11:05:56you have to do is to identify the
11:05:58bearish candles before the price begin
11:06:00to move higher. This is how we spot
11:06:02bullish order flows in the charts. Let
11:06:05us now learn how to spot a bearish order
11:06:07flow. You will find bearish order flow
11:06:09in a bearish market structure. In a bare
11:06:11market, the major structure forms lower
11:06:14highs and lower lows while the
11:06:16corrective moves forms higher highs and
11:06:18higher lows. And the bearish order flow
11:06:20is represented by the last buying price
11:06:23move before the ongoing bearish price
11:06:25momentum. Or in other words, the last
11:06:27buying move before they drop or sell is
11:06:29called as a bearish order flow.
11:06:32Therefore, you need to identify the
11:06:34bullish candles before the price begin
11:06:36to drop lower. But is the order flow
11:06:38that we have identified a valid one?
11:06:41This is a question which is very
11:06:42important to consider. Order flows can
11:06:45be classified into three types. These
11:06:47are mitigated order flows, unmititigated
11:06:49order flows and failed order flows. Out
11:06:52of these three, only the unmititigated
11:06:55order flows are of any use to us. But
11:06:57for the sake of understanding, I will
11:06:59explain all of them. Basically, a
11:07:01mitigated orderflow is one where the
11:07:03price has already tested or mitigated
11:07:06the order flow. Think of an orderflow or
11:07:08even an order block as a one-time use
11:07:11thing. Once it is tested or mitigated,
11:07:13it is of no use to us anymore. It is not
11:07:16like our typical support or resistances
11:07:18where the price will respect it multiple
11:07:20times. But this is not the case with
11:07:22order flows and order blocks. Check out
11:07:25this example. We have identified the
11:07:27last selling move before the buy. So
11:07:29technically this area is an order flow.
11:07:32But if you notice closely, you will see
11:07:34that the price has tapped into the
11:07:36bullish order flow. Therefore, this
11:07:38bullish order flow is mitigated by
11:07:40prices. This means that the order flow
11:07:43will not work in the future. Look at
11:07:45another example. But this is for a
11:07:47bearish structure. We can spot the last
11:07:49buying move before the drop and mark
11:07:52this area as a bearish order flow. Then
11:07:54you will notice that the price has
11:07:56tapped into this order flow and
11:07:58therefore it is already mitigated. So
11:08:00this order flow will not work for the
11:08:02future price moves and it is not worth
11:08:05considering. The second type is
11:08:07unmitigated order flow. In this case the
11:08:10price will not tap into the order flow
11:08:12or the price will not mitigate the order
11:08:14flow. These are the order flows which
11:08:16are useful to us. This is because there
11:08:18is a high probability that the price
11:08:20might return back to mitigate this order
11:08:22flow. Now we can take a few examples to
11:08:25understand this better. In this first
11:08:27case, the market is in a bullish trend.
11:08:30So during the corrective move, the price
11:08:32forms lower lows and lower highs. Our
11:08:35order flow will be the last selling move
11:08:37before the buy. Once we have marked the
11:08:39order flow, we can observe that the
11:08:41price has not tested or mitigated this
11:08:44bullish order flow. It also means that
11:08:46the price could come back to this order
11:08:48flow later to mitigate it. So this is an
11:08:51unmititigated order flow. Similarly, if
11:08:54we spot a bearish orderflow in a bearish
11:08:56market structure and the orderflow is
11:08:58not tested or mitigated by prices, then
11:09:01this is an unmititigated orderflow zone
11:09:03which could be a potential area of
11:09:05interest for a price reversal in the
11:09:07future. Now keep in mind that even the
11:09:09Vicks projecting into an orderflow zone
11:09:12mitigates it. So the tiniest of tiny
11:09:14details matter. Now what is a failed
11:09:17order flow? So it is an order flow which
11:09:19we have identified and marked through
11:09:21which the prices passes through. Just
11:09:23like a mitigated order flow, failed
11:09:25order flows are of no use to a trader.
11:09:28Another point to keep in mind is that
11:09:29once an order flow is mitigated, you can
11:09:31always shift towards the next one and if
11:09:33the next one is also tested then you can
11:09:36shift towards the next order flow and so
11:09:38on. Now let us briefly look at how to
11:09:41take trades using the orderflow concept.
11:09:43The idea is to take a trade from the
11:09:45orderflow zone when price comes back to
11:09:48test the orderflow during a pullback
11:09:50which follows the breakoff structure and
11:09:52then take a trade entry when the price
11:09:54begins to reverse from the order flow
11:09:56after mitigation. As I have mentioned a
11:09:58few times, this should only be applied
11:10:00to unmititigated orderflows. If you know
11:10:03how to correctly mark the market
11:10:05structure and identify the pullbacks
11:10:07then this is going to be very easy. Now
11:10:09let us consider an example for bullish
11:10:11and bearish scenarios. This is a bullish
11:10:14market structure. Here you can see that
11:10:16the price has created a bullish breakup
11:10:19structure when it broke above the
11:10:21previous major swing high. We can
11:10:23identify the unmititigated order flow by
11:10:25using the method that we have learned.
11:10:27Now we have to wait for a valid pullback
11:10:29to happen. And as you can see, the
11:10:31pullback returned to our unmititigated
11:10:34order flow and tested it. By now, we can
11:10:36anticipate two outcomes to happen.
11:10:39Either the price can break below our
11:10:40order flow, forming a failed order flow,
11:10:43resulting in no trades, or the price can
11:10:45test the order flow and reverse its
11:10:47direction to move along with the major
11:10:49bullish structure. If it were the second
11:10:51scenario, we can take a long trade above
11:10:54the bullish order flow while keeping the
11:10:56stop- loss below the orderflow zone. Our
11:10:58minimum target should be the most recent
11:11:00swing high or the major higher high
11:11:02level. In a similar manner, we can
11:11:05discuss the scenario for a bearish
11:11:07market structure. As you can see, the
11:11:09price has formed a bearish breakoff
11:11:11structure when it broke below the
11:11:13previous major swing low level. We can
11:11:15mark the unmititigated orderflow zone
11:11:17here. Then we will have to wait for a
11:11:19valid pullback to happen. We can observe
11:11:22that the pullback returned to test the
11:11:24unmititigated order flow. As in the
11:11:26previous scenario, two outcomes are
11:11:28possible. First, the price could just
11:11:30break past the order flow resulting in
11:11:33no trade. The other scenario is when the
11:11:35price test the bearish unmititigated
11:11:37order flow and reverse lower to move in
11:11:40the existing major market direction
11:11:42which is bearish. In that case, we can
11:11:45look to take a short trade below the
11:11:47order flow after it has been mitigated
11:11:49while keeping our stop loss above the
11:11:51orderflow zone. And our minimum target
11:11:53level should be the most recent swing
11:11:56low level or the lower low level. This
11:11:59orderflow concept can also be applied to
11:12:01the minor market structures or in your
11:12:04lower time frame charts for the sake of
11:12:06taking short-term trades or for grabbing
11:12:08some quick points. I have marked out
11:12:10some bullish as well as bearish cases
11:12:12here. An important point to note is that
11:12:14if there are multiple unmitigated order
11:12:17flows formed within a major structure,
11:12:19then there is a high probability that
11:12:21the market will return back to the most
11:12:23extreme order flow while failing all
11:12:26other orderflow areas. Or in other
11:12:28words, the extreme orderflow zones have
11:12:30a higher probability of providing us
11:12:32with a successful trading opportunity.
11:12:35Now you can pause the video and take a
11:12:37note of the points mentioned or else the
11:12:39video will get very long. I hope this
11:12:41will be useful for many scalpers and
11:12:43intraday traders who just wants to catch
11:12:45a few quick points. Now there are a few
11:12:48drawbacks with order flows that all
11:12:50traders need to be aware of. First of
11:12:52all, stop losses will be considerably
11:12:55large. Since order flow is a zone or an
11:12:58area in the chart, we will have to place
11:13:00our stop loss beyond this zone or area.
11:13:02Even then we cannot be absolutely sure
11:13:04that the price will not return to hit
11:13:06our stop- loss. And because of a large
11:13:08stop-loss, the reward to risk also
11:13:10reduces. The reward to risk provided by
11:13:13an orderflow trading opportunity is
11:13:15lower compared to that given by an order
11:13:17block trading opportunity. Another
11:13:19problem with orderflow is that there is
11:13:21no proper entry criteria. Entering a
11:13:23trade position from an orderflow zone is
11:13:25mostly about our intuitions and reward
11:13:28to risk considerations. Yet another
11:13:30problem which is committed due to human
11:13:32error is the wrong identification and
11:13:34marking of orderflow areas. If you make
11:13:36the mistake of marking the orderflow
11:13:38wrongly, then most probably the price
11:13:40won't return to mitigate it or sometimes
11:13:42it will even fail the order flow. Now
11:13:44take a look at this case. Tell me where
11:13:46to mark the orderflow area. By
11:13:48definition, a bullish orderflow is the
11:13:50last selling move before the buy. So if
11:13:52you follow this definition blindly, then
11:13:55we will mark this area as the order
11:13:57flow. But this is not the correct
11:13:59orderflow zone. The area that we have
11:14:01highlighted is just an internal move or
11:14:04consolidation. The real order flow is
11:14:06this whole selling move. The reason why
11:14:08I say this is because the consolidation
11:14:10did not take out the low of the selling
11:14:12move. If it would have taken out the
11:14:14previous low, then there is no issues
11:14:16with considering it as an order flow.
11:14:18And you can see how the price returned
11:14:20to test the order flow. Similarly, while
11:14:23marking a bearish order flow, which is
11:14:25the last buying move before the sell,
11:14:27you have to make sure if the move is
11:14:28just an internal move or consolidation
11:14:30or is it actually taking out the high of
11:14:33the previous move. Now, let us shift our
11:14:36attention to order blocks. Order blocks
11:14:38are considered as a refinement of an
11:14:40orderflow. Order blocks eliminates a lot
11:14:42of issues that an orderflow had. Order
11:14:45blocks provide you with limited rates
11:14:47which are of high quality and have a
11:14:49high probability of success. Secondly,
11:14:51the reward to risk ratio is largely
11:14:54improved when using order blocks. This
11:14:56means the stop-loss setting is much
11:14:58tighter. The trade entries are also more
11:15:00optimized due to the limited number of
11:15:02trades on offer. But on the downside, a
11:15:05tight stop-loss can be taken out by
11:15:07volatile price swings. Let us first
11:15:10learn the textbook definition of order
11:15:12blocks and how to identify and mark the
11:15:14order blocks. In a bullish market
11:15:16scenario, a bullish order block is
11:15:18identified as the last bearish candle
11:15:21before the buy. And during a bearish
11:15:23market structure, a bearish order flow
11:15:25is considered as the last bullish candle
11:15:27before the sell. So you have to spot the
11:15:29last bullish or bearish candle before an
11:15:32impulse price move and mark its highs
11:15:34and lows. This is considered as an order
11:15:37block by most stock market teachers aka
11:15:40gurus. If you follow this logic and
11:15:42start marking order blocks, you'll be
11:15:45shocked to notice that there will be a
11:15:47large number of order blocks on the
11:15:48charts and you'll obviously be confused
11:15:51as to which order blocks will work and
11:15:53which won't. This is a vague way of
11:15:55explaining what an order block is and it
11:15:58is of very little use to a trader. The
11:16:00majority of order blocks obtained using
11:16:02this method is useless and it won't
11:16:04work. to identify and mark only valid
11:16:07and high probability order blocks. I
11:16:10will introduce you to seven important
11:16:12factors. These are concepts that you
11:16:14have already learned in the previous
11:16:16episodes of this SMC course. So it is
11:16:18nothing new and you don't need to stress
11:16:20about it a lot. Here are the seven
11:16:23factors. The first point is that you
11:16:25should mark order blocks on higher time
11:16:27frames only. So if you are an intraday
11:16:29player then 15 minutes can be your
11:16:32higher time frame and you should mark
11:16:33your order blocks on this time frame
11:16:35only. Second one is that there should be
11:16:37a valid breakoff structure. The third
11:16:40thing is to look for the last buying
11:16:42candle before the sell for a bearish
11:16:44market structure and look for the last
11:16:46selling candle before the buy for a
11:16:47bullish market structure. But certain
11:16:50conditions apply to this step. The
11:16:52fourth factor to notice is that there
11:16:54should be an imbalance or a fair value
11:16:56gap. Another important thing to look out
11:16:58for is that there should be a proper
11:17:00inducement after the breakoff structure.
11:17:02This is to avoid falling into the smart
11:17:04money trap. Next point is that there
11:17:07should be a proper liquidity sweep of
11:17:09the previous highs or previous lows
11:17:11depending on the market structure. And
11:17:13the final thing to check for is to see
11:17:15whether the order block is associated
11:17:17with an unmititigated order flow. Now if
11:17:20you manage to identify and mark order
11:17:23blocks based on these seven factors then
11:17:25you will come to the realization that
11:17:27there can only be a maximum of two valid
11:17:30order blocks within a certain swing
11:17:31move. Also the minimum number of order
11:17:34blocks within a swing move is one. We
11:17:36will learn about these two valid order
11:17:38blocks very soon. But first let us
11:17:40discuss in great detail about the seven
11:17:42factors for identifying and marking
11:17:45valid order blocks. So the first factor
11:17:47is time frame. I have mentioned at the
11:17:49beginning of this course that structure
11:17:52mapping has to be done on high time
11:17:53frames and trade entries are to be taken
11:17:56on low time frames depending on your
11:17:58trading style. Similar logic applies to
11:18:01order blocks also. The order blocks are
11:18:03to be identified and marked on your
11:18:05higher time frame charts. This order
11:18:07blocks will be lower in number and has a
11:18:10higher chance of success compared to
11:18:12those order blocks marked on lower time
11:18:14frames. Once the higher time frame order
11:18:16blocks are marked, then we can turn to
11:18:18our lower time frame charts to refine
11:18:20our order block for better entry prices.
11:18:23For example, if you are an intraday
11:18:25trader, then you can mark valid order
11:18:27blocks on your higher time frame, which
11:18:29is 15 minutes. And once you're done with
11:18:31marking the order blocks, you can go
11:18:33down to your lower time frame such as 1
11:18:36minute, 2 minute, or even 3 minute
11:18:38charts and refine your order block for
11:18:40taking better trade entries. This is
11:18:42called lower time frame orderflow
11:18:44refinement. This method will help you
11:18:46analyze the trend and take positions
11:18:49with better reward to risk. Now the
11:18:51second factor is to have a valid
11:18:53breakoff structure. The market should
11:18:55form a valid breakoff structure before
11:18:57we can actually start to spot and mark
11:19:00the order blocks. Order blocks are not
11:19:02valid until and unless there is a proper
11:19:05breakoff structure or a change of
11:19:07character in prices. You may already be
11:19:09familiar with how to mark the market
11:19:11structure by identifying boss and chalk.
11:19:13I won't go into all those details. You
11:19:16can always go back and watch the
11:19:17comprehensive video on market structure
11:19:19mapping. Anyways, during a bullish
11:19:22market structure forming higher highs
11:19:24and higher lows. We will only start to
11:19:26look for order blocks when the price has
11:19:28broken and closed above the previous
11:19:30swing high level. In this case, we will
11:19:32look for bullish order blocks since the
11:19:35overall idea is to ride the existing
11:19:37trend. But in case if the market has
11:19:40broken down and closed below the
11:19:42previous major higher swing low level
11:19:44which results in a bearish break of
11:19:46character, then we will look for bearish
11:19:48order blocks only. But a valid breakoff
11:19:50structure or a change of character is
11:19:52not the only metric to confirm before
11:19:54spotting the order blocks. We also need
11:19:56to check for inducements. I have seen
11:19:59traders mark bearish order blocks on
11:20:01bullish market trends and vice versa on
11:20:04bearish trending markets. They are
11:20:06literally trying to grab the minor or
11:20:08internal swing moves. This may work on
11:20:10some occasions but most often the price
11:20:13end up breaking through these low
11:20:14probability order blocks. Marking order
11:20:17blocks on a higher time frame and then
11:20:19refining it on lower time frame is one
11:20:22thing but marking counter order blocks
11:20:24against the existing market structure
11:20:26can result in big losses. So I will
11:20:29never ask you to bet against the market.
11:20:31In fact, it is the wrong approach. In a
11:20:34similar manner, you should only mark
11:20:35order blocks once the price has broken
11:20:38and closed below the previous major
11:20:40lower swing low level. This is a valid
11:20:42bearish breakout structure. And for this
11:20:44instance, we will only look to identify
11:20:46and mark bearish order blocks. And if
11:20:48the price has broken and closed above
11:20:50the previous lower swing high level,
11:20:52which is a bullish change of character,
11:20:54then we will look for bullish order
11:20:56blocks. I hope things are making sense.
11:20:59We have already discussed about the
11:21:01third point but still certain things
11:21:03need more clarification. So in order to
11:21:06identify a bullish order block, you will
11:21:08have to find the last bearish candle
11:21:10before the buy. But it is not so
11:21:12straightforward. There are other things
11:21:14that you need to look for. The point is
11:21:16to check if there is a liquidity sweep
11:21:18involved. This means that the last
11:21:20scandal that we have spotted should take
11:21:23out the previous minor low formed. This
11:21:25also means that next candle should not
11:21:28take out the low of our last selling
11:21:30candle. Now if you are unaware of what
11:21:32liquidity and liquidity sweep are then I
11:21:34suggest you to watch my videos on the
11:21:36same topic. So if the last selling
11:21:38candle was unable to take out the
11:21:40previous liquidity or if the succeeding
11:21:43candles take out the low of our last
11:21:45selling candle then we will not consider
11:21:47this candle for marking our bullish
11:21:49order block. In addition to this, an
11:21:51imbalance should be formed after our
11:21:53last selling candle is formed in case of
11:21:55a bullish structure. So technically,
11:21:57there should be a fair value gap between
11:21:59the high of our last selling candle and
11:22:02the low of the third candle when counted
11:22:04from our last selling candle. It does
11:22:06not matter if this imbalance is wide or
11:22:08narrow. The only condition is that there
11:22:11should be an imbalance between these two
11:22:13candles. As I have mentioned earlier, we
11:22:16should only start checking for order
11:22:17blocks and imbalances only after a valid
11:22:20break of structure or a change of
11:22:22character in the swing structure. If any
11:22:24of these two conditions are not met,
11:22:26then our bullish order block is not a
11:22:28valid one. So if there was no liquidity
11:22:30sweep, then we can shift our order block
11:22:32to that candle which has actually taken
11:22:34out the liquidity or the previous minor
11:22:36low level. This indirectly mean that
11:22:39while marking a valid order block the
11:22:41color of the candle doesn't really
11:22:43matter. What matters is whether the
11:22:45minor liquidity was swept or not. Now
11:22:48even if we have spotted the last candle
11:22:50which has taken out the liquidity at the
11:22:52previous minor low. If there is no
11:22:54imbalance between our marked candle and
11:22:56the third numbered candle then we cannot
11:22:58mark this as a bullish order block. And
11:23:01even if there was an imbalance between
11:23:03the highs and lows of these candles. But
11:23:05if this imbalance is mitigated then also
11:23:08we cannot mark our first candle as a
11:23:10bullish order block. So the fair value
11:23:12gap is the most important factor to
11:23:14consider while marking a valid order
11:23:16block. And once a liquidity sweep and an
11:23:19imbalance is confirmed then we can mark
11:23:21the high and low of our first candle
11:23:23which will become our bullish order
11:23:25block. Another interesting observation
11:23:27that might be useful is that once you
11:23:30have identified the last selling candle
11:23:32or the candle that have swept the
11:23:34liquidity of the previous minor low and
11:23:36if the succeeding candles are formed
11:23:39within the highs and lows of this first
11:23:41candle then these candles don't really
11:23:43have any importance and these are just
11:23:46internal consolidations. In this case,
11:23:48we will only consider the candle which
11:23:50breaks the high of our first candle and
11:23:52this will be our second candle. You can
11:23:55then check for imbalance between these
11:23:57three candles and not take into account
11:23:59the consolidating candles. I have talked
11:24:02about imbalances and also about such
11:24:04internal consolidations in my fair value
11:24:06gap episode. So you can check that video
11:24:09to know more. The logic remains the same
11:24:11while marking a bearish order block in a
11:24:13bearish market structure after a valid
11:24:16breakout structure. I won't go deep into
11:24:18all the details here. As always, the
11:24:20first step is to ensure that there is a
11:24:22valid bearish break of structure. Then
11:24:24you have to look for the last buying
11:24:26candle before the sell. Make sure that
11:24:28this candle has taken out the previous
11:24:30minor high. If it is not the case, you
11:24:32can shift towards the right to find that
11:24:34candle which has swept the previous
11:24:36minor high level. So the color of the
11:24:38candle doesn't really matter when
11:24:40marking the order blocks. What matters
11:24:42is this liquidity sweep. The next factor
11:24:45after this is to check whether there is
11:24:47an imbalance or a fair value gap between
11:24:49the first candle's low that we have
11:24:51identified and the third candle's high.
11:24:54If there is no imbalance or gap between
11:24:56them, then the order flow is not valid
11:24:58at all. But if there is an imbalance
11:25:00between the first candle's low and the
11:25:02third candle's high, then we can mark
11:25:04the order block by drawing lines at the
11:25:07highs and lows of the first candle that
11:25:09we have identified. In some cases,
11:25:11multiple internal consolidating candles
11:25:13can be formed within these highs and
11:25:15lows of our liquidity grabbing candle.
11:25:17You don't have to consider these
11:25:19candles. I have already stated the
11:25:21reason as to why this is so. You can
11:25:23mark the candle which breaks the low of
11:25:25our first candle as the second candle
11:25:27for the imbalance identification. This
11:25:30is how you spot and mark a bearish order
11:25:32block properly. But to filter the best
11:25:34order blocks, you need to consider more
11:25:37factors. Earlier in this video I have
11:25:39mentioned that there can be a minimum of
11:25:42one order block and a maximum of two
11:25:44order blocks between a swing high and a
11:25:46swing low. These are number one the
11:25:49extreme order block and the second one
11:25:51is the decisional POI or the decisional
11:25:54order block. Both order block and POI or
11:25:57price of interest are used in a similar
11:25:59sense. Now both these types of order
11:26:02blocks work in the market if properly
11:26:04identified and marked. The extreme order
11:26:06block is considered the high probability
11:26:08OB because it is the last resort for
11:26:11price to make a reversal as there is
11:26:13enough liquidity and imbalance
11:26:14available. The reason why there can only
11:26:16be two valid order blocks can be either
11:26:19due to inducements or it can be due to
11:26:22orderflow mitigations. I will explain
11:26:24both. Let me start with inducements. I
11:26:27have made a detailed video on
11:26:28inducements in the previous episode. Uh
11:26:30make sure to watch that video to get a
11:26:32proper idea on the topic. Anyways,
11:26:34inducement is considered as the first
11:26:36pullback after a valid breakoff
11:26:39structure has happened. The pullback can
11:26:41be a minor one. If you observe in this
11:26:43figure, then the first pullback after
11:26:45the bullish breakoff structure is marked
11:26:47using a line with a dollar sign. It is
11:26:50essential for price to take out this
11:26:52inducement. Only then we can identify
11:26:54our valid order blocks from the smart
11:26:56money traps. But as you can see here,
11:26:59the price moved higher without sweeping
11:27:01the inducement. the price formed another
11:27:03minor pullback. Keep in mind that the
11:27:06minor pullbacks can be a single bearish
11:27:08candle or a group of candles against the
11:27:10bullish price flow. When price forms a
11:27:13new pullback, then we will shift our
11:27:15inducement level at the low of this
11:27:16pullback. And if the price still moves
11:27:18higher without taking out the liquidity
11:27:20below this pullback's low, then once
11:27:22again we can shift our inducement level
11:27:24to the minor pullback formed at the
11:27:26higher level. And in this case, the
11:27:28market has taken out the inducement as
11:27:30the price has crossed below the pullback
11:27:32loss. Now I will tell you why this is
11:27:35important. See during the minor pullback
11:27:38after a bullish break of structure, you
11:27:40can mark a bullish order block at one or
11:27:43more of these levels. But the bullish
11:27:45order block drawn at the highest
11:27:47pullback level is of low probability and
11:27:50there are high chances that the market
11:27:52will come back to take out the liquidity
11:27:54and break below this order block and
11:27:56move lower. Many traders make the
11:27:58mistake of marking this order block and
11:28:00when the price give a reaction near this
11:28:03order block they initiate a long
11:28:05position. But the chances of this trade
11:28:07failing is very high. So this is not
11:28:10really an order block, but instead it is
11:28:12a trap commonly known as the smart money
11:28:14trap. So no matter what the scenario,
11:28:17never try to take a trade until and
11:28:19unless you haven't confirmed that the
11:28:21inducement is taken out. Once the
11:28:24inducement is taken out, you can use the
11:28:26orderflow mitigation rule to further
11:28:28filter order blocks if there are more
11:28:30than two of them. We will come to this
11:28:32in a short while. Meanwhile, let us
11:28:34understand inducement for a bearish
11:28:36market structure. In this case, the
11:28:39price did a bearish break of structure
11:28:41below the previous swing low and then it
11:28:43formed a minor pullback higher. We will
11:28:45draw a line at the high of this pullback
11:28:47with a dollar symbol to mark the
11:28:49inducement level. And as you can see,
11:28:51market moved lower without taking out
11:28:53this inducement. Then it formed another
11:28:55minor pullback. So now we will shift our
11:28:58inducement level at this pullback high.
11:29:00Then you can notice how the price moved
11:29:02higher and grab the liquidity above this
11:29:04pullback level or in other words our
11:29:06inducement is taken out. Once the
11:29:09inducement level is taken then we can
11:29:11look towards other order blocks for
11:29:12taking a trade. Now if there are still
11:29:15multiple order blocks available even
11:29:17after applying all these rules then we
11:29:19can further filter them using the
11:29:21orderflow mitigation rule. This concept
11:29:23is very simple and easy to understand.
11:29:26You might already have an understanding
11:29:28of what an orderflow is and how it
11:29:30works. So if I were to talk about a
11:29:32bullish market structure, then the last
11:29:34selling move before the buy or the
11:29:36impulse is our bullish order flow. And
11:29:38the last selling candle or that candle
11:29:40which has swept the liquidity of the
11:29:42previous minor low and having a fair
11:29:44value gap between them will be our
11:29:46bullish order block. This rule asks a
11:29:49trader to mark the order flow associated
11:29:51with an order block and then check if
11:29:53the order flow is mitigated or not. In
11:29:56case if the order flow is mitigated then
11:29:58the order block associated with it will
11:30:00be of low probability or it can also be
11:30:03neglected. And if the order flow is also
11:30:05unmitigated then the order block and
11:30:07order flow are both high probability
11:30:09areas from which price can take a
11:30:11reversal. This filtration method using
11:30:14order flows will reduce the number of
11:30:16order blocks marked between a swing low
11:30:18and a high to a maximum of two and a
11:30:21minimum of one. Now finally let us
11:30:24summarize what we have learned. We will
11:30:26consider a bullish market scenario
11:30:28first. This is a 1-day time frame of
11:30:31Euro USD chart but you can choose any
11:30:34chart on any time frame based on your
11:30:36trading style. Here you can see that the
11:30:38price has managed to break and close
11:30:40above the previous higher swing. So this
11:30:42is a valid bullish breakup structure and
11:30:45we can name it. So the first condition
11:30:47is met. Now as the price moves higher we
11:30:50need to look for the inducement levels.
11:30:52Inducements as you are familiar with are
11:30:54formed at the lows of the minor
11:30:56pullbacks being created usually after a
11:30:58valid structure break. Here as the price
11:31:01moves higher it forms a minor pullback.
11:31:03The low of which we will draw a small
11:31:06horizontal line. The minor swing low is
11:31:08our inducement level. Now price moves
11:31:10higher once again without grabbing the
11:31:12liquidity below our inducement level. As
11:31:15the market moves up, prices forms
11:31:17another minor pullback. Based on our
11:31:19rule, we will now shift the inducement
11:31:21level to this newly formed swing high
11:31:23level. But once again, the market moved
11:31:25higher and formed another single candle
11:31:27pullback without sweeping the previous
11:31:30inducement. Again, we will have to shift
11:31:32the inducement level to this new minor
11:31:34low formed. You can clearly see how we
11:31:37should mark the inducement only on the
11:31:39impulse price move. Now finally price
11:31:42makes a correction and takes out our
11:31:44inducement level. This implies two
11:31:46things. Number one, the highest price
11:31:48before the inducement sweep will become
11:31:50our higher high. Secondly, it also means
11:31:53that the price can now tap into any
11:31:56liquidity level or zone and probably
11:31:58reverse higher. This is also a go ahead
11:32:01sign that we require to begin marking
11:32:03our order blocks. So start from the
11:32:05lowest point on the imbulse price swing.
11:32:08For finding bullish order blocks, start
11:32:10finding the last bearish candle before
11:32:12the buy which should necessarily take
11:32:14the liquidity below the minor swing low
11:32:16and it should also be associated with an
11:32:18imbalance or a fair value cap which is
11:32:20unmitigated. Now based on these
11:32:23criteria, if we consider this bearish
11:32:25candle, then we would be marking the
11:32:27order block falsely. It is because this
11:32:29candle did not sweep the liquidity and
11:32:32there is neither an imbalance associated
11:32:34with it. The candle which absorbed the
11:32:36minor liquidity is the next bullish
11:32:39candle and there is a fair value gap
11:32:42between this candle and the third candle
11:32:44which is unmitigated. So we will have to
11:32:46shift our order block to this first
11:32:48bullish candle. We can mark the highs
11:32:51and lows of this candle. And this is our
11:32:53high probability extreme order block.
11:32:55You might have understood how the color
11:32:57of the candle is less significant in
11:33:00comparison to the liquidity grab and
11:33:02fair value gap criteria. As I have
11:33:05mentioned earlier, a maximum of only two
11:33:07order blocks are possible. Here you can
11:33:09see how this bearish candle sweeps out
11:33:12the liquidity below the previous minor
11:33:13low with its deep wicks. In addition,
11:33:16there is also an imbalance or
11:33:18inefficiency between the first and third
11:33:20candles and it remains unmititigated. So
11:33:23this becomes our second order block.
11:33:25Just mark the highs and lows of this
11:33:27bearish candle. This is the decisional
11:33:29order block which has a 50%age chance of
11:33:32working. In addition to marking the
11:33:34order blocks, also make sure to draw the
11:33:37imbalances or fair value gaps associated
11:33:39with them. Now let's see how the price
11:33:41responded. Price moved lower and it took
11:33:44a reaction from the decisional POI or
11:33:46the decisional order block. It also
11:33:49mitigated the imbalance in that area.
11:33:51Now here's the thing. When presented
11:33:53with two order blocks that is a
11:33:55decisional order block and an extreme
11:33:57order block, we should look to take a
11:33:59position from the extreme order block
11:34:01because this is a high probability order
11:34:03block than a decisional order block and
11:34:06it also helps us to buy at discount
11:34:08prices. We will talk about premium and
11:34:10discounts in one of our upcoming videos.
11:34:12So here the price took a reaction from
11:34:15the decisional order block but then it
11:34:17break down below this order block. Keep
11:34:20in mind that the order flow and order
11:34:22blocks are just a one-time use thing. So
11:34:24we will neglect the decisional order
11:34:26block now. Then the price declined lower
11:34:29and it mitigated the imbalance and
11:34:31interestingly moved higher without
11:34:33taking our high probability extreme
11:34:35order block. One of the reasons why the
11:34:37order block was not tested was due to
11:34:40the fact that the bullish order flow
11:34:42which is the last selling move before
11:34:44the buy that is associated with our
11:34:46extreme order block was mitigated. As
11:34:49you can see here, it is one of those
11:34:50filters that you can apply to separate
11:34:53high probability order blocks from the
11:34:54lowquality ones. In this scenario, since
11:34:57the price is at a discount valuation and
11:35:00since it filled the imbalance, we can
11:35:02look for long trading setups while
11:35:04keeping our stop- loss below the order
11:35:06block area. If you are more risk avers
11:35:10somewhere below the imbalance zone. All
11:35:13the minor swing highs will be our minor
11:35:15targets but one major target will be the
11:35:18previously formed higher high. You can
11:35:20see how the price moved higher. Now let
11:35:22us look at a bearish scenario. This is a
11:35:251 hour time frame chart. Here you can
11:35:27see how the price reacted from the
11:35:29previous lower low level but it failed
11:35:31to break below it. But after a slight
11:35:34pullback, price managed to break and
11:35:36close below the major swing low, thereby
11:35:39forming a valid bearish breakup
11:35:40structure. Once the breakup structure is
11:35:43confirmed, the next step is to find a
11:35:45proper inducement. Usually inducement is
11:35:48the high of the first minor pullback
11:35:50after a bearish breakup structure. But
11:35:53here price moved upwards. There is no
11:35:56inducement to be found lower. In such
11:35:58cases, inducement level becomes the high
11:36:01of the last minor pullback before the
11:36:03structure break. I will mark this level
11:36:05and you can observe how the price return
11:36:07to absorb the liquidity above the
11:36:09inducement. Once the inducement sweep is
11:36:12confirmed, we can establish the lowest
11:36:14price point before the inducement grab
11:36:16as our lower low. In addition, we can
11:36:18expect the market to reverse from any
11:36:20liquidity zones and continue to decline
11:36:23lower. This also give us a go ahead
11:36:25signal to mark our order blocks. Let us
11:36:28start from the highest point of the
11:36:29impulse move that generated the
11:36:31structure break. By definition, a
11:36:33bearish order block is the last buying
11:36:36candle before the sell. In addition to
11:36:38this, it needs to sweep the liquidity
11:36:40above the minor highs and it should also
11:36:42be associated with an imbalance. Now,
11:36:44this is the last buying candle, but it
11:36:47has not swept the liquidity. It was this
11:36:49bearish candle that has actually taken
11:36:51out the liquidity above the previous
11:36:53minor high. There is also an imbalance
11:36:55between the first red candle and the
11:36:57third candle. Above what? This imbalance
11:37:00is unmitigated. Now, if we mark the
11:37:02order flow, we can see that it is also
11:37:04unmitigated. Therefore, we can mark the
11:37:07high and low of this first bearish
11:37:09candle as our valid bearish order block.
11:37:12This is a high probability extreme order
11:37:14block. Now, we will see if there is
11:37:16another order block available. If you
11:37:18look at this particular candle, you can
11:37:20notice how it has taken out the previous
11:37:22minor highs. It is also associated with
11:37:24an imbalance which is unmititigated. So
11:37:27this green candle can be our second
11:37:29order block. We can mark its highs and
11:37:31lows. So it becomes our decisional order
11:37:34block. We can also mark the order flow
11:37:36for additional filtering. We can find
11:37:38that the order flow is also unmitigated.
11:37:41But keep in mind that the extreme order
11:37:44block has a higher probability of
11:37:45success than the decisional order block.
11:37:48Now let's see how the price reacted.
11:37:50First the price moved higher, mitigated
11:37:53the imbalance and tested the decisional
11:37:55order block but it did not reverse.
11:37:58Instead the price moved upwards first
11:38:00mitigating the inefficiency there. Then
11:38:03the price moved into the order block.
11:38:05But instead of just testing this extreme
11:38:07order block, price break through the
11:38:09order block. During such an instance,
11:38:12most market participants would expect a
11:38:14change of character. But someone who
11:38:16knows deeply about liquidity and
11:38:18manipulation, they would wait for the
11:38:19price action to complete. And as
11:38:21expected, the price did not break and
11:38:24close above the previous swing high.
11:38:26Instead, it was sweeping the external
11:38:28liquidity available above this major
11:38:30swing high, which is none other than
11:38:32retail stop- losses and breakout limit
11:38:35orders. Now the market absorbed the
11:38:37liquidity and closed below our extreme
11:38:39order block. So this order block is
11:38:42still valid. The traders can look for
11:38:44short trades from within the order block
11:38:46and they can set the stop-loss above the
11:38:49order block or they can even place the
11:38:51stop- loss above the wick of the
11:38:53manipulation candle. This is a good
11:38:55location to sell because we are shorting
11:38:57at a premium valuation. All the previous
11:38:59minor lows are potential target levels
11:39:02but the major take-profit level will be
11:39:04a previous lower low level.
11:39:12We will focus our attention on one of
11:39:14the common manipulation methods in the
11:39:16market. Market manipulation is the cause
11:39:19for losses of many retail traders. But
11:39:22still there are some proactive traders
11:39:24who trade with this manipulation and
11:39:26they grow their small accounts with the
11:39:28smart money. If you know how the market
11:39:30behaves, you can easily identify the
11:39:32possible manipulation areas for taking
11:39:34advantage of. The manipulation concept
11:39:37that we will discuss is known as the
11:39:39institutional candle or the
11:39:41institutional funding candle or IFC for
11:39:44short. For beginners, the institutional
11:39:46candle is an outstanding concept
11:39:48associated with the market liquidity and
11:39:50price action. In addition, it is also a
11:39:53standalone powerful trading strategy
11:39:55that is followed by many SMC traders and
11:39:57price action traders. So, in this video,
11:40:00we will talk about what an institutional
11:40:02candle is and why do these IFC candles
11:40:05form. We will also find reasons as to
11:40:08why these IFC candles work in the
11:40:10markets and why is it important for
11:40:12traders. And finally, we will also learn
11:40:15how to take trades using this concept.
11:40:18So, make sure to watch the video till
11:40:19the end to get the complete
11:40:21understanding of the entire concept. So,
11:40:23let's get started.
11:40:28The institutional funding candles are
11:40:30represented as the last opposing single
11:40:33or multiple close candles before the
11:40:35market forms a strong directional move.
11:40:38Those late buying or selling candles
11:40:40with one or more candlesticks within
11:40:42them which runs out of liquidity before
11:40:44heading in the intended direction are
11:40:47referred to as institutional funding
11:40:48candles. These candles simply indicate
11:40:51that the institutions sell before buying
11:40:54and buy before selling. And that is the
11:40:56reason why these institutional candles
11:40:59are also called banker scandal. So it is
11:41:02one of the most popular smart money
11:41:03trading concept out there. Basically it
11:41:06is the manipulation phase or we can
11:41:08visualize it as a tricky area where the
11:41:11big banks and institutions manipulate
11:41:13the market for liquidity. So if you
11:41:15remember I have already talked about the
11:41:18AMD concept of liquidity in the episode
11:41:20about inducements. You can go back and
11:41:23watch that video to get a detailed
11:41:25understanding about the topic. But to
11:41:27brush things up, the AMD concept or
11:41:30accumulation manipulation distribution
11:41:32is a three-step process which involves
11:41:35hunting the retailer liquidity in the
11:41:37market by inducing these ill-informed
11:41:39traders to buy or sell at the wrong
11:41:41place at the wrong time in the wrong
11:41:43direction. This IFC concept is one of
11:41:46the popular manipulation techniques used
11:41:49to absorb the retail liquidity. You can
11:41:51easily identify this institutional
11:41:53candlestick pattern in charts with your
11:41:55naked eye. you don't really need any
11:41:57additional indicator to look for it. So
11:41:59if you want a simple hack to identify
11:42:02these institutional candles then follow
11:42:04this idea. So when you are looking at
11:42:06the chart for institutional candles give
11:42:09extra attention to the body of the
11:42:10candles and not the wicks. The majority
11:42:13of the volume is held by the body and
11:42:16big players are trading there. Wicks are
11:42:18not so much important as retail traders
11:42:20are trading there. Now you may ask me
11:42:23why do these institutional candles form?
11:42:26The one word answer is obviously
11:42:28liquidity sweep. But for the sake of
11:42:30better understanding, let's just take
11:42:32the longer route. So whenever there is a
11:42:34buyer in the market, there must be a
11:42:37seller. So there must be somebody on the
11:42:39other side of the market to take the
11:42:41trade. This is true for all liquid
11:42:43markets and assets. And that is the
11:42:45reason why market prices moves. And this
11:42:48is where the institutional funding
11:42:50candle comes to play. as it acts as a
11:42:52fishing warm of the smart money to grab
11:42:55retail traders liquidity. Generally from
11:42:57a retailer point of view, the stop loss
11:42:59is placed above the swing high for a
11:43:02short trade position and they will set
11:43:04their stop-loss below the swing low for
11:43:06buy orders. Now when institutions and
11:43:09big banks wants to sell, they will need
11:43:11more buyers. It's obvious, right? So
11:43:14what will they do? Keep in mind that
11:43:17these big players are looking to sell at
11:43:19higher prices. So they will require more
11:43:21buyers to buy from them at higher
11:43:23valuations. Most of the time their modus
11:43:26operandi is the same. Initially they
11:43:28breach the immediate swing high level
11:43:30with a big bullish candle with little or
11:43:33no wick. On different time frames you
11:43:35might see different scenarios. You might
11:43:38see one big candle push in the 1 hour
11:43:40time frame but on the 15minut or 5
11:43:42minute time frame on the same chart
11:43:44you'll be able to see multiple candles
11:43:46push through above the highs. Remember
11:43:48that in the formation of institutional
11:43:51candles, the number of candles is not
11:43:53important. It may be one or more. But
11:43:56the crucial thing is the intention of
11:43:58these candles or the push which is
11:44:00actually to take out the liquidity. Now
11:44:03the stop- losses of all the early
11:44:05sellers are triggered by this push which
11:44:07is placed above the high. We know for a
11:44:09fact that the seller stop- losses are
11:44:12actually buyback orders. Besides this,
11:44:15the buy limit orders of breakout traders
11:44:17also exist above the high level. The
11:44:20institutional candles will also trigger
11:44:22these buyers by limit orders
11:44:24deliberately. This is the manipulation
11:44:26step. Further, the institutions will
11:44:29grab all the unwilling and willing buy
11:44:32orders as liquidity to sell their
11:44:34positions at higher valuations and once
11:44:37the liquidity is absorbed, their
11:44:38intended bearish market movement will
11:44:41start. The same case happens during a
11:44:43bullish price move. So the intention of
11:44:45the big institutions is to buy at lower
11:44:48prices. So they will require a lot of
11:44:51sellers to sell at lower valuations
11:44:53which will become their liquidity. And
11:44:55in order to create this liquidity, the
11:44:57big players will manipulate prices. The
11:45:00price will breach the immediate low or
11:45:02the support level with a big bearish
11:45:05candle with little or no wick. And as
11:45:08mentioned earlier, it can be multiple
11:45:10candles as well. It is not really the
11:45:12number of candles that matters but it is
11:45:14the intention of these candles or the
11:45:17push. The stop- losses of early buyers
11:45:20are triggered due to this price push
11:45:22which were placed below the lows or the
11:45:24minor support. We know that the buyer
11:45:26stop- losses are actually sell orders.
11:45:29Besides this, the willing sell orders of
11:45:31breakout traders also exist below the
11:45:34support level which are also triggered
11:45:36in the process. And once the institution
11:45:38grabs all the unwilling and willing sell
11:45:41orders as liquidity, their intended
11:45:43upward movement will start. So the
11:45:46agenda of institutional funding candle
11:45:48is to take out or sweep the liquidity
11:45:51above or below the immediate resistance
11:45:54or support lines respectively. Now you
11:45:56can ask me why do these institutional
11:45:58candles actually work in the market. Now
11:46:01the strong reason why institutional
11:46:03funding candles work in the market is
11:46:05because these are the draw down or loss
11:46:07of the smart money. I know you are
11:46:09confused but let me explain. If the big
11:46:12institution wants to buy at lower
11:46:14valuation they will need more sellers
11:46:17who would sell at lower prices. For
11:46:19generating enough liquidity they will
11:46:21manipulate the prices. In this case they
11:46:23will create a single bearish candle or a
11:46:26group of candles below the immediate low
11:46:28or the support level. This means the
11:46:31institutions are actually selling here
11:46:33but their real intention is to buy but
11:46:36they sell initially to trap the retail
11:46:38traders in their trades so that they can
11:46:40start using the retail orders to buy at
11:46:43lower prices. And when the price returns
11:46:45back to the previous support level, they
11:46:48would exit their short positions on a
11:46:50break even or on a small loss. And as
11:46:52you can guess, these institutions won't
11:46:55take such unnecessary positions and
11:46:57losses unless they want to make a much
11:47:00bigger gain. So keep in mind that
11:47:03usually when the price comes back to the
11:47:05manipulation zone, smart money would
11:47:07close their counter order with a small
11:47:10loss or break even as they mitigate
11:47:12their position. These are the best
11:47:14places to take a trade and make some
11:47:16profits by following the footprints of
11:47:19the spark money. Now let us discuss what
11:47:21makes institutional candles important.
11:47:24Institutional candle helps you to
11:47:27determine order flow and market
11:47:28structure. Yes, you heard it right. We
11:47:31know what an orderflow is. So a bullish
11:47:33order flow is the last selling move
11:47:36before a buy on a bullish market
11:47:38structure. And a bearish orderflow is
11:47:40the last buying move before a sell in
11:47:42case of a bearish trend. Now look at how
11:47:45institution candles form. It follows the
11:47:47AMD criteria. This means the
11:47:50manipulation move which is the IFC will
11:47:53act as the order flow since it is the
11:47:55price move against the major trend
11:47:57structure. Now IFC can also be used to
11:48:00determine market structures. This is
11:48:02because institutional candles usually
11:48:04form the extreme highs and lows in a
11:48:06price move before the actual
11:48:08distribution in prices. These highs and
11:48:10lows can act as swing highs and swing
11:48:13lows which are reference points for
11:48:14mapping the market structure. In
11:48:17addition to this, IFC is also a popular
11:48:19trade entry strategy. You can think of
11:48:22trade setups in the dominant trend
11:48:23direction and the trade entry orders can
11:48:26be placed after the last price pushup or
11:48:29push down beyond the zone which is an
11:48:31important strategy that many traders
11:48:33follow. Actually, institutional candles
11:48:36forms swing highs or swing lows. So
11:48:39there are high chances that the market
11:48:41will never violate or break beneath the
11:48:43low of the last down close candles in a
11:48:46bullish market. And likewise price will
11:48:48never violate and break above the last
11:48:50uplose candles during a bearish trend.
11:48:53In addition to this, if you have watched
11:48:55my videos on liquidity that is both
11:48:57major and minor liquidity and if you
11:49:00have done analysis on the charts, then
11:49:02you might have come across innumerable
11:49:04situations of liquidity manipulations
11:49:06taking place in different locations and
11:49:09in different scenarios. These liquidity
11:49:11manipulations could be near equal highs
11:49:14and equal lows, near supports and
11:49:16resistances, during consolidation
11:49:18breakouts, trend line breakouts, during
11:49:21pattern formations and so on. And on
11:49:23most cases within these manipulations,
11:49:26you can spot institutional funding
11:49:28candles which goes deeper to grab the
11:49:30retailer orders. So what I mean to say
11:49:33is that IFC is a very common
11:49:35manipulation type that you can find on
11:49:37the charts. Now let us learn in detail
11:49:39as to how to trade with these
11:49:41institutional funding candles. So first
11:49:44of all you will have to mark up your
11:49:46major swing points that are formed by
11:49:48the institutional funding candles.
11:49:50Remember that in the upward moving
11:49:52market the last downlo candles are
11:49:55usually respected while the last uplo
11:49:58candles are respected in the bearish
11:50:00trending markets. In case if the market
11:50:02is in a consolidation period, then both
11:50:05these types of institutional candles are
11:50:07respected. Once you have identified the
11:50:10IFC candles, you need to mark the IFC
11:50:13range. For this, you need to select the
11:50:15Fibonacci tool from the toolbar and then
11:50:18select the highest and lowest points in
11:50:21the institutional candles. So, the idea
11:50:23is to start plotting the Fibonacci
11:50:25retracement from the origin of the IFC
11:50:28candles. For bearish candles, start
11:50:30drawing from the highest to lowest
11:50:32point. And for bullish institutional
11:50:34candles, begin from the lowest point and
11:50:37follow through to the highest point. The
11:50:39Fibonacci retracement levels will be
11:50:42automatically plotted. But we only
11:50:44require the 0 percentage, 50%age, and
11:50:47100%age levels. You can go to the fib
11:50:50settings and change it accordingly. Now
11:50:52even though you can execute a trade
11:50:54anywhere within the range of the
11:50:56institution candles, it is mostly
11:50:58preferred to enter a trade either near
11:51:00the opening price of the institutional
11:51:02candles or at the 50%age of the push. So
11:51:06you can trade within the fib 100
11:51:08percentage to fib 50%age levels. This is
11:51:11your tradable zone. Now where to take a
11:51:14trade entry is entirely up to you
11:51:16depending on whether you are aggressive
11:51:18or conservative in your approach. But
11:51:20let me tell you, if you plan to take
11:51:22trades at 50%age of the institutional
11:51:25candles, then you might miss some of
11:51:27your entries because price never always
11:51:29returns to the 50%age level. But on the
11:51:32upside, if your limit order or market
11:51:34order is executed at 50%age level, then
11:51:37you will definitely get a better reward
11:51:39to risk ratio. One additional thing you
11:51:41can do is you can use the Fibonacci
11:51:43retracement tool once again and select
11:51:46the fib 1 and fib 0.5 levels. This will
11:51:49generate another Fibonacci level at the
11:51:5150%age of our entry zone. This can
11:51:54further improve our chances of getting
11:51:56into most of the trade opportunities
11:51:58without having to take much risks. When
11:52:00it comes to stop-loss setting, your stop
11:52:02loss should be placed above the highs of
11:52:04the institutional candles for the sell
11:52:06orders and it should be placed below the
11:52:08low of the down closed institutional
11:52:10candles for buy orders. You can even
11:52:13place your stop loss above or below the
11:52:15institutional candles body or wick. But
11:52:18I personally prefer to place my stop
11:52:20loss above or below the wick. This is
11:52:22the best and safest place to place your
11:52:24stop- loss. Now let's talk about the
11:52:27targets. Your take profits should be
11:52:29placed at the next area of interest or
11:52:32price of interest. It could be the next
11:52:34high or low, support or resistance,
11:52:36supply or demand zone, equal highs or
11:52:39equal lows where ample liquidity exist
11:52:41to drive the market to the opposite
11:52:43direction. You can also place your
11:52:45takeprofits by analyzing the higher time
11:52:48frames. I think that as a beginner to
11:52:50SMC concepts, a bigger win rate is more
11:52:53important than the large reward to risk
11:52:56ratio. So you should cut over
11:52:58expectations and place your targets at a
11:53:00specific logical area and be consistent
11:53:03with it and always try to improve your
11:53:05entries thereby you can maximize your
11:53:07rewards. Now let's take an example to
11:53:10understand the concepts even better. In
11:53:12this case, the price is trading within a
11:53:15range. In such cases, both the upclosed
11:53:17and downclosed institution candles are
11:53:20usually respected by prices. Now, as you
11:53:23can see, price formed equal lows which I
11:53:26have marked here and then it
11:53:27consolidated for a while. Then the price
11:53:30moved lower and it break below the equal
11:53:32lows with candles having deep wicks to
11:53:34sweep the liquidity below this level.
11:53:37And once the liquidity was absorbed, the
11:53:39price moved swiftly creating imbalances
11:53:41or fair value gaps on the way up. These
11:53:44imbalance formations are very important.
11:53:46It gives a reason for the price to
11:53:48return back and fill the inefficiency
11:53:51that was created. To know more about
11:53:53fair value gaps or imbalances, you can
11:53:55watch my video on the same topic.
11:53:58Anyways, when the price starts to move
11:54:00higher, we can identify the manipulation
11:54:02candles. In this scenario, these are the
11:54:05last down close candles. I have marked
11:54:07these candles. Now I have to identify
11:54:10the tradable IFC range. For this, bring
11:54:13up the Fibonacci retracement tool and
11:54:15select the highest point in the IFC
11:54:17candles and then drag the cursor and
11:54:20select the lowest point in the
11:54:21institution candles. This will give you
11:54:24the IFC range. As I have mentioned
11:54:26before, when price returns back to this
11:54:29range after mitigating the imbalance, we
11:54:31will look for long trading opportunities
11:54:33from fib 1 or fib 0.5 levels. If you
11:54:37want, you can also draw another
11:54:38Fibonacci retracement between the fib 1
11:54:41and fib 0.5 levels to obtain another 50%
11:54:45level at the midpoint of these two
11:54:47levels, which will give a higher
11:54:49probability that your buy limit orders
11:54:51will get executed. And this intermediate
11:54:53level will provide a better
11:54:55risk-to-reward than the fib 100
11:54:57percentage level. Now let us observe
11:54:59what the market did. The market moved
11:55:01higher, broke above the consolidation
11:55:04after which it reversed, took a short
11:55:06reaction and once again break below the
11:55:08resistance turn support level. Further
11:55:11price consolidated near the resistance
11:55:13area where it formed equal highs. I have
11:55:16marked this level. Now the price made a
11:55:18buildup and eventually break above the
11:55:20equal high level to sweep the liquidity
11:55:22above it. After the liquidity hunt,
11:55:24price returned lower. This manipulation
11:55:27was in form of a level breakout
11:55:29following a consolidation. After the
11:55:31manipulation price declined lower
11:55:33swiftly creating an imbalance or a fair
11:55:36value gap. This is a classic case of AMD
11:55:39or power of three concept. Also, this
11:55:42imbalance or inefficiency is a crucial
11:55:45part of the overall concept because it
11:55:47gives price a strong reason to return
11:55:49back and fill the inefficiency in
11:55:51prices. The manipulation move or the
11:55:53liquidity grab was done by institutional
11:55:56candles. In this case, the last uplose
11:55:59candles are our IFC candles. I have
11:56:02marked these institutional candles here.
11:56:04Now, we have to mark the tradable IFC
11:56:07range using Fibonacci tool. For this,
11:56:09bring up the Fibonacci retracement tool
11:56:12and first select the lowest point of the
11:56:14IFC candles and then select the highest
11:56:17point of the institution candles. Our
11:56:19tradable zone is between fib 1 and fib
11:56:220.5 levels. You can also mark the
11:56:24intermediate level between fib 1 and fib
11:56:270.5 levels for getting good results. So
11:56:30the overall idea is to place sell limit
11:56:32orders at any of the mentioned Fibonacci
11:56:35levels when the price return to fill the
11:56:37inefficiency and there are very high
11:56:40chances that the price will tap into
11:56:42this Fibonacci range and our sell orders
11:56:44will get executed. Now let's see how the
11:56:47trade has turned out in both the cases.
11:56:49So the price return to our bullish trade
11:56:51setup. All the buy limit orders between
11:56:54fib 1 and fib 0.5 levels are executed.
11:56:57You can set your stop loss below the low
11:56:59of the IFC range. For target placement,
11:57:03you can choose this recent swing low
11:57:04level as your first take-profit level.
11:57:07You can also choose the resistance level
11:57:09for target, but the probability of price
11:57:11reaching this level is low. And as you
11:57:14can see, the price moved higher and
11:57:15attained our first target. But the price
11:57:18did not move all the way up. Instead,
11:57:20the price reversed once again and
11:57:22sharply moved lower. Once an IFC range
11:57:25is tested, it is not useful anymore. The
11:57:28price break through all these ranges.
11:57:30Keep in mind that our bearish trade
11:57:32setup is still active. And after a
11:57:34while, price reversed sharply and it
11:57:37started to rise again. It came back to
11:57:39fill the price inefficiency and it
11:57:41tested all the sell limit orders placed
11:57:44between fib 1 and fib 0.5 levels. In
11:57:47this case, our stop loss can be placed
11:57:49above the high of the IFC candle. Our
11:57:52target can be set as the previous low
11:57:54formed. And as you can see the price
11:57:57moved lower and hit our takerit level. I
11:58:00hope things are clear now. So you have
11:58:03to identify equal lows, equal highs,
11:58:06support resistance levels where possible
11:58:08manipulations may occur and the
11:58:10institution candles might form. Then you
11:58:12have to mark up the candles. It might be
11:58:15one candle in the higher time frame and
11:58:16multiple candles in the lower time
11:58:18frame. Now you know how to spot this
11:58:21smart money manipulation. Institutional
11:58:23candle is an advanced price action
11:58:25trading concept. Also
11:58:32we will learn an advanced tutorial on a
11:58:35rather interesting smart money concept
11:58:37which is regarding the identification
11:58:39and utilization of flip patterns and
11:58:42flip zones. So in this video I will talk
11:58:45about flip zones, the different types of
11:58:47flip entry models and I will also give
11:58:50you the important rules to identify and
11:58:52mark valid flip zones. These are
11:58:55powerful concepts in smart money
11:58:56strategies and neglecting them in your
11:58:58trading may leave you lagging behind the
11:59:00changing market trends. So by
11:59:03understanding and utilizing these
11:59:05essential techniques, you will gain the
11:59:07adequate expertise to identify high
11:59:09probability flip setups and you will
11:59:11also be able to make well-informed
11:59:13trading decisions. So if these series of
11:59:15videos are useful for you, then give
11:59:17this video a thumbs up to show your
11:59:19support and make sure to subscribe to
11:59:21our channel and also enable the bell
11:59:23notification to get all the latest
11:59:25updates. So without wasting any time,
11:59:27let's get started. As the name suggests,
11:59:30the term flip in the flip pattern
11:59:33indicates a market transition from one
11:59:35direction to the other, thereby implying
11:59:37a change in the market sentiment. This
11:59:39could be a shift from bullish to bearish
11:59:42or vice versa. Flips are often viewed as
11:59:44crucial turning points or areas where
11:59:47the traders have potential opportunities
11:59:49to capitalize on the changing market
11:59:51dynamics. The flip trading entries are
11:59:53considered as an effective method to
11:59:55enter quickly during market declines or
11:59:58surges. So how can you define a flip
12:00:01pattern? You can think of a flip pattern
12:00:03as a particular price pattern or
12:00:05configuration on the price chart that
12:00:08indicates a potential shift or flip in
12:00:10the market direction. Flips signal a
12:00:13transition from an existing trend to a
12:00:15possible reversal or it indicates a
12:00:18shift in the market sentiment. So the
12:00:20overall idea of a flip pattern is
12:00:22simple. A flip pattern involves reacting
12:00:25to a significant price zone in the chart
12:00:27and then effectively breaking through
12:00:29it. These significant price zones could
12:00:31be support or demand areas, order
12:00:33blocks, gaps, important highs or lows
12:00:36etc. Now the flip patterns are majorly
12:00:39divided into two main categories. These
12:00:41are reversal flip patterns and
12:00:44continuation flip patterns. We will talk
12:00:46in detail about each one of them. First,
12:00:49let us look at how we can spot a
12:00:51reversal flip pattern. Let's imagine a
12:00:54bullish market structure with a
12:00:55consistent formation of higher highs and
12:00:58higher lows in prices. To identify a
12:01:00valid flip pattern, we have to consider
12:01:02a few key criteria. First of all, the
12:01:05price should face a rejection from a
12:01:07higher time frame supply zone. So when
12:01:09you mark the structure on higher time
12:01:11frames like 1 day or 1 hour or any
12:01:14higher time frame based on your trading
12:01:16style, you'll be able to identify such
12:01:18price zones where we can expect the
12:01:20price to face some resistance. These
12:01:23could be major resistance areas,
12:01:25unmititigated higher time frame bearish
12:01:27order blocks, price gaps, daily, weekly
12:01:30or monthly highs, etc. All these levels
12:01:32or zones can act as a supply zone and
12:01:35reject the prices. Now after
12:01:37encountering a resistance at the supply
12:01:39zone and declining the price should
12:01:41retest the last formed demand zone and
12:01:44then move upwards showing a rejection
12:01:46from this demand zone. But the crucial
12:01:48thing to make sure is that the price
12:01:50should not establish a new higher high
12:01:52but instead the price should break
12:01:54through the previously tested demand
12:01:56zone. This break of the demand zone
12:01:58forms a new supply zone which is
12:02:00referred to as a flip zone. This flip
12:02:03zone is marked on the basis of an
12:02:05imbalance formed while breaking through
12:02:07the demand zone. We will talk about how
12:02:09to mark a flip zone in a short while. It
12:02:11is vital that we closely monitor this
12:02:13newly formed flip zone since the
12:02:16likelihood of price returning back to
12:02:18retest this zone is very high. It is
12:02:20usually recommended to place a sell
12:02:22limit order within this supply flip zone
12:02:24to enter into a short trade position
12:02:26when the price retest the flip zone. The
12:02:29same principles apply in a bearish
12:02:31scenario. In case if the market is
12:02:33consistently making lower highs and
12:02:35lower lows, thereby indicating a bearish
12:02:38market trend, then we will wait for
12:02:40price to find a support on a higher time
12:02:42frame demand zone and then move higher.
12:02:45This demand zone could be an
12:02:46unmititigated higher time frame bullish
12:02:48order block, a major support level,
12:02:50price gaps, daily or weekly or monthly
12:02:53lows, etc. As the price decline lower,
12:02:56it should react with the last form
12:02:58supply zone on the same time frame that
12:03:00we are analyzing and then move lower.
12:03:03But the crucial part is to make sure
12:03:04that this price reaction should not
12:03:07establish a new lower low or it should
12:03:09not form a bearish break of structure
12:03:12but instead the price should break
12:03:14through the previously tested supply
12:03:15zone. This break of the supply zone will
12:03:18form a new demand zone which is called
12:03:20our flip zone. Marking the flip zone is
12:03:23based on price imbalance formed during
12:03:25the supply zone break. We should closely
12:03:27monitor this flip zone because there are
12:03:29high chances that the price could return
12:03:31back to retest this zone. It is a usual
12:03:34practice to place a buy limit order
12:03:36within this demand flip zone so as to
12:03:39enter into a long trade position when
12:03:41the price retest the flip zone. Here I
12:03:43would like to highlight a key point. A
12:03:46flip pattern wouldn't exist without a
12:03:48reaction from the last demand or supply
12:03:50zone. At least some of you might look at
12:03:53this and ask me, isn't this a change of
12:03:55character? Although the flip pattern
12:03:58shares similarity with change of
12:03:59character pattern, not every change of
12:04:02character is a flip. But on the
12:04:04opposite, every flip is a change of
12:04:06character. Actually, a flip is a
12:04:08specific type of change in the market
12:04:10dynamics where the price reverses and
12:04:12establishes a new structure. This
12:04:15pattern as I have already mentioned is
12:04:17characterized by a clear rejection from
12:04:19the last supply or demand zone followed
12:04:21by a subsequent break of that price zone
12:04:24creating a flip zone. Setting up trades
12:04:26for the flip pattern is similar to those
12:04:29setups that we have for a change of
12:04:31character pattern thereby allowing the
12:04:33use of both aggressive and conservative
12:04:35entry types with the flip zones. We will
12:04:37not dwell deep into each of these entry
12:04:39types in this video. We will talk about
12:04:41all the entry types and risk management
12:04:44strategies in the next season of smart
12:04:46money concepts. But now let's briefly
12:04:49analyze the flip pattern through a
12:04:51detailed candlestick analysis and come
12:04:53up with some rules to identify the best
12:04:55reversal flip patterns. It is observed
12:04:58that the flip pattern's effectiveness is
12:05:00greatly enhanced when the price reacts
12:05:03aggressively and push away from the
12:05:05demand or supply zone and then swiftly
12:05:07breaking through either the last demand
12:05:09zone or the last supply zone thereby
12:05:12leaving behind an inefficiency. We have
12:05:14already made a video about
12:05:16inefficiencies or imbalances or fair
12:05:19value gaps in this course. You can check
12:05:21it out if you want to know more. If you
12:05:23have spotted an imbalance or
12:05:25inefficiency in price while breaking the
12:05:27supply or demand zone, then all you have
12:05:29to do is to find the extreme candle
12:05:32formed during the price pullback from
12:05:33the supply or demand zone before the
12:05:36price break through the supply or demand
12:05:37zone. You can mark the highs and lows of
12:05:40this candle using a rectangle and this
12:05:42will be our flip zone. It is even better
12:05:45if this extreme candle is followed by a
12:05:47large bodied imbalance candle. But just
12:05:50keep in mind that the breakout move
12:05:52should be associated with a price
12:05:53imbalance. We will understand the reason
12:05:56for this in a short while. Now it is
12:05:58crucial to recognize the fact that the
12:06:00strength of demand or a demand zone can
12:06:03be assessed by the level of rejection
12:06:05that it provides to prices and its
12:06:07ability to drive price to new higher
12:06:10highs. If the demand associated with the
12:06:12zone is weak and it fails to generate
12:06:15substantial momentum and eventually
12:06:17leading to a break through the zone then
12:06:19it signals a shift in control towards
12:06:21the new supply zone or we can say that
12:06:24the beers are gaining dominance. So as
12:06:26SMC traders we can concentrate on
12:06:29trading the supply side of market in
12:06:31these situations. On a similar note, the
12:06:34strength of a supply zone can be gauged
12:06:36by the level of rejection it provides in
12:06:38pushing the prices to form new lower
12:06:40lows. If supply turns out to be weak and
12:06:43it fails to produce substantial price
12:06:45momentum and thereby eventually leading
12:06:47to a break through the zone, then it
12:06:49signals a shift in control towards a new
12:06:52demand zone which indicates that the
12:06:54bulls are gaining traction. So as an SMC
12:06:57trader, you can focus on trading the
12:06:59demand side of market. That is look for
12:07:01long trading setups. Now let's outline
12:07:04some rules and other criteria for
12:07:07identifying valid and highquality flip
12:07:09patterns and zones in the market. I will
12:07:12discuss four essential rules that you
12:07:14can follow in order to identify valid
12:07:16flip patterns and zones with a high
12:07:18probability of success. The first rule
12:07:21states that for a reversal flip pattern
12:07:23to be considered valid, the price must
12:07:25first mitigate and reverse from a higher
12:07:28time frame supply or demand zone. This
12:07:30rejection from the higher time frame
12:07:32supply or demand zone indicates the
12:07:34possibility of a change in the market
12:07:36sentiment, thereby setting the stage for
12:07:38a potential flip to occur. In other
12:07:40words, the price should react from a
12:07:42significant supply or demand level
12:07:44before forming the flip pattern. So if
12:07:47the price fails to mitigate a higher
12:07:49time frame supply or demand zone and
12:07:51then simply forms a flip pattern, it
12:07:54cannot be considered a valid flip
12:07:56pattern. Now let's talk about rule
12:07:58number two. This rule states that for a
12:08:00valid flip pattern to occur, the price
12:08:03must react from a supply or demand zone,
12:08:05create a pullback, and then break
12:08:07through the supply or demand zone.
12:08:09Without a pullback or any rejection of
12:08:12price from the supply or demand zone,
12:08:14the pattern cannot be considered as a
12:08:16valid flip pattern. Moving on to rule
12:08:18number three. This is a very important
12:08:20criteria that needs to be satisfied. It
12:08:23states that a highquality flip pattern
12:08:26should create a significant imbalance or
12:08:28inefficiency when flipping a demand or
12:08:31supply zone. This imbalance or
12:08:33inefficiency should be associated with a
12:08:35clear change of character or in other
12:08:37words it should involve a swift powerful
12:08:40price movement that invalidates the
12:08:42previous market sentiment. Let us
12:08:44understand the reasons why this is very
12:08:46important. Imbalance represents an
12:08:49inefficiency between buyers and sellers
12:08:52leading to a disequilibrium in prices
12:08:54that needs to be filled. Often
12:08:56imbalances are seen as a gap within the
12:08:58candles. These are also known as fair
12:09:01value gaps. To understand this better,
12:09:03we will consider two scenarios. If a
12:09:06three candle sequence as shown here
12:09:09lacks gaps between the high of the first
12:09:11candle and low of the third candle in
12:09:13case of a bullish scenario. And if a
12:09:15three candle sequence lacks a gap
12:09:17between the low of the first candle and
12:09:19high of the third candle in case of a
12:09:21bearish scenario, then these are
12:09:23examples of efficiency in the market.
12:09:25This means the price action is balanced
12:09:28and there is no imbalance or
12:09:30inefficiency that needs to be filled.
12:09:32Conversely, the presence of a gap within
12:09:35the first and the third candle as shown
12:09:37in these scenarios signifies an
12:09:39inefficiency or imbalance in prices that
12:09:42need to be filled in order to balance
12:09:44the price action or to make the market
12:09:46efficient. Therefore, the presence of an
12:09:49imbalance during the supply or demand
12:09:51zone break will increase the probability
12:09:53of the price returning back to fill this
12:09:55inefficiency which will in turn improve
12:09:58the chances of our flip zone being
12:10:00tested. I hope things are making sense.
12:10:03Now the last rule that is rule number
12:10:05four emphasizes that a valid and high
12:10:08probability flip zone must be
12:10:10unmitigated. It means price should not
12:10:12test our flip zones when moving to break
12:10:15through the supply or demand zones. Flip
12:10:17zones are considered as one-time use
12:10:19thing. Just like orderflow or autoblock
12:10:21areas, we will focus on only those
12:10:24trading opportunities when the price
12:10:26first enters a flip zone. Once a flip
12:10:28zone has been mitigated, meaning the
12:10:30price has moved beyond its boundaries
12:10:32and the inefficiency associated with it
12:10:35has been filled, it will lose its
12:10:36significance as a trading area and we
12:10:39will not consider it as an area or price
12:10:41of interest for our future trades and
12:10:44subsequent retests of flip zone may not
12:10:46offer the same trading opportunities as
12:10:48the initial trade entry. Now, we can use
12:10:51aggressive or conservative entries when
12:10:53trading with the flip setup. As I have
12:10:55mentioned before, we will cover
12:10:57different SMC entries and risk
12:10:59management strategies in the second
12:11:00season of this SMC course. But to give
12:11:03you a general idea, while trading the
12:11:05reversal flip setups, take a short trade
12:11:08from or within the supply flip zone and
12:11:10take a long trade from or within a
12:11:12demand flip zone and price pulls back to
12:11:15fill the inefficiency formed during the
12:11:17breakout. Now that we have extensively
12:11:20discussed the reversal flip pattern,
12:11:22let's explore the specifics of the
12:11:24second flip pattern type which is the
12:11:26continuation flip pattern. The
12:11:28continuation flip pattern can be divided
12:11:30into two types. It can be either a
12:11:33supply to demand flip pattern or a
12:11:35demand to supply flip pattern. Let's
12:11:37begin with the supply demand flip
12:11:39pattern. The supply to demand flip
12:11:41pattern is a type of continuation flip
12:11:43pattern that involves a price transition
12:11:46from a supply zone to a demand zone. As
12:11:49the name suggest, it implies a shift
12:11:51from a supply zone to a demand zone.
12:11:53This flip pattern indicates a decrease
12:11:55in the selling pressure and an increase
12:11:57in the buyer control or dominance,
12:12:00thereby suggesting a potential
12:12:01continuation of the bullish trend.
12:12:04Traders spotting this pattern can seek
12:12:06opportunities to enter long trade
12:12:08positions as the price reverses from the
12:12:10supply zone and move towards a demand
12:12:13zone. Now let's look into this scenario
12:12:15in greater detail. For this, let us
12:12:17consider a bullish market where the
12:12:19price has mitigated the extreme demand
12:12:21zone or the extreme bullish order block
12:12:23and begin to reverse thereby continuing
12:12:25its upward movement towards the next
12:12:27unmitigated higher time frame supply
12:12:29zone. However, in this scenario, an
12:12:32interesting twist unfolds. Instead of
12:12:34respecting this unmititigated supply
12:12:36zone and reversing lower, the price
12:12:39sharply surges upwards, breaking through
12:12:41the supply zone. So, this break of the
12:12:43supply zone indicates a lack of bearish
12:12:46momentum to sustain the selling
12:12:47pressure. It also implies that the bulls
12:12:50have taken control, thereby suggesting a
12:12:52potential continuation of the existing
12:12:54bullish trend. This scenario creates a
12:12:57perfect demand zone that is generated by
12:12:59the price wave that flipped the supply
12:13:02zone. So the new demand flip zone can be
12:13:04marked as the extreme candle in the
12:13:06price wave that caused the break above
12:13:09the unmititigated supply zone. Also keep
12:13:11in mind that here also the price needs
12:13:14to form an imbalance or inefficiency
12:13:16during the breakout wave. Typically
12:13:18after such a flip pattern formation, the
12:13:21price may return to this flip zone to
12:13:23mitigate it and then resume its upward
12:13:25movement. The reason why price returns
12:13:27to this flip zone is due to the
12:13:29imbalance created by prices during the
12:13:32inefficient breakout move. This is what
12:13:34we call a supply to demand flip pattern.
12:13:36It signals a shift in market dynamics
12:13:39from selling pressure to buying
12:13:40pressure, presenting a potential
12:13:42opportunity for traders to consider
12:13:45entering into long trade positions,
12:13:47thereby anticipating the continuation of
12:13:49the bullish trend. Similar concepts
12:13:51apply to demand to supply flip pattern
12:13:53as well. Let's talk about it now. In
12:13:56this pattern, the price shift from a
12:13:58demand zone to a supply zone, suggesting
12:14:01a decrease in buying pressure and an
12:14:03increase in the selling interest,
12:14:05thereby indicating a potential
12:14:07continuation of the prevailing bearish
12:14:09trend. In this scenario, we have a
12:14:11bearish market where the price enters
12:14:13the extreme supply zone and starts to
12:14:16reverse, continuing its downward
12:14:18movement towards the next unmitigated
12:14:20higher time frame demand zone. However,
12:14:23something interesting occurs in this
12:14:24situation. Instead of respecting this
12:14:27unmititigated demand zone and reversing
12:14:29higher, the price sharply pushes
12:14:31downwards and breaks through the demand
12:14:34zone. This break of the demand zone
12:14:36indicates a lack of the bullish momentum
12:14:38in the market, thereby signaling a shift
12:14:40in control from buyers to sellers. This
12:14:43creates a perfect supply zone that is
12:14:45generated by the price wave that flipped
12:14:47the demand zone to the downside. So the
12:14:50new supply flip zone can be marked as
12:14:52the extreme candle in the price wave
12:14:54that caused the break below the
12:14:56unmititigated demand zone. In this case
12:14:59also price needs to form an imbalance or
12:15:02inefficiency during the breakout price
12:15:04move. Typically after such a flip
12:15:06pattern occurs the price may retrace
12:15:08back to our flip zone to fill the
12:15:10inefficiency and thereby even mitigate
12:15:12the supply flip zone before resuming its
12:15:14bearish moment. So this is what we refer
12:15:17to as a demand to supply flip pattern.
12:15:19It denotes a shift in the market
12:15:21dynamics suggesting a potential
12:15:23opportunity for traders to consider
12:15:26entering short positions anticipating
12:15:28the continuation of the prevailing
12:15:30downtrend. Now let us look at an
12:15:32example. Here we have a 1 hour time
12:15:34frame chart. The price has formed a
12:15:36series of bearish breakoff structures
12:15:38indicating a bearish trend. We can also
12:15:41notice an unmititigated demand zone in
12:15:43the 4hour time frame. Upon reaching this
12:15:45higher time frame demand zone, many
12:15:47traders would expect a potential
12:15:49reversal and they would start looking
12:15:51for signs of a change of character to
12:15:53enter into long trade positions. But
12:15:56contrary to their expectations, price
12:15:58taps into the 4-hour demand zone,
12:16:01experiences a minor pullback, and it
12:16:03crashes downward with significant
12:16:05momentum. This aggressive price move is
12:16:08associated with inefficiencies or
12:16:10imbalances that needs to be filled to
12:16:12regain the balanced price action. This
12:16:14movement causes a flip in the demand
12:16:17zone indicating a shift in the market
12:16:19dynamics and potentially signaling a
12:16:21continuation of the bearish trend. We
12:16:24can mark this newly formed supply flip
12:16:26zone at the extreme candle of the
12:16:28inefficient price wave that caused the
12:16:30break of the higher time frame demand
12:16:32zone to the downside. The break of the
12:16:34demand zone also signals a lack of
12:16:36bullish momentum indicating a shift in
12:16:39control from buyers to the sellers. And
12:16:41as you can see on the chart, the price
12:16:43retraces back to the supply flip zone,
12:16:45experiences a reaction, and then
12:16:47aggressively move downwards with
12:16:49significant momentum. Traders can look
12:16:52to take short trades from within the
12:16:54supply flip zone formed.
12:17:00I will talk about breaker blocks,
12:17:02mitigation blocks, and how you can use
12:17:04these concepts to improve your chart
12:17:06analysis. I will explain what these are,
12:17:09the psychology behind them, and why they
12:17:11work in the market. We will also learn
12:17:13how to identify and trade them. Breaker
12:17:16blocks and mitigation blocks are
12:17:18reference areas on charts where you can
12:17:20potentially find a trade opportunity.
12:17:23Breaker block and mitigation block
12:17:25concepts are almost the same but their
12:17:27formation pattern is different. The
12:17:29general definition of a breaker block
12:17:31and mitigation block are similar. The
12:17:34general definition states that a breaker
12:17:36block or even a mitigation block is a
12:17:39failed order block that turns into
12:17:41another supply or demand area on the
12:17:43chart. From my basic price action
12:17:45course, we know that whenever the price
12:17:48breaks through a resistance level, it
12:17:50becomes a support due to the behavior of
12:17:53market participants. Similarly, whenever
12:17:56the price breaks through a support
12:17:57level, it starts to behave like a
12:17:59resistance when the market taps into
12:18:01that area. Again, this is the simple
12:18:04principle of polarity. The same concept
12:18:07applies to breaker and mitigation blocks
12:18:09as well. The market could ignore an
12:18:11order block supply and demand for many
12:18:13reasons. These could include a shift in
12:18:16the market structure, price being
12:18:18overvalued or undervalued, price tapping
12:18:20into higher time frame key levels or
12:18:22prices of interest and there can be many
12:18:25more such reasons. Now when a valid
12:18:28demand level fails to reject the price
12:18:30and if the price breaks through it
12:18:32becomes a supply level. The overall
12:18:35logic is correct. But involving order
12:18:38blocks into the mix is what I cannot
12:18:40digest. Considering mitigation blocks
12:18:42and breaker blocks as failed order
12:18:44blocks doesn't always make sense. If you
12:18:47have watched my video on order flow and
12:18:50order blocks, you might have noticed the
12:18:52number of criteria that needs to be
12:18:54satisfied in order to identify a valid
12:18:57order block. Be it a valid market
12:18:59structure break, an inducement, a proper
12:19:02liquidity sweep, presence of an
12:19:04unmititigated imbalance, etc. You might
12:19:07have also realized that order blocks are
12:19:09not always found at the extreme swing
12:19:11points. We might have to shift our order
12:19:13blocks for obvious reasons. Now look at
12:19:16these two figures where I have marked a
12:19:18breaker block and a mitigation block.
12:19:21One thing that catches the eye is that
12:19:23both these figures are associated with a
12:19:25change in the market structure or simply
12:19:28a change of character. Another important
12:19:30observation is that both these blocks
12:19:32are formed at the extreme points of the
12:19:35price swing. So calling it a failed
12:19:37order block doesn't actually do justice
12:19:39for order blocks because order blocks
12:19:42don't always get formed at the extreme
12:19:44swing points. This is why I don't want
12:19:46to involve order blocks when it comes to
12:19:49breaker blocks and mitigation blocks.
12:19:51There is one other obvious reason which
12:19:54will strengthen my analysis. Comment
12:19:56down below if you have spotted it. I
12:19:58will reveal it when we talk about the
12:19:59mitigation blocks. Having said that,
12:20:02what is a proper way to define breaker
12:20:04blocks and mitigation blocks? This idea
12:20:07is simple to grasp if you associate it
12:20:09with basic price action. In the smart
12:20:12money trading concept, it is called a
12:20:14breaker block and a mitigation block.
12:20:16And in the price action concept, it is
12:20:18called a breakout and retest. The idea
12:20:21behind a breakout and retest or break a
12:20:24block or mitigation block is that if the
12:20:26market can successfully retest the
12:20:28breakout level and continue in the same
12:20:30direction of the breakout, it confirms
12:20:32the breakout's validity and suggests
12:20:34that the market will likely continue
12:20:36moving in the direction of the breakout.
12:20:39In SMC terms, there is liquidity on
12:20:41offer above the extreme swing highs and
12:20:44below the swing low levels. So here in
12:20:47search of liquidity, the market can
12:20:49break through the extreme swing low
12:20:50level, forming a bearish change in the
12:20:53market structure. This further brings in
12:20:55a lot of sellers who would start
12:20:57shorting the market while placing the
12:20:59stop- losses above the extreme swing low
12:21:02level or the support. So the market will
12:21:04likely return back to sweep these stop-
12:21:07losses and limit orders which are
12:21:09accumulated above the support. So this
12:21:11is actually the reason why breaker
12:21:12blocks and mitigation blocks work in the
12:21:14market. Let's learn how to identify a
12:21:17breaker block. A breaker block involves
12:21:20looking for key support or resistance
12:21:22levels on a price chart that may cause a
12:21:24significant change in the price
12:21:26direction when the level is broken. So
12:21:28when a support resistance or supply
12:21:30demand level is breached, it is
12:21:32considered as a significant signal that
12:21:34the price may continue to move in the
12:21:36breakout direction. Once the breakout is
12:21:38established, we have to wait for the
12:21:40price to return to the breakout level to
12:21:42confirm that it has become a new support
12:21:45or resistance level. And once the level
12:21:47has been confirmed, traders can enter a
12:21:50trade in the direction of the breakout.
12:21:52So a breaker block can be an area of
12:21:54supply or demand which was broken
12:21:56through by prices leading to a change in
12:21:59the structure and it is only confirmed
12:22:02after price retest back to the breaker
12:22:04block. It should be noted that the
12:22:06polarity of the breaker block changes
12:22:08after the breakout. That is if it was a
12:22:11supply zone, it would become a demand
12:22:13zone after breakout and vice versa. This
12:22:16is the whole idea behind identifying and
12:22:18trading breaker blocks. But let's dive
12:22:20deeper into the entire process. We will
12:22:23begin our discussion with a bearish
12:22:25breaker block. For identifying a bearish
12:22:28breaker block, first we need to identify
12:22:30a swing high and a swing low in prices.
12:22:33Then the market should break above the
12:22:35high to form a new higher high. We don't
12:22:38have strict rules here like the price
12:22:40should break and close above the
12:22:41previous high and it should take out an
12:22:44inducement. Nothing like that is
12:22:46required here. Even if all these
12:22:48conditions are met, then also it is
12:22:50fine. In this case, the price has to
12:22:52just break above the previous high to
12:22:54create a higher high point. This could
12:22:56even be the wick of a candle. It should
12:22:58just sweep the liquidity available above
12:23:01the previous high. But if this move is
12:23:03associated with an inefficiency, then it
12:23:06would be even better. This would mean
12:23:08that more participants would expect the
12:23:10price to come back lower to fill the
12:23:12imbalance and these players will look to
12:23:15go long from these discounted
12:23:17valuations. Once the higher high is
12:23:19formed, the price should move lower and
12:23:21break below the previous low to create a
12:23:24lower low. But here it is recommended
12:23:26that we should wait for the price to
12:23:29actually break and close below the
12:23:31previous low. So essentially there is a
12:23:33break of a high and a low. Once the
12:23:35lower low is confirmed, we can identify
12:23:38a breaker block. For this scenario, the
12:23:40last down close candle or the deepest or
12:23:43lowest candle in the group of the last
12:23:46consecutive down close candle will be
12:23:48our bearish breaker block. In case if
12:23:50there are three or four consecutive down
12:23:52close candles, you have two options. One
12:23:55is to mark the whole area from the
12:23:57highest to lowest point including the
12:23:59wicks. The second option is to mark only
12:24:02the highs and lows of the last down
12:24:04close candle or the lowest candle in the
12:24:06mix. I would recommend using the second
12:24:08method because in the first scenario the
12:24:11risk associated with it and the
12:24:12stop-loss placement would be higher. It
12:24:15is vital to involve the lowest candle in
12:24:17the swing low and it doesn't matter what
12:24:19the color of the candle is. Now this
12:24:21block used to be a demand zone but now
12:24:24it has been converted to a supply zone.
12:24:27Unlike the case of an order block, we
12:24:29don't have to see if there is an
12:24:31imbalance and a liquidity sweep. And
12:24:33unlike an orderflow, we don't need to
12:24:35check if it is unmititigated. For a
12:24:38bearish breaker block, we just need to
12:24:40find the last down close candle or the
12:24:42lowest candle in the series of
12:24:44consecutive down candles and mark them
12:24:46from wick to wick. Once the breaker
12:24:48block is identified and marked, we
12:24:51expect the price to return back to this
12:24:53breaker block and then continue to
12:24:55decline lower. The breaker block is
12:24:57validated when the price returns to
12:24:59retest it. But here I would like to add
12:25:02an additional condition to make this
12:25:04setup a high probability one. The
12:25:07condition is simple. When the price
12:25:09breaks through the breaker block, it
12:25:11should be associated with an imbalance
12:25:13or a fair value gap. Specifically, a CB
12:25:16that is a sellside imbalance and a
12:25:18buyside inefficiency. If a sellside
12:25:21imbalance is generated during the
12:25:23breakout below the breaker block, this
12:25:25will become a high probability setup
12:25:27because it gives price more reason to
12:25:29retest our breaker block as the price
12:25:32imbalance need to be filled in order to
12:25:34make the market efficient again. This
12:25:36setup is known as the unicorn setup. Let
12:25:39us briefly understand the logic behind
12:25:41the old concept. the market forms a new
12:25:44higher high. But contrary to forming a
12:25:46higher low, the market breaks below the
12:25:49previous low and makes a change of
12:25:51character instead. As a result of the
12:25:53aggressive move breaking below the
12:25:55previous low, the directional bias has
12:25:57changed to bearish and our demand level
12:25:59will turn into a supply level after this
12:26:02break has occurred. The psychology
12:26:04behind the breaker blocks is that the
12:26:06traders who got long from the demand
12:26:08areas are now trapped after the bearish
12:26:10market structure shift. So they would
12:26:13want to wait for the price to get back
12:26:15to their break even spot where they can
12:26:17close their long positions for little to
12:26:19no losses. Also, traders will start
12:26:22taking short trades here since they see
12:26:25this area as a key area of supply. The
12:26:28outcome of this double action is what
12:26:30makes the price reverse from this area.
12:26:32So one of the key points here is that a
12:26:34breaker blocks forms when we have a run
12:26:37of liquidity before a market structure
12:26:39shift. Keep in mind that this breaker
12:26:41block concept is applicable to the
12:26:44internal market structures also. We can
12:26:46take trades from breaker blocks when
12:26:48they are formed within the minor
12:26:50structure. Breaker blocks are one of the
12:26:52seven institutional reference points in
12:26:54SMC which is very important when using
12:26:57the PD arrays. We will talk about PDR in
12:27:00the penultimate episode of this season.
12:27:03Anyways, when price returns back to the
12:27:05bearish breaker blocks and move lower,
12:27:07we can look to enter into short trades.
12:27:10Now, another thing you can do is to draw
12:27:12a Fibonacci retracement connecting the
12:27:14highest and lowest points on the breaker
12:27:16block. We only need the 0 percentage,
12:27:1950%age, and 100%age Fibonacci levels.
12:27:22You can adjust this in the settings.
12:27:25This way, you can optimize your trade
12:27:27entries. You can look to place sell
12:27:29limit orders or take short trades
12:27:31between the fib 0.5 and fib 0 levels.
12:27:35You can set your stop- loss above the
12:27:37breaker block or above the fib 1 level.
12:27:39You can set your targets based on the
12:27:42previous market swings or you can even
12:27:44use the price projection method for
12:27:46setting the takerits. We will talk about
12:27:48breaker block trading strategies in the
12:27:50second season of the SMC course.
12:27:53Anyways, let's now learn about bullish
12:27:56breaker blocks. Here also we need to
12:27:58identify a swing high and a swing low.
12:28:01The price should take out this low and
12:28:03form a new lower low. This is a
12:28:05liquidity sweep below the previous low.
12:28:08It is better if this particular move is
12:28:11associated with an inefficiency. Once
12:28:13the lower low is established, we want
12:28:15the price to swiftly move higher and
12:28:18break and close above the previous high
12:28:20thereby forming a new higher high. When
12:28:23the price breaks out above the previous
12:28:25high, we can mark the last up close
12:28:28candle or the highest up close candle or
12:28:31the group of consecutive up close
12:28:33candles in the swing high. This becomes
12:28:35our bullish breaker block which acted as
12:28:38a supply zone before but now it is
12:28:40converted to a demand zone after the
12:28:43structure change. As mentioned before,
12:28:45it is ideal to mark only the last uplose
12:28:48candle or the highest uplose candle when
12:28:51dealing with a group of candles when
12:28:53drawing the breaker block. The color of
12:28:55the candle doesn't really matter. This
12:28:57will help us with better risk
12:28:59management. Now if the breakout move is
12:29:01associated with a fair value gap or an
12:29:03imbalance specifically a busy that is a
12:29:07buyside imbalance and a sellside
12:29:08inefficiency this gives price a reason
12:29:11to return back to fill the imbalance and
12:29:14thereby test our breaker block. Then
12:29:16this becomes a high probability trade
12:29:18setup known as a unicorn setup. Now when
12:29:21the price returns back to our bullish
12:29:23breaker block we can plan to take long
12:29:26trade positions. You can use a Fibonacci
12:29:28retracement tool to mark the FIB 0, FIB
12:29:320.5 and FIB 1 levels by connecting the
12:29:35lowest and highest points in the bullish
12:29:37breaker block. This will help you
12:29:39optimize your trade entries. You can
12:29:41place buy limit orders between FIB 0 and
12:29:44FIB 0.5 levels. You can set your stop-
12:29:47loss below the breaker block or below
12:29:49the fib 1 level. You can set your
12:29:51targets based on the previous market
12:29:54swings or you can even use the price
12:29:56projection technique for setting
12:29:57takeprofits. So some of the key factors
12:30:00that you need to consider while trading
12:30:02breaker blocks are number one market
12:30:05structure. You need to identify the
12:30:07current market structure before looking
12:30:09for breaker blocks. Market structure
12:30:11includes defining the market direction,
12:30:14supply and demand areas, higher time
12:30:16frame key levels, liquidity areas, etc.
12:30:19Number two is validity. Make sure the
12:30:22breaker block you identified is valid.
12:30:25Breaker blocks are created by a run of
12:30:27liquidity before the market structure
12:30:29shift. So you need to look for sharp
12:30:31moves with fair value gaps between the
12:30:34wicks that creates inefficiency. And
12:30:36finally number three is confirmation.
12:30:40Wait for confirmation before entering a
12:30:42trade. Confirmation can be in form of
12:30:44many price action signals, candlestick
12:30:47signals, volumes, etc. Now let's quickly
12:30:51dive into mitigation blocks. We will
12:30:53begin with a bullish mitigation block.
12:30:55So first we need to look for a swing
12:30:58high and a swing low. Then mark these
12:31:00points. Now the prices moves down but it
12:31:03fails to break below the low. It is
12:31:05unable to take out the liquidity below
12:31:07the low. The price moves higher swiftly,
12:31:10breaking through the high and closing
12:31:12above the high, resulting in a market
12:31:14structure shift. Once the breakout above
12:31:16the high is established, we can mark the
12:31:19last up close candle or the highest
12:31:21candle in the series of uplose candles
12:31:24forming the previous swing high. This
12:31:26will be our bullish mitigation block. It
12:31:29is ideal to mark the highs and lows of
12:31:31the last up close candle or the highest
12:31:33candle in the mix as the bullish
12:31:35mitigation block when there are multiple
12:31:37consecutive candles as it provides
12:31:40better reward to risk for the trades.
12:31:42Now the color of the candle doesn't
12:31:43really matter much. In addition to this,
12:31:46if the breakout move is associated with
12:31:48an imbalance or a fair value gap, more
12:31:51specifically a busy that is a buyside
12:31:53imbalance and a sellside inefficiency,
12:31:56then this will become a high probability
12:31:58setup for our trades. This inefficiency
12:32:01will be a motive for prices to return
12:32:03back to fill the imbalance and thereby
12:32:05even testing our bullish mitigation
12:32:07block. We can look for long trades from
12:32:10this mitigation block. You can also
12:32:12optimize your entries using Fibonacci
12:32:14levels. For this, extend a Fibonacci
12:32:17retracement from the lowest to highest
12:32:19points of the mitigation block. We only
12:32:21require the 0%, 50%, and 100% levels.
12:32:25So, the idea is to place by limit orders
12:32:28between fib 0 and fib 0.5 levels. You
12:32:31can set your stop loss below the
12:32:33mitigation block or below the fib level.
12:32:36As you can see, the only difference
12:32:38between a bullish breaker block and a
12:32:40bullish mitigation block is that the
12:32:42breaker block is associated with a
12:32:44liquidity sweep below the lows, thereby
12:32:46forming a lower low. But in case of
12:32:48mitigation blocks, price fails to
12:32:51execute a liquidity run below the
12:32:53previous low, thereby failing to create
12:32:55a lower low. This is the reason why
12:32:58mitigation blocks are also known as
12:33:00swing failure patterns or swing failure
12:33:02blocks. This also proves another
12:33:04important point. Since the price was
12:33:07unable to break the previous low, this
12:33:09means the use of order blocks as
12:33:12mitigation blocks cannot be justified.
12:33:14Think about it. The first condition that
12:33:16needs to be satisfied if we are to
12:33:19identify order blocks is that the market
12:33:21needs to form a valid breakup structure.
12:33:24But here the price didn't even sweep the
12:33:26previous low. So the concept of order
12:33:29blocks being used as supply or demand
12:33:31area is significant in this case. This
12:33:34is why I refuse to accept the idea of
12:33:37mitigation blocks and breaker blocks
12:33:39being considered as failed order blocks.
12:33:41I hope you get the essence of it. Now
12:33:44keep in mind that just like a breaker
12:33:46block, the mitigation block is also one
12:33:48of the seven institutional reference
12:33:50points in SMC. Mitigation block trading
12:33:53is also applicable in minor structure.
12:33:56Mitigation blocks can be used to take
12:33:58trade positions from the internal market
12:34:00structure when formed within a PD. Now
12:34:04let's quickly touch upon a bearish
12:34:06mitigation block. As always, identify
12:34:09the swing high and swing low in prices.
12:34:11In this case, price fails to sweep the
12:34:14liquidity above the high and it swiftly
12:34:16declines down breaking and closing below
12:34:19the previous low. So the price was
12:34:21unable to establish a new higher high.
12:34:24So this is a swing failure. Once the
12:34:26breakdown below the low is confirmed, we
12:34:29can mark the last down close candle or
12:34:31the lowest or deepest candle in the mix
12:34:34including the wicks and this will be our
12:34:36bearish mitigation block. If there is a
12:34:39price imbalance or a CB associated with
12:34:42the breakdown move, then the probability
12:34:44of price returning back to our
12:34:45mitigation block increases because the
12:34:48price will try to fill the inefficiency.
12:34:50For trade entries, use FIB 0 and FIB 0.5
12:34:54levels to place sell limit orders. You
12:34:57can set the stop- loss above the
12:34:58mitigation block or even above the FIB
12:35:01one level. Now, being a swing failure
12:35:03pattern, I'm not particularly interested
12:35:06in trading from these mitigation blocks
12:35:08because liquidity is still available
12:35:10beneath these swings due to which the
12:35:12market could just reverse thereby
12:35:15hitting our stop- losses and taking us
12:35:17out of the trade. So be a little
12:35:19cautious while dealing with mitigation
12:35:21blocks.
12:35:25We will learn about rejection blocks.
12:35:28Rejection block is a sophisticated
12:35:30concept in SMC methodology that is
12:35:33essential for identifying potential
12:35:35reversal points in the market. This is
12:35:37another important reference point in
12:35:39smart money concepts. So in this episode
12:35:42we will discuss what rejection blocks
12:35:44are, how to identify and mark these
12:35:47blocks and we will briefly talk about
12:35:49how to trade these blocks. Now let's
12:35:52begin our discussion on rejection
12:35:54blocks. A rejection block can either be
12:35:57a sell zone or a buy zone that appears
12:36:00on the chart as long wicks or shadows of
12:36:03candles at the market highs or lows.
12:36:06This block is characterized by a
12:36:08specific candle or a series of candles
12:36:11with long wicks indicating the strong
12:36:13rejection of a price level or a price
12:36:15zone typically occurring at key support
12:36:17or resistance zones or near important
12:36:20supply or demand zones. This signifies
12:36:22that the market attempted to break
12:36:24through a price level but the effort was
12:36:27promptly rejected thereby hinding at a
12:36:29strong underlying market sentiment
12:36:31contrary to the attempted price move.
12:36:34Such patterns indicate a significant
12:36:36struggle between buyers and sellers
12:36:38leading to a rejection of the prevailing
12:36:41price trend. This pattern is perceived
12:36:43as a clear indication that the market is
12:36:46not ready to sustain prices beyond that
12:36:48level be due to extreme opposition or
12:36:51other institutional factors. So SMC
12:36:54traders keenly look for rejection blocks
12:36:57as they often precede significant trend
12:36:59reversals or retracements making them
12:37:02invaluable price areas for predicting
12:37:04future market movements and also helps
12:37:07in strategizing entry and exit points
12:37:10when it comes to trading from these
12:37:11blocks. Now let us learn to identify
12:37:14these zones. So what are the things to
12:37:16look out for? A rejection block is
12:37:19identified on a price chart as a
12:37:21specific pattern where the market
12:37:23strongly rejects a certain price level
12:37:26or zone indicating a potential shift in
12:37:29the trend. So the first point is to
12:37:32identify key areas of interest where the
12:37:35price has a good chance of giving a
12:37:37reversal or a retracement after a
12:37:39rejection. These areas can be support or
12:37:42resistance zones, supply or demand zones
12:37:45or important highs or lows like the
12:37:47daily or weekly highs and lows etc. The
12:37:51other point to note is that a rejection
12:37:53block is often represented by one or
12:37:55more candlesticks that show a sudden and
12:37:58decisive move towards an area of
12:38:00interest only to be followed by an
12:38:02equally sharp reversal. This means that
12:38:04a rejection block is formed only after
12:38:07capturing the liquidity from the
12:38:09previous high or low or equal highs or
12:38:12equal lows. So in price action, this is
12:38:15called a horse breakout. And in smart
12:38:17money terms, this is called a liquidity
12:38:20sweep. Now that we know what to look for
12:38:22in the charts, let us learn to mark
12:38:25rejection blocks in the correct manner.
12:38:27Rejection blocks are classified into two
12:38:29types. A bearish rejection block and a
12:38:32bullish rejection block. The logic for
12:38:34constructing a rejection block is very
12:38:36simple. Let's start with a bearish
12:38:39rejection block. A bearish rejection
12:38:41block occurs when the price spikes up
12:38:44but then falls rapidly indicating a
12:38:46rejection of higher prices thereby
12:38:48signaling a potential downward movement.
12:38:51So effectively we are looking for a
12:38:53swing high that is we have to find the
12:38:56highest candle. The high and close price
12:38:58of this candle has to be higher than the
12:39:01high and close of the neighboring
12:39:02candles respectively. In that case the
12:39:05tail or the wick of this highest candle
12:39:08will be our bullish rejection block.
12:39:10Usually we consider three consecutive
12:39:13candles near the highs for the purpose
12:39:15of identifying a rejection. Out of these
12:39:17three candles, the middle candle has to
12:39:20be the highest of them all. The color of
12:39:22the candles doesn't really matter. But
12:39:24what matters is that the high of the
12:39:26middle candle should be higher than the
12:39:28neighboring candles. And the close of
12:39:30this candle has to be higher than or
12:39:32equal to the close of the preceding and
12:39:34succeeding candles. Now once all these
12:39:37conditions are filled, we can mark the
12:39:40entire upper wick of this highest candle
12:39:42using a rectangle. This will be our
12:39:45bearish rejection block. We expect the
12:39:47price to swiftly decline lower after the
12:39:50rejection. Such a move would mean that
12:39:52the price has grabbed the liquidity
12:39:54above the highs and then it strongly
12:39:56moved lower. This would also signal that
12:39:59big players were involved in the price
12:40:01move. Keep in mind that the area near
12:40:03the highest wick or the rejection block
12:40:06still contains a lot of orders waiting
12:40:08to be executed. These include a cluster
12:40:11of buy stop-loss orders and buy limit
12:40:13orders. So we expect the price to return
12:40:16back to this rejection block to absorb
12:40:18the buy side liquidity. When price comes
12:40:21back to test the rejection block, we can
12:40:23look to take short trade entries. We can
12:40:25make use of the 0% 50% and 100%
12:40:29Fibonacci retracement levels to place
12:40:31our sell limit orders. We can set our
12:40:34stop loss above the bearish rejection
12:40:36block. But the issue here is that since
12:40:39buyside liquidity is available above the
12:40:41rejection block, we cannot judge the
12:40:44extent to which the price will extend
12:40:46itself to sweep the liquidity. There are
12:40:48occasions where the wick of the radar
12:40:50scandal breaks above the bearish
12:40:52rejection block significantly. So it is
12:40:55always recommended to patiently wait
12:40:57until the liquidity run is over and the
12:40:59price starts to show signs of a
12:41:01retracement or a reversal. Then only we
12:41:04should initiate a short trade. I don't
12:41:06really appreciate the idea of placing
12:41:08limit orders and stop losses way before
12:41:11the price has tested the rejection
12:41:13block. In such scenarios, there are high
12:41:15chances that your stop loss will be
12:41:17taken out. So, be a little mindful about
12:41:20it. Now, talking about targets, you can
12:41:22set your take-profit level as any of the
12:41:25nearest support areas or demand zones
12:41:27where the price could potentially face a
12:41:30rejection or a push back. Now, let's
12:41:32talk about bullish rejection blocks. A
12:41:34bullish rejection block is formed when
12:41:37the price quickly drops to a low point
12:41:39but then rebounds sharply suggesting a
12:41:42rejection of lower prices and a
12:41:44potential upward trend. So effectively
12:41:47for a bullish rejection block we are
12:41:49looking for a swing low. That is we have
12:41:51to find the lowest candle whose low and
12:41:54close prices are lower than the low and
12:41:56close prices of the neighboring candles
12:41:58respectively. In that case, the tail or
12:42:01the wick of this lowest candle will be
12:42:03our bullish rejection block. Usually, we
12:42:06consider a three candle pattern in which
12:42:09the middle candle has to be the lowest
12:42:11of them all. The color of this candles
12:42:13are not really significant. But what is
12:42:16important is that the low of the middle
12:42:18candle has to be lower than its
12:42:20neighbors and the close price of the
12:42:22middle candle should be lower than or
12:42:24equal to the candles on the right and
12:42:26left. If these conditions are fulfilled,
12:42:29then we can plot the entire lower tail
12:42:31or wick of this middle candle. This will
12:42:34be our bullish rejection block. So after
12:42:37sweeping the liquidity below the lows
12:42:39and forming a price rejection, we can
12:42:41expect the price to swiftly move higher.
12:42:44This tells us that the big institutions
12:42:46were involved in this move. It is worth
12:42:49mentioning that the area near the lowest
12:42:51wick or the bullish rejection block
12:42:53still contains a lot of retailer orders
12:42:56waiting to be executed. These include a
12:42:59cluster of sell stop-loss orders and
12:43:01sell limit orders placed by those
12:43:03reversal traders who bought from the
12:43:05demand zone and those breakout traders
12:43:07waiting to sell below the support area.
12:43:10This is why we can expect the price to
12:43:12return back to this rejection block to
12:43:14absorb the sellside liquidity. So when
12:43:17the price comes back to test the
12:43:18rejection block, we can look to take
12:43:20long trade entries. We can also make use
12:43:23of the 0%, 50% and 100% Fibonacci
12:43:27retracement levels to place our buy
12:43:29limit orders. We can set our stop loss
12:43:32below the bullish rejection block. Here
12:43:34also the issue is that since sellside
12:43:37liquidity is already available below the
12:43:40rejection block, we cannot really judge
12:43:42the extent to which the price will go
12:43:44deeper to sweep the liquidity. On some
12:43:46occasions, the wick of the retita candle
12:43:49breaks below the bullish rejection block
12:43:51so significantly that even if your
12:43:53analysis was spoton, you would still end
12:43:56up on the losing side due to an early
12:43:58trade entry. So it is always advised to
12:44:01patiently wait until the liquidity below
12:44:04the rejection block is absorbed or
12:44:06waiting for a clear rejection signal and
12:44:08when the price starts to show sign of a
12:44:10retracement or a reversal then only we
12:44:13should end the trades in the direction
12:44:15of the rejection. This would mean
12:44:16initiating long trade positions. Now I
12:44:19don't generally agree with the idea of
12:44:21placing buy limit orders and stop-
12:44:23losses way before the price has tested
12:44:26the rejection block. In such scenarios,
12:44:28there are high chances that your stop-
12:44:30loss will be taken out. So, trade
12:44:32logically and mindfully. Now, when it
12:44:35comes to targets, you can set your
12:44:37takerit level as any of the nearest
12:44:39resistance areas or supply zones where
12:44:42the price could face a rejection or a
12:44:44push back. So, that is all you need to
12:44:47know about rejection blocks. In SMC,
12:44:50rejection blocks stand as a crucial tool
12:44:52in deciphering the market trends and
12:44:54making informed trading decisions. The
12:44:57key to success lies in accurately
12:44:59interpreting these blocks within the
12:45:01broader market context and using them to
12:45:03pinpoint optimal entry and exit points.
12:45:11Do you feel like you are not able to
12:45:13catch the price trends at the best
12:45:15spots? And even when you do, your stop-
12:45:18loss is either too much or too little,
12:45:20making your profit target a little too
12:45:23far beyond reach or too small, resulting
12:45:26in either bad trades or trades with poor
12:45:29risk-to-reward. In SMC, there is a
12:45:32concept that can help you fix this trade
12:45:34entry issue. It is none other than
12:45:36optimal trade entry or OT. This
12:45:40technique relies on market structure
12:45:42analysis and Fibonacci retracements to
12:45:45identify high probability entry points
12:45:47within established trends by
12:45:50understanding where smart money might
12:45:51enter the market. OT's can help you get
12:45:54the best reward for your risk. So in
12:45:57this episode I will help you understand
12:45:59what optimal trade entry zones are, how
12:46:02to identify OT zones on your chart and
12:46:05how to use OT's for your trades.
12:46:08Let us understand what an optimal trade
12:46:10entry is. So the optimal trade entry as
12:46:13the name suggest is a zone where you are
12:46:16most likely to get the best reward for
12:46:19your risk. Just like I have mentioned,
12:46:21optimal trade entry is basically a
12:46:24trading model based on the retracement
12:46:26of price in a trending market. More
12:46:29precisely, an OTE is the range between
12:46:33the 0.618 618 to 0.786 levels of the
12:46:37Fibonacci retracement. This zone is
12:46:40where your risk is neither too little
12:46:42nor too high and it is likely to give
12:46:45you the best return. Now the core
12:46:48principle lies in recognizing the
12:46:50temporary price retracements within an
12:46:52established trend. As you may all know,
12:46:55markets rarely move in a straight line.
12:46:58In fact, price moves in the form of
12:47:01impulses and corrections. The impulse
12:47:04move is the strong move usually with
12:47:06largebodied candles in the direction of
12:47:08the major trend targeting the external
12:47:11range liquidities. On the opposite, the
12:47:14corrective moves happen against the
12:47:16existing trend direction usually to
12:47:19target the internal range liquidity.
12:47:21Now, these retracements or corrections
12:47:24offer potential entry points for traders
12:47:26to capitalize on the trend continuation.
12:47:29So by combining the market structure
12:47:32analysis, Fibonacci retracements and
12:47:35some other smart money concepts, OTES
12:47:37can equip you with a targeted and high
12:47:40probability approach to entering trades.
12:47:42The core idea of this concept is to
12:47:45align your entries with the potential
12:47:48moves of the big players thereby
12:47:50positioning yourself to write the next
12:47:52impulse trend wave they might be
12:47:54creating. In simple words, OT help us to
12:47:58spot the beginning of the upcoming
12:48:00impulsive moments and define possible
12:48:03targets. But before we get into all
12:48:05that, let us learn how to identify
12:48:08optimal trade entry zones in your chart.
12:48:10Generally, due to the theory behind the
12:48:13optimal trade entry, OTE's are more
12:48:16effective when the market is trending.
12:48:19Keep this in the back of your mind. So
12:48:21when the price is trending, it forms
12:48:23higher highs and higher lows in a
12:48:25bullish trend and it forms lower highs
12:48:28and lower lows in a bearish trend. This
12:48:31makes it easier for you to identify
12:48:33OTE's in the trending markets rather
12:48:35than sideways market conditions. With
12:48:38this understanding, I will guide you on
12:48:40how to identify optimal trade entry
12:48:42zones or OTCs in your chart in two
12:48:46simple steps. The first step is to
12:48:49confirm a clear uptrend or downtrend
12:48:52using market structure analysis. Higher
12:48:54high and higher low formations with
12:48:57bullish structure breaks denote an
12:48:59uptrend while lower low and lower high
12:49:02formations with bearish structure breaks
12:49:04denote a downtrend. Now once you have a
12:49:07confirmed trend, the second step
12:49:09involves using Fibonacci retracement
12:49:11tool. You need to overlay the Fibonacci
12:49:14retracement levels on the price chart
12:49:16spanning across the recent swing points.
12:49:19I hope you know how to use the Fibonacci
12:49:21retracement tool correctly. For
12:49:23instance, if you are plotting Fibonacci
12:49:25levels on a bullish swing leg, then you
12:49:28need to start from the recent swing low
12:49:31and proceed to the recent swing high. On
12:49:33the opposite, for a bearish swing leg,
12:49:36you need to start plotting the Fibonacci
12:49:38retracement levels from the recent swing
12:49:40high and then move to the swing low.
12:49:43Now, you'll be able to see all the
12:49:45important Fibonacci retracement levels
12:49:47between 0 and 1. Out of this, the OT
12:49:51zone typically ranges from the 0.618 to
12:49:550.786
12:49:56fib levels. Approximating this, you can
12:49:59consider it as 0.62 62 and 0.79 levels.
12:50:04This OT zone between 0.62 and 0.79 fib
12:50:09levels represents a potential
12:50:11retracement area where prices might
12:50:14stall or reverse before continuing the
12:50:16existing market trend. The optimal trade
12:50:19entry zone uses different levels of the
12:50:21Fibonacci retracement tool. For an ideal
12:50:24OT setup, I suggest you edit your
12:50:27default fib levels according to the
12:50:29settings I'm about to tell you. So fib
12:50:31one level would be the starting position
12:50:33of the swing leg. FIB 0.5 would be the
12:50:37equilibrium level that separates the
12:50:39premium and discount zones. Now 0.62 fib
12:50:43level would be the OT zone boundary
12:50:45number one and fib 0.79 would be the OT
12:50:50zone boundary number two. The optimum
12:50:52trade entry level resides within this OT
12:50:55zone. The OT level is the midpoint of
12:50:58the boundary number one and two which is
12:51:01the 705 or 70.5 percentage Fibonacci
12:51:05level. So take note that the actual OT
12:51:09level is 0.705
12:51:12but anything between 0.62 and 0.79 still
12:51:16falls within the OT boundary. Now fib 0
12:51:19would be our primary profit target level
12:51:22and fib minus0.5
12:51:25or minus0.61
12:51:27would be our second target. So if you're
12:51:30someone who views your charts on the
12:51:32trading view software, this is what the
12:51:34OT fib levels will look like to you. And
12:51:37this is how they would look like on the
12:51:39chart. Now you can ask me why this OT
12:51:42zone is such a big deal when trading.
12:51:45There are multiple reasons why this
12:51:47Fibonacci range is considered an optimal
12:51:50area for trading. The main reason is
12:51:52obviously the higher reward to risk
12:51:55ratio that it offers. For example, let
12:51:58us take the case of this bullish market
12:52:00structure. We know that no matter where
12:52:02our entry is within this correction or
12:52:05retracement, the first target for the
12:52:07trade is this recent high level of the
12:52:10market structure. When the price taps
12:52:12into this level, some traders will close
12:52:14their positions or lock in some of their
12:52:17profits while others might go long
12:52:19anticipating a breakout. This can create
12:52:22a temporary correction or it could even
12:52:24reverse the trend direction. Now,
12:52:26keeping this in mind, this level would
12:52:28be our first target. Now, if you enter
12:52:31in the OTZ, your risk-to-reward ratio
12:52:34would be reasonable. We always aim for
12:52:37at least 2 is to1 reward to risk ratio.
12:52:40And from this zone or OT we usually
12:52:43achieve this. That is why trading inside
12:52:46the optimal trading zone will give us a
12:52:48higher reward potential for the risk
12:52:50taken and it provides a more rational
12:52:53trade within the discount zone in this
12:52:55particular case. Now the second reason
12:52:57is that we get a much safer trade entry
12:53:00from the OTZ. Let us continue with the
12:53:02previous example. The fact of the matter
12:53:04is that market usually take out early
12:53:07buyers or weak hands and use them as
12:53:10liquidity for future price movements. So
12:53:13waiting for the price to enter the
12:53:15optimal trading zone within the discount
12:53:17area and then looking for long trade
12:53:19opportunities will instantly increase
12:53:22our win rate. But as always, every
12:53:25strategy has its downsides. In this
12:53:27case, we might miss some trades due to
12:53:30this high conservative trading approach.
12:53:32But a missed trade is always better than
12:53:35a losing trade. Trading is all about
12:53:38probabilities. There is no absolute
12:53:40shity of something happening in the
12:53:42markets. Now another important reason
12:53:44why OT zones are optimal is due to the
12:53:48reasonable stop-loss. See in this
12:53:50bullish scenario the best price level to
12:53:53set our stop- loss to stay safe from the
12:53:55market volatility is below this swing
12:53:58low because if the price breaks through
12:54:01this level we will have a market
12:54:03structure shift and our trade would be
12:54:06invalidated. So the bulls will do their
12:54:08best to protect this level. So the
12:54:11closer your stop loss is to this level,
12:54:13the safer it is. And the OTZ entry will
12:54:17ensure that this stop-loss is reasonable
12:54:19and within our risk tolerance. Now let's
12:54:23learn how to make use of optimal trade
12:54:25entry strategy. I would say OTE is one
12:54:28of the most straightforward SMC tool
12:54:31with which you can take your trade
12:54:32entries. But there are different ways to
12:54:35go about this. I will teach you all of
12:54:37them. Starting off, we can enter out
12:54:40trades directly on the OT with the help
12:54:43of other SMC concepts. So the first and
12:54:46most direct way to use OT is to set your
12:54:49limit orders, be it buy or sell limit
12:54:51orders depending on the existing trend
12:54:53at the OT zone. It gets even better when
12:54:57this OT zone coincides with another
12:55:00important SMC concept like fair value
12:55:02gaps or order blocks. Take this example
12:55:05for instance. The market is in an
12:55:07uptrend because we are seeing a series
12:55:10of higher highs and higher lows. So the
12:55:12first step of trend confirmation is
12:55:14complete. Now we need to draw the
12:55:16Fibonacci retracement with the OT
12:55:19settings from the most recent low to the
12:55:22most recent swing high. Here you can
12:55:24notice how our OT zone coincide with a
12:55:27bullish fair value gap roughly at the
12:55:29same level confirming our trade. This is
12:55:32a powerful setup because when the price
12:55:34pulls back to these areas, they will act
12:55:37as a support and will likely push the
12:55:39price higher. Now, there might be
12:55:41instances where there will be multiple
12:55:44fair value gaps like in this case. In
12:55:47such a scenario, we would most probably
12:55:49look to take an entry from the most
12:55:51extreme fair value gap that coincides
12:55:54with the OT zone. This is because there
12:55:57is a higher chance that the price might
12:55:59use the first fair value gap as
12:56:00liquidity grab and trap retraers who
12:56:03went long there. So our approach would
12:56:06be to wait for the price to retrace all
12:56:08the way down to the extreme fair value
12:56:10gap and enter the long position there.
12:56:13So the next step is to place a buy limit
12:56:16order at the 0.62 OT level which is the
12:56:20upper boundary. If you're very confident
12:56:22about your chances, then you can lower
12:56:24this buy limit order to the 0.705
12:56:27level. Also, you can set your stop loss
12:56:30just underneath the most recent swing
12:56:32low or below the fib zero level and
12:56:35place your first profit target as the
12:56:37previous high or fib one level. And as
12:56:40you can see, the price dips into the OT
12:56:43level and immediately rises to continue
12:56:45its bullish trend. Now the advantage of
12:56:48using the OT this way is that it
12:56:51simplifies things. You don't need to
12:56:53worry too much about other complicated
12:56:55trading strategies or concepts. You just
12:56:58confirm the trend, map out your OT and
12:57:00fair value gaps, and then set a limit
12:57:03order in the direction of your trend. On
12:57:05the flip side, this strategy does not
12:57:07always guarantee trade entry
12:57:09opportunities. the price won't always
12:57:11return to the OT. So you might miss out
12:57:14on some chances using this method. But
12:57:17like I have mentioned before, no trade
12:57:19is better than a losing trade. Moving
12:57:22on, let's learn how to combine optimal
12:57:24trade entry with market structure shift.
12:57:27So here the market was in a long-term
12:57:30downtrend, but then price first failed
12:57:33to create a new lower low which
12:57:35indicates the loss of bearish momentum.
12:57:38Then the price broke the supply level to
12:57:40the upside. This is a bullish change of
12:57:43character and it shows that the sellers
12:57:45are no longer in control and suggest a
12:57:48potential reversal to the upside. Now we
12:57:51need to wait for a bullish breakup
12:57:53structure to happen. And once we see a
12:57:55breakup structure above the previous
12:57:57swing high, it indicates that the buyers
12:58:00are now completely in control, marking a
12:58:03complete market structure shift from
12:58:04bearish to bullish. Now our bias is to
12:58:08look for long trading opportunities to
12:58:10benefit from the bull market. Even
12:58:12though the price has a high chance of
12:58:14continuing upwards, we can't just enter
12:58:16at any random location because we could
12:58:19still get stopped out if we enter at the
12:58:21wrong place. This is where we make use
12:58:24of the concept of price swings and
12:58:26optimal trade entry. In this case, our
12:58:29directional bias is bullish and we have
12:58:32enough space before reaching the next
12:58:34important level, which is this high
12:58:36right here. So, we can apply the
12:58:38Fibonacci retracement tool to this
12:58:40latest impulse swing leg and then set a
12:58:43buy limit order at the 70.5%
12:58:46or 61.8% Fibonacci retracement levels.
12:58:50You can set your stop loss below this
12:58:52swing low and you can place your first
12:58:54target as the previous swing high. This
12:58:57setup can be further enhanced if there
12:58:59is a bullish fair value gap or an order
12:59:02block coinciding the OT zone. So this is
12:59:05how we combine optimal trade entry
12:59:07concept with the market structure shift
12:59:09concept to enter highquality trades.
12:59:12Another method you can implement is
12:59:14using multi-time frame analysis. In this
12:59:17particular trading setup, we will use
12:59:19two time frames to enter into a trade.
12:59:22Most of our analysis is carried out on
12:59:24the higher time frame charts like the 1
12:59:26day or 1 hour time frames and then we
12:59:29will zoom into the lower time frame
12:59:31chart like 15 minutes or 5 minutes to
12:59:33find trade confirmation and to enter
12:59:36into a position. Now let's take an
12:59:38example to understand this better. So
12:59:41this is a 1 hour time frame chart and we
12:59:43have a clear uptrend. Let's apply the
12:59:46Fibonacci retracement tool and mark the
12:59:48optimal trading zone. Like I have
12:59:50mentioned earlier, when the price pulls
12:59:53back to the optimal trading zone, we
12:59:55will then zoom into the lower time frame
12:59:57like 15 minutes or 5 minutes to find an
12:59:59entry. If you notice on the lower time
13:00:02frame, this correction move may appear
13:00:05as a downtrend. So our goal is to find
13:00:08signals that indicate the downtrend is
13:00:10over and that we can enter a long
13:00:13position in alignment with the dominant
13:00:15bullish higher time frame direction. So
13:00:17what we need is a market structure shift
13:00:20on this lower time frame chart. When we
13:00:22see a change of character happen, we can
13:00:25consider entering a long position. In
13:00:27this trade, we know that the higher time
13:00:29frame trend is bullish and we are in the
13:00:32optimal trading zone. Then you can place
13:00:35a buy limit order at the OT area and set
13:00:38your stop- loss below the lowest point
13:00:40before the market structure shift
13:00:42happen. Now combining optimal trade
13:00:45entry with other SMC techniques such as
13:00:47fair value gaps, liquidity, order
13:00:50blocks, breaker blocks or any other
13:00:52entry reasons that you can use to get
13:00:54more confluence can greatly improve your
13:00:57chances of trade success. Now the OT is
13:01:01one of the most straightforward concept
13:01:03in ICT SMC. Yet using it in isolation is
13:01:07not the best approach. You'll need to
13:01:09learn and combine other SMC concepts
13:01:12with OT to get the best out of it. Even
13:01:15nonSMC trading strategies can work well
13:01:17with OT.
13:01:24Take a look at these three figures. Can
13:01:26you identify what these highlighted
13:01:28areas are and how they are different?
13:01:31Just write down your answers in the
13:01:33comment box.
13:01:39So the first figure shows a fair value
13:01:42gap. The second one displays an inverse
13:01:45fair value gap and the last figure
13:01:48portrays a balanced price range. Now if
13:01:51you have got all three right, congrats.
13:01:54At this point, most of you will have a
13:01:57good understanding on what a fair value
13:01:59gap and inverse fair value gap is. What
13:02:02is left is the balanced price range. So
13:02:05in this video we are going to learn
13:02:08exactly that. I will help you understand
13:02:10what balanced price ranges are, their
13:02:13formation, identification as well as
13:02:15their use in the market. Balanced price
13:02:18range or BPR is one of those critical
13:02:21concepts that can aid your understanding
13:02:23of the market and help you find trade
13:02:26opportunities. This is a very useful SMC
13:02:29concept that can complement your trade
13:02:31entries. We will begin with defining
13:02:34what a balanced price range is. So a
13:02:37balanced price range is a concept
13:02:39closely related to fair value gaps. To
13:02:42understand a balanced price range, you
13:02:44need to have a decent idea on what a
13:02:47fair value gap is. I have talked about
13:02:49fair value gaps and imbalances in
13:02:52multiple videos. I recommend anyone with
13:02:54zero knowledge on fair value gaps to
13:02:57watch the second episode of the first
13:02:59season of the SMC course. Please go back
13:03:02and watch that video before proceeding
13:03:04with this episode. A balanced price
13:03:06range or BPR in SMC trading refers to a
13:03:10specific market condition where the
13:03:12price exhibits a quick upward movement
13:03:15followed by an equally rapid downward
13:03:18movement or vice versa where there is a
13:03:20quick drop in the price followed by a
13:03:23rapid upward movement. These rapid price
13:03:26movements leave behind imbalances in
13:03:28price action. More specifically, a
13:03:31balanced price range is the area on a
13:03:33price chart where two opposite fair
13:03:36value gaps overlap. In this case, you
13:03:39can see a bearish fair value gap
13:03:41formation after which the price retrace
13:03:44back strongly forming a bullish fair
13:03:46value gap on the way up that overlaps
13:03:49with the bearish fair value gap.
13:03:51Similarly, this is another case where a
13:03:54bearish fair value gap overlaps with a
13:03:56bullish fair value gap on the way down.
13:03:59Just like normal fair value gaps, when
13:04:01the price revisits these areas, price
13:04:04often reacts strongly, making the
13:04:06balance price range a crucial area of
13:04:09interest for trading. Normally, the
13:04:11price fills this gap before moving in
13:04:14the same direction as the last price
13:04:16movement. For instance, in this case,
13:04:18price could come back and fill the
13:04:20balance price range formed and then
13:04:22continue to move higher. Now you could
13:04:25ask me why is this concept important and
13:04:28why should you learn this? Well, the
13:04:31importance of a balanced price range
13:04:33lies in its sensitivity towards market
13:04:36price movement. When the market
13:04:38approaches a BPR, it often results in a
13:04:42quick and significant price reaction.
13:04:44Before continuing a market movement, the
13:04:46market frequently retest the BPR. This
13:04:50retest is a critical moment for traders
13:04:52to identify potential entry and exit
13:04:55points. This price reaction is primarily
13:04:58due to the presence of two overlapping
13:05:00fair value gaps which attracts the
13:05:02attention of a lot of smart money
13:05:04traders who can influence market
13:05:06direction. ICTMC is a very popular
13:05:09trading strategy especially in the forex
13:05:12markets. So their actions in these areas
13:05:15can significantly impact market
13:05:17direction. Now let's move ahead and
13:05:20learn to identify a BPR properly.
13:05:23Basically identifying a balanced price
13:05:26range on any chart involves two key
13:05:29steps. As I have mentioned earlier, this
13:05:32process involves recognizing fair value
13:05:34gaps on both the buy and sell sides of
13:05:37the price. So start by identifying a
13:05:40fair value gap on the sell side of the
13:05:42price. As you might have already
13:05:44guessed, this bearish fair value gap
13:05:47will appear when the price drops
13:05:49quickly, leaving an imbalance between
13:05:51the lowest price of the first candle and
13:05:54the highest price of the third candle.
13:05:56Next up, find a fair value gap on the
13:05:58buy side of the price when the market
13:06:01rises rapidly, creating a similar
13:06:03imbalance. Once you have marked both the
13:06:06fair value gaps, the second step
13:06:08involves looking for a common area where
13:06:11these two fair value gaps overlap
13:06:13horizontally. This overlapping zone is
13:06:16known as the balanced price range. It is
13:06:19the region where the bullish and bearish
13:06:21fair value gaps coincide thereby
13:06:24indicating a balance between supply and
13:06:26demand at that price level. This
13:06:28indicates efficient price delivery
13:06:31meaning that the market has effectively
13:06:33filled the imbalance and is likely to
13:06:36respect this BPR area as a strong
13:06:38support or resistance zone. Now, just
13:06:41like the other SMC zones, the BPR also
13:06:45has two types. There is a bullish and a
13:06:48bearish BPR. Let's quickly take a look
13:06:50at each one of them and understand how
13:06:53we can use them for our trades. We will
13:06:55begin with a bullish BPR. A bullish
13:06:58balance price range is identified on the
13:07:01buy side of the price and it acts like a
13:07:04region of support for future price
13:07:05movements which can be used by traders
13:07:08to enter into long trade positions. Now
13:07:11let's figure out how to take trades
13:07:13using a bullish BPR. So to trade a
13:07:16bullish BPR, you have to look for
13:07:18bullish market structure on your higher
13:07:20time frame chart where the price is
13:07:22forming higher highs and higher lows.
13:07:24This higher time frame will depend on
13:07:26your trading style. It could be 1 day, a
13:07:294 hour or a 15 minutes or any other time
13:07:32frame. Let me consider a 15-minut chart.
13:07:35The second thing you need to look for is
13:07:37a bullish PDA within this higher time
13:07:40frame bullish price leg. This could be a
13:07:42bullish fair value gap, a bullish order
13:07:45block or any other area of value where
13:07:48the price could form a strong rejection.
13:07:50Now if this internal range liquidity is
13:07:53found within the discount zone the
13:07:55better it is. Now when the price
13:07:57approaches the bullish PDA you need to
13:08:00switch to your lower time frame chart
13:08:02for identifying a market structure shift
13:08:05in this time frame. Here I have
13:08:07considered a one minute chart to see
13:08:09whether there is a market structure
13:08:10shift from bearish to bullish. After you
13:08:14identify a market structure shift, look
13:08:16for a bullish fair value gap which is
13:08:18overlapping with a bearish fair value
13:08:20gap. Now mark the overlapping area. This
13:08:24is the bullish BPR that we are looking
13:08:26for. Now wait for the price to test to
13:08:28this BPR area before you execute a long
13:08:31trade entry. You can place a buy limit
13:08:34order at the high level of this BPR or
13:08:37you could take a limit entry at the
13:08:3950%age of this BPR level. You can set
13:08:41the stop- loss below this BPR or you
13:08:44could place it below the recent swing
13:08:46low formed before the LTF market
13:08:49structure shift. For setting your profit
13:08:51targets, switch back to your higher time
13:08:53frame and place your target near the
13:08:55next draw on liquidity. A similar
13:08:58approach is applicable for trading
13:09:00bearish BPR. Let's quickly look at this.
13:09:03So a bearish balance price range can be
13:09:06identified on the sell side of the price
13:09:08and it can be used by traders to
13:09:11initiate sell trades or short positions.
13:09:14Just like the previous case, in order to
13:09:16trade a bearish BPR, first you need to
13:09:19look for a bearish market structure on
13:09:21your higher time frame chart. Secondly,
13:09:23you need to identify a bearish PDA like
13:09:27a bearish fair value gap, bearish order
13:09:29block, etc. within the higher time frame
13:09:32bearish swing leg. It is better if this
13:09:34internal range liquidity gets formed in
13:09:37the premium zone of this price swing.
13:09:39Anyways, when the price approaches this
13:09:42bearish PDA, you need to switch to your
13:09:44lower time frame structure. Then you
13:09:47need to check for a market structure
13:09:49shift from bullish to bearish. Now if
13:09:52you identify such a shift in structure,
13:09:54I need you to look for a bearish fair
13:09:56value gap which overlaps with a bullish
13:09:59fair value gap. This overlapping region
13:10:02is our bearish BPR. Now you have to wait
13:10:05for the price to test this BPR area
13:10:08before you execute a short trade entry.
13:10:10You can place a sell limit order at the
13:10:12low level of this BPR zone or you could
13:10:15take a limit entry at the 50%age of this
13:10:18BPR level. You can set the stop- loss
13:10:20above this range or you could place it
13:10:23above the recent swing high formed after
13:10:25the lower time frame market structure
13:10:27shift. For setting your profit targets,
13:10:29switch back to your higher time frame
13:10:31and place your target near the next draw
13:10:33on liquidity. I hope things are clear.
13:10:42We will delve into the premium and
13:10:44discount concepts exploring their
13:10:47application in trading and how they can
13:10:49enhance decision-m. We will also talk
13:10:52about the common mistakes that traders
13:10:54make and finally we will discuss PDAs
13:10:58and the hierarchy of different reference
13:11:00points within the PD. Understanding
13:11:03these concepts can help traders refine
13:11:06their entry and exit points, thereby
13:11:09maximizing the potential for profitable
13:11:11trades.
13:11:12Premium and discount are simple concepts
13:11:15that apply to buying and selling things.
13:11:18This includes buying and selling
13:11:19instruments in the stock market or the
13:11:21forex market. Premium means expensive or
13:11:25markup and discount means cheap or
13:11:29markdown. This is a basic trading
13:11:31principle that can be used in any market
13:11:34from consumer goods to securities traded
13:11:37through exchanges or even forex. So when
13:11:40you buy something at a premium, it means
13:11:43you're paying more than its fair value.
13:11:45On the other hand, buying something at a
13:11:47discount means you're getting it at a
13:11:49lower price than the actual value. These
13:11:52simple concepts can be applied to
13:11:54various products and assets that are
13:11:56traded in the market such as stocks,
13:11:59currency pairs, or even commodities. If
13:12:01you look at this picture, you will see
13:12:03that markups and discounts can be
13:12:05applied to anything that can be sold on
13:12:08the open market, even if it's a pack of
13:12:10banana chips. The most optimal demand
13:12:13for a pack of chips will be 200 rupees.
13:12:16But as the price gets higher, the demand
13:12:18reduces. and vice versa. The lower the
13:12:21price, the higher the demand. This is
13:12:24simply the low of supply and demand. You
13:12:27can learn more about it in my basics of
13:12:29stock market video. Now, this is quite
13:12:32logical because if a one-stop
13:12:34supermarket chain like Demart has a
13:12:36promotion for discounts on their
13:12:38different products, then you will see a
13:12:40lot of people flocking to buy these
13:12:42products like Bees on Honey. Now, when
13:12:45it comes to trading, premiums and
13:12:47discounts can be marked on a candlestick
13:12:49chart to determine the premium and
13:12:51discount levels within a specific range
13:12:54or price action. And you must all
13:12:56understand that a major player will
13:12:58never sell at cheap prices and they will
13:13:01never buy at higher prices. Premium and
13:13:04discount zones are places where majority
13:13:07of their sales and purchases takes place
13:13:09respectively. When marking premium and
13:13:12discount zones on a candlestick chart,
13:13:15you have the choice to apply this
13:13:17marking to any part of the price or
13:13:19range. Therefore, even despite the
13:13:22strategy you have chosen, you should
13:13:24strive to buy in the discount zone. That
13:13:26is when the asset is trading at a
13:13:28discount and you should look to sell in
13:13:30the premium zone. That is after the
13:13:33asset marks up or becomes expensive.
13:13:36Think of it this way. When you want to
13:13:38buy something from Amazon or Flipkart,
13:13:40you will look for the best discount that
13:13:42you can get so that you can buy it at a
13:13:45price lower than the actual going price
13:13:47in the market. And when you want to sell
13:13:49the same product after some months in
13:13:51Oil X, you will definitely look to get
13:13:53the highest price possible. That is you
13:13:56want to sell it at a premium or at an
13:13:58expensive price than the actual going
13:14:01price in the market. Now let's learn how
13:14:03to draw premium and discount zones. For
13:14:06this you will require three things. A
13:14:09swing high, a swing low, and a Fibonacci
13:14:12retracement tool. If you have watched my
13:14:15video on market structure mapping, you
13:14:17will definitely have a good idea on how
13:14:19to spot swing highs and swing lows in a
13:14:22chart. Here the price is rallying
13:14:24higher. This is an impulse move towards
13:14:27the upside. The swing low is the lowest
13:14:30point in this entire impulse swing move.
13:14:33We will also have to include the wicks
13:14:35if any. On the contrary, swing high is
13:14:38the highest point within the entire
13:14:40impulse swing move including the wicks.
13:14:43Now once the swing high and swing low
13:14:45are identified, we can bring up the
13:14:47Fibonacci retracement tool from the left
13:14:49side toolbar section. Then select the
13:14:52swing low point that we have identified
13:14:54and drag the cursor and select the swing
13:14:57high point. This will automatically plot
13:15:00all the Fibonacci retracement levels. We
13:15:02don't require all these default levels.
13:15:05So we can select the Fibonacci settings
13:15:07and then uncheck all the levels other
13:15:10than 0%, 50% and 100% levels. Then you
13:15:14can click on okay. Now what we have are
13:15:16three levels. One at the swing low, one
13:15:19at the swing high and another at the
13:15:22midpoint between the high and the low.
13:15:24Now the area below the 50%age Fibonacci
13:15:27level is considered as the discount zone
13:15:30and the region above the 50%age
13:15:32Fibonacci level is considered as the
13:15:35premium zone. The 50%age level is known
13:15:38as equilibrium or mean threshold which
13:15:42is nothing but the fair valuation of the
13:15:44asset at that particular instance. This
13:15:47is the point where bearish premium
13:15:50arrays and bullish discount arrays meet.
13:15:53It represents a state of balance in the
13:15:55market where supply and demand are equal
13:15:58and the forces of buying and selling are
13:16:01evenly matched. Since the price is
13:16:04rallying upwards, our bias will be
13:16:07bullish. That is we want to trade with
13:16:09the trend. So we will look for buying
13:16:11opportunities. But as I have stated
13:16:14earlier, we should always look to buy at
13:16:16the discount valuations or cheaper
13:16:19prices. So where will you get the
13:16:21cheapest price? Obviously, you should
13:16:23look to buy from the discount zone when
13:16:25the price makes a retracement or
13:16:27correction in order to get a markdown
13:16:30below the mean threshold. This doesn't
13:16:32mean you should take a long position
13:16:34anywhere in the discount zone. You
13:16:36should take buy positions only from one
13:16:39or more of those prices of interest or
13:16:41SMC reference points. This gives us
13:16:44additional confirmations for our trades.
13:16:47We will talk about these reference
13:16:48points and their relevance when we take
13:16:51up the PD concept. Now look at the next
13:16:54scenario. In this case, the price has
13:16:56declined lower. This is an impulse move
13:16:59towards the downside. So the first step
13:17:02is to spot the swing high and swing low
13:17:04of this impulse move. Then use Fibonacci
13:17:07retracement tool to connect the swing
13:17:09high and the swing low. This will plot
13:17:12the retracement levels automatically.
13:17:14Now go to the settings and uncheck all
13:17:16those levels that we don't require. Just
13:17:19keep the 0% 50% and 100% levels. So
13:17:24there is a level at the swing low, one
13:17:27at the swing high and the last one is at
13:17:29the middle between swing high and swing
13:17:31low which is nothing but the mean
13:17:33threshold or equilibrium. And above the
13:17:36main threshold is the premium zone and
13:17:39below equilibrium is the discount zone.
13:17:42Since the price is declining lower, our
13:17:44bias will be to sell. That is, we will
13:17:47look for short trading setups when price
13:17:49makes a retracement or correction
13:17:51towards the upside. And when we are
13:17:53looking to sell, we will obviously look
13:17:56to sell at expensive valuations or at
13:17:58higher prices. This means we should
13:18:01short above the mean threshold or in the
13:18:03premium zone. This is where prices are
13:18:06marked up above the fair value or
13:18:08equilibrium. Now you can't just sell at
13:18:11random prices within the premium zone.
13:18:13It doesn't work like that. You need to
13:18:15sell at any of the prices of interest or
13:18:18the SMC reference points which is
13:18:20already existing inside the premium zone
13:18:23for the best possible results. This will
13:18:25provide a high probability setup for us
13:18:27to work with. Now moving on, let us look
13:18:30at some issues with this concept and we
13:18:33will also look at some of the common
13:18:34mistakes that traders make when using
13:18:37premium and discount zones. The truth is
13:18:40that most traders either rely too
13:18:42heavily on this tool to make informed
13:18:44trading decisions or they use it in such
13:18:47market conditions in which it does not
13:18:49make any sense to use this tool. When
13:18:52using Fibonacci, you don't need to be
13:18:54fib dependent on rely on the fact that
13:18:57when price drops into the discount zone,
13:18:59it should immediately begin to rise and
13:19:02when the price rises to the premium
13:19:04zone, it should immediately stop and
13:19:06begin the downward movement. Keep in
13:19:08mind that price does not owe you
13:19:11anything and the market does not move
13:19:13according to your whims and fancies. It
13:19:16is true that price takes into account
13:19:18premium and discount zones, but the
13:19:20higher the time frame, the stronger is
13:19:22the possibility of it working out for
13:19:24us. The most common problem with premium
13:19:26and discount zones is that on lower time
13:19:29frames that are below 15 minutes, this
13:19:32tool becomes less effective if the price
13:19:34is not in its full range. It is also
13:19:37worth remembering that price tends to
13:19:39change direction even if there are these
13:19:42important zones on the way. So there is
13:19:44no real guarantee of a price reversal
13:19:46from these zones. While we believe that
13:19:49premium and discount are a great entry
13:19:51point tool, over reliance on it can
13:19:54cause you to incur losses and also miss
13:19:56out on quality trade setups just because
13:19:59they are not premium or discount. So
13:20:02without conducting an in-depth analysis
13:20:04of prices using concepts like market
13:20:06structure, supply demand zones,
13:20:09liquidity etc. which helped to get the
13:20:11idea of the market direction. It is not
13:20:14even worth choosing a Fibonacci tool to
13:20:16plot premium and discount zones. The
13:20:19other common mistake that traders fall
13:20:21into is using premium and discount zones
13:20:24in those markets or assets that are
13:20:26either extremely volatile or those which
13:20:29are trending strongly in one direction.
13:20:31A simple example is to choose a stock
13:20:33that tends to move in one direction over
13:20:36the long term but with a very high
13:20:38volatility. The price may fluctuate
13:20:40parabolically within an upward trend and
13:20:43it will not even think about falling
13:20:45into the discount zone. So the price may
13:20:47not always follow the expected pattern
13:20:49when it is in the premium or discount
13:20:51zone especially in short to medium-term
13:20:54trends. Another mistake committed by the
13:20:57less experienced traders is that they go
13:20:59chasing premium and discount zones
13:21:01everywhere in the charts and they will
13:21:03eventually end up on the wrong side of
13:21:05the trend. So do not chase premium and
13:21:08discount zones and do not go against the
13:21:11trend. And lastly, don't trade premium
13:21:14and discount zones within a
13:21:16consolidation zone. So it is important
13:21:18to note that there is no real magic in
13:21:21premium and discount Fibonacci tool.
13:21:23What matters most is the narrative, the
13:21:27story that the market is telling. Only
13:21:29with a clear understanding of the
13:21:30narrative can you use this zone as a
13:21:33framework for trading. This is where the
13:21:36significance of PD arrays come into
13:21:38play. PD arrays stands for premium and
13:21:42discount arrays. This is a central
13:21:44concept in SMC. An array is nothing but
13:21:47a specific arrangement of things. Now,
13:21:50premium discount array is crucial for
13:21:52understanding how the market has moved
13:21:54and how it might move in the future. It
13:21:57is like a detailed map of the market
13:21:59activity showing traders where the price
13:22:02has been and suggesting where it might
13:22:04go. This array is particularly useful
13:22:07for identifying key levels of support
13:22:09and resistance as well as potential
13:22:12entry and exit points for trades. PDAs
13:22:15focuses on the analysis of price levels
13:22:18in terms of their relative value
13:22:20compared to the market's perceived fair
13:22:22value. In a PDA, price points are
13:22:25categorized as either premium or
13:22:28discount. Premium prices are those
13:22:30considered higher than the market's
13:22:32perceived fair value, indicating a
13:22:35potential overvaluation, while discount
13:22:38prices are seen as lower, suggesting an
13:22:41undervaluation. You already know how to
13:22:43plot these premium and discount zones.
13:22:46And as a matter of fact, you also know
13:22:48that this method of categorization
13:22:50allows traders to gain insight into the
13:22:53potential market turning points by
13:22:56identifying where the market might
13:22:57switch from a state of overvaluation to
13:23:00undervaluation and vice versa. But PDAs
13:23:04are more than just premium and discount
13:23:06zones. This is a multifaceted analysis
13:23:09that helps traders to not only see what
13:23:12the market is doing but also understand
13:23:15why it is doing so thereby enabling more
13:23:17informed and strategic trading
13:23:19decisions. PD arrays also take into
13:23:22consideration some array items or
13:23:25reference points. Specifically, there
13:23:27are seven array items or institutional
13:23:30reference points that we need to
13:23:32consider in a PD array. In ICT
13:23:35methodology, these reference points
13:23:37includes old highs and old lows, order
13:23:40blocks, rejection blocks, mitigation
13:23:43blocks, breaker blocks, fair value gaps,
13:23:46and liquidity voids. Old highs and old
13:23:50lows refers to the swing highs and swing
13:23:53lows that can act as potential
13:23:55resistances or support levels for prices
13:23:57respectively. Due to this reason, there
13:24:00will be liquidity in the form of
13:24:02retailer orders available beneath these
13:24:04levels. So, old highs and old lows are
13:24:08potential areas where the smart money
13:24:10can manipulate prices to absorb the
13:24:12liquidity and then reverse the market
13:24:14direction. Other than this, I have given
13:24:17you detailed explanation on each and
13:24:19every single topic. You can watch and
13:24:21revise them by going to the SMC
13:24:24playlist. Now there's a particular order
13:24:27or hierarchy or relevance by which each
13:24:30of these array items are organized
13:24:32within a PD array. But before I tell you
13:24:35the hierarchy of array items, I want you
13:24:38to remember that you need to conduct
13:24:40your analysis on your higher time frame
13:24:42charts. No matter what trading style you
13:24:45follow, it could be swing, intraday,
13:24:48positional, etc. But this primary
13:24:50analysis should be done on your
13:24:52preferred higher time frame. This will
13:24:55definitely improve the quality of the
13:24:56trade signals. Once you receive a good
13:24:59setup, you can always move down to your
13:25:01lower time frame charts to optimize your
13:25:03trade entries. Now let us look at the
13:25:06order of relevance of discount area
13:25:09items. We will only consider the
13:25:11discount zone when our trading bias is
13:25:13bullish. So for remembering this with
13:25:16ease, we can also call it a bullish
13:25:18discount array. Here I have listed the
13:25:21bullish discount array items in the
13:25:23order of their relevance or hierarchy.
13:25:26So the most relevant institutional
13:25:28reference point is the old low followed
13:25:32by a bullish rejection block then a
13:25:35bullish order block, a bullish fair
13:25:37value gap after this followed by a
13:25:40bullish liquidity void, a bullish
13:25:42breaker block thereafter and the least
13:25:45relevant item is the bullish mitigation
13:25:47block. the hierarchy or relevance of
13:25:50fair value gaps and liquidity voids can
13:25:53be interchanged. Now even though the
13:25:55relevance of these array items are in
13:25:57this particular order, we should start
13:25:59looking for these reference points in
13:26:01the opposite order. That is we need to
13:26:04start searching for a bullish mitigation
13:26:06block first followed by a bullish
13:26:09breaker block and so on. There is a
13:26:11simple explanation as to why the
13:26:13relevance is in this order. But when
13:26:15looking for opportunities, we should go
13:26:17in the opposite order of the hierarchy.
13:26:20Look at this figure. I have marked some
13:26:22of the seven reference points within a
13:26:24discount zone. Now, what do you notice?
13:26:27We can see that the old low is the
13:26:30lowest of all array items located at the
13:26:33end of the discount zone. The next item
13:26:36is the bullish rejection block followed
13:26:38by a bullish order block. a liquidity
13:26:41void and a few fair value gaps within
13:26:43it. You can notice that one of the fair
13:26:46value gaps is closer to the equilibrium
13:26:48zone. It is clear that the reference
13:26:51points are arranged based on how cheap
13:26:53the price can become when compared to
13:26:56the mean threshold. So higher the
13:26:58relevance of an array item, the cheaper
13:27:00the price is available in the discount
13:27:02zone, which increases a trader's
13:27:05profitability and improves his chances
13:27:08of success. But you might already be
13:27:10aware of the fact that price will not
13:27:12pull back all the way down to absorb the
13:27:15liquidity. Price needs liquidity to
13:27:17move. It doesn't matter from where it
13:27:19gets it. This means the probability of
13:27:22price returning back to sweep the old
13:27:25low or the rejection block in a discount
13:27:27zone is much lower. Prices might reverse
13:27:30from an order block or a fair value gap.
13:27:33This is why we should look for the least
13:27:35relevant array items first which is
13:27:37situated closer to the mean threshold
13:27:40and then only look for other reference
13:27:42points which are usually formed deep
13:27:44within the discount zone. Another point
13:27:46to notice that not all these reference
13:27:49points will get formed within a discount
13:27:51zone. There might be occasions where you
13:27:54might get only a bullish order block and
13:27:56a bullish fair value gap. But there
13:27:58might be other situations where you
13:28:00might encounter a majority of these
13:28:02reference zones. So the idea is not to
13:28:04force yourself into finding these
13:28:06reference zones. If it is there, it will
13:28:09be visible to you. If it is not there,
13:28:12don't go searching for a ghost that does
13:28:14not exist. Now once price trades below
13:28:17equilibrium and if the overall narrative
13:28:20is bullish, it sets up buy conditions.
13:28:23You can look for long trading setups
13:28:25from these reference areas within the
13:28:27discount zone as it increases the
13:28:30probability of a successful trade. These
13:28:33reference areas are where buyers might
13:28:35step in to drive prices up from these
13:28:38discounted levels. These setups are
13:28:41identified when the price returns to the
13:28:43discounted conditions allowing you to
13:28:45buy at favorable prices. Moving on, let
13:28:49us look at the order of relevance of
13:28:51array items in a premium zone. It is
13:28:53also called a bearish premium array
13:28:56because our bias is to go short in the
13:28:58market. Here I have listed down the
13:29:01array items based on their hierarchy in
13:29:04a premium zone. So the most relevant
13:29:06institutional point on the sell side is
13:29:09the old high followed by a bearish
13:29:12rejection block. After which comes a
13:29:14bearish order block, a bearish fair
13:29:17value gap thereafter followed by a
13:29:20bearish liquidity void and then a
13:29:23bearish breaker block and the last
13:29:25reference point is the bearish
13:29:27mitigation block. Here also the
13:29:30relevance of liquidity voids and fair
13:29:32value gaps can be interchanged. Now just
13:29:35like the previous case, we should start
13:29:37looking for the lowest array items in
13:29:40terms of priority because the price will
13:29:42not always retrace all the way back to
13:29:45grab the liquidity. It can sweep the
13:29:48liquidity available anywhere in the
13:29:50bearish premium array and then reverse
13:29:52lower. So start looking for the
13:29:54mitigation blocks first followed by the
13:29:57bearish breaker blocks, the liquidity
13:29:59voids and so on. Also, not all these
13:30:02array items get formed within the
13:30:04premium zone. So, don't just assume
13:30:07things. Follow what you have learned and
13:30:09apply it. If it is not there, it is not
13:30:12there. As simple as that. The same
13:30:15concepts apply to short setups as well.
13:30:18When the market takes liquidity, forms a
13:30:20swing low and trades above the
13:30:22equilibrium region, you can wait for
13:30:24institutional reference points like
13:30:26bearish fair value gaps, bearish order
13:30:29blocks, etc. These reference zones are
13:30:32where sellers might dominate pushing the
13:30:34prices down from these premium levels.
13:30:36If the overall bias is bearish, you can
13:30:39take a short trade entry which will
13:30:41present you with a high probability
13:30:43trade setup. So these are all the
13:30:46important things that you need to know
13:30:47about premium and discounts. It is
13:30:50important to keep in mind that premium
13:30:52and discount concepts should be used as
13:30:54a part of a comprehensive trading
13:30:56strategy. Traders should consider other
13:30:59factors such as market structure, supply
13:31:01and demand zones and liquidity before
13:31:04making trading decisions. These concepts
13:31:06provides additional insights and can
13:31:09enhance decision making. But they should
13:31:11not be relied upon as the sole basis for
13:31:14entering or exiting trades.
13:31:20Take a look at these series of ranges
13:31:23that were formed and get shifted on the
13:31:25chart as the market moves to new price
13:31:27territories. What is it that you observe
13:31:30here? To be frank, this is a very
13:31:32important concept in SMC that you need
13:31:35to master in order to get your daily
13:31:37bias right and also to optimize your
13:31:40trade entries such that you buy at
13:31:42discounts and sell at premiums. So the
13:31:45main concept that I'm going to talk
13:31:47about in this video is regarding dealing
13:31:50ranges and I will talk about
13:31:52displacement ranges also. So in this
13:31:55video we will focus on dealing ranges,
13:31:57its key elements, its identification,
13:32:01potential trading setups that you can
13:32:02use and then we will discuss
13:32:05displacement ranges and its
13:32:07identification and applications.
13:32:10Okay, let us first understand what
13:32:12dealing ranges are. We all know that SMC
13:32:16trading style focuses mostly on market
13:32:18structure and liquidity. Within the
13:32:21market structure, the dealing range is a
13:32:23concept where both buy side and sellside
13:32:26liquidities are taken out. A dealing
13:32:28range is simply a price range between a
13:32:31swing low and a swing high that takes
13:32:34out both the buy side and sellside
13:32:36liquidities. And it doesn't matter if
13:32:38this liquidity is a major liquidity or a
13:32:41minor liquidity. We will talk about this
13:32:43in a bit. But before that, let us
13:32:45understand the intention behind such
13:32:48range formations. Trust me when I say
13:32:50this, dealing range theory or DRT is one
13:32:54of those SMC concepts that you need to
13:32:56master as a trader, especially if you
13:32:58are a beginner. The reason why I say
13:33:00this is because dealing ranges can help
13:33:03you wait for the right setup to form
13:33:05before taking a trade entry. Within the
13:33:08dealing range, the smart money
13:33:10institutions are focused on accumulation
13:33:12and distribution campaigns. These
13:33:14institutions have deep pockets and
13:33:17detailed data to track where the
13:33:19majority of liquidity sits within the
13:33:21swing highs and swing lows. Institutions
13:33:24and smart money use such ranges to
13:33:27manipulate retail traders. They
13:33:29manipulate price action, drive liquidity
13:33:32hunts, and influence major price
13:33:34movements. In fact, the market primarily
13:33:37moves between the dealing ranges to
13:33:39balance fair value gaps or to hunt
13:33:42liquidity by breaking highs and lows
13:33:44within these ranges. These smart money
13:33:46institutions are aimed at building
13:33:49positions at specific levels of premium
13:33:51and discount zones of a dealing range.
13:33:54We will come to this concept soon
13:33:55enough. Now, to better understand a
13:33:58dealing range, mastering the following
13:34:00elements is critical. This includes the
13:34:03market structure, liquidity and premium
13:34:06and discount arrays or PDAs. I have
13:34:08extensively covered all these topics in
13:34:11the previous season of the SMC course. I
13:34:14suggest you go back and watch them to
13:34:16brush up your memory. In short, when
13:34:18drawing the market structure, the
13:34:20dominant trends swing high and swing low
13:34:23are typically identified. The most
13:34:25important element in the swing low
13:34:27estimation is the breakoff structure and
13:34:30that in the estimation of swing high is
13:34:32the price retracement below an
13:34:34inducement level for a bullish market
13:34:37structure. Likewise, the breakoff
13:34:39structure is the most important element
13:34:41in the estimation of a swing low and for
13:34:44the estimation of a swing high, it is
13:34:46usually the price pullback above the
13:34:48inducement level. The change of
13:34:50character or market structure shift is
13:34:53another important element of market
13:34:55structure that signals a change in the
13:34:57dominant trends nature. But one of the
13:35:00key components of dealing range is
13:35:02selecting the proper swing highs and
13:35:04lows. Now the second thing you need to
13:35:07have a good grasp on is the concept of
13:35:09premium and discount areas. The dealing
13:35:12ranges are divided into premium and
13:35:14discount areas. We will make use of the
13:35:16Fibonacci levels to mark the range.
13:35:19There are three levels in the range.
13:35:21These are 0%, 50% and 100% fib levels.
13:35:26The 50% fib level is considered as the
13:35:29equilibrium level. Now, in an uptrend,
13:35:32the discount area is below the
13:35:34equilibrium level and the smart money
13:35:36players are more likely to buy in this
13:35:38area. Similarly, in a downtrend, the
13:35:41premium area is above the equilibrium
13:35:44level and big players are more likely to
13:35:46sell in this area. Now, the most
13:35:49important component associated with the
13:35:51dealing range is liquidity and liquidity
13:35:54sweeps. So, as you may all know by now,
13:35:57liquidity sweeps are zones on the chart
13:35:59where large amounts of stop-loss orders
13:36:01and pending orders accumulate, often
13:36:04forming within and outside of a dealing
13:36:06range. There are internal and external
13:36:08range liquidities. External range
13:36:10liquidity is the liquidity associated
13:36:13with the major swing highs or lows.
13:36:15While the internal range liquidities are
13:36:18associated with fair value gaps, order
13:36:20blocks, equal highs or lows and internal
13:36:23highs or lows within the range.
13:36:25Liquidity is also classified into buy
13:36:28side and sellside liquidities based on
13:36:31where the orders are accumulated and
13:36:33what type of orders are accumulated near
13:36:35red level. Now with an understanding of
13:36:38the main components that make up a
13:36:40dealing range, let us learn how to
13:36:42identify one. By definition, a dealing
13:36:45range is simply a price range between a
13:36:48swing low and a swing high that takes
13:36:50out both the buy side and sell side
13:36:52liquidities. We will begin with a
13:36:54bullish scenario. Like always, we will
13:36:57begin our analysis on a higher time
13:36:59frame chart. This is a 1 hour time frame
13:37:01chart that you're looking at and the
13:37:03trend is bullish. Now, the most
13:37:06important point you need to keep in mind
13:37:08while looking for a dealing range is
13:37:10that your focus should be on the current
13:37:12price and not on the historic prices.
13:37:15This means you should focus on what the
13:37:18market is currently doing. Once you have
13:37:20that sorted out, you need to find the
13:37:22proper swing high and swing low for
13:37:25marking the dealing range. Now, the
13:37:27reason why I said proper is because you
13:37:30need a swing low that has already taken
13:37:32out a sellside liquidity and you also
13:37:34need a swing high that has already taken
13:37:37out the buy side liquidity for marking a
13:37:39valid dealing range. For this, you need
13:37:42to check the new swing highs and lows
13:37:44with the previous swing highs and lows.
13:37:46So basically we want the new swing low
13:37:49to take out a sellside liquidity pole.
13:37:52Since we are in a bullish market
13:37:53structure, we know that the old swing
13:37:55lows are considered as strong lows.
13:37:58Which means the probability of price
13:38:00moving below these lows to sweep
13:38:02sellside liquidity is very low. So what
13:38:05are the other areas where we can expect
13:38:08to find sellside liquidity? Quite
13:38:10obviously these include the equal lows
13:38:13and the internal low levels. You will
13:38:16find clusters of retail sell aside
13:38:18liquidity below these areas. Now you can
13:38:20ask me why not the fair value gaps and
13:38:23order blocks. Why are they not
13:38:25considered? If you have asked this
13:38:28question then you are very sharp. So
13:38:31even though both order blocks and fair
13:38:33value gaps are considered as internal
13:38:35range liquidity, these are quite
13:38:37different from buy and sell side
13:38:39liquidities. To be more precise, fair
13:38:41value gaps highlight areas where price
13:38:44moved too fast, thereby skipping the
13:38:46liquidity or it is simply an imbalance
13:38:49in prices that the market would return
13:38:51back to fill. Order blocks on the other
13:38:53hand show areas where institutions
13:38:56placed large orders. They represent
13:38:58institutional buying and selling zones.
13:39:01Now when it comes to buy side and
13:39:03sellside liquidity pools, it represents
13:39:06areas where the retail traders have
13:39:09placed their stop- losses and limit
13:39:10orders. Simply put, it all comes down to
13:39:13how the institutional players interact
13:39:16with these areas. Order blocks and fair
13:39:19value gaps are costbased, meaning they
13:39:21show where the institutions acted or
13:39:24where imbalances occurred. While buy or
13:39:27sellside liquidity is effect based
13:39:30meaning they show where the retail
13:39:31traders are most vulnerable. So the
13:39:34point I want to make is that fair value
13:39:36gaps and order blocks are not the
13:39:39liquidity areas we are looking for.
13:39:41Instead these are potential trading
13:39:43zones within a dealing range where we
13:39:45can plan our entries. Now the buy and
13:39:48sell side liquidities can be found above
13:39:51equal highs or internal swing highs and
13:39:54below equal lows or internal swing lows
13:39:56respectively. The new swing low should
13:39:59either take out the liquidity below an
13:40:01old low or previous swing low or else it
13:40:04should sweep the sellside liquidity
13:40:06clustered below an equal low or an
13:40:09internal low level. Then we need a swing
13:40:11high that sweeps the buy side liquidity.
13:40:14In a bullish market trend, we normally
13:40:16get a liquidity sweep above the previous
13:40:19swing high in the form of a bullish
13:40:21breakoff structure. Now, a breakoff
13:40:23structure in itself doesn't tell us
13:40:25where the swing high is. It does help
13:40:27out in figuring out where the swing low
13:40:29is. But to determine a swing high point,
13:40:32we need to make use of the concept of
13:40:34inducements. In fact, inducement is a
13:40:37concept that has multiple benefits when
13:40:40it comes to the identification of a
13:40:42dealing range. Simply put, inducement is
13:40:45considered as the first pullback after a
13:40:47break of structure has happened. Now,
13:40:49there may be different scenarios where
13:40:51we need to tweak this concept of
13:40:53inducement. For instance, in a strong
13:40:56bullish trend, price won't always
13:40:58retrace deep enough. In such cases, the
13:41:01level below the latest minor pullback
13:41:03that the market forms on the way up is
13:41:06just an inducement level. Likewise,
13:41:09there are occasions when market will not
13:41:11even form a pullback after a breakup
13:41:13structure. Instead, there will be a
13:41:15minor pullback before the breakoff
13:41:17structure happens. In that case, the low
13:41:20below this minor pullback level will be
13:41:22our inducement level. But no matter what
13:41:24the situation is, we can consider a
13:41:27retracement as a valid one. Only when an
13:41:30inducement level is swept. In addition,
13:41:33only when an inducement level is swept
13:41:35can we properly determine our swing high
13:41:38level. So in this bullish scenario, we
13:41:41want to see price retracing below an
13:41:43inducement level to sweep the sellside
13:41:45liquidity available there. This does two
13:41:48things. First, we can confirm our new
13:41:51swing high level. And second, we get a
13:41:54sweep of our sellside liquidity. Now we
13:41:56have the swing high and swing low that
13:41:58we have been looking for which has swept
13:42:01the liquidities on both buy and sell
13:42:02sides. Now to properly mark our dealing
13:42:05range for trading, we can make use of
13:42:07Fibonacci levels. So let's select the
13:42:10Fibonacci retracement tool from the left
13:42:12sidebar menu or from the favorite tool
13:42:15section in Trading View. Now start
13:42:17plotting from the lowest swing point and
13:42:20drag and select the highest swing point.
13:42:22Your Fibonacci levels will be plotted
13:42:24automatically. But we do not actually
13:42:26need all these levels. We just require
13:42:29the 0%, 50% and 100% fib levels. You can
13:42:33go to the settings and change it
13:42:35accordingly or you could save it as a
13:42:37template for easier access. Here I will
13:42:40use my save template. So this is our
13:42:43bullish dealing range. The high is
13:42:45called the dealing range high and the
13:42:47low is the dealing range low while the
13:42:5050% fib level is the equilibrium level.
13:42:53Now can you tell me why we did this?
13:42:56This was done simply to identify the
13:42:59premium and discount areas within the
13:43:01dealing range. So as a rule of thumb, if
13:43:04our bias is bullish, it would be ideal
13:43:06to take long trades from the discount
13:43:08zones. And if our bias is bearish, it
13:43:12would be ideal to take short trading
13:43:14opportunities from the premium areas. So
13:43:16the simple idea is to buy low and sell
13:43:18high. Now in this particular case since
13:43:21we have a bullish market structure we
13:43:24will wait for prices to fall back to the
13:43:26discount area of our dealing range. This
13:43:28means we can look to take long trades
13:43:30below the 50%age Fibonacci level. But
13:43:33taking trades anywhere below the 50%age
13:43:36fib levels seems vague. So you need to
13:43:39make use of bullish PDAs within the
13:43:41discount zone. It could be the old highs
13:43:44or lows, order blocks, liquidity voids,
13:43:47fair value gaps, breaker blocks,
13:43:49mitigation blocks, rejection blocks,
13:43:51etc. But primarily I like to make use of
13:43:55fair value gaps and order blocks for
13:43:57trade entries. It's strictly personal.
13:44:00You can use what works for you. Now fair
13:44:02value gaps represent imbalances in
13:44:05prices. These market imbalances will act
13:44:08like magnets attracting prices towards
13:44:11it. You could also look for order blocks
13:44:13along with fair value gaps within the
13:44:16discount area of the dealing range. Now
13:44:18once you have identified a fair value
13:44:20gap within the discount zone, there is a
13:44:23very high chance that prices would pull
13:44:25back deep enough to fill these
13:44:26imbalances completely or partially. Now
13:44:29this is not 100% guaranteed. There are
13:44:32occasions where price could keep heading
13:44:34higher without retracing back to these
13:44:37discount zones. In such cases, the best
13:44:40course of action is to either wait
13:44:42patiently or else try using displacement
13:44:45ranges to ride short-term pulses. We
13:44:48will talk about displacement ranges in a
13:44:50short while. Now, here you can see the
13:44:52price retracing into the discount zone
13:44:54of our dealing range and then it
13:44:57mitigated a fair value gap and started
13:44:59to reverse back higher. You can enter a
13:45:02long trade either from the high of the
13:45:04fair value gap or from the consequent
13:45:07encroachment level. You can then set
13:45:09your stop- loss below the low of the
13:45:10fair value gap or even below the lower
13:45:13swing level. Our profit target would be
13:45:16the next draw on liquidity which in this
13:45:18case is the previous swing high where
13:45:21buyside liquidity is present. But you
13:45:24can significantly improve your odds of
13:45:26getting into a profitable trade by using
13:45:29the lower time frame market structure
13:45:31shift. I have talked about this in the
13:45:33recap episode of this season. The idea
13:45:36is to use the fractal nature of market.
13:45:39So if you are looking at the market
13:45:40structure in a higher time frame chart
13:45:43such as the 15-minut chart, then you
13:45:45should switch to a lower time frame
13:45:47chart such as a 1 minute or 3 minute
13:45:49time frame chart. Now you'll be able to
13:45:51see the fractal nature of prices. Most
13:45:54probably you will observe price forming
13:45:56lower lows and lower highs during the
13:45:59retracement or pullback move. Now all
13:46:01you have to do is to wait for a change
13:46:04of character or a market structure shift
13:46:06in this lower time frame structure. But
13:46:08make sure that this shift in structure
13:46:11towards bullish price movements happen
13:46:13within a price of interest like a fair
13:46:15value gap or order block. So when you
13:46:18align your long trade entry with a
13:46:20market structure shift and a price of
13:46:22interest, you will get a highreward
13:46:24low-risk setup. In this case, take the
13:46:27long trade entry after the bullish
13:46:29change of character. You can place your
13:46:31stop- loss below the lowest point before
13:46:34the market structure shift happened.
13:46:36Your take-profit level would be the next
13:46:38draw on liquidity on the higher time
13:46:40frame structure. In this case, it would
13:46:42be the next swing high where the
13:46:44external buyside liquidity is present. I
13:46:47hope things are making sense. Now, let's
13:46:50see what the price did. The price moved
13:46:52higher, broke above the old swing high
13:46:55to sweep the buyside liquidity, thereby
13:46:57forming another bullish breakup
13:46:59structure. So now our swing low is
13:47:02confirmed which has already taken out
13:47:04the sellside liquidity available below
13:47:06the previous inducement level which was
13:47:09a minor swing low level. The price has
13:47:12then swept the buy side liquidity also.
13:47:14Now all we need is for the price to take
13:47:16out the inducement level such that our
13:47:19swing high is also confirmed. This way
13:47:22we can get the high and low of our new
13:47:24dealing range. You can use a Fibonacci
13:47:27retracement tool to plot the premium and
13:47:29discount areas within this new dealing
13:47:31range. Now our focus should be to take
13:47:34long trades from the discount zone by
13:47:37utilizing the PDR components like
13:47:39bullish fair value gap or bullish order
13:47:41block. Now a bonus tip here. When price
13:47:44retraces down during a bullish market
13:47:47structure, it could take out multiple
13:47:49sellside liquidity pools clustered below
13:47:51minus swing lows or below equal lows.
13:47:54This is more prominent if you are doing
13:47:56your analysis on a much lower time frame
13:47:59such as 15 minutes for the purpose of
13:48:01intraday trades. No matter what the
13:48:03situation is, what matters is that the
13:48:06swing low formed should have taken out
13:48:08some sort of sellside liquidity. Another
13:48:11point to keep in mind is that the price
13:48:13could pull back deep enough to sweep the
13:48:15sellside liquidity below the major swing
13:48:17low, but it should not break and close
13:48:20below the low. In such a case, it is an
13:48:23indication that our main trend has
13:48:26shifted from bullish to bearish and this
13:48:29is a bearish change of character. In
13:48:31that case, our previous dealing range
13:48:33gets invalid and we need a new dealing
13:48:36range that aligns with the newly formed
13:48:39trend. But I won't be talking about a
13:48:42bearish scenario because the process is
13:48:44the same. All you need to do is to
13:48:47identify a swing high which has already
13:48:49taken out a buyside liquidity above an
13:48:52old high, internal high or an equal or
13:48:54relative high. Then you need to figure
13:48:57out a swing low point formed after a
13:48:59bearish break of structure which has
13:49:01swept the sell side liquidity. You can
13:49:04make use of inducements for this
13:49:05purpose. Once an inducement level is
13:49:08swept, your lower low gets confirmed.
13:49:11Then use a Fibonacci retracement tool to
13:49:14draw a bearish dealing range from the
13:49:16swing high to the swing low point. The
13:49:18area above 50% Fibonacci level is our
13:49:21premium zone and below the equilibrium
13:49:23is our discount zone. Since our bias is
13:49:26bearish, we will look for short trade
13:49:28entries from within our premium zones
13:49:30with the help of any of the seven PD
13:49:33elements. It could be from a bearish
13:49:35fair value gap or from a bearish order
13:49:37block etc. Now let me quickly walk you
13:49:40through an example on how to draw
13:49:42dealing ranges and how to shift dealing
13:49:44ranges in a bullish market scenario. So
13:49:47here we have a bullish structure on a 1
13:49:49hour time frame. So here you can see
13:49:51that the market created a bullish
13:49:54breakup structure and swept the buy side
13:49:56liquidity. But before that market swept
13:49:59the sellside liquidity below a minor low
13:50:02which turns out to be an inducement
13:50:04level. So after the breakout the lowest
13:50:07point which took out the sellside
13:50:09liquidity will be our dealing range low.
13:50:12Now after the structure break price
13:50:15formed an inducement in the form of
13:50:17first pullback and then price came back
13:50:20down to sweep the sellside liquidity
13:50:22below this inducement low. Now our
13:50:25dealing range high is also confirmed. So
13:50:27we can plot a Fibonacci retracement from
13:50:30the low to the high point to get the
13:50:32premium and discount zones of our
13:50:34dealing range. You could look for
13:50:36bullish trade entries from any PD
13:50:38element within the discount range of
13:50:41this dealing range such as a fair value
13:50:43gap or order block. Now once again price
13:50:46moved up higher to break above the
13:50:48previous high and swept the buyside
13:50:50liquidity. This will confirm the low of
13:50:53our new dealing range. After a bullish
13:50:55break of structure, wait for an
13:50:57inducement to be taken out to validate a
13:51:00new dealing range high. Once again,
13:51:03using a Fibonacci tool, plot the premium
13:51:05and discount areas. This will be our new
13:51:08dealing range. In this case, price
13:51:11didn't move deep into the discount zone
13:51:13because there was sellside liquidity on
13:51:15offer below a minor consolidation and
13:51:18there was also a fair value gap close to
13:51:20the equilibrium zone. But the important
13:51:23thing here is that the price has swept
13:51:25the sell side liquidity. Then again the
13:51:27market moved higher formed a structure
13:51:30break and took out the buy side
13:51:32liquidity. The dealing range low is
13:51:34confirmed. When the inducement is taken
13:51:37out our dealing range high also gets
13:51:39confirmed. Plot the new dealing range
13:51:42using Fibonacci. In this case, price
13:51:44retraced deep enough taking out all the
13:51:47internal sellside liquidities near the
13:51:49minor lows and then moved even lower to
13:51:53sweep the sellside liquidity below the
13:51:55previous low and then only it reversed.
13:51:58So the point that I want to make is that
13:52:01despite having order blocks or fair
13:52:03value gaps on the way, there is always a
13:52:06possibility that the market could break
13:52:08past all these zones and draw into the
13:52:10external pole of liquidity. Now again
13:52:13the price moved higher and it swept the
13:52:16buy side. Our dealing range low is
13:52:19confirmed. Then the market retraced to
13:52:22take out the inducement. The high of the
13:52:24range is also confirmed. Now mark the
13:52:27dealing range and wait for the price to
13:52:29pull back into the discount zone for you
13:52:32to enter into a long trade position. In
13:52:34this case, price took the sellside
13:52:36liquidity below the inducement level,
13:52:39moved lower into the discount zone of
13:52:41our dealing range and then reversed
13:52:43higher after mitigating a fair value
13:52:46gap. Now, using this technique, you can
13:52:48mark dealing ranges for the rest of the
13:52:51chart also. I recommend you try this out
13:52:53on your own on multiple charts to see if
13:52:56it actually works for you. Now, let's
13:52:58say there is a bare change of character.
13:53:01In that case, our bias has shifted and
13:53:04we will only look for bearish dealing
13:53:06ranges. Now, let's quickly talk about
13:53:09displacement ranges. You may be familiar
13:53:11with what displacement moves are. Simply
13:53:13put, price displacements are large
13:53:16impulsive moves formed by largebodied
13:53:19candles with minimal retracements or
13:53:21wicks, often leaving fair value gaps or
13:53:24liquidity voids behind. These
13:53:26displacement moves confirms
13:53:29institutional intent in taking prices
13:53:31higher or lower depending on the market
13:53:33sentiment. If you have understood what
13:53:36displacement moves are, then figuring
13:53:38out a displacement range won't be a
13:53:40challenge at all. Just identify a
13:53:42displacement move such as this in
13:53:44prices, then connect the lowest and
13:53:47highest points in the displacement move
13:53:49with a Fibonacci tool. By doing so, you
13:53:52can get an idea about the premium and
13:53:53discount areas within the displacement
13:53:56ranges. Let us understand this with the
13:53:58help of a bullish displacement range.
13:54:01Usually, a displacement move occurs in
13:54:03the market when price has swept some
13:54:05form of liquidity. It could be an
13:54:07external or internal range liquidity and
13:54:10the candles associated with a
13:54:12displacement move are strong bullish
13:54:14candles with large real bodies with
13:54:16little to no wicks. So we need to spot
13:54:19such a series of strong bullish
13:54:21imbalance candles. Then you need to
13:54:23identify the starting point or the low
13:54:25of this bullish displacement move. And
13:54:28you also need to mark the high of this
13:54:30displacement move. Now use the Fibonacci
13:54:32tool to connect the lowest and highest
13:54:35point of the displacement move. We only
13:54:37require the 0% 50% and 100% fib levels.
13:54:41Now this becomes our displacement range.
13:54:45Similar to dealing ranges here also the
13:54:47area below the 50%age equilibrium level
13:54:50is the discount zone and above the 50%
13:54:53is the premium zone. Now what should we
13:54:56do with this range? The idea is to wait
13:54:59for the price to pull back at least to
13:55:02the 50%age fib level or to the discount
13:55:05zone. During a bullish displacement
13:55:07move, price would have created bullish
13:55:09fair gaps on the way up. We can
13:55:12anticipate a price retracement to these
13:55:14imbalances to fill these imbalances
13:55:17completely or partially. So we can try
13:55:19to take long trade entries from or below
13:55:22the equilibrium level. Now for
13:55:24optimizing your trade entries, you could
13:55:26also move down to your lower time frame
13:55:28chart and look for a bullish market
13:55:30structure shift after the price pullback
13:55:33to confirm a reversal in the actual
13:55:35trend direction. Once this is confirmed,
13:55:38you can take your long trade entry and
13:55:40you can keep the stop loss below the
13:55:42lowest point before the minor structure
13:55:44shift happened. And our first target in
13:55:46this case would be the displacement
13:55:48range high. Now, one interesting thing
13:55:51about displacement ranges is that it is
13:55:53either formed within a dealing range or
13:55:56else it could be equal to the dealing
13:55:58range. Either way, just like with
13:56:00dealing ranges, we will only consider
13:56:03the most recent price action for
13:56:05plotting displacement ranges. So once a
13:56:08displacement range is done and dusted,
13:56:10it is no longer useful and we will have
13:56:12to shift to a new displacement range as
13:56:15and when it occurs. Now the same concept
13:56:18applies to bearish displacement ranges
13:56:20as well. So most probably you will find
13:56:22bearish displacement moves during a
13:56:25bearish market structure. Once you have
13:56:27identified the displacement move with
13:56:29strong bodied bearish candles, you can
13:56:31now connect the highs and lows of this
13:56:33displacement move using a Fibonacci tool
13:56:36that will split the range into two
13:56:38zones. The area above the 50%age fib
13:56:41level is the premium zone while the area
13:56:43below it is the discount zone. Since the
13:56:46overall market sentiment is bearish, we
13:56:49will look for short trade opportunities
13:56:51when price retraces back at least to the
13:56:53equilibrium level or into the premium
13:56:55zone. You could refine your trade entry
13:56:58by moving down to a lower time frame
13:57:00chart and wait for a bearish structure
13:57:02shift to happen within the premium zone.
13:57:05You could enter a short trade and set
13:57:07your stop- loss above the highest point
13:57:09before the minor structure shift
13:57:11happened. Our initial profit target
13:57:13would be the low of the displacement
13:57:15zone. I hope things are clear now. So
13:57:18this is all you need to know about
13:57:20dealing and displacement ranges.
13:57:27Once you complete each episode, I want
13:57:30you to go back to your favorite charts
13:57:32and apply what you have learned. I want
13:57:34you to select the highest time frame for
13:57:37your chart analysis based on your
13:57:39trading style. Once that's done, I want
13:57:42you to mark the market structure. That
13:57:44is identify the major swing structure
13:57:47and the internal structures. Then I need
13:57:50you to figure out where to find the
13:57:52internal and external liquidity areas
13:57:54and see how the price reacts in these
13:57:57areas or zones. Further I want you to
13:58:00identify and mark the major SMC
13:58:03reference areas. These reference areas
13:58:06could be order blocks, fair value gaps,
13:58:09rejection blocks, liquidity voids, etc.
13:58:13And finally, based on the market
13:58:15structure and the trading bias, you need
13:58:18to identify the premium and discount
13:58:20areas within a particular swing. This is
13:58:23how the entire SMC chart analysis
13:58:25process looks like in brief. As a
13:58:28beginner, you need to keep identifying
13:58:30and marking them manually. This will
13:58:33help cement the concepts in your head.
13:58:35The trade entry process is yet another
13:58:38topic of discussion which we will cover
13:58:40in the second season of SMC course. Now
13:58:43analyzing multiple charts can turn out
13:58:46to be time consuming and cumbersome. So
13:58:49we require some help. This is where
13:58:52indicators come into picture. So in this
13:58:54video I will be talking about a few very
13:58:57useful and effective SMC indicators that
13:59:00will release a lot of burden when
13:59:02analyzing charts. Keep in mind that all
13:59:05the indicators that I will introduce to
13:59:07you are available for free in trading
13:59:10view. Before I talk about the SMC
13:59:13indicator, I would like you to select
13:59:15the highest time frame depending on your
13:59:18trading style. This time frame selection
13:59:20will vary from one trader to the other.
13:59:23If you know your trading style but you
13:59:25are unable to choose proper time frames,
13:59:27I suggest you watch my detailed video on
13:59:30how to select time frames accordingly. I
13:59:33am predominantly a swing trader. So the
13:59:35higher time frame for my analysis is
13:59:38usually the 1 day time frame. And if you
13:59:40are someone who trades intraday
13:59:42positions, you can choose your higher
13:59:44time frame as the 1 hour or even the
13:59:4715-minut time frame. Once that is done,
13:59:49you will notice a problem in the chart.
13:59:52This is commonly observed in most Indian
13:59:54stocks and indices. It is nothing but
13:59:57price gaps. These gaps are a result of
14:00:00overnight market sentiment. These gaps
14:00:03become annoying when we start to mark
14:00:05the market structure. It does not
14:00:07provide a continuous price action due to
14:00:10which structure mapping can get a little
14:00:12bit complicated. So a simple work around
14:00:15this issue is to use an indicator. Keep
14:00:17in mind that in forex and crypto markets
14:00:20there is no requirement of this
14:00:22indicator as the price is continuous as
14:00:25the market is open almost 24/7. Now
14:00:28let's take a look at this indicator. So
14:00:31open trading view in your browser or
14:00:33app. Then open the chart you want to
14:00:36analyze. For this case I will choose the
14:00:38nifty index. Then I will select the 1
14:00:41hour time frame. And you can see a lot
14:00:44of gap formations in the chart. Now go
14:00:46to the indicators icon and click on it.
14:00:49A pop-up menu will appear on your
14:00:51screen. On the left side of this menu,
14:00:54select the section named technicals. Now
14:00:58on the search bar, type in no gap
14:01:00candles and then hit enter. You can see
14:01:03there is only one indicator available in
14:01:06that list which is created by Ichipata.
14:01:10Just click on this indicator. Now go
14:01:12back to the chart and you can see how
14:01:14the gaps are automatically filled by
14:01:17extending some candles. Keep in mind
14:01:20that this indicator should not be used
14:01:22while trading or taking a position in
14:01:25the live market. This indicator should
14:01:27be used just to make the structure
14:01:29mapping process easier if you are a
14:01:31beginner or if the chart is too much
14:01:33crowded with price gaps. I will turn
14:01:36this indicator on and off so that you
14:01:38can see what really happens in the
14:01:40chart. You will instantly notice that
14:01:42gaps are filled just by extending one of
14:01:45the candles. So there is no real logic
14:01:47in doing so. Therefore, make sure to
14:01:49switch off this indicator once you have
14:01:52completed marking the structure. Now if
14:01:54you go to the settings of this
14:01:55indicator, you will find that there are
14:01:58not really many adjustments to be made.
14:02:00Just keep everything as default. But
14:02:02maybe you can change the colors so that
14:02:04you can easily recognize where the price
14:02:06gaps were. Moving on, there are a lot of
14:02:09smart money related indicators available
14:02:12in trading view indicator section. The
14:02:14indicators that are used by a large
14:02:17number of traders are the ones created
14:02:19by Lux Algo. Just go to the indicator
14:02:22section and on the search bar type in
14:02:25Luxalgo and you will see hundreds of
14:02:28results showing up. There are some smart
14:02:30money related indicators, price action
14:02:32based indicators and a lot of others.
14:02:35For the purpose of this video, our focus
14:02:37is only on smart money indicators by
14:02:40Lexalgo. A special mention to Lexalgo
14:02:43for keeping these indicators absolutely
14:02:45free for retailers. Anyways, I have
14:02:48starred or favored some of the best SMC
14:02:51indicators by Lexalgo. You can pause
14:02:54this video, take a screenshot and type
14:02:56in the names and add these indicators to
14:02:59your favorite indicator section. These
14:03:01indicators provides a lot of flexibility
14:03:04for traders to choose only those
14:03:06concepts which are actually required for
14:03:09your trades. For example, if you want
14:03:11the indicator to spot potential order
14:03:13blocks and breaker blocks, then you can
14:03:16use the order blocks and breaker blocks
14:03:18indicator by Lexalgo. But if you only
14:03:21want order blocks and don't want the
14:03:23indicator to spot breaker blocks, then
14:03:26you can select the order block detector
14:03:28indicator by Lexalgo. And in case if you
14:03:31don't want the indicator to show order
14:03:32blocks but only spot breaker blocks then
14:03:36use breaker blocks with signals
14:03:37indicator for doing so. So the scope of
14:03:40customization is endless. I won't go
14:03:43into each and every one of these
14:03:44indicators because it will then become a
14:03:47very long video and I don't want to
14:03:49waste your valuable time by talking
14:03:51about the indicator settings. It is
14:03:54actually not worth it. So I leave it up
14:03:56to you to play with these indicators.
14:03:59I think trading view has now limited the
14:04:01number of indicators on the chart to
14:04:03just two for their basic plan. Now most
14:04:06beginners won't be able to afford
14:04:08trading view subscriptions. Even I was
14:04:10not able to afford trading view when I
14:04:12started out. For such people using
14:04:14multiple indicators as a part of
14:04:17customization is not really a
14:04:19possibility. But fear not there is an
14:04:21SMC indicator that is an allrounder. It
14:04:24takes care of most of the useful SMC
14:04:27concepts from mapping the external and
14:04:29internal structures to finding order
14:04:32blocks, fair value gaps, equal highs and
14:04:34lows, multiple time frame highs and lows
14:04:37to figuring out the premium and discount
14:04:39areas. It will satisfy more than 90%age
14:04:42of your requirements and it will help
14:04:44quicken your chart analysis by multiple
14:04:47folds. The creator of this indicator is
14:04:50none other than Lexalgo himself. So go
14:04:53to the indicator section and on the
14:04:55search bar type in smart money concepts
14:04:58and in the results you will instantly
14:05:00notice the first indicator by Luxalgo
14:05:03that is used by more than 40,000
14:05:05traders. Just click on this indicator.
14:05:08It will automatically apply all the
14:05:10concepts on the chart. You will see a
14:05:12lot of markings like Bose, chalk, equal
14:05:15highs, equal lows, strong lows, weak
14:05:18highs, order block sounds etc. After
14:05:22applying the indicator, the chart looks
14:05:24kind of crowded. So let's fix this. In
14:05:27order to do that, let us tap the
14:05:29indicator settings. Under the input
14:05:31section, you will notice a lot of
14:05:33options for customizing the indicator.
14:05:36Let us take a look at each one of them
14:05:38and understand what is what. So the
14:05:40first option says mode. By default, it
14:05:43is set to historical. If you click on
14:05:46the drop-own menu, there is another
14:05:48option named present. If you want to
14:05:51know what these options mean, just hover
14:05:54over or click on the I button on the
14:05:56right. It asks if you want the indicator
14:05:59to mark the historical structures also
14:06:01or do you just want the recent structure
14:06:03formations. If you click on the present
14:06:06option, you can notice that all the
14:06:08previous markings are removed and only
14:06:11the most recent structure is marked.
14:06:14Personally, I like to keep this option
14:06:16set to historical as it gives me a
14:06:18general idea about the market trends and
14:06:21how it has played out in the past. The
14:06:23second option says style. By default, it
14:06:27is set to colored. Click on the drop-own
14:06:29menu and you will find another option
14:06:32named monochrome. Hovering over the I
14:06:34button, it says indicator color theme.
14:06:37If you select monochrome, every marking
14:06:40will be set to gray. It might help with
14:06:42keeping things simple, but if you want
14:06:44the markings to look more bright and
14:06:46colorful, choose the first option. It
14:06:49depends on your personal preferences.
14:06:51The next option is a tick box named
14:06:54colored candles. This option will color
14:06:57the candles based on the current trend
14:06:59as detected by the structure. Enabling
14:07:02this option also depends on your
14:07:04personal preference. The next section
14:07:06says realtime internal structure. This
14:07:09option displays the internal or minor
14:07:12market structure on the chart. The
14:07:14internal structure is not the major
14:07:16component in our analysis. But if you're
14:07:18someone who follows fast-paced trading
14:07:20styles by entering and exiting positions
14:07:23quickly, grabbing only a few points,
14:07:25then internal structure might come handy
14:07:27for you. You have some customization
14:07:30options to change the color of the
14:07:32bullish and bearish internal structure
14:07:34markings as well as filtering only BS or
14:07:37choke or both. There is also a
14:07:39confluence filter that will filter out
14:07:42all the non-significant internal
14:07:44structure breakouts. For the time being,
14:07:46I will just uncheck the internal
14:07:48structure option. Once we do that, the
14:07:51chart becomes much more cleaner. Now on
14:07:53scrolling down the next section reads
14:07:56realtime swing structure. Enabling this
14:07:59option will display the major swing
14:08:01structure. You have a lot of controls
14:08:04available. First of all you can decide
14:08:06whether you want the indicator to
14:08:08display just the boss or the chalk or
14:08:11display both. I will keep it as default.
14:08:14You can also change the color of the
14:08:16markings however you like. Then there is
14:08:19another tick box reading show swing
14:08:21points. Enabling this option will mark
14:08:24the higher highs, higher lows, lower
14:08:27highs and lower lows. The default number
14:08:30is set to 50. You can increase or
14:08:32decrease this number to get the
14:08:34appropriate swing labels. The next tick
14:08:37option is to display the most recent
14:08:39strong highs or lows and weak highs or
14:08:42lows. This is also an important option,
14:08:45so keep it enabled. Keep in mind that
14:08:47the market structure mapping may not
14:08:49always be 100%age accurate. There might
14:08:52be certain discrepancies. So, make sure
14:08:55to double check the outputs. Now, scroll
14:08:57down again. The next section is for
14:09:00order blocks. Here there are two
14:09:02options. One is for internal order
14:09:04blocks and the other option is for swing
14:09:07order blocks. The swing order blocks are
14:09:09considered as high probability high
14:09:12reward to risk order blocks compared to
14:09:14the internal order blocks which are
14:09:16considered less effective. Both numbers
14:09:18are set to five by default. It simply
14:09:21denotes the number of order blocks to be
14:09:23displayed. You can change this number if
14:09:25you want. The next option says order
14:09:28block filter. By default, it is set to
14:09:31ATR. The drop-down gives an additional
14:09:33option to use the cumulative mean range
14:09:36as the filtering method. The I button
14:09:39clearly mentions that cumulative mean
14:09:41range is to be used only when the price
14:09:44data available is low. Meaning this
14:09:46might come in handy on illlquid assets.
14:09:49Since our focus is only on liquid
14:09:51assets, we should keep the filtering
14:09:53method to the default setting of ATR.
14:09:56You also have the option to change the
14:09:58color of the order blocks so as to set
14:10:00them apart for easier identification.
14:10:03Now scroll down again. The next section
14:10:05is for equal highs and equal lows.
14:10:08Enable this tick box. Equal highs and
14:10:11lows help us figure out the market
14:10:13liquidity. The first option says bars
14:10:16confirmation and it is set to three by
14:10:19default. This is nothing but the number
14:10:21of candles used to confirm the equal
14:10:24highs and lows. More the number of bars
14:10:26required, lower will be the number of
14:10:29equal highs and lows marked and vice
14:10:31versa. Keeping this number high can help
14:10:34us find more purposeful equal highs and
14:10:36equal lows. Setting this number to a
14:10:38very small value like one can basically
14:10:41return a lot of results on the chart but
14:10:44they are noisy and less useful for us.
14:10:47So play with the numbers to find your
14:10:49sweet spot. The next option is threshold
14:10:52and it is set to 0.1. Not all equal
14:10:55highs and equal lows are formed
14:10:57perfectly. There will be some
14:10:59variations. This setting will help us
14:11:02account for this variation information
14:11:04and help us detect such equal highs and
14:11:06lows which are not perfect. Keeping a
14:11:09lower value like 0.1 can help us provide
14:11:12closer results and will return limited
14:11:15results. Keeping it to zero will return
14:11:17perfectly equal highs and lows. Now when
14:11:20the sensitivity is increased to say like
14:11:230.5 it will return more results but the
14:11:26variance of equal highs and lows formed
14:11:28will be higher. So try to keep this
14:11:31threshold value as low as possible. The
14:11:34next section is for fair value gaps. You
14:11:37already know what fair value gaps are,
14:11:39how they are formed and how they work.
14:11:41Once the checkbox is enabled, the
14:11:44indicator will display fair value gaps
14:11:46on chart. The next options is auto
14:11:48threshold. Also enable this setting as
14:11:51it will filter out all those failed and
14:11:54mitigated fair value gaps which are not
14:11:56significant anymore. There is also an
14:11:58option to select the time frame in which
14:12:01the fair value gaps get formed. By
14:12:03default, it is set to the chart time
14:12:06frame. If you want the indicator to show
14:12:08fair value gaps from some other time
14:12:10frame for the purpose of taking
14:12:12confluence trades, then it is very much
14:12:14on the cards. You can also change the
14:12:17color of imbalances. Also, make sure to
14:12:20extend the fair value gaps so that it is
14:12:22visible clearly. Turn up this number to
14:12:2525 or 30 or more. On scrolling down, the
14:12:29next section is to select the multiple
14:12:31higher time frame highs and lows.
14:12:33Options for daily, weekly, and monthly
14:12:36highs and lows are available. Enable all
14:12:38of them to get a reference of where the
14:12:41price is with respect to these levels.
14:12:43It gives an idea about overvaluation and
14:12:46undervaluation of prices. The last
14:12:48section says premium and discount zones.
14:12:52Once enabled, it will show the most
14:12:54recent premium and discount zones within
14:12:57a particular price swing. Keep in mind
14:12:59that it will not mark the PDAs. It will
14:13:02only display the premium, discount, and
14:13:05equilibrium zones to give you a general
14:13:07idea of where the price is trading at.
14:13:09Is it cheap or is it expensive? So that
14:13:13is all the input customization settings
14:13:15in this indicator. I would not say that
14:13:17the indicator is perfect and every
14:13:20marking is 100%. So make sure you double
14:13:23check everything and if you have some
14:13:25knowledge on pine script the source code
14:13:28is also available for free and you can
14:13:30make changes to customize the indicator
14:13:32according to your requirements. You can
14:13:35also check out the other favored smart
14:13:37money indicators and decide upon which
14:13:39ones to use. I hope this video will make
14:13:42your smart money analysis easier.
14:13:51I'm going to cover one of the most
14:13:53widely used indicator that traders use
14:13:55for technical analysis and for trading.
14:13:58It is none other than the Fibonacci
14:14:00tool. Now you may have heard of
14:14:02Fibonacci even from your school days and
14:14:04in many other fields other than trading.
14:14:07This is because it has many interesting
14:14:09properties and has a variety of
14:14:11applications in different fields like
14:14:13mathematics and science. It is really an
14:14:16interesting topic of discussion. But
14:14:18what is more interesting is its role
14:14:20when it comes to financial markets.
14:14:22Fibonacci is a powerful tool that can
14:14:24forecast future price movements and it
14:14:27can give you potential levels where you
14:14:29could take your entries or exits. So
14:14:32this is going to be a complete course on
14:14:34the Fibonacci tool. And as always I will
14:14:37start from the very basics of Fibonacci.
14:14:40Then I will discuss the important
14:14:41Fibonacci numbers and how they are
14:14:43calculated followed by the importance of
14:14:46Fibonacci ratios and the golden ratio.
14:14:49And then we will understand why does the
14:14:51Fibonacci concept work while trading in
14:14:53the financial markets. Then I will talk
14:14:56about the most important Fibonacci tools
14:14:58that traders must be aware of. Starting
14:15:00from the Fibonacci retracement,
14:15:02Fibonacci extension and Fibonacci
14:15:04expansion and not to mention we will go
14:15:07in depth into how to use these Fibonacci
14:15:09tools for trading. So make sure you
14:15:12watch the video till the end without
14:15:13skipping so as to get the complete
14:15:15understanding of the entire concept. So
14:15:18fasten your seat belts because this is
14:15:21going to be a fun ride.
14:15:23Let's start from the grassroot level.
14:15:26What is a Fibonacci sequence and where
14:15:28did it originate? Leonardo Pisano Bolo,
14:15:31an Italian mathematician from Pisar is
14:15:34credited with the discovery of Fibonacci
14:15:36sequence way back in 1202. The Fibonacci
14:15:39sequence that you can see on the screen
14:15:41goes like 0 1 1 2 3 5 8 13 21 34 55 89
14:15:49144 233 and the sequence goes solve.
14:15:52Okay, let me make it clear that I will
14:15:54not dwell deep into the mathematical
14:15:57properties behind the Fibonacci sequence
14:15:59but I will give you the basics that will
14:16:01provide you with necessary background of
14:16:03the sequence. Now how to make sense out
14:16:06of all this? How are the numbers in the
14:16:08sequence formed? Now, it's very easy.
14:16:10Now, each number in the sequence is
14:16:12formed by adding the two consecutive
14:16:14numbers before it. So, if you add 5 and
14:16:188, you will get 13, which is the next
14:16:20number in the Fibonacci sequence. And if
14:16:22you add 34 and 55, you get 89. And the
14:16:26sequence goes on to infinity. But these
14:16:29numbers don't really mean anything for a
14:16:31trader because the numbers that you see
14:16:33on a Fibonacci trading tool aren't
14:16:35actually the Fibonacci sequence
14:16:37themselves. As you can see, the
14:16:39Fibonacci tool in your charts consist of
14:16:41numbers like 236, 382, 618, 786, etc. So
14:16:49what exactly are this? The simple answer
14:16:51is that the numbers used in the
14:16:53Fibonacci trading tools are actually
14:16:56Fibonacci ratios and not really
14:16:58Fibonacci sequences itself. Now what do
14:17:01I mean by Fibonacci ratios? So if you
14:17:04divide a number on the Fibonacci
14:17:07sequence by any of the succeeding
14:17:09numbers then we will get the Fibonacci
14:17:12ratios. So if you divide two consecutive
14:17:15numbers on the sequence then we will get
14:17:17the first ratio which is 618. For
14:17:21example, if you divide 21 by the next
14:17:24number which is 34 then you will get 618
14:17:27or 61.8 when converted to percentage by
14:17:31just simply multiplying the ratio by
14:17:33100. And if you divide two Fibonacci
14:17:35numbers with a gap between them on the
14:17:37sequence then you will get the second
14:17:39ratio which is 382. An example would be
14:17:42when 21 is divided by 55, you will get
14:17:46382 or 38.2%age.
14:17:50In a similar manner, if you divide any
14:17:52Fibonacci number by its preceding
14:17:54number, then we will get the ratio as
14:17:571.618. For example, if you divide 55 by
14:18:0134, you will get 1.618 or 161.8%age.
14:18:06This ratio is very popular and it is
14:18:09called as the golden ratio. Now this
14:18:11ratio appears many times in geometry,
14:18:14art, architecture, nature etc. The ratio
14:18:18is simply the inverse of 618 ratio.
14:18:22Okay. Now that is the basic idea behind
14:18:24Fibonacci ratios and Fibonacci numbers.
14:18:28Now the question is how to use them to
14:18:30our advantage while trading. First of
14:18:33all, let me make it clear that there are
14:18:35many kinds of Fibonacci tools like
14:18:38Fibonacci retracements, Fibonacci
14:18:40channels, Fibonacci time zones,
14:18:42Fibonacci circles, Fibonacci spirals,
14:18:44Fibonacci wedges and the list goes on.
14:18:47Which of these Fibonacci tools matters
14:18:49the most? And more importantly, how do
14:18:52you use these Fibonacci tools for
14:18:53trading so that you can get the best
14:18:56possible results? Now, despite a whole
14:18:58spectrum of Fibonacci tools out there,
14:19:01the most widely used ones are Fibonacci
14:19:04retracement, Fibonacci extension, and
14:19:06Fibonacci expansion. And to be honest,
14:19:09it is all you need. But before
14:19:11introducing each one of them in detail,
14:19:14let me tell you the reason why Fibonacci
14:19:16levels work in the real market
14:19:18conditions. It could be due to either of
14:19:20the two reasons. It may be due to the
14:19:22core mathematical principles supporting
14:19:25the Fibonacci numbers and their relation
14:19:27to natural geometrical structures found
14:19:30throughout the nature that makes them
14:19:32work in the financial market. Or you
14:19:34could just argue that it is simply due
14:19:36to the crowd mentality of people in the
14:19:39markets and the fact that so many
14:19:41traders watch these levels day in and
14:19:44day out and they trade them. So we can
14:19:46anticipate the price to behave in a
14:19:48particular manner near these levels. So
14:19:51if you ask me which one of them is true,
14:19:53well I would say probably a bit of both.
14:19:56But the important point is that we don't
14:19:58really need to know for certain as to
14:20:00why it works. Moving on, let me now
14:20:03explain what Fibonacci retracements,
14:20:05Fibonacci extensions and Fibonacci
14:20:08expansions are and also show you how to
14:20:10apply them in your charts. Let's start
14:20:13with Fibonacci retracements. Now the
14:20:15textbook definition of Fibonacci
14:20:17retracement goes like this. Fibonacci
14:20:20retracement levels work on the theory
14:20:22that after a big price move in one
14:20:24direction, the price will retrace or
14:20:26return partway back to a previous price
14:20:29level before resuming in the original
14:20:32direction. Now, if you think about it
14:20:34for a while, you will understand what it
14:20:36means. It is simply taking into
14:20:38consideration the swing nature or the
14:20:40wave nature of prices. That is prices
14:20:43just don't go up and down all at once
14:20:46but instead it moves in the form of
14:20:48swings or waves where there will be an
14:20:51impulse move followed by a corrective
14:20:53move. The impulse move is where the
14:20:55momentum happens or it is the strong
14:20:57price move which happens with strong
14:21:00candles and it happens rather quickly.
14:21:02While the corrective or retracement move
14:21:04is the price move which is against the
14:21:06ongoing momentum and it may be due to
14:21:09short-term profit booking by traders and
14:21:11is usually associated with weaker
14:21:13candles. So, one of the purposes of
14:21:16Fibonacci retracement levels is to
14:21:18predict when the pullback or retracement
14:21:20or the correction will end so that you
14:21:22can hope into an existing trend once
14:21:24again. Some traders even anticipate a
14:21:27trend reversal if the price manages to
14:21:29break certain retracement levels like
14:21:3138.2 or 61.8 levels. So, in short,
14:21:36traders use Fibonacci retracement levels
14:21:39as potential supports and resistance
14:21:41areas. Now I will talk about all these
14:21:43in a little while but first let us learn
14:21:46how to plot Fibonacci retracement levels
14:21:48on our chart and let's look at the
14:21:51important things to keep in mind while
14:21:53plotting these levels. See Fibonacci
14:21:55retracement levels are actually
14:21:57horizontal lines that indicate possible
14:22:00support and resistance levels where the
14:22:02price could potentially reverse
14:22:04direction. Now the first thing you
14:22:06should know about Fibonacci tool is that
14:22:08it works best when the market is
14:22:10trending. So the simple idea is to go
14:22:13long or buy on retracement at any of the
14:22:17Fibonacci support levels when the market
14:22:19is uptrending or the idea is to go short
14:22:22or sell on a retracement at a Fibonacci
14:22:25resistance level when the market is
14:22:27trending down. So in short, we can think
14:22:30of Fibonacci retracement levels as a
14:22:32predictive technical indicator. Since we
14:22:34are attempting to identify where the
14:22:36price might be in the future. Now in
14:22:39order to find these Fibonacci
14:22:40retracement levels, you have to identify
14:22:43the existing trend in the market. Be it
14:22:45an uptrend or a downtrend and then you
14:22:48have to find the most recent significant
14:22:51swing highs and swing lows. Now, if you
14:22:54don't have any idea about price swings
14:22:56and trends, then you can watch my video
14:22:59on market trends or you can even watch
14:23:01the entire price action course for much
14:23:04more clarity. Now, once you have
14:23:06identified the trend and the most recent
14:23:08swing levels, you can use the Fibonacci
14:23:11retracement tool to draw the required
14:23:13levels. For example, if the market is in
14:23:16a downtrend and you have identified the
14:23:19swing high and swing low, now you can go
14:23:21to the left side panel to access the
14:23:23Fibonacci retracement tool. If you are
14:23:26using Trading View, just select the
14:23:28Fibonacci retracement tool and then
14:23:30click on the most recent swing high that
14:23:32we have identified and then simply drag
14:23:34the cursor to the most recent swing low
14:23:37and click once again and we are all
14:23:40done. The levels will be automatically
14:23:42plotted. Now why do we have to select
14:23:45the swing high first and then swing low
14:23:47for a downtrend? The reason is quite
14:23:50simple. It is because in a downtrend the
14:23:52100%age swing move is measured from the
14:23:55recent swing high to the recent swing
14:23:58low. And if we draw the Fibonacci tool
14:24:01from the swing low to the swing high
14:24:03then the retracement levels will get
14:24:06inverted meaning that 0 percentage 23.6%
14:24:106 percentage etc. will be marked near
14:24:12the swing high and 78.6%
14:24:16100%age levels will be marked near the
14:24:19swing low and so a small upward
14:24:22retracement will now show a 78.6%age
14:24:26retracement which is not really true
14:24:28because it is actually just a 23.6
14:24:31percentage retracement. So it is
14:24:33important that you follow the correct
14:24:35way of drawing Fibonacci levels. That is
14:24:37you always start from the origin of the
14:24:40impulse move. That is for an uptrend
14:24:42origin is the swing low and for a
14:24:44downtrend the origin of the impulse move
14:24:47is the swing high level. Now for uptrend
14:24:50you have to do the exact opposite. So
14:24:52first of all you have to find the most
14:24:54recent swing low and swing high. And
14:24:56once you have done that you have to
14:24:57select the Fibonacci tool from the left
14:25:00side panel. Then you have to select the
14:25:02origin of the impulse move. That is
14:25:04click on the swing low, not the swing
14:25:06high, but click on the most recent swing
14:25:08low and then drag the cursor to the most
14:25:11recent swing high and click once again
14:25:14and we are done. The levels will be
14:25:16plotted automatically. Now you can
14:25:18always go to the settings to adjust the
14:25:20parameters, colors, appearances and all
14:25:23that. You can also change the levels in
14:25:26terms of do we want it in decimal values
14:25:28or percentages. I personally like to
14:25:30keep it in percentages. So do check it
14:25:33out if you want to add or delete some
14:25:35levels. These settings would be
14:25:37particularly useful when dealing with
14:25:39harmonic patterns where some specific
14:25:41levels are required for certain
14:25:43patterns. And maybe we'll discuss this
14:25:45in one of our future videos. Now based
14:25:48on the depth of the levels, we can
14:25:49consider a 23.6%age
14:25:52retracement to be relatively shallow.
14:25:54Such retracements would be appropriate
14:25:57for uh flag patterns or short pullbacks.
14:26:01Now short pullbacks usually happen in
14:26:03strong trends where the corrective moves
14:26:05are very limited compared to impulse
14:26:07move. Now retracements in the 38.2
14:26:10percentage to 50%age range would be
14:26:13considered moderate which is appropriate
14:26:15for pen and chart patterns. Even deeper
14:26:18the 61.8%age 8 percentage retracement
14:26:21can be referred to as the golden
14:26:23retracement as it is based on the golden
14:26:25ratio. In those scenarios, you will find
14:26:28deep pullbacks and deep pullbacks
14:26:30usually happen with weak trends where
14:26:32the corrective moves are more visible
14:26:35similar to the ones that we find in the
14:26:37channel patterns. Now let's take a look
14:26:40at some examples on chart as to how to
14:26:42apply the Fibonacci retracement levels
14:26:45and how price responds to these levels.
14:26:48As you can see the price is trending up.
14:26:50So we will plot the Fibonacci
14:26:52retracement levels by first clicking on
14:26:54the origin that is the swing low and
14:26:57then dragging the cursor to the swing
14:26:58high. The charting software will
14:27:01automatically calculate and show you the
14:27:03Fibonacci retracement levels. Now this
14:27:05is the daily time frame chart of
14:27:07Reliance Industries and as you can see
14:27:09from the chart the Fibonacci retracement
14:27:11levels are plotted and it includes
14:27:1423.6%age,
14:27:1538.2%age, 2 percentage, 50%age,
14:27:1861.8%age, and 78.6%age,
14:27:22etc. Now, you might find something odd
14:27:24here. Yes, the 50%age ratio is not
14:27:28officially a Fibonacci ratio, but it was
14:27:30somehow able to sneak into the group and
14:27:33has never left. Jokes apart, to be
14:27:35precise, this number or percentage stems
14:27:38from do theory's assertion that the
14:27:40averages often retrace half their price
14:27:43more. I won't go into greater detail on
14:27:45this. Maybe I will talk about this when
14:27:48we take up doors theory for the
14:27:49discussion. Anyways, it is very useful
14:27:51to indicate the 50%age of the price move
14:27:54and usually the price respect it. So, it
14:27:56is a good practice to keep the 50%age
14:27:59level as it is. Now the expectation is
14:28:01that if the price retraces from the
14:28:04recent swing high, it will find support
14:28:07at one of these Fibonacci retracement
14:28:09levels because traders will be placing
14:28:11buy orders at these levels as the price
14:28:14pulls back. Now let's look at what
14:28:16happened after the swing high occurred.
14:28:18Price pulled back right through the
14:28:2023.6%age
14:28:22level and continued to stay over there
14:28:24for a few days. Then finally the market
14:28:27resumed its upward move and eventually
14:28:29broke through the swing high. Clearly
14:28:31buying at the 23.6%age Fibonacci
14:28:34retracement level would have been a
14:28:36profitable long-term trade. Now let's
14:28:39take a look at another example but this
14:28:41time for a downtrend scenario. Here the
14:28:44price is trending down. So we will plot
14:28:46the Fibonacci retracement levels by
14:28:48clicking on the swing high first and
14:28:51then dragging the cursor to the swing
14:28:53low. The software will automatically
14:28:55plot the retracement levels. Now this is
14:28:58the daily time frame chart of Tech
14:28:59Mahindra. Now the expectation of a
14:29:02downtrend is that the price retraces
14:29:04from this low. It could possibly
14:29:07encounter resistance at one of these
14:29:09Fibonacci levels because traders who
14:29:11want to enter and play the downtrend at
14:29:13a better prices are anticipating a
14:29:15pullback and may be ready with sell
14:29:17orders at these levels. The market did
14:29:20try to rally but it started below the
14:29:2223.6. 6 level for a bit and then came
14:29:25back to test the 38.2 percentage level.
14:29:28Now look what happened afterwards. The
14:29:30price continued the downward rally once
14:29:33it took the resistance at 38.2
14:29:35percentage level where there could have
14:29:38been a good selling pressure. Now in
14:29:40these two example we observe that the
14:29:42price found some temporary support or
14:29:44resistance at Fibonacci retracement
14:29:47levels. So if enough market participants
14:29:49believe that a retracement will occur
14:29:51near a Fibonacci retracement level and
14:29:54they wait to open a position when the
14:29:56price reaches the level then all those
14:29:59pending orders could impact the market
14:30:01price. But one thing you should
14:30:03understand is that prices won't always
14:30:05bounce from these levels. There are
14:30:07actually occasions when the price will
14:30:10just break through these levels and move
14:30:12in the opposite direction. Therefore,
14:30:14these levels should be looked at as
14:30:16potential areas of interest or potential
14:30:19areas of values and nothing more. Now,
14:30:21we have discussed in our price action
14:30:23course that supports and resistances
14:30:26eventually break. Well, from that
14:30:28perspective, Fibonacci levels are also
14:30:31potential supports and resistance
14:30:33levels. Therefore, this logic applies to
14:30:35Fibonacci levels also. This means that
14:30:37Fibonacci retracements do not always
14:30:40work. They are not foolproof and they
14:30:43are not 100%age reliable. Now let's look
14:30:46at another example to prove this point.
14:30:49This is the daily chart of TCS. As you
14:30:52can see the stock is trending down and
14:30:54we have identified the swing lows and
14:30:57swing highs. Now I will plot the
14:30:59Fibonacci levels. You can see that the
14:31:01price retraced to 23.6%age
14:31:04level and then stalled at the 50%age
14:31:07level for a couple of candles. At this
14:31:10point, many traders would think that the
14:31:1250%age Fibonacci level is holding and it
14:31:15is time to short its futures or options
14:31:17or whatever. But take a look at what
14:31:19happens next. It turns out that the
14:31:22swing low was the bottom of the
14:31:24downtrend and the price begin to rally
14:31:26above the swing high point. So what's
14:31:29the lesson here? While Fibonacci
14:31:31retracement levels give you a higher
14:31:33probability of success like other
14:31:35technical tools, they don't always work.
14:31:38You can't actually predict for sure if
14:31:40the price will reverse from a level
14:31:42before resumeuming the trend. Sometimes
14:31:44it may hit 38.2 percentage or 50%age or
14:31:47even 61.8 percentage levels before
14:31:50turning around. But there are also times
14:31:52when the price will just ignore all
14:31:54these Fibonacci levels and blow past all
14:31:57the levels just like it does not even
14:31:59exist. So always keep this in mind and
14:32:02be cautious. Now another problem in
14:32:04using Fibonacci retracement tool is
14:32:06determining which swing lows and swing
14:32:09highs to use. Now the problem mainly
14:32:11arises due to the fact that people like
14:32:13you and me look charts differently. We
14:32:16look at different time frames and have
14:32:18our own fundamental biases and beliefs.
14:32:21Now the bottom line is that there is no
14:32:23absolute right way to do it especially
14:32:25when the trend on the chart is not so
14:32:27clear. Sometimes it all becomes a
14:32:29guessing game. But one thing that I like
14:32:32to follow is to find the most recent
14:32:34swing high and swing low level including
14:32:37the candle wick. That way I can
14:32:39accommodate the entire price swing
14:32:41within these levels. But at the end of
14:32:43the day it all comes down to how you
14:32:45like to use it. Now that we know how to
14:32:47draw the Fibonacci retracement levels
14:32:50and how to use it, let us learn a few
14:32:52methods as to how to combine Fibonacci
14:32:55with other indicators or tools to
14:32:58improve our odds in the market. In that
14:33:00context, we will talk about how to use
14:33:02Fibonacci retracements with supports and
14:33:05resistance levels in the market, how to
14:33:07use Fibonacci retracement with trend
14:33:09lines, how to use Fibonacci retracement
14:33:11with candlestick patterns, and how to
14:33:14use Fibonacci retracement with chart
14:33:16patterns. Let's start with how to use
14:33:18Fibonacci retracement with support and
14:33:21resistance levels in the chart. I am of
14:33:23the belief that even though the
14:33:25Fibonacci retracement tool is extremely
14:33:27useful, it shouldn't be used all by
14:33:30itself. This is true for any kind of
14:33:32indicator or analysis that you conduct
14:33:35in the market. You always need
14:33:37confluence. You always need more
14:33:38confirmations. And so the Fibonacci
14:33:41retracement tool should be used in
14:33:43combination with other tools. And one of
14:33:46the best ways to use Fibonacci
14:33:47retracement tool is to spot potential
14:33:50supports and resistance levels and see
14:33:52if they line up with Fibonacci
14:33:54retracement levels. If Fibonacci levels
14:33:56are already support and resistance
14:33:58levels and you combine them with other
14:34:01price areas that a lot of other traders
14:34:04are watching, then the chances of the
14:34:06price bouncing from those areas are much
14:34:08higher. Let's look at an example of how
14:34:10you can combine support and resistance
14:34:12levels with Fibonacci levels. So as you
14:34:15can see the stock has been on an
14:34:17uptrend. You can use the Fibonacci tool
14:34:19to mark up the levels. Now if you
14:34:21observe closely you'll notice that there
14:34:23is a strong level or maybe I should say
14:34:26a range which acted as a resistance
14:34:28before but now since the price has
14:34:31broken out it will act as a support
14:34:33level which is simply the concept of
14:34:35change in polarity. And to our advantage
14:34:38this resistance turn support level
14:34:41coincide with the 61.8%age late
14:34:43percentage Fibonacci retracement level.
14:34:46So if I were to take a long position, I
14:34:48would wait for the price to retrace or
14:34:51pull back to this particular level of
14:34:5361.8, which is a confluence zone or a
14:34:56nested zone where the probability of a
14:34:59trade working out in your favor
14:35:01increases. And as you can see, the price
14:35:04did return back to test this level and
14:35:07went back up by giving us a decent
14:35:09return. You can do similar setups on
14:35:11downtrend as well. The point is you
14:35:13should look for price levels that seem
14:35:16to have been areas of interest in the
14:35:18past and support and resistance levels
14:35:20seem to perfectly fit into the box. With
14:35:23a lot of traders looking at the same
14:35:25support and resistance levels, there is
14:35:27a good chance that a huge number of
14:35:29orders are at those levels. Now, there
14:35:32is no guarantee that price will bounce
14:35:34from these levels, but at least you can
14:35:36be more confident about your trade. See
14:35:39always remember that trading is all
14:35:41about probabilities and if you can stick
14:35:43to those higher probability trades then
14:35:45there is a better chance of you coming
14:35:47out profitable in the long run. Now the
14:35:50second method is how to use Fibonacci
14:35:52retracement with trend lines. So
14:35:55Fibonacci retracement levels work best
14:35:57when the market is trending. So it makes
14:36:00a lot of sense to combine it with trend
14:36:02lines. This is an interesting
14:36:04application of Fibonacci retracement
14:36:06tool which can help us forecast the next
14:36:08swing low in case of an uptrend and the
14:36:10next swing high in case of a downtrend
14:36:13which is expected to be a part of the
14:36:15trend line. Let me explain. For example,
14:36:18the price has been respecting a
14:36:20shortterm ascending trend line or an
14:36:22uptrend line. So you are planning to
14:36:24take a long entry on the next swing low
14:36:26into the trend line. But before the
14:36:28price even test the trend line again,
14:36:31what you can do is that you can plot the
14:36:33Fibonacci retracement levels from the
14:36:36previous swing low to the most recent
14:36:38swing high so that you can forecast
14:36:40beforehand as to which level you can
14:36:43expect the price to retrace. Notice how
14:36:45the 50%age and 61.8%age
14:36:49Fibonacci levels are intersected by the
14:36:52rising trend line. We'll also observe if
14:36:54any of these levels will act like a
14:36:56support level. And guess what? The
14:36:5961.8%age Fibonacci level held and it
14:37:02acted as a support level not just once
14:37:05but twice and the price bounced from it
14:37:08both times. But since we are looking for
14:37:10confluence and high probability setups,
14:37:13we will only take an entry when the
14:37:15price tests the 61.8 percentage level
14:37:18and the trend line. Now this would have
14:37:21been our perfect entry and an even
14:37:23perfect trade. You can adopt this
14:37:25process throughout the entire trend. You
14:37:28can also use this method in case you are
14:37:30eyeing a downward trend. But the only
14:37:32difference is that you'll be looking to
14:37:34forecast the swing high instead of a
14:37:36swing low. Now let's look at the third
14:37:38method which is using Fibonacci
14:37:40retracement with candlestick patterns.
14:37:43Now when combining Fibonacci retracement
14:37:45tool with candlestick patterns, we are
14:37:47actually looking for exhaustive
14:37:49candlesticks which can tell you if the
14:37:51buying or selling pressure is exhausted
14:37:54and it can also give you a clue as to
14:37:56when the price may continue trending or
14:37:59when it is weakening. Now the exhaustive
14:38:01candlesticks that we are interested in
14:38:04are pin bars with or without a real
14:38:06body. Now the long upper or lower wicks
14:38:09represent price rejection and it
14:38:12indicates a potential shift in the
14:38:14momentum and market sentiment. Now take
14:38:16a look at this example where the price
14:38:18moves with strong momentum towards the
14:38:20upside. Then we plot the Fibonacci
14:38:23retracement levels. We can notice that
14:38:25the price retrace back to the 23.6
14:38:28percentage level. At this point, you
14:38:30might have this doubt in mind since the
14:38:33price has moved up so much. There might
14:38:35not be enough momentum for the price to
14:38:37move upside and so you might anticipate
14:38:39the price to retrace even lower or in
14:38:42fact it could even reverse for that
14:38:44matter. But then something interesting
14:38:46happens. The retracement stalls with an
14:38:49exhaustive pinbar candle with a very
14:38:51long wick which rejects all the lower
14:38:54prices indicating that the sellers are
14:38:57weak or in other words the buyers are
14:39:00still dominant. So at this point you can
14:39:02look to take a long trade and the price
14:39:04starts to move higher. It would earn you
14:39:07some decent returns. You can always
14:39:09improve your odds if you add support and
14:39:11resistance levels into the mix and then
14:39:14you get more confirmations on your
14:39:15trade. Now the last method is to use
14:39:18Fibonacci retracements in conjunction
14:39:20with chart patterns like penance, flags,
14:39:24wedges etc. I have already discussed
14:39:26this topic in detail in my chart
14:39:28patterns course. So you can check that
14:39:31video out to know more. But to briefly
14:39:33remind you, chart patterns like flags
14:39:37usually have narrow retracement usually
14:39:39between 23.6%age
14:39:41and 38.2%age.
14:39:43While patterns like penance have much
14:39:46deeper retracements between 38.2
14:39:48percentage and 50%age, the trade entry,
14:39:52stop-loss and targets will be based on
14:39:54the pattern and not really based on the
14:39:56Fibonacci tool. Now that you have an
14:39:58idea on how to use Fibonacci retracement
14:40:01levels to find confluence setups, the
14:40:03next thing you might have in your mind
14:40:05is when to enter and where to set the
14:40:07stop- loss. Well, the context is very
14:40:10straightforward. You could set your stop
14:40:12loss just past the Fibonacci retracement
14:40:15level. Let me explain. So, if you're
14:40:17planning to take a long trade at 38.2
14:40:20percentage Fibonacci level, then you
14:40:22would place your stop loss beyond the
14:40:2550%age level. Or another case, if you
14:40:27feel like the 50%age level would hold or
14:40:30if you take a trade from 50%age level,
14:40:33then you would put your stop- loss past
14:40:3561.8%age level and so on and so forth.
14:40:39Simple, right? So in a similar manner,
14:40:42if you have shorted at 50%age level,
14:40:44then you could place your stop-loss
14:40:46order just above the 61.8%age Fibonacci
14:40:49level. Now the reasoning behind the
14:40:51method of setting stop-loss is that you
14:40:53believed that 50%age level would hold as
14:40:57a resistance level. Therefore, if the
14:40:59price were to rise beyond this point,
14:41:01your trade idea would be invalidated.
14:41:04Now, the problem with this method of
14:41:06setting stop- loss is that it is
14:41:07entirely dependent on you having a
14:41:10perfect entry. And setting a stop-loss
14:41:12just past the next Fibonacci retracement
14:41:15level assumes that you're actually
14:41:17confident that the support or resistance
14:41:19area will hold. And as pointed out
14:41:21earlier, using drawing tools is not an
14:41:24exact science. So, usually this method
14:41:26is good for stop-loss placement based on
14:41:29short-term and intraday trades. Now, if
14:41:32you're planning to trade a support,
14:41:34resistance and Fibonacci confluence
14:41:36setup, then you can take a trade entry
14:41:38when the price starts to resume in the
14:41:41direction of the trend from the area or
14:41:43level of interest. And your stop loss
14:41:45can be either placed beyond the next
14:41:47Fibonacci level as we have mentioned
14:41:50earlier or you can set the stop loss
14:41:52below the support level or above the
14:41:55resistance level with suitable buffer
14:41:57using a volatility indicator like ATR
14:42:01depending on your trade direction. And
14:42:03in case if you have considered an
14:42:05exhaustive pin bar candlestick for your
14:42:07trade, then you might be better off
14:42:08taking a trade when the price crosses
14:42:11the pin bar in the direction which you
14:42:13want to trade. So if you're looking to
14:42:15go long, then buy when the price breaks
14:42:17above the high of the pin bar candle and
14:42:20set the stop- loss below the exhaion pin
14:42:22bar. Or if you're looking to short, then
14:42:24take a short trade when the price breaks
14:42:27below the low of the pin bar candle and
14:42:30place the stop loss above the high of
14:42:32the pin bar candlestick. Now the same
14:42:34logic applies if you are taking trades
14:42:36from trend lines. In this case, you have
14:42:38to set your stop- loss with a suitable
14:42:40buffer with respect to the trend line.
14:42:43Now let's move on to the next topic
14:42:45which is Fibonacci expansions and
14:42:48Fibonacci extensions. Now most of the
14:42:50time traders get confused as to what is
14:42:54what. Now most of us might not even know
14:42:56both of these exist and there are some
14:42:58of them who believe that both of them
14:43:01are the same. So let's address all these
14:43:04issues and discuss in detail what both
14:43:06of these Fibonacci tools are and what it
14:43:09does. Both these tools are used by
14:43:12traders to predict how far a trend will
14:43:15go. Or maybe you can think of these
14:43:17levels as potential targets or exits for
14:43:20traders who have taken a trade from any
14:43:23of the retracement levels. I know you
14:43:25have questions. I know you want to know
14:43:27how both of them are different. How can
14:43:29we apply these tools in the charts?
14:43:32Should we include wicks or is it just
14:43:34the body that we should consider? So let
14:43:37me keep things as simple as possible.
14:43:39Since we use Fibonacci retracement tool
14:43:41to time pullbacks and since we want to
14:43:44measure the whole trending move, we
14:43:47start from the origin of an impulse move
14:43:49and that includes the wicks of the
14:43:51candles also. Now it's similar to the
14:43:53Fibonacci extension and expansion tools
14:43:56as well. We require the entire price
14:43:58swing. So we will consider the lowest
14:44:01and highest wicks of the candles also.
14:44:03Now let me start off with the Fibonacci
14:44:05extension level which is rather the more
14:44:08commonly used Fibonacci tool. To draw
14:44:10the Fibonacci extension levels, we
14:44:12require three points. A swing high, a
14:44:15swing low, and a retracement level.
14:44:18Let's start with an uptrend. In an
14:44:20uptrend, the general idea is to take
14:44:22profits on the long trade at a Fibonacci
14:44:25price extension level. First, select the
14:44:27trendbased Fibonacci extension tool from
14:44:30the left side panel. If you are using
14:44:33trading view, as I have mentioned
14:44:34earlier, you can determine the Fibonacci
14:44:36extension levels by using three mouse
14:44:39clicks. First, click on the significant
14:44:42swing low, which is the origin of the
14:44:44move in an uptrend. Then, drag your
14:44:46cursor and click on the most recent
14:44:48swing high. Finally, drag your cursor
14:44:51back down and click on any of the
14:44:54retracement levels. Now, this will
14:44:55automatically display each of the price
14:44:58extension levels showing both the ratios
14:45:00and their corresponding price levels.
14:45:03And in a downtrend, the general idea is
14:45:05to take profits on a short trade at a
14:45:08Fibonacci extension level since the
14:45:10market often find support at these
14:45:12levels. And the concept actually remains
14:45:14the same. You need to select the
14:45:17trendbased Fibonacci extension tool from
14:45:19the left side panel and click on the
14:45:22three swing points. So you'll have to
14:45:24start with the most significant swing
14:45:26high which is the origin and then click
14:45:28on it. Drag the cursor down. Click on
14:45:31the most recent swing low level and then
14:45:34again drag the cursor back up and click
14:45:36on the most significant retracement
14:45:38level. Now the software will
14:45:40automatically plot all the price
14:45:42extension levels and their corresponding
14:45:44ratios. And as you can notice the major
14:45:47extension levels includes 100%age,
14:45:50127.2%age,
14:45:52161.8 and 8 percentage which is actually
14:45:55the golden ratio and so on. You can
14:45:57always go to the settings and play with
14:45:59it to understand how different levels
14:46:02will look like in the chart and you can
14:46:04also change the appearance of the levels
14:46:06and so on. Now coming back to our
14:46:08discussion let's take an example to
14:46:10understand things better. Now this is
14:46:12Nifty 1day chart. The market is trending
14:46:15up and we have a swing low, a swing high
14:46:18and a retracement which is perfect for
14:46:20bringing up our Fibonacci extension
14:46:22tool. Now, first select the swing low
14:46:25which is the origin of the move. Then
14:46:27drag the cursor and click on the swing
14:46:29high and then drag the cursor back down
14:46:32and click on the lowest point on the
14:46:34retracement. This will automatically
14:46:36bring up all the Fibonacci extension
14:46:38levels which are none other than
14:46:39possible price levels where the price
14:46:41could face resistance or in simple terms
14:46:44these could be levels where potential
14:46:47selling pressure could come in. This
14:46:48also means that these are good levels
14:46:51for setting up our targets. Now let us
14:46:54see what happened to the price
14:46:56afterwards. In terms of retracement, the
14:46:58price got a good support at 50%age
14:47:01retracement level. Then the price
14:47:03started to move higher. The price
14:47:05rallied all the way to 61.8 percentage
14:47:08level which formed a swing high level.
14:47:11Then it fell back to the 38.2 percentage
14:47:13level where it found support again. The
14:47:15price rallied again and found some
14:47:17resistance at 100%age level. Couple of
14:47:20days later the price rallied again
14:47:22before finding a short resistance at
14:47:25161.8 8 percentage level and moved
14:47:27higher to 200%age level and finally
14:47:31found some good resistance at 261.8
14:47:34percentage level. As you can see from
14:47:36the example, 61.8 percentage level,
14:47:39100%age,
14:47:41161.8 percentage and 261.8 percentage
14:47:45levels all would have been good places
14:47:47to take off some profits. Now let's look
14:47:50at an example of a downtrend. Let's take
14:47:52the case of co force on a daily time
14:47:54frame. Note that you can use any time
14:47:57frame that you like for analysis and
14:47:59trading using Fibonacci. So if you look
14:48:01at the coforge retracements, it is clear
14:48:04that we have a shallow retracement
14:48:07between 23.6 and 38.2 percentage level
14:48:10for a while. Now let me bring up the
14:48:12Fibonacci extension tool to mark its
14:48:14potential take-profit levels if you
14:48:16intend to short its futures or options.
14:48:19So click on the swing high which is the
14:48:21origin. Then drag the cursor and click
14:48:23on the swing low and then drive the
14:48:26cursor back up to the highest
14:48:27retracement point which is between 23.6
14:48:30and 38.2 percentage level and click on
14:48:33it. Now all the Fibonacci extension
14:48:36levels are plotted and let's see how the
14:48:38trade would have performed. Now the
14:48:40price found support at 38.2%age level
14:48:44stayed there for a while and even made
14:48:47another sharp retracement before falling
14:48:49lower. Then the 50%age level held as
14:48:52initial support. Then became an area of
14:48:55interest. And as the price moved lower,
14:48:58the 61.8 percentage level also became an
14:49:01area of interest before the price shot
14:49:04down to test the 100%age extension
14:49:06level. So if you look at it, you'll find
14:49:08that the 100%age extension level also
14:49:12acted as a strong support. So in short,
14:49:14we could have taken profits at 38.2%age
14:49:172 percentage level, 50%age, 61.8
14:49:21percentage levels and with some patience
14:49:24even at 100 percentage levels. All these
14:49:26levels acted as support possibly because
14:49:29other traders were keeping an eye out
14:49:31for these levels for taking profits as
14:49:33well. Now these examples illustrates
14:49:36that price finds at least some temporary
14:49:39support or resistance at Fibonacci
14:49:41extension levels but not always but
14:49:44often enough to correctly adjust your
14:49:46position to take profits and manage your
14:49:48risk. But of course there are some
14:49:50problems to deal with here. The first
14:49:53one is that there is no way to know
14:49:55which exad Fibonacci extension level
14:49:58will provide a support or resistance.
14:50:00Secondly, there are occasions where some
14:50:03of these levels may or may not act as
14:50:05support or resistance. The price might
14:50:08neglect it and move past it as if it
14:50:10does not even exist. And the problem is
14:50:13determining which swing low to start
14:50:15from in creating the Fibonacci extension
14:50:17level. This usually happens when the
14:50:19price consolidates in a level so much so
14:50:22that multiple highs or lows are created
14:50:25which can actually confuse traders.
14:50:27Again the point is that there is no one
14:50:30right way to do it but with a lot of
14:50:32practice you will make better decisions
14:50:34of picking swing points. You'll have to
14:50:37use your discretion in using Fibonacci
14:50:39extension tool. You'll have to judge how
14:50:41much longer the trend will or may
14:50:43continue. So if I were to talk about the
14:50:46important levels from my experience the
14:50:49best levels to set your targets based on
14:50:51Fibonacci extensions are 61.8%age 8
14:50:54percentage 100 percentage and 161.8
14:50:58percentage levels. I'm not saying that
14:51:00other levels are useless or not worth
14:51:02considering, but these three levels
14:51:05gives good results. Most of the time,
14:51:07you can also use trailing stop- losses
14:51:09along with these levels to improve your
14:51:12odds of booking the profit. Trailing
14:51:14stop-loss can be as simple as moving
14:51:16averages or an ATRbased stop-loss like
14:51:19Chandler stops. I've already made videos
14:51:22on setting stop losses and on ATR
14:51:24indicator. You can watch it to know
14:51:26more. Now we have come to the final
14:51:29topic of our discussion which is
14:51:31Fibonacci expansions. Expansions are
14:51:35also used for profit taking or for trend
14:51:38forecasting or simply for getting an
14:51:40idea on how far the trend might move.
14:51:43For this scenario, we will use the exact
14:51:45same tool to plot the expansions that we
14:51:48have used to draw the Fibonacci
14:51:50extension levels. But we will only
14:51:52require two points and three clicks to
14:51:55draw the expansions instead of three
14:51:57points and three clicks in case of
14:52:00extension levels. The two points
14:52:02required are simply the swing low and
14:52:05swing high of the impulse move. Now, how
14:52:07to draw the expansion levels? Let's take
14:52:10a look at the process for an uptrend.
14:52:12For an uptrend, we require a swing low
14:52:15and a swing high. The swing low is the
14:52:18origin of the swing. So, we will select
14:52:20the trendbased Fibonacci tool from the
14:52:22left side panel. Then, click on the
14:52:25swing low. Then, drag the cursor and
14:52:27click on the swing high and then drag
14:52:29the cursor all the way back down to the
14:52:31swing low or the origin. But make sure
14:52:33to shift this click towards the right
14:52:36for better visibility. Now, this will
14:52:38automatically plot all the expansion
14:52:40levels. There is not much of difference
14:52:43in ratios of levels being plotted. But
14:52:46what is more important to understand is
14:52:48that Fibonacci extensions are used to
14:52:51project the potential levels up to which
14:52:54the price could move up after a
14:52:56retracement. But when it comes to
14:52:58Fibonacci expansions, we are literally
14:53:01projecting the entire swing that we have
14:53:03considered. that is we are projecting
14:53:05100%age of the swing that we have
14:53:08considered over and above the swing
14:53:10highs in case of an uptrend. If you ask
14:53:12me what is the use of doing so I would
14:53:15say there is not much of a strong use
14:53:17case here but one thing that I have
14:53:19noticed is that we can make use of the
14:53:22golden ratio or 161.8 percentage level
14:53:25more by making use of these expansion
14:53:28levels in comparison to the extension
14:53:30levels because in extension levels 161.8
14:53:348%age is a very large price target and
14:53:37it is a common practice to use 61.8
14:53:41or 100%age extension levels for targets
14:53:44as they are easily achievable most of
14:53:46the time but with the expansion levels
14:53:49161.8%age
14:53:51is quite easily achievable. Now let's
14:53:53look at an example for a downtrend also.
14:53:56In this case also we will require the
14:53:57swing high and swing low. The swing high
14:54:00is the origin or the start point of the
14:54:02bearish impulse swing while the swing
14:54:04low is the end of the impulse swing
14:54:06move. So once the start and end points
14:54:09are identified, select the trendbased
14:54:11Fibonacci tool from the left side
14:54:13toolbar. Then click on the swing high.
14:54:16Then drag the cursor down. Click on the
14:54:18swing low and then drag the cursor all
14:54:21the way up to the swing high and place
14:54:23the cursor in line with the swing high
14:54:25level towards the right and click.
14:54:28Expansion levels will be automatically
14:54:30plotted. Even in this case, levels like
14:54:33127.2%,
14:54:35161.8%age,
14:54:37200%age, etc. will be our potential
14:54:40take-profit levels. You can always go to
14:54:42the indicator settings and add or remove
14:54:44more ratios. You can even change the
14:54:47ratios if you want even though it is not
14:54:49recommended. Anyways, these are the
14:54:51three Fibonacci tools that you must know
14:54:53as a trader. It doesn't matter if you
14:54:55are an intraday trader, swing trader or
14:54:57positional trader. These Fibonacci tools
14:55:00work in all type of liquid charts and
14:55:03across all different time frames. You
14:55:05can use these levels to make buy or sell
14:55:07decisions or to set stop-loss and take
14:55:10profit levels. However, it is important
14:55:12to note that Fibonacci trading is just
14:55:15one of the many technical analysis
14:55:17methods and it should be used in
14:55:19conjunction with other forms of analysis
14:55:22before making any trading decisions.
14:55:27I will talk about CPR which is a
14:55:30revolutionary level-based indicator that
14:55:32can change the way you approach trading
14:55:35and the way you see the charts and
14:55:37improve it big time. We will learn about
14:55:39the CPR and floor pivots in greater
14:55:41detail with more emphasis on CPR
14:55:44indicator in particular so that you can
14:55:46create your edge over other market
14:55:49participants. This video will cover the
14:55:51following topics. We will start our
14:55:54discussion with the basics of CPR
14:55:56indicator followed by the calculations
14:55:58of CPR and what exactly does this
14:56:01calculation mean to a trader. Then we
14:56:03will move on to the advantages of CPR
14:56:06and then to the uses of CPR. We will
14:56:08also discuss the significance of CPR
14:56:10indicator and we will shortly peak into
14:56:12the disadvantages of CPR. Then we will
14:56:15discuss about the general criteria for
14:56:17using floor pivots and finally we will
14:56:19end the video up with two CPR strategies
14:56:22that you can apply in the market. So
14:56:24without wasting any time let's get
14:56:26started.
14:56:29Before starting with CPR, we have to
14:56:32understand how it came into being. For
14:56:34that, we should start our journey from
14:56:36floor pivots. See, floor pivots have
14:56:39been around for a long time, and many
14:56:41traders have used these pivot levels to
14:56:43master the market for decades. Larry
14:56:46Williams, the famous stock and commodity
14:56:48trader, repopularized this formula of
14:56:51floor pivots by including it in his
14:56:53book, How I Made $1 million last year
14:56:56trading commodities in the year 1979. In
14:56:59the book, he described the pivot price
14:57:01formula, which he used to arrive at the
14:57:04next day's probable price range, that is
14:57:06the high or the low. Nowadays these
14:57:08pivots can go by many names in the
14:57:10market including pivot points, floors or
14:57:13just pivots but we will call them floor
14:57:16pivots. The reason for this is simple
14:57:18but interesting because they came
14:57:20popular once traders on the floors of
14:57:22the exchanges began to use them. The
14:57:24pivots served as a simple way for these
14:57:26floor traders to forecast the particular
14:57:29day's potential support and resistance
14:57:31levels since they didn't have
14:57:33sophisticated computers and softwares on
14:57:35the floors of the exchanges back then.
14:57:37Another reason is that this name helps
14:57:40to distinguish them from other types of
14:57:42pivot points. Now coming back to the
14:57:44details, floor pivots are extremely
14:57:47powerful price-based support and
14:57:49resistance levels that are calculated
14:57:51using a prior periods high, low and
14:57:54close prices. Actually, it offers an
14:57:57amazing way to view the market. They're
14:57:59like maps for the market, revealing the
14:58:01moves of the market even in the most
14:58:04uncertain times. So when we begin to
14:58:06study the pivots on a much deeper level,
14:58:09you'll begin to observe the parallel
14:58:11nature that exist between the floor
14:58:13pivots and the price behavior. Now you
14:58:16may ask me why in the world should I
14:58:18believe that these levels will work in
14:58:20the market. The main reason these pivots
14:58:22can be so unbelievably accurate is the
14:58:25simple fact that market participants are
14:58:28aware that these levels exist. Now they
14:58:30are watching them and trading these key
14:58:32levels every now and then. It all boils
14:58:35down to the trader psychology and human
14:58:37nature for that matter which has
14:58:39remained the same for centuries and the
14:58:41factors that run the market are the same
14:58:44fear, greed, hope and uncertainty. These
14:58:47are the reasons why traders continue to
14:58:49react to these key levels in the chart
14:58:51the same way over and over again. This
14:58:54is also the reason why these pivots have
14:58:56stood the test of time and will continue
14:58:59to work in the future. Now let us look
14:59:01at the standard floor pivots and then
14:59:03take our learning to a whole new level
14:59:06with slight modifications to the same. I
14:59:08will guide you through these topics
14:59:10based on my learnings from the very
14:59:12famous book secret of pivot boss by
14:59:15Franklin Oova for whom I am deeply
14:59:18inducted to and I urge you to read the
14:59:20book because it has got a lot of
14:59:22valuable insights for all types of
14:59:24market participants.
14:59:27As I have mentioned, even though the
14:59:29floor pivots have been around for
14:59:31decades, they can still cause confusion
14:59:33due to the fact that there are several
14:59:35variations of the formula that can be
14:59:37found in the market. However, there is
14:59:39one such formula that is widely
14:59:41considered to be the standard one. So
14:59:43all you have to do is to plug in the
14:59:46high, low and close of a prior day or a
14:59:49week or month depending on the time
14:59:51frame on which you want to conduct your
14:59:53analysis and the formula will
14:59:55automatically calculate the central
14:59:57pivot, three resistance levels from R1
15:00:00to R3 and three support levels from S1
15:00:02to S3 that can be used for the current
15:00:05day's trading activity. That is seven
15:00:07pivot levels will be plotted on your
15:00:09chart. Now do you know why the high, low
15:00:12and close are used for the equation? It
15:00:14is simply because they are the most
15:00:16important values for any given time
15:00:19period. Whether it is a single 5-minut
15:00:21candle or an entire day or an entire
15:00:23month. In fact, the high and the low
15:00:26represent the most bullish and bearish
15:00:28expectations for the market for a given
15:00:31period of time. Thus, making these
15:00:33values an important reference point for
15:00:35the equation. Likewise, where the price
15:00:37closes gives an insight into the
15:00:40collective behavior of the market while
15:00:42heading into a future period of time.
15:00:44Now, take a look at these equations. The
15:00:46pivot is calculated as an average on the
15:00:49three significant prices in a prior
15:00:51trading period or a prior trading day.
15:00:54All the other values are calculated from
15:00:56this basic value of the central pivot.
15:00:59Only
15:01:00the standard floor pivots provides a lot
15:01:03of vital information about the prices.
15:01:05But in order to make the indicator
15:01:07exponentially more dynamic and
15:01:09responsive, we have to focus on some
15:01:12modifications. First of all, given
15:01:13today's volatile markets, just a third
15:01:16level of support and resistance can be
15:01:19quite shallow due to the explosive moves
15:01:21we see today. As a matter of fact, the
15:01:23volatility was less of a factor in the
15:01:26late 1980s and all when the formula that
15:01:28Larry Williams produced offered only two
15:01:31levels of support and resistances.
15:01:33However, it is not going to gauge the
15:01:35moves that we experience these days. So,
15:01:37we can add a fourth level or even a
15:01:40fifth level for that matter of support
15:01:42and resistances to the equation that
15:01:44falls in line with the general theme of
15:01:47original levels. So, the addition of
15:01:49this fourth level of support and
15:01:51resistance helps to provide an extra
15:01:53target for those days when the market
15:01:56has exploded through the third layer of
15:01:58the pivot levels. On top of that, taking
15:02:00the concept of pivot range from Mark
15:02:03Fischer's book, The Logical Trader, we
15:02:05can include a top and bottom pivot in
15:02:08relation to the central pivot of the
15:02:10indicator, which by itself is extremely
15:02:13powerful. Now, these are the expanded
15:02:16floor pivots which consist of a total of
15:02:1811 levels. The central pivot range or
15:02:22CPR is an indicator that is used to
15:02:25identify key price levels to set up
15:02:27trades. CPR is quite beneficial if you
15:02:30are an intraday trader. The CPR consists
15:02:33of three components. A central pivot, a
15:02:36bottom central pivot that is below the
15:02:38central pivot and a top central pivot
15:02:40that is above the central pivot. All
15:02:42these levels are derived out of the
15:02:44underlyings high, low and close
15:02:46calculations of the previous day. So the
15:02:49central pivot is the average of the
15:02:51high, low and close. While the bottom
15:02:53central pivot is the average of high and
15:02:55low of the previous day while the top
15:02:57central pivot is the sum of the pivot
15:03:00and the difference of pivot and the
15:03:02bottom central pivot. If you understand
15:03:04the formula closely, one thing you will
15:03:06instantly notice is that these equations
15:03:08are simple averages and manipulation to
15:03:11these averages. So as a thumb rule in
15:03:14any technical indicator the moment you
15:03:16see averages you need to associate the
15:03:18indicator with an underlying trend. The
15:03:21CPR indicator does just this is it helps
15:03:24the trader identify key price points and
15:03:26the associated trend around these price
15:03:29points. But there is a lot more to CPR
15:03:32which makes it extremely special. We
15:03:34will get back to this in a bit but let
15:03:36us briefly discuss the advantages of CPR
15:03:39first.
15:03:40The CPR is absolute without a doubt the
15:03:43most powerful part of floor pivots
15:03:46indicator. At any given time, the CPR
15:03:49range can be a support or resistance to
15:03:51the prices. It can also help to forecast
15:03:54with a good degree of accuracy if the
15:03:56next day will be having a trending or
15:03:59sideways price behavior. It can also
15:04:01dictate the price direction and also the
15:04:04price momentum. The CPR can tell you so
15:04:07much about the potential movement of the
15:04:09upcoming day and even how the prior day
15:04:11performed. Moreover, CPR is the same in
15:04:14all time frames or these levels are
15:04:16constant throughout the day. For
15:04:18example, if you have used the previous
15:04:20day data for the calculation of today's
15:04:23CPR, then the CPR will remain the same
15:04:26in the 1 minute chart, 5 minute chart or
15:04:2915 minute or even 1 hour charts for that
15:04:31day and it does not change as constant
15:04:34values are used for calculation. Many
15:04:36people think that the central pivot
15:04:38range is helpful only for intraday
15:04:41trading, but this is not true. There are
15:04:43many traders out there who use CPR for
15:04:46both intraday as well as swing trading
15:04:48and it is also a very powerful concept
15:04:50that can be very beneficial to every
15:04:53trader if he knows how to use it
15:04:55correctly. So if you are using trading
15:04:58view then you can make use of the CPR
15:05:00indicator by goati shankar from the
15:05:02trading view indicators library. I
15:05:05personally use it myself. Now in the
15:05:07indicator setting there are a lot of
15:05:08options to select from but from an
15:05:10intraday perspective we are only
15:05:12interested in the daily pivots and maybe
15:05:15you can also use the previous day highs
15:05:17and lows as these can be potential
15:05:19levels of interest in the market. Don't
15:05:21worry we will discuss all of this in
15:05:23greater detail as we go through this
15:05:25video.
15:05:29One of the main characteristics of floor
15:05:31pivots and CPR is that these are leading
15:05:34indicators. Traders who use price-based
15:05:36indicator are using the earliest price
15:05:39information available. Traditional
15:05:41indicators are usually lagging
15:05:43indicators which means that as soon as
15:05:45they confirm a move most price-based
15:05:47traders have already identified a
15:05:50reversal and are already profiting in
15:05:52their trades. So the truth is that the
15:05:54best leading indicators are always price
15:05:57based. Beat the floor pivots, the camera
15:05:59law, the money zone etc. anything
15:06:01lagging and you will be trading from the
15:06:03back of the crowd instead of leading
15:06:05from the front. In addition to that, the
15:06:07fact that you can plot the next day's
15:06:09pivot is a breakthrough. Back then it
15:06:11was a time-consuming task that included
15:06:13putting in values to the equations and
15:06:16plotting the lines in the chart. But now
15:06:18it is extremely easy. All you have to do
15:06:20is to uncheck the daily pivots from the
15:06:23indicator settings after the market
15:06:25closes in the evening and then enable
15:06:27tomorrow's pivots and you can straight
15:06:29away view tomorrow's ranges and levels
15:06:32with ease. This will help you analyze
15:06:34where the potential levels are for the
15:06:36next day and plan for different
15:06:38situations beforehand and set a strategy
15:06:41for each of these situations that is
15:06:43possible. The idea can be extended to
15:06:46other time frames also in case of swing
15:06:49or positional traders by simply enabling
15:06:52the weekly and monthly pivots in
15:06:54contrast to the daily pivots. This idea
15:06:56of forecasting can get even better when
15:06:59we discuss pivot relations. But first,
15:07:01let me talk about pivot width
15:07:03forecasting. Since the prior day's
15:07:05trading activity leads to the creation
15:07:07of today's pivots, it is extremely
15:07:10important to understand how the market
15:07:12behaved on the prior day in order to
15:07:14forecast what may occur in the upcoming
15:07:16session. So more specifically, if the
15:07:19market experienced a wide range of
15:07:21movement in the prior session as with a
15:07:24trending day, the pivots for the
15:07:25following day will likely be wider than
15:07:28normal. Meaning that the distance
15:07:29between the top central pivot and the
15:07:31bottom central pivot will be very high
15:07:34or wide, which will usually lead to a
15:07:36range day or a sideways day where not
15:07:39much price action is expected.
15:07:41Conversely, if the market experiences a
15:07:43very quiet trading day in the prior
15:07:45session, the pivots for the following
15:07:47day are likely to be unusually tight or
15:07:50narrow, meaning that the top and the
15:07:52bottom central pivots will be very close
15:07:54to each other and will be very close to
15:07:56the central pivot also, which will
15:07:58typically lead to a trending day or a
15:08:01double distribution trend day where
15:08:03either a clear trending price action is
15:08:05visible or potential range breakouts and
15:08:08rallies are possible during the session.
15:08:10So it is important to understand the
15:08:12pivot width concept as this information
15:08:15allows you to prepare properly for the
15:08:17specific day types in the upcoming
15:08:19session. So if you are able to
15:08:21anticipate the market's likely behavior,
15:08:23you are giving yourself the best chance
15:08:25at success because you are able to
15:08:27deploy specific trading setups that are
15:08:30tailored for certain types of days. So
15:08:32anytime you have an idea of how the
15:08:34market will behave in the following
15:08:36session, you are giving yourself an
15:08:38significant edge over the other traders.
15:08:40So as I have mentioned when describing
15:08:42the width, I am referring to the
15:08:44distance between the top central pivot
15:08:46and the bottom central pivot that is TC
15:08:49minus BC. Typically an extremely tight
15:08:52central pivot range indicates that the
15:08:54market traded sideways or consolidated
15:08:57in a prior period of time. As such, this
15:09:00price behavior usually leads to a
15:09:02breakout or trending behavior in the
15:09:04following session. And conversely, an
15:09:06extremely wide central pivot range
15:09:08indicates the market experienced a wide
15:09:11range of movement in the prior day,
15:09:12which usually leads to sideways or
15:09:15trading behavior in the following
15:09:16session. As I mentioned, an important
15:09:18factor to note, however, is that the
15:09:20pivot width analysis works best when the
15:09:23range of the prior price movements is
15:09:26distinctly high or low, thereby creating
15:09:28unusually wide or unusually narrow
15:09:31pivots. What this means is that it must
15:09:33be clear that the width of the pivots is
15:09:36either abnormally wide or extremely
15:09:39narrow as these are the sessions that
15:09:41grant us a higher probability of
15:09:44forecasting success. If the pivot width
15:09:46is not distinctly wide or narrow, it
15:09:49becomes challenging to predict the
15:09:51potential trading behavior with any
15:09:53degree of certainty for the next
15:09:54session. So you must also keep this in
15:09:56mind that this analysis is not without
15:09:59fault. Measuring pivot width gives you a
15:10:02significant edge in determining the
15:10:03potential behavior for the upcoming
15:10:05session. But unlike any form of
15:10:08technical analysis, this method is not
15:10:10always correct. Therefore, it is best to
15:10:13use it as a guideline. Now let us take a
15:10:15closer look at the pivot width
15:10:17relationship that can lead to one of the
15:10:19most explosive days in the market. The
15:10:21narrow pivot range relationship. So an
15:10:24unusually narrow pivot range is formed
15:10:26when the top, bottom and central pivots
15:10:30overlap each other and it usually
15:10:32indicates that the market is all set for
15:10:34an explosive breakout opportunity.
15:10:36Therefore, it becomes highly beneficial
15:10:39to know when this relationship has
15:10:41formed. If you have studied the chart
15:10:42patterns and price action, you'll
15:10:44understand that the consolidations and
15:10:47trading ranges leads to breakouts and
15:10:50range expansion. Essentially, what a
15:10:52tight pivot range is telling you is that
15:10:55the prior day was consolidating which
15:10:57usually leads to a breakout on the day
15:11:00with the narrow pivot range given the
15:11:02right opening circumstances. And also if
15:11:04you observe the charts most trending
15:11:06days occurs when the central pivot range
15:11:09is considerably tighter than the prior
15:11:12days range especially if the prior days
15:11:14range is unusually wide. So you can make
15:11:17use of screeners to look for narrow CPR
15:11:20in charts and then go on to each chart
15:11:22to analyze them. Do keep in mind that
15:11:24the more narrow the range the stronger
15:11:27the expected trend or the price move
15:11:29will be.
15:11:32Understanding how the current day CPR
15:11:34relates to the prior day CPR will help
15:11:37you go a long way towards understanding
15:11:40the current market behavior as well as
15:11:42future price movements. Actually, there
15:11:44are seven types of pivot range
15:11:46relationships that should be considered
15:11:48when analyzing the current strength and
15:11:51the attempted direction of the market.
15:11:52So these seven relationships are the
15:11:55higher value relationship, the
15:11:57overlapping higher value relationship,
15:11:59the lower value relationship,
15:12:01overlapping lower value relationship,
15:12:03unchanged value, outside value and
15:12:05inside value relationships. Each pivot
15:12:08range relationship brings with it a
15:12:10directional bias or an expected outcome
15:12:13which you can prepare for certain types
15:12:15of trading scenarios in the upcoming
15:12:17session. Each of these seven pivot range
15:12:20relationships depend on two important
15:12:22prices. The prior day's closing price
15:12:25and the current day's opening price.
15:12:27Where the market closes in relation to
15:12:30the pivot range gives you an initial
15:12:32directional bias for the following
15:12:34session, which you can actually plan for
15:12:36after the market closes. But it is only
15:12:39the next day's opening price that will
15:12:41either confirm or reject this bias that
15:12:44you had which then gives you an
15:12:45opportunity to adjust for which type of
15:12:48trade you should be prospecting to. Now
15:12:50let's take a look at the first two-day
15:12:52relationship which is the higher value
15:12:54relationship. This relationship occurs
15:12:57when the current day's pivot range is
15:12:59completely higher than the prior day's
15:13:01pivot range. This means that today's
15:13:03bottom central pivot is higher than the
15:13:06top of the prior days pivot range. This
15:13:08is the most bullish relationship of the
15:13:1172day combinations. Therefore, when this
15:13:14relationship develops, your initial
15:13:16directional bias will always be bullish.
15:13:19Also, if the price closed above its
15:13:21pivot range in the prior session, then
15:13:23we can expect that the market is
15:13:25positioned to move higher in the
15:13:27upcoming session. However, as I have
15:13:29mentioned earlier, how the market opens
15:13:31the next day will either confirm or
15:13:33reject this initial bias. So, if the
15:13:35market opens the day anywhere above the
15:13:38bottom of the pivot range, you will only
15:13:40look for buying opportunities,
15:13:42preferably at a pullback to the range
15:13:44ahead of a move to the new highs. This
15:13:46is especially the case if the price
15:13:48opens above the top of the range. The
15:13:50simple fact that the price opened the
15:13:53day above the bottom of the range
15:13:55indicates that the market sentiment
15:13:57remained bullish overnight. When this
15:13:59occurs, any pullback to the range will
15:14:01likely be met with a responsive buying
15:14:03activity. But if the market had opened
15:14:06the session below the central pivot
15:14:08range, then a completely different
15:14:10outcome would have been the result. That
15:14:12is the price may face a resistance at
15:14:14this EPR and as a result it can push the
15:14:17price lower because a change in the
15:14:19market sentiment has occurred overnight
15:14:21that cause the price to open below the
15:14:24range. The next pivot range relationship
15:14:26is the overlapping higher value
15:14:28relationship which offers a moderately
15:14:30bullish outlook for the upcoming
15:14:32session. Now this relationship occurs
15:14:34when today's pivot range is higher than
15:14:36yesterday's range but it overlaps to
15:14:39some degree. Therefore, the top of the
15:14:41range is higher than the top of
15:14:43yesterday's range, but the bottom of the
15:14:45range is lower than the top of
15:14:47yesterday's range. The same closing and
15:14:50opening price dynamics are in effect for
15:14:52this relationship as well. So, if the
15:14:54market closes above its range in the
15:14:56prior session, a bullish bias should be
15:14:59assigned to the following day. However,
15:15:01where the market opens in the following
15:15:03session will either reject or accept
15:15:06this directional bias that we have had.
15:15:08The next type of pivot range
15:15:10relationship is the lower value
15:15:12relationship which occurs when the
15:15:14current day's pivot range is completely
15:15:16lower than the prior sessions range.
15:15:18This is the most bearish 2-day
15:15:20relationship and it typically leads to
15:15:22further weakness given the current day's
15:15:25opening price confirms the directional
15:15:27bias that we have. So if the price opens
15:15:29the session below the CPR, we will be
15:15:32looking for shorting opportunities at
15:15:34any pullback to the range ahead of a
15:15:36drop to the new loss within the current
15:15:38trend. When you see a two-day
15:15:40relationship that is clearly a lower
15:15:42value situation, it points to continued
15:15:45weakness in the upcoming session. As
15:15:47mentioned, the bias is confirmed by the
15:15:49fact that the price closed below the
15:15:52pivot range. Moreover, the price opens
15:15:54the current session below the CPR, which
15:15:57offers the best opportunity to sell a
15:16:00pullback if at all the price test the
15:16:02pivot range. Even though the lower value
15:16:04relationship is the most bearish 2-day
15:16:07relationship, the opening price plays a
15:16:09very crucial role in confirming our
15:16:11bearish bias. That is, if the price
15:16:13somehow opens above the CPR, it
15:16:16indicates a drastic shift in the market
15:16:18sentiment overnight. And there is a
15:16:20great chance that the pivot range can
15:16:22now act as a support which can initiate
15:16:24responsive buying to the upside.
15:16:27The next two-day relationship is the
15:16:30overlapping lower value relationship.
15:16:32This occurs when the current day's pivot
15:16:34range is lower than the prior days range
15:16:37but overlaps to some degree. That is the
15:16:40current day's bottom central pivot is
15:16:42lower than the bottom of the prior days
15:16:45range but the top of the current day's
15:16:47range is higher than the bottom of the
15:16:49prior days range. Now this relationship
15:16:52indicates a moderately bearish outlook
15:16:54for the upcoming session. That is if the
15:16:56price opens within or below the pivot
15:16:59range, the price is expected to continue
15:17:01lower and any pullback to the range
15:17:03should be seen as a selling opportunity.
15:17:05And the closing and opening price
15:17:07dynamics are in effect for this
15:17:09relationship as well. That is if the
15:17:11market closes below the range in the
15:17:13prior session. A bearish bias should be
15:17:15assigned for the following day. However,
15:17:17where the market opens in the following
15:17:19session will either accept or reject our
15:17:22directional bias. Moving forward, the
15:17:252-day unchanged value relationship
15:17:27occurs when the current pivot range is
15:17:30virtually unchanged from the prior days
15:17:33range. Of the seven two-day
15:17:35relationship, this is the only one that
15:17:37can project two very different outcomes
15:17:39on the following day. On one hand, a
15:17:422-day unchanged pivot range indicates
15:17:44that the market is satisfied with the
15:17:46continuation of trade within the current
15:17:49or the existing range. When this occurs,
15:17:51the market will trade quietly within the
15:17:53boundaries of the existing two or
15:17:55three-day trading range. On the other
15:17:57hand, however, a 2-day unchanged pivot
15:18:00range relationship can also indicate
15:18:02that the market is on the verge of a
15:18:04major breakout opportunity. Now, the
15:18:06outcome of this situation is typically
15:18:08driven by the opening price of the
15:18:11current session. So, if the market opens
15:18:12the day near the prior session's closing
15:18:15price, but well within the prior day's
15:18:17range, the market will most likely lack
15:18:19the conviction necessary for a breakout
15:18:22attempt. But if the opening occurs
15:18:24beyond the prior day's range or very
15:18:26close to the range, then the chance of a
15:18:28breakout opportunity cannot be denied.
15:18:31The outside value relationship happens
15:18:33when the current day's pivot range
15:18:35completely engulfves the prior days
15:18:37range. This two-day relationship
15:18:39typically implies sideways or range
15:18:41trading activity as the market is happy
15:18:44with the current facilitation of the
15:18:46trade in the current price range. The
15:18:48huge width of the pivot range will also
15:18:50lead us to this conclusion as well since
15:18:52a wide range will usually indicate range
15:18:55trading behavior where the prices
15:18:56basically trade sideways quietly
15:18:58throughout the day. When this two-day
15:19:00relationship develops, you can look to
15:19:02execute short straddles or short
15:19:04strangles to benefit from the premium
15:19:06decay. An exception is when a clear
15:19:09trading range has been formed which can
15:19:11offer nice intraday moves within the
15:19:13boundaries of an established range where
15:19:16you can profit from short scalping
15:19:18trades. An important thing to keep in
15:19:20mind is that this relationship is much
15:19:22more revealing if the current day's
15:19:25price range is significantly wider than
15:19:27the prior days range. Otherwise, just
15:19:30merely engulfing the prior days range
15:19:32without the necessary width may even
15:19:34lead to the same result but with a very
15:19:37less accuracy. The last 2-day pivot
15:19:39relationship is the inside value
15:19:41scenario which occurs when the current
15:19:43day's pivot range is completely inside
15:19:46the prior days range. This two-day
15:19:48relationship typically implies a
15:19:50breakout opportunity for the current
15:19:52session as the market is likely to
15:19:53attempt a breakout. If the market opens
15:19:56the day beyond the prior day's range,
15:19:58there is a very good chance that the
15:20:00initiative participants will enter the
15:20:03market with conviction in order to push
15:20:05the prices to new values since the
15:20:07market sentiment seems to have clearly
15:20:09changed overnight as indicated by the
15:20:11opening price. This two-day relationship
15:20:14does not occur very frequently, but on
15:20:16days when it develops, this usually
15:20:18leads to major trending sessions. Now
15:20:21the two-day pivot range relationships
15:20:23offer guidelines for trading virtually
15:20:25any type of market condition be trending
15:20:28breakout and trading range. But it is up
15:20:31to you to properly interpret the 2-day
15:20:34relationship and apply confirmations
15:20:36before entering a trade.
15:20:40This is one of my favorite ways of using
15:20:42pivot ranges in charts. Using the CPR to
15:20:45gauge the market trend is extremely
15:20:48powerful. You may know from the basic
15:20:50price structure that an uptrend is
15:20:51characterized by higher highs and higher
15:20:53lows of the price swings while a
15:20:55downtrend is associated with lower lows
15:20:58and lower highs of prices. When it comes
15:21:01to the pivot ranges, we can think of
15:21:03ascending pivots in case of an uptrend
15:21:05where the centrals form a higher value
15:21:08relationship or an overlapping higher
15:21:10value relation where the prices continue
15:21:12higher. On the flip side, we can think
15:21:14of descending pivots in case of
15:21:16downtrend where the central ranges form
15:21:19a lower value relation or an overlapping
15:21:22lower value relation and the prices fall
15:21:25lower. As a matter of fact, I can remove
15:21:27the price from the chart leaving only
15:21:28the central pivot range and even then
15:21:31you should be able to tell what the
15:21:33market is doing and still make money.
15:21:35You can easily see the trends of the
15:21:37market and make money by only trading
15:21:40the direction of the prevailing trend.
15:21:42As you already know by now, the CPR can
15:21:44be one of the best sources of support
15:21:46and resistance in the market. Due to
15:21:48this fact, they can control the tide of
15:21:50the trend. Another thing to notice is
15:21:52how the price remains above or below the
15:21:54central pivot range throughout a trend
15:21:57until it either stalls or changes
15:21:59direction. So, a strong trend can be
15:22:01usually gauged by how the price remains
15:22:04at or above the bottom central pivot in
15:22:06an uptrend and at or below the top
15:22:08central pivot while in a downtrend. Once
15:22:11the price violates this pattern by
15:22:13closing beyond the range for the day, we
15:22:16can observe either a change in the trend
15:22:18or a trading range market develop. Now
15:22:21this behavior is a blessing for most
15:22:23swing traders as they could enter the
15:22:25market once the pivot range is violated
15:22:27and then trade in the direction of the
15:22:29newly developed trend while holding
15:22:31their stop- losses just beyond the
15:22:33opposite side of the central pivot
15:22:35range. For example, you can catch
15:22:37majority of uptrend using the pivot
15:22:39range by keeping the stop- loss below
15:22:41the bottom central pivot. You would
15:22:43remain in the uptrend up until the
15:22:45prices close below the bottom central
15:22:47pivot at which point you would liquidate
15:22:49your trade. One of the most common
15:22:51signals that you get associated with a
15:22:53change in trend direction is due to a
15:22:55narrow range CPR breakout. So if you
15:22:58know about the different market stages
15:23:00starting from accumulation followed by
15:23:02markup or uptrend then by distribution
15:23:05to markdown and finally accumulation
15:23:07again and if you don't know about it you
15:23:09can watch this video on market structure
15:23:11from my free price action trading
15:23:13course. Do check that out after this
15:23:15video. Now after a period of uptrend for
15:23:18example two things can happen. The
15:23:20market will take a breather thereby
15:23:22forming a range or consolidation for a
15:23:25few days. Now the problem is that this
15:23:27can either be an accumulation phase or a
15:23:30distribution phase. Now if this is a
15:23:32reaccumulation phase then we can expect
15:23:34a continuation of the uptrend. But if
15:23:37this is a distribution stage then a
15:23:39reversal towards the downside is in
15:23:41play. This is where the narrow CPR comes
15:23:43into picture. So if you observe the
15:23:45charts most often before a trend
15:23:47continuation or reversal after a
15:23:49consolidation price forms a narrow range
15:23:52thereby forming a very narrow CPR due to
15:23:55which the prices explodes on that
15:23:57particular day giving an idea about the
15:24:00direction in which the market will move
15:24:02in the upcoming sessions. In simple
15:24:04words, the narrow CPR decides the market
15:24:07trend for a short term. Now you can use
15:24:10all these observations from the study to
15:24:12improve your analysis for the next day.
15:24:16Nowadays on most trading days the market
15:24:19gaps at the open of the session. When
15:24:21this occurs you have two options either
15:24:23to take a potential breakaway move from
15:24:26one of the floor pivots or you can wait
15:24:28for the market to fill the gap. In
15:24:30either case, a gap at the open indicates
15:24:32that the market sentiment has changed
15:24:34overnight. One important feature of the
15:24:37CPR is that it has an amazing magnetic
15:24:40effect on the price which leads to a
15:24:42high percentage fill of the morning
15:24:44gaps. So I have mentioned that CPR is an
15:24:48average price base level. So the central
15:24:50pivot range is the equilibrium of the
15:24:53market for that particular day. So if
15:24:55the price opens the day with a gap and
15:24:57the centrals are very close to the prior
15:24:59day's closing price, you typically see a
15:25:02fill of gap a high percentage of time
15:25:03given the right circumstances. This is
15:25:06like a magnet attracting iron nails. The
15:25:09centrals attract prices causing the gap
15:25:12to fill. So all we have to look for is
15:25:14responsive market participants to enter
15:25:17the market and push the prices to the
15:25:19central range. Or in other words, we
15:25:21have to look for price rejections of
15:25:23newer values and let the market return
15:25:25to the fair value, which is actually the
15:25:27central range. Now, while this trade
15:25:30looks simple, there are a few additional
15:25:32tips that can help make this trade even
15:25:34more powerful as well as profitable. So,
15:25:36for instance, trading the right size gap
15:25:39greatly increases the success rate of
15:25:41the setups. The gaps that are too large
15:25:44don't tend to fill as easily as those
15:25:46that are moderate in size. So it is
15:25:49better to stick to those gaps that have
15:25:51a fighting chance to fill and the pivot
15:25:53range will do the rest. Secondly, the
15:25:55pivot range placement should be at or
15:25:58very near to the prior days closing
15:26:00price. So when this is the case, the
15:26:03pivot range helps to attract the price
15:26:05to fill the gap. Also, you must remember
15:26:07that the goal of the trade is to play
15:26:09for a fill of gap back to the CPR, which
15:26:12means the trade will be usually very
15:26:14short. This indirectly means that you
15:26:16don't have to wait all day for a gap to
15:26:18fill because the longer the trade takes,
15:26:21the more unlikely the gap is to fill.
15:26:23Another important point to notice that
15:26:25the trend can also play an important
15:26:27factor in the successful outcome of a
15:26:29magnet trade. If you recall from the
15:26:31trend identification part, when a market
15:26:34has formed an established trend, the
15:26:36price will usually pull back to the
15:26:38pivot range before assuming in the
15:26:40direction of the trend. Therefore, if
15:26:42the market has formed an uptrend and the
15:26:44price gaps up in the direction of the
15:26:46trend, there is a very good chance that
15:26:48the price will drop to the pivot range
15:26:51before another round of buying pressure
15:26:53is seen, thereby causing to fill the
15:26:55gap. This market behavior lines up
15:26:57perfectly with the idea of magnet trade.
15:27:00Another important factor to consider
15:27:01when trading this setup is looking for
15:27:04additional pivot confirmations that can
15:27:06add to the success of your trade. So if
15:27:08the price gaps up to R1 resistance or
15:27:11gaps down to S1 support, these four
15:27:14pivots can serve as a barrier to the
15:27:16breakout trade which usually leads to a
15:27:19high percentage of gaps getting filled.
15:27:21So knowing where the support and
15:27:23resistance levels are can help you give
15:27:25confidence in entering a trade
15:27:27especially if the market gaps up at the
15:27:29open. On the contrary, any gap beyond
15:27:31these R1 and S1 levels, these levels
15:27:34will resist the price from reverting to
15:27:36the CPR and thereby eliminating a magnet
15:27:40trade. A CPR is called a virgin CPR when
15:27:43all the candles on a particular trading
15:27:45session have closed either upside or
15:27:48downside of the CPR and none of the
15:27:51candles closed at the CPR. Meaning that
15:27:53the CPR range was not tested even once
15:27:57in the entire session. A virgin CPR can
15:28:00act as a strong support or resistance
15:28:02for the subsequent few trading sessions.
15:28:05So whenever you see a virgin CPR on a
15:28:07stock or an instrument, you can extend
15:28:10it or mark it for the upcoming sessions.
15:28:12So when the price comes to that virgin
15:28:14CPR level, you'll probably see a very
15:28:17strong reversal. This is a powerful
15:28:19level to look forward to as the price
15:28:21will respect this level once it reaches
15:28:23it and will most probably reverse from
15:28:26it.
15:28:28Now one of the disadvantages of CPR is
15:28:31that you will not get a good result in a
15:28:33penny stock or a small cap stock because
15:28:35of the lack of participation or volume
15:28:38which makes these levels less useful. So
15:28:41it is best to stick to indices like
15:28:43nifty and bank nifty and those stocks
15:28:46only which has a good enough volumes.
15:28:48This is directly related to the way
15:28:51these levels works as it is dependent
15:28:54directly upon the psychological value
15:28:56that the market gives to these levels
15:28:58and the more number of people observing
15:28:59these levels the better it will work.
15:29:02Another disadvantage is that you will
15:29:03not get an entry or exit solely from
15:29:06CPR. So CPR can act as a support or
15:29:09resistance to prices. So it is difficult
15:29:11to judge the trade direction within the
15:29:13CPR and it is advisable not to take
15:29:16trades with a directional bias from
15:29:18inside the CPR range. Instead, we will
15:29:21use floor pivots for planning our
15:29:23entries, exits, and stop- losses. We
15:29:25will now take a look at some of the
15:29:27general rules that we can follow while
15:29:29using the floor pivots for trading.
15:29:33Buy at support in an uptrend and sell at
15:29:35resistance in a downtrend. This is the
15:29:38most basic way of using floor pivots
15:29:40that can be easily overlooked but it is
15:29:43one of the most powerful concept that
15:29:45you can take away from using pivots.
15:29:47Essentially, we will discuss the concept
15:29:49of pivot filtering based on the current
15:29:52trend of the market. In a sense, we can
15:29:54filter out all other floor pivots below
15:29:56S1 while keeping the central pivot range
15:29:59and resistance levels when the market is
15:30:01in an uptrend. In a downtrend, all
15:30:04pivots are filtered above R1 while
15:30:06keeping all support levels and the
15:30:08central pivot range. Basically,
15:30:11filtering the pivots in this manner
15:30:13forces you to become disciplined to the
15:30:15trend, which increases your chances for
15:30:17a profitable outcome. The filtered
15:30:19pivots allow you to focus on playing the
15:30:21pivots that are more prone to reversals
15:30:24with the corresponding trend. That is if
15:30:26you remove all the pivots below S1
15:30:28support, you are forced to remain
15:30:30disciplined to a bullish trend by
15:30:32looking for long opportunities at S1 and
15:30:35the central pivot range. Likewise,
15:30:37removing all pivots above R1 forces you
15:30:40to prospect in the direction of a
15:30:42bearish trend only looking for short
15:30:44opportunities from these levels. This
15:30:46seems like a very simple concept, but
15:30:48many traders can lose focus of the trend
15:30:51through all the noise that comes along
15:30:53with trading. the fact that when the
15:30:55market is moving within an established
15:30:57trend, certain pivot points become
15:30:59retired for that particular trend. It is
15:31:01at this point that your focus should
15:31:03shift to the pivots that are active for
15:31:05key trading opportunities. For example,
15:31:08in a bullish trend, any pivot level
15:31:10below S1 level is literally useless on
15:31:12your chart since these levels are not
15:31:15tested during a true bullish advance.
15:31:18Likewise, any level above R1 is just
15:31:20noise during a bearish trend as these
15:31:23levels are rarely tested during a true
15:31:26price decline. Therefore, if the market
15:31:29is trending higher, you will look to buy
15:31:31at the support at either S1 or central
15:31:34pivot range with your target set to R1
15:31:36or R2 levels. Likewise, if the market is
15:31:39trending lower, you will look to sell at
15:31:42the resistance at either R1 or the
15:31:45central pivot range with your target set
15:31:47to a new low at either S1 or S2. You
15:31:50see, trending markets have a very
15:31:53interesting dynamic when it comes to
15:31:55pivots. As you have already seen, the
15:31:57market will remain strictly above S1 in
15:32:00a bullish trend and below R1 in a
15:32:02bearish trend. However, once a severe
15:32:05breach occurs through the first layer of
15:32:07pivots, you will see a shift of the
15:32:09trend towards the opposite extreme. Uh
15:32:12that is a bullish trend becomes a
15:32:14bearish trend and a bearish trend
15:32:17becomes a bullish trend. This type of
15:32:19analysis is extremely powerful for all
15:32:21type of traders including intraday swing
15:32:24or position traders. Another thing is
15:32:27when we are trading breakouts using
15:32:29floor pivots, what we are actually
15:32:31looking for is to see a gap occur
15:32:34between the prior days range and value
15:32:37preferably just beyond the first layer
15:32:39be R D R D R D R D R D R D R D R D R D R
15:32:39D1 or S1 of the indicator. In addition
15:32:42to that, the gap should not be
15:32:43overextended beyond the second layer of
15:32:46pivots. That is your chances for a trend
15:32:48day scenario increases. If the gap
15:32:51occurs beyond R1 for a bullish breakout
15:32:54play or if it forms below S1 for a
15:32:57bearish play. If the price gaps to the
15:32:59second layer, we will consider the trade
15:33:01only if the price test any of the
15:33:04previous pivot levels that were
15:33:05surpassed the gap and further move in
15:33:08the direction of trend with clear
15:33:10indications using candlesticks like pin
15:33:13bar setups. And if the price gaps too
15:33:15far beyond these levels, I would rather
15:33:17avoid trading on that day because
15:33:19usually in such scenarios, market will
15:33:22begin to move sideways.
15:33:25The first strategy that we will discuss
15:33:27is the NR4 NR7 strategy. NR4 stands for
15:33:31narrow range 4 and NR7 stands for narrow
15:33:34range 7. This is a very popular strategy
15:33:37and it is one of those strategies that
15:33:39helps to find the calm so that we can
15:33:42prepare and profit for the impending
15:33:44explosive price movement. We know that
15:33:47the market goes through a regular
15:33:48contraction and expansion cycles. In
15:33:51this trade setup, we should patiently
15:33:53wait for the market to enter into the
15:33:56contraction phase which is associated
15:33:58with a reduction in the range of the
15:34:00candles. Generally we conduct the
15:34:02analysis based on the daily range of the
15:34:04candles. So the time frame that we use
15:34:07for our analysis will be a daily time
15:34:09frame. Now the narrow range trading
15:34:12strategy is a breakoutbased method which
15:34:14assumes that the price of a security
15:34:17trends up or down after a consolidation
15:34:20in a narrow range. We know from the
15:34:22previous sessions that when the range of
15:34:24the candles becomes lower, the CPR
15:34:27becomes narrower which in turn confirms
15:34:29that a trend breakout is in picture. So
15:34:32the philosophy behind this pattern is
15:34:34same as Ballinger band squeeze which is
15:34:37a volatility contraction followed by a
15:34:39volatility expansion. So if you want you
15:34:41can watch about this squeeze concept in
15:34:44the Ballinger bands video. Now let us
15:34:46understand what exactly is NR4 and NR7.
15:34:50Now the following are the steps to
15:34:52identify an NR7 day. First of all, you
15:34:54have to get the high and low data of the
15:34:57last 7 days. Then then calculate the
15:35:00range for each day. Now the range as we
15:35:02know is calculated as the difference
15:35:04between the high and low of the
15:35:06particular day. Now compare the range of
15:35:09today and the previous 6 days range. If
15:35:13today's range is smallest of all the
15:35:15seven days that has been considered,
15:35:17then today is an NR7 day. else it's not.
15:35:21Similarly, when it comes to identifying
15:35:23an NR4 day, we have to get the high and
15:35:26low of the last few days. Then we have
15:35:29to calculate the range for every day and
15:35:31compare the range of today and the
15:35:34previous 3 days range. Now, if today's
15:35:36range is the smallest of all the four
15:35:38days that have been considered, then it
15:35:40is an NR4 day. Else it's not. Now one
15:35:43thing that we can observe is that as the
15:35:46range gets narrower so does the CPR
15:35:48levels. So our objective is to look for
15:35:51narrow CPR which gets formed inside the
15:35:54range of the previous day CPR thereby
15:35:57forming an inside bar like setup in the
15:36:00candlesticks. I would say an inside
15:36:02value narrow range CPR is very much
15:36:05stronger than just a narrow CPR that is
15:36:07found at a random location. In some
15:36:09occasions, there will be more than one
15:36:12inside CPR or inside bar candles which
15:36:14gets formed and this is an indication of
15:36:17a bumper trade because the market has
15:36:19contracted so much in volatility that
15:36:22there will be a very strong price move
15:36:24expected in either direction. Now the
15:36:26direction of the price move is judged
15:36:28based on the previous day closing price
15:36:30with respect to the CPR, the 2-day CPR
15:36:33relationship and the overall market
15:36:35trend. The trade idea here is quite
15:36:38straightforward like the one that we
15:36:40adopted with an inside bar. We will look
15:36:42to buy if the price breaks above the
15:36:44high of the previous candle and we will
15:36:47place the stop loss below the low of the
15:36:50NR4 or NR7 candle and try to capture the
15:36:53entire trend by trailing your stop loss
15:36:56at 1.5 ATR level below the candle. On
15:37:00the other hand, if the price breaks
15:37:01below the inside bar candle, then we
15:37:04will look for a short trade below the
15:37:06low of the NR4 or NR7 candles, keeping
15:37:09our stop-loss above the high of the
15:37:11narrow range candle that we have
15:37:13considered. Here also, we will look to
15:37:15write the entire trend by trailing our
15:37:17stop-loss. Even in case of a gap up or
15:37:20gap down opening, also the trade setup
15:37:22will remain the same. As a bonus, in
15:37:24order to identify the stocks with these
15:37:26trader opportunities, you can search for
15:37:29NR4, NR7 range screeners like those
15:37:32available in charting and after finding
15:37:35such stocks, you can analyze if it fits
15:37:37your requirement and if it does, then
15:37:40you can keep it in your watch list for
15:37:42tomorrow's trading session. The
15:37:44correlation trade setup is a very
15:37:46interesting trade setup which is
15:37:49extremely profitable but at the same
15:37:50time rare in occurrence. Now the idea is
15:37:54to use correlation associated with the
15:37:56index and its stocks. In this case I
15:37:59will discuss only about bank nifty. We
15:38:02know that the bank nifty index is the
15:38:04index that tracks the banking sector
15:38:07comprising of 12 banking stocks of which
15:38:10the first five stocks which includes
15:38:12HDFC Bank, ICIC, Axis, COT and SPI which
15:38:16contributes about 85%age of the total
15:38:19weightage and the top three banks
15:38:21contributes 62%age of the total
15:38:23weightage in Bank Nifty. Now the trade
15:38:25idea is to use this relation. If at
15:38:28least two of these heavyweight banking
15:38:31stocks forms a narrow range for the
15:38:33following session, we can expect a
15:38:35similar price action in Bank Nifty
15:38:37index. Also, do keep in mind that we
15:38:39have to look for very narrow ranges in
15:38:42order for a trending day to play out the
15:38:44next day with a good amount of
15:38:45confidence. So if two or three of these
15:38:48stocks and the index forms a narrow
15:38:50range CPR and in addition if there is
15:38:53also an inside value relation then we
15:38:55can expect breakouts in all these
15:38:58scripts and as a result the index will
15:39:00move with a lot of momentum in either
15:39:02direction depending upon the stocks. In
15:39:05such a situation, you can take a trade
15:39:08in any or all of these scripts or you
15:39:11can just focus on the index as it will
15:39:13move with a consolidated strength and
15:39:15gain a good amount of profits. Now, it
15:39:18is up to you to properly interpret the
15:39:21CPR and floor pivots and apply proper
15:39:24confirmations before entering a trade.
15:39:26The faster you recognize the pattern of
15:39:28the market, the faster you will be able
15:39:30to deploy your strategy because anybody
15:39:33can plot the floor pivots and CPR on
15:39:35their screen. But only those traders who
15:39:38have a keen understanding of the
15:39:40market's behavioral tendencies with
15:39:42respect to the pivots will profit by
15:39:44using these amazing levels.
15:39:49I will talk about the RSI indicator
15:39:51which is one of the most popular trading
15:39:54indicators out there. We will take a
15:39:56look at the RSI indicator in greater
15:39:57detail and fine-tune your view on how to
15:40:00use the indicator to improve your
15:40:02trading results. We will talk about what
15:40:04is RSI and what are the basic things
15:40:07that you need to know about RSI. Then we
15:40:10will move on to discussing the
15:40:11calculation behind RSI and what does it
15:40:14mean to a trader. Further we will
15:40:16discuss about the significance of RSI or
15:40:19what makes RSI a better indicator. We
15:40:22will also talk about the limitations of
15:40:24RSI or the mistakes that traders makes
15:40:26while using the RSI indicator. We will
15:40:28also take a look at the Andrew Carwell's
15:40:31RSI model and how to modify for a better
15:40:34RSI setting. After that, we will talk
15:40:36about the different uses of RSI
15:40:38indicator and finally we'll wind the
15:40:41video with three RSI trading strategies
15:40:43that you can use in the market. So
15:40:45without wasting any time, let's get
15:40:47started.
15:40:50RSI stands for relative strength index
15:40:53and it is a momentum indicator that is
15:40:56developed by J. Weller in short RSI is
15:40:59an oscillating type indicator that moves
15:41:02to and fro between a fixed set of values
15:41:05or ranges. So the value of the RSI
15:41:08indicator oscillate between zero and
15:41:10100. What this means is that you can
15:41:12never go below zero and you can never go
15:41:15above 100. Since the RSI is a momentum
15:41:18indicator, it measures how fast the
15:41:20price moves. The quicker the price has
15:41:23increased, the greater will be the RSI
15:41:25values. Similarly, the faster the price
15:41:28has dropped, the lower the RSI value.
15:41:30And so, if the price moves up or down
15:41:32very slowly, the RSI indicator will be
15:41:35in the middle, that is around the 50 or
15:41:3760 range. The RSI can fluctuate between
15:41:4020 and 30 and can go all the way up to
15:41:4370, 80 or even 90 especially when there
15:41:46is a strong momentum in the market. From
15:41:48a conventional standpoint as described
15:41:51by Mr. Wellis Wilder, what's significant
15:41:54are the levels between 30 and 70 because
15:41:57traditionally when RSI reaches 30, it is
15:42:00considered to be oversold. meaning that
15:42:02the selling has pushed the price far too
15:42:04down and the supply is almost depleted
15:42:07and so the market is expected to bounce
15:42:10back up or turn bullish. Similarly, when
15:42:13the RSI indicator crosses above 70, the
15:42:15market is considered to be overbought
15:42:17meaning that buying has pushed the price
15:42:20too far up and there is not enough
15:42:21demand in the market implying that a
15:42:24price fall is about to occur. So, we
15:42:26will talk about this concept later in
15:42:28the video.
15:42:29Let us briefly look at the calculation
15:42:31behind RSI which will help us understand
15:42:34more about the indicator. Now here's the
15:42:36formula of RSI. RSI is equal to 100
15:42:40minus 100 divided by 1 + RS where RS is
15:42:45the relative strength which is given by
15:42:47average gain divided by average loss.
15:42:50Okay, don't think that this is too
15:42:52complicated or don't let the math scare
15:42:54you because this isn't as hard as it
15:42:56looks. Let me break this down so that
15:42:58you can understand it very easily. So as
15:43:01you can see in the calculation, the only
15:43:03tricky part is the relative strength
15:43:05calculation which is defined as the
15:43:07average gain divided by average loss. So
15:43:10in simple words, the relative strength
15:43:13or the RS value goes up when the average
15:43:15gain is large or when the average loss
15:43:18is small. Now you might be wondering how
15:43:20does the value of average gain goes up.
15:43:23So it's very easy. For instance, when
15:43:24the price moves up quickly with little
15:43:26or no pullbacks, your average gain is
15:43:29large because the price is making
15:43:31positive gains, which in turn leads to a
15:43:34higher RS value. Likewise, when the
15:43:36price falls very quickly with little or
15:43:38no pullbacks, your average loss is large
15:43:41in case if you are having a long
15:43:43position because the price is making
15:43:45negative gains, which in turn leads to a
15:43:48lower RS value. Now with this in mind
15:43:51because the RS is at the denominator the
15:43:53larger the RS value the higher will be
15:43:56the RSI value and if the RS value is
15:43:59lower then the RSI value will also be
15:44:02lower. So the key thing to note is that
15:44:05the higher your average gain the higher
15:44:07your RSI is going to be. I hope it makes
15:44:10sense even if not we will consider some
15:44:12examples. Let's take the case where the
15:44:14average gain is equal to 10 rupees and
15:44:17the average loss associated is 1 rupee.
15:44:20Taking 10 divided by 1, your relative
15:44:23strength or the RS value equals to 10.
15:44:26Now all you have to do is to put this
15:44:28value into the formula and you'll get an
15:44:30RSI of about 91. So an RSI value of 91
15:44:33shows you that there is a strong
15:44:35momentum in the market because your
15:44:37average gain is much higher than your
15:44:39average loss. Let's consider another
15:44:41situation where the average gain is 10
15:44:43rupees but the average loss is 20
15:44:46rupees. When 10 is divided by 20 your RS
15:44:49equals to.5. Now all you have to do is
15:44:52to put in the numbers and you will get
15:44:54an RSI of 33.34.
15:44:57The reason for this is that your average
15:44:59loss is greater than your average gain.
15:45:02So there is more bearish momentum in the
15:45:04market and that is why your RSI value
15:45:06has fallen. The standard period used for
15:45:09the calculation of RSI is 14, which
15:45:12means that the average gains and losses
15:45:15of the previous 14 candles are used to
15:45:18compute the RSI data. In addition, by
15:45:21default, the closing prices of 14
15:45:23candles are taken for estimation. What
15:45:26this conveys is that the average gain or
15:45:29average loss can be manipulated by RSI
15:45:32settings. For example, if you choose a
15:45:3414 period RSI, then the average gain and
15:45:37the average loss will be based on the
15:45:39last 14 candles. Similarly, if you use a
15:45:42five period RSI, then the average gain
15:45:45and average loss will be based on the
15:45:47last five candles. So, if you have used
15:45:50a lower period RSI setting, then the
15:45:52indicator will be more sensitive to
15:45:54recent price movements. And it is the
15:45:56opposite for a higher period RSI setting
15:45:59where the indicator becomes less
15:46:00sensitive to random price movements. As
15:46:03per Mr. Wells Wilder, the best setting
15:46:05for RSI is the default setting of 14
15:46:08period itself. But it is not a crime if
15:46:10you want to change the settings for your
15:46:12convenience.
15:46:14One of the main advantages of RSI is
15:46:17that it is an leading indicator. RSI is
15:46:20very often used to obtain early signs of
15:46:23possible trend changes in the market.
15:46:25This feature itself makes it a very
15:46:27powerful tool for intraday traders to
15:46:29get ready for a big price move before it
15:46:32happens and thereby improving their
15:46:34chances of getting a higher return due
15:46:36to an early entry which is otherwise not
15:46:39possible by a lagging indicator. Another
15:46:41significance of RSI is that RSI can be
15:46:44used with multiple time frames be it
15:46:47weeks or even months as inputs instead
15:46:49of days, hours or minutes. So by using a
15:46:52longer time scale, it is possible to
15:46:55align your short-term trades with
15:46:57longerterm trends. What this means is
15:47:00that if the monthly RSI is reasonably
15:47:02low but is rising, then a buy signal on
15:47:06RSI is more likely to succeed.
15:47:08Similarly, a high but declining monthly
15:47:11RSI suggests that a buy signal in a
15:47:14daily RSI is possibly a false positive.
15:47:17You can gain such insights when you
15:47:19conduct your analysis with RSI on
15:47:21multiple time frames. And finally, being
15:47:23a momentum indicator gives RSI the
15:47:26superpower to identify when the momentum
15:47:28is gaining and when there is a loss in
15:47:31momentum. We will talk more about this
15:47:32while we discuss the uses of RSI later
15:47:35on. If the 14 period RSI is below the 30
15:47:39levels, what it's telling you is that
15:47:41over the last 14 days or the 14 candles,
15:47:45the prices have dropped a lot in the
15:47:47market and there is a strong bearish
15:47:49momentum and the market is oversold. In
15:47:52that sense, the market has declined
15:47:54strongly, but it does not in any way
15:47:56mean that the market will make a rebound
15:47:59anytime soon or just because it's
15:48:01oversold doesn't mean the market will go
15:48:03up higher. This is a mistake many
15:48:06traders make. They think that just
15:48:08because the RSI indicator is oversold,
15:48:10it means it's time to buy or just
15:48:13because the RSI indicator is overbought,
15:48:15it's time to short. In reality, what the
15:48:18indicator is telling you is that there
15:48:20is strong momentum in the market. If
15:48:22it's overbought, it's telling you that
15:48:24there is strong bullish momentum and if
15:48:26it's oversold, it's telling you that
15:48:28there is strong bearish momentum. That's
15:48:31the critical thing to understand and not
15:48:33the other way around. So don't make the
15:48:35mistake of buying just because the RSI
15:48:37is oversold because what's oversold for
15:48:39you can be even more oversold. So if you
15:48:42look at the charts more closely you will
15:48:44notice that the real momentum usually
15:48:46comes after the price has moved above
15:48:49the 70 levels generating an even
15:48:51stronger upside move or when it moves
15:48:54below the 30 oversole levels generating
15:48:56a very strong bearish price move. So do
15:48:59keep this in mind. Another issue with
15:49:01RSI is that it can generate a lot of
15:49:03misleading signals if the price is
15:49:06staying within a range. So it is better
15:49:08to avoid trusting RSI signals when the
15:49:12price is consolidating or rangebound.
15:49:16The first lesson taught to traders when
15:49:19doing analysis with RSI is how to trade
15:49:22with the overbought and oversold levels.
15:49:25New traders are thought that when the
15:49:26RSI reaches 70 or higher, it is an
15:49:29opportunity to exit out of the long
15:49:31positions or start to consider taking a
15:49:33short position. On a similar note, if
15:49:36the RSI drops below 30 or lower, then it
15:49:38is an opportunity to cover your short
15:49:40position and open a long position. Now,
15:49:44it's important to understand that the
15:49:46RSI was designed at a time when the
15:49:48markets were very much rangebound. This
15:49:51chart shows the S&P 500 from 1975 to
15:49:551980 and you can clearly see that the
15:49:58markets are rangebound mostly during the
15:50:00time. So from this perspective of
15:50:02extensive ranges that occurred, the RSI
15:50:05looks like a very powerful tool and the
15:50:07suggestion to buy an oversold RSI and
15:50:10sell an overbought RSI seems like a
15:50:12reliable and profitable strategy back
15:50:14then. But a lot has changed in the 21st
15:50:16century with the computers, internet,
15:50:19alos and whatnot. And the markets are
15:50:21not always ranging anymore. So RSI needs
15:50:24modifications of its own. For this
15:50:26purpose, you can either follow Andrew
15:50:29Cardwell or Constance Brown. For the
15:50:31time being, I will follow Andrew
15:50:33Cardwell's RSI model. According to
15:50:35Andrew Cardwell, there are five types of
15:50:38RSI range shifts that helps to determine
15:50:40the trend of the underlying security.
15:50:42The first one is a bullish range. It is
15:50:45observed that in a bullish range, the
15:50:47RSI tends to oscillate in the 40 to 80
15:50:51levels. So with this idea in mind, when
15:50:53the RSI reaches 40, it is an oversold
15:50:56zone and whenever RSI reaches 80, it is
15:50:59an overbought zone. The second range is
15:51:02the super bullish range. So in a super
15:51:04bullish range, however, RSI tends to
15:51:06oscillate between the 60 to 80 range. So
15:51:09whenever the RSI reaches or moves above
15:51:12the 60 to 65 levels, it is a very good
15:51:14opportunity to buy and it's very likely
15:51:17that the market may bounce back from
15:51:18these level thereby forming a strong
15:51:21support level for higher price
15:51:22movements. The third one is a bearish
15:51:25range. It is observed that in a bearish
15:51:27range RSI tends to oscillate between the
15:51:3020 to 65 zones. Accordingly, when RSI
15:51:33reaches the 6065 zone, it is now an
15:51:37overbought area or in other words, it
15:51:39acts as a good selling point on RSI.
15:51:41When RSI reaches up to 20 level, it is
15:51:44now considered as an oversold zone. The
15:51:47fourth range is the super bearish range.
15:51:50Now, the RSI tends to oscillate between
15:51:5220 to 40 in the super bearish range. So
15:51:55whenever RSI reaches the 40 level, it is
15:51:58a very good selling opportunity for
15:51:59keeping 20 RSI levels as target because
15:52:02the 40 levels will now act as a
15:52:04resistance level for price movements.
15:52:06Final range is the sideways range. So in
15:52:09a sideways range, it has been observed
15:52:11that RSA tends to oscillate between the
15:52:1440 to 6065 zones which basically helps
15:52:17us to determine that the security or the
15:52:20market is sideways or rangebound. So in
15:52:23these range shift scenarios, we have
15:52:25taken an additional range of five points
15:52:27that is 60 to 65 because some stocks
15:52:30works well with the 65 as resistance
15:52:33while others work with 60 as resistance.
15:52:36Hence five point tolerance in RSI is
15:52:38taken both for higher and lower sides.
15:52:41So this logic of RSI range shift goes
15:52:44well with all types of chart whether
15:52:46it's index, stocks, commodities,
15:52:48currencies etc. It is applicable to all
15:52:51these types of chart. Now we will apply
15:52:53this range shift phenomenon in charts
15:52:55and see its utility. Now look at this
15:52:57chart where we will understand the
15:52:59bullish range, super bullish range and
15:53:02sideways range. Now the bullish range is
15:53:04defined with the help of a blue box
15:53:06where the RSI tends to oscillate between
15:53:0940 to 80 range where 80 is the
15:53:12overbought condition and 40 is the
15:53:14oversold condition. Now, as seen in the
15:53:16chart, whenever RSI touches the 80 zone,
15:53:20the price tends to slow its momentum and
15:53:22turns down. The next green box in the
15:53:25chart indicates a super bullish range
15:53:28under which the RSI tends to oscillate
15:53:30between the range of 60 to 80. Now, it
15:53:33is very clearly evident that the stock
15:53:35has given a strong up move during this
15:53:37stage. And finally the sideways market
15:53:40is shown with the help of a red box
15:53:42where the RSI tends to oscillate between
15:53:45the 40 to 6065 zones. Here the stock is
15:53:49expected to move sideways or stay within
15:53:51a range and as a trader you can witness
15:53:54a lot of whip source in the RSI. Moving
15:53:57forward this chart indicates a bearish
15:53:59range which is highlighted with the help
15:54:01of a violet box. Here the relative
15:54:04strength index tend to oscillate between
15:54:0660 to 65 to 20 levels where 60 to 65
15:54:10acts as a overbought condition and 20 is
15:54:13the oversold condition. And finally the
15:54:16chart indicates a super bearish range as
15:54:19highlighted in red where the RSI tends
15:54:21to oscillate between 40 to 20 range and
15:54:24it is an indication that a strong down
15:54:26move is very likely. I hope the RSA
15:54:29range shift concept is now clear.
15:54:33What you can do with the RSI indicator
15:54:35is to use it as a trend filter to trade
15:54:37in the direction of a particular trend.
15:54:40In order to do this, you need to play
15:54:41with the RSI settings a little bit. For
15:54:43a start, what you can do is change your
15:54:46RSI settings to 200 period. This
15:54:48settings means that RSI indicator will
15:54:50look through the last 200 candles
15:54:53closing prices to measure the average
15:54:55gains to average loss. Now to make a
15:54:57proper logic out of this we can use the
15:55:00RSI midline which is indicated by 50.
15:55:03What the midline represents is that if
15:55:05the RSI is above 50 it means that the
15:55:08average gain is greater than the average
15:55:11loss over a period of time. And if the
15:55:13RSI is below 50, it means that the
15:55:16average gain is lesser than the average
15:55:18loss over a given period. So if over the
15:55:21last 200 candles the average gain is
15:55:24more than the average loss, you can
15:55:26imagine that the RSI indicator will be
15:55:28above 50 because there are more gains
15:55:31than losses. Likewise, if over the last
15:55:33200 candles, the average loss is greater
15:55:36than the average gain, then the RSI
15:55:38indicator will be below 50. So the RSI
15:55:41indicator can be used to gauge the
15:55:43long-term trend. Now the essence of this
15:55:45is that if the 200 period RSI indicator
15:55:48is above 50, you can conclude that the
15:55:50market is in a long-term trend and look
15:55:53for buying opportunities only. And if
15:55:55the 200 period RSA indicator is below
15:55:5850, you can conclude that the market is
15:56:00in a long-term downtrend and you can
15:56:03only look for selling opportunities. Now
15:56:05when I use the word long-term, it is
15:56:07relative to the time frame you're
15:56:09looking at. Because if you refer to 200
15:56:11candles on a 5 minute time frame, it
15:56:13will be a long-term uptrend or downtrend
15:56:16on the 5 minute time frame only. So if
15:56:18you do this on a daily time frame, it
15:56:20will be a long-term downtrend or uptrend
15:56:23on a daily time frame. Now the issue
15:56:25with this approach is the sensitivity.
15:56:27As the calculation will include a large
15:56:29number of candles, the signal will be
15:56:31received much later after the price move
15:56:33has already started. So the higher the
15:56:35time frame used, the greater will be the
15:56:38lag. Now with that being said, this is
15:56:40only an alternate method to finding
15:56:42market trends. And if you are not
15:56:44comfortable with this, please avoid
15:56:47using it and instead follow the trend
15:56:49identification method using the range
15:56:51shift concept which is more detailed in
15:56:53the way it expresses the market trends
15:56:56into different zones. But the idea here
15:56:59is to make you aware of different
15:57:00approaches you can take with the RSI.
15:57:03The divergence are a very common
15:57:06application of RSI. For those unfamiliar
15:57:09with divergences, they are a powerful
15:57:11tool that can help identify the
15:57:13dishonesty with the price action. So, it
15:57:16mainly develops when the indicator is
15:57:18moving in the opposite direction of the
15:57:20price. The divergences are mainly
15:57:22classified into negative and positive
15:57:25divergences based upon the movement of
15:57:27prices and indicator. So a positive
15:57:30divergence takes place when the prices
15:57:32makes a new low whereas the indicator
15:57:34makes a new high. Similarly a negative
15:57:37divergence takes place when the prices
15:57:39makes a new high but the indicator in
15:57:41turn makes a new low. Now there are
15:57:44different types of divergence patterns.
15:57:46Number one are the regular or normal
15:57:48divergences which includes a bullish
15:57:51regular divergence and a bearish regular
15:57:53divergence. Similarly, there are
15:57:55irregular or hidden divergences which
15:57:57also includes bullish and bearish hidden
15:57:59divergences. Regular divergence occurs
15:58:02when the momentum does not support a
15:58:04price trend. We can identify bearish
15:58:06divergences by comparing highs on the
15:58:09price chart against the highs on the
15:58:11RSI. So, if the price creates a new
15:58:14higher swing high, but the RSI is
15:58:16creating a new lower swing high, then it
15:58:19is known as a regular bearish
15:58:21divergence. What this tells you is that
15:58:23the prices towards the upside is
15:58:25weakening and there might be a
15:58:27correction in prices soon. So it may not
15:58:29always be a trend reversal but most
15:58:32probably you can expect a pullback or a
15:58:34minor reversal. Another point to notice
15:58:36that the divergence signal is stronger
15:58:38if the first high on the RSI was formed
15:58:41on an overbought region and the second
15:58:43swing gets formed just below the
15:58:45overbought region depending upon your
15:58:48RSI range settings. On the contrary, if
15:58:51we observe the price making new lower
15:58:53swing lows, but the RSI is forming new
15:58:56higher swing highs, then we see a
15:58:58regular bullish divergence. What this
15:59:00tells you is that the BOS are weakening
15:59:03or the bulls might be gaining traction
15:59:05to take the market upside and there
15:59:07might be chances for a price correction
15:59:09soon. And as stated earlier, it may not
15:59:11always be a trend reversal, but probably
15:59:14you can expect a pullback or minor
15:59:16reversal towards the upside. Another
15:59:19important point to note is that
15:59:20divergence signal is stronger if the
15:59:22first low on the RSI was formed at the
15:59:25oversold region and the second swing
15:59:27gets formed above the oversold region
15:59:30depending upon your RSI range settings.
15:59:32Let us talk about hidden divergence. Now
15:59:35a hidden divergence occurs when the
15:59:37trend holds up despite the momentum
15:59:40going against it. So in case of hidden
15:59:42divergence it doesn't mean something is
15:59:43hiding. Instead it is hiding the fact
15:59:45that the trend is going to continue. So
15:59:48talking about a hidden bearish
15:59:49divergence, this idea should only be
15:59:52used or considered if it is a part of
15:59:54the dominant trend meaning that the
15:59:56existing trend in the market should be
15:59:59bearish. So a hidden divergence happen
16:00:01when the price creates lower highs but
16:00:04the RSI creates higher highs. Now when
16:00:06it comes to a bullish divergence, hidden
16:00:08bullish divergence is only relevant if
16:00:11the dominant trend is an uptrend. So to
16:00:14identify hidden bullish divergence, we
16:00:16need to see the price creating higher
16:00:18lows while the RSI creates new lower
16:00:21lows. Now what this tells you is that
16:00:23despite the bearish momentum implied by
16:00:26the RSI, the uptrend price structure
16:00:29held up. Hence the hidden divergence
16:00:31represent a window of opportunity for
16:00:33joining the bull trend at a bargain or
16:00:36discount valuation. So I would say
16:00:38divergence is a great tool to carry out
16:00:40swing trades effectively if you can read
16:00:42the charts properly. But I won't be
16:00:45talking about any strategies associated
16:00:47with divergences because it's already
16:00:49very common and there are a lot of
16:00:51videos available. So I recommend you to
16:00:53learn more about RSI divergences
16:00:54strategies utilizing candlesticks for
16:00:57entries. And finally we will talk about
16:01:00three RSI strategies. The first strategy
16:01:03is the range shift and inflection point
16:01:05on multiple time frames. The second
16:01:08strategy is RSI with 2 EMAs. And the
16:01:11last strategy is RSI trend line break.
16:01:14As we have understood from the Cardwell
16:01:16model, there is a different range of RSI
16:01:19indicator in a bullish market and in a
16:01:21bearish market. So instead of the 7030
16:01:24relative strength index, we will use the
16:01:276040 range for RSI indicator for this
16:01:30particular strategy. The range between
16:01:3240 to 80 of the RSI indicator is used to
16:01:35indicate a bullish market and a range
16:01:38between 65 to 20 for a bearish market.
16:01:41What this tells you is that whenever the
16:01:43market is bearish, it won't be able to
16:01:45cross the 60 to 65 levels towards the
16:01:48upside. Meaning that it will act as a
16:01:50resistance level and whenever in a
16:01:52bullish range, it won't be able to cross
16:01:54below the 40 levels, meaning that the 40
16:01:57level will act as a strong support
16:01:59level. Now this range shift concept can
16:02:01be applied in any time frame whether
16:02:04intraday, daily, weekly etc. As I
16:02:06mentioned earlier, the idea is that when
16:02:08the monthly and weekly RSI is above 60
16:02:11levels thereby clearly indicating a
16:02:13bullish trend but when the RSI indicator
16:02:16takes a support at 40 levels in the
16:02:18daily chart. This is the inflection
16:02:21point which is a good setup because the
16:02:23price may bounce back and most probably
16:02:25it will not go below 40 level because 40
16:02:28level lagged as a support. So when a
16:02:31bullish candle is formed at the 40 level
16:02:33the prices may bounce back up and you
16:02:35can buy the stock. Now the stop loss in
16:02:37this case can be very aggressively
16:02:39placed at the low of the bullish candle
16:02:41where the movement begin and the first
16:02:43target in this case can be the 60 RSI
16:02:46level. Now on the contrary when the
16:02:48monthly and weekly RSI is below 40
16:02:51levels which clearly indicates a bearish
16:02:53trend in the market but the RSI
16:02:55indicator takes a support on the 60
16:02:58levels in the daily chart forming an
16:03:00inflection point indicating that the
16:03:02price may fall back and it will not go
16:03:04above the 60 levels as the 60 to 65
16:03:07level will act as a strong resistance
16:03:09level. So if a bearish candle is formed
16:03:12at the 60 to 65 RSI level, the price may
16:03:15fall back from there and you can look to
16:03:18enter the stock for shorting
16:03:19opportunities. Similar to the previous
16:03:21case, the stop loss can be aggressively
16:03:24placed at the high of the bearish
16:03:26candlestick where the fall begin and the
16:03:28first target can be the 40 RSI levels.
16:03:31So in short, the idea is to find the
16:03:34overall market trend over two larger
16:03:36time frames. If these two larger period
16:03:39RSIs signal a particular trend and the
16:03:42RSI on the lower time frame is forming
16:03:45an inflection point, then it is a good
16:03:47indication of a trade opportunity. You
16:03:49can change the time frames accordingly
16:03:51to your trading requirement. Meaning
16:03:53that if you want to use it for intraday
16:03:55purposes, keep the higher time frames as
16:03:581 hour and 15 minutes RSI and the lower
16:04:00time frame can be the 5 minute to check
16:04:02for the inflection point and also to
16:04:04further take an entry from. We can add
16:04:07an extra piece of analysis to help the
16:04:10RSI as a trade entry tool and that is
16:04:12with the use of moving averages. Not
16:04:15just one but two moving averages. The
16:04:17moving averages are not plotted on the
16:04:20price chart but it is directly added on
16:04:22the RSI indicator. Don't worry if you
16:04:25don't have a paid version of trading
16:04:26view. You can use this community script
16:04:28named RSI with moving averages by Omar
16:04:32Oscar. Now you may have this doubt how
16:04:34can two moving averages itself being a
16:04:36lagging indicator help us make trading
16:04:39decisions. But first of all we have to
16:04:41adjust the settings of our moving
16:04:42average. The black colored moving
16:04:44average is the slow moving average
16:04:46having a 33 period and the orange
16:04:49colored moving average represents the
16:04:51faster moving average which is 13 period
16:04:54moving average plotted over the 14
16:04:56period RSI. Now the basic idea of using
16:04:59two moving averages is to look for
16:05:01crossovers between the slow and fast
16:05:03moving averages. So you can be flexible
16:05:05if you want and make use of different
16:05:08settings like 20 and n moving averages
16:05:10also just to adjust the sensitivity of
16:05:13the indications. Also, it doesn't really
16:05:15matter if you use SMA or EMA. But in
16:05:18this indicator, the fast one that is the
16:05:2013 period one is the simple moving
16:05:23average while the slower one that is the
16:05:2533 period one is the exponential moving
16:05:27average. The trade idea is quite simple.
16:05:30Look to see when the RSI is pushing
16:05:32above both the moving averages from
16:05:34below. It is better if this crossover of
16:05:37RSI happens below the 50 level. Now you
16:05:40have to stay alert and observe the
16:05:42moving averages are coming closer
16:05:44together. And if the faster moving
16:05:46average crosses above the slow 33 period
16:05:50moving average, then you can look to
16:05:51take long trades. But keep in mind that
16:05:54you will also have to look at the slope
16:05:56of the moving averages in order to gauge
16:05:58if the move is going to be a significant
16:06:00one. Additionally, you can plan your
16:06:02entries based on the price action formed
16:06:04for better confirmation. Similar is the
16:06:07setup in the sell side. Here you have to
16:06:09observe when the RSI is pushing below
16:06:11both the moving averages from above. It
16:06:13is better if the cross under happens
16:06:16above the 50 level or the midline. Now
16:06:19you have to stay attentive and observe
16:06:21if the moving averages are coming closer
16:06:23together and if the faster moving
16:06:25average crosses below the slow 33 period
16:06:28moving average from above then you can
16:06:30look to take short trades. So as
16:06:32mentioned earlier, you have to look for
16:06:35the slope of the moving averages in
16:06:37order to gauge if the move is going to
16:06:39be a significant one or not. Also make
16:06:41sure to use additional confirmation
16:06:43using price action or bearish
16:06:45candlesticks. You can use this strategy
16:06:47effectively for intraday and short-term
16:06:50trades. It is an interesting observation
16:06:52to note that the RSA indicator and the
16:06:54price chart almost go hand in hand.
16:06:57Similar to how we apply trend lines on
16:06:59the price chart, in the same manner, we
16:07:01can plot a trend line on RSI. Since the
16:07:04RSI is a momentum oscillator, a trend
16:07:06line will help you determine the
16:07:08momentum direction. All you have to do
16:07:10is to connect the tops and bottoms of
16:07:12the RSI chart itself and trade a trend
16:07:15line break. So, in order to draw an RSI
16:07:18uptrend line, you have to connect three
16:07:20or more points, generally the higher
16:07:22swing lows on the RSI line as it rises.
16:07:25Similarly, a downtrend line is drawn by
16:07:28connecting three or more points,
16:07:30generally the lower swing highs on the
16:07:32RSI line as it falls. Note that drawing
16:07:34a trend line is somewhat subjective. A
16:07:37guideline that you can use is connecting
16:07:39three or more points first and then
16:07:41extending the line to see other supports
16:07:44and resistance levels. Now, when the
16:07:46trend line is broken, it shows you that
16:07:48the momentum has reverted or shifted.
16:07:51For example, in case of an uptrend RSI
16:07:54line which connects three or more swing
16:07:56lows of the indicator which acts as a
16:07:59support level. Now when the trend line
16:08:01is broken, there is a greater chance
16:08:03that the line will now act as a
16:08:05resistance to the further price swings
16:08:07in RSI. Most probably the pullback or
16:08:09the rally back to the RSI trend line
16:08:11will reject the swing and the RSI will
16:08:14move down indicating a downside
16:08:16momentum. In this case, you can enter a
16:08:18short trade when the price breaks below
16:08:20the RSI trend line. Or else, you can
16:08:22wait for the price to pull back to the
16:08:24trend line once again and enter at the
16:08:26rejection from the trend line. The
16:08:28strategy is similar in case of a
16:08:30downtrend RSI line. You just have to
16:08:32change the rules of the entry criteria
16:08:35to fit a long trade setup. Make sure you
16:08:37use candlesticks and price action to
16:08:40provide additional confirmations. Now
16:08:42bear in mind that the break of RSI trend
16:08:45line usually precedes the break of a
16:08:47trend line on the price chart itself.
16:08:49Thereby providing an advanced signal or
16:08:52an advanced warning and an early
16:08:54opportunity to trade. Which means that
16:08:56RSI trend line break gives an advanced
16:08:58signal that the price is going to break
16:09:01the same trend line very soon. Now you
16:09:04should understand that RSI is not a
16:09:06perfect indicator nor it is the holy
16:09:09grail to trading. This is why many
16:09:11traders and investors choose to
16:09:13incorporate RSI into their wider trading
16:09:16strategy which includes price action and
16:09:18additional and popular indicators such
16:09:20as MACD etc.
16:09:25I'll be talking about the stochastic
16:09:27indicator which is among the list of
16:09:30most popular technical indicators in the
16:09:32market. The stoastic indicator is a
16:09:34great momentum as well as a trend
16:09:36following indicator. Meaning that it can
16:09:39help traders in understanding trend
16:09:41dynamics and also improve their chart
16:09:43reading or analysis. But all these
16:09:46properties are a waste if you don't
16:09:48really understand the indicator that
16:09:50you're using or even worse if you use
16:09:53these indicators in the wrong way you
16:09:55end up making bad trading decisions that
16:09:58could have been easily avoided. So in
16:10:00this video I will help you understand
16:10:02the stoastic indicator in the right way
16:10:04and I will show you what it does and how
16:10:07you can use it in your trading. And as
16:10:09always I will start from the very basics
16:10:12of stochastics followed by the
16:10:14calculation of stochastic the general
16:10:16settings of a stoastic indicator
16:10:18followed by the relationships between
16:10:20stoastic oscillator and relative
16:10:23strength index or RSI and we will also
16:10:25talk about the limitations of stochastic
16:10:28or even the mistakes that traders make
16:10:30by using this indicator. Then we will
16:10:32talk about the stochastic RSI and its
16:10:35advantages and disadvantages over
16:10:37stochastic indicator. And further we
16:10:39will learn a few uses of stoastic
16:10:42oscillator followed by different
16:10:44stoastic trading strategies. And finally
16:10:47we will wind up the video by discussing
16:10:50a few ways in which we can combine
16:10:52stoastics with other tools or
16:10:54indicators. So make sure you watch the
16:10:57video till the end.
16:11:01Dr. George Cain was the one who
16:11:04developed the stoastic oscillator in
16:11:061950s way before indicators like RSI
16:11:09which came into being only after 1978.
16:11:12Unlike other traditional technical
16:11:14indicators that either follow the price
16:11:16or the volume, the stoastic indicator
16:11:19follows the momentum of price of an
16:11:21asset or instrument. This means the
16:11:24indicator measures the oscillations in
16:11:26the price of an asset which is the
16:11:28reason why it is referred to as the
16:11:30stochastic oscillator. But before we get
16:11:33into using the stochastic, we should be
16:11:36clear about what momentum actually is.
16:11:38In simple terms, momentum is defined as
16:11:41the rate of acceleration of the price of
16:11:44a security or a stock. So in an
16:11:46interview with Mr. Lane, he mentioned
16:11:48that the stochastic goal later does not
16:11:51follow the price. It does not follow the
16:11:53volume or anything like that but instead
16:11:56it follows the speed or the momentum of
16:11:58the price. The way he provides an
16:12:01analogy to understand the oscillator is
16:12:03quite convincing. He ask us to visualize
16:12:06a rocket going up in the air. But before
16:12:09it can turn down, it must first slow
16:12:11down. In a similar manner, momentum
16:12:13always changes direction before price.
16:12:16Or in simple layman terms, the stoastic
16:12:19is an indicator that measures momentum
16:12:21in the market. But how does the stoastic
16:12:24oscillator actually work? Well, as a
16:12:26matter of fact, the stoastic oscillator
16:12:28compares a specific closing price of an
16:12:31asset with a wide range of high and low
16:12:34prices over a given period of time. As a
16:12:37general rule of thumb, the stoastic
16:12:39oscillator is calculated by taking a 14
16:12:42period as the standard for calculation.
16:12:44However, as with any other indicator,
16:12:47this period can be changed and adjusted
16:12:49according to your specific needs. Also,
16:12:52keep in mind that since stochastic is an
16:12:54oscillator just like RSI, the value of
16:12:57stoastic indicator for any specific time
16:13:00period always stays between a minimum
16:13:03value of zero to a maximum value of 100.
16:13:07By the way, I have already made a
16:13:09detailed video on RSI indicator. So if
16:13:12you want to know more you can watch that
16:13:14video. Now the oscillator works on the
16:13:16following theory that is during an
16:13:18uptrend prices will remain equal to or
16:13:21above the previous closing price and
16:13:23during a downtrend prices will likely
16:13:26remain equal to or below the previous
16:13:28closing price. This is the basic idea
16:13:31upon which the indicator functions. But
16:13:33in order to understand how and why it
16:13:36works, we will need to dig into the
16:13:38calculations of this indicator. Don't
16:13:40worry thinking that the calculations are
16:13:42going to be hard to understand. I will
16:13:44try my level best to explain it as
16:13:46simply as possible. Now as mentioned
16:13:49just now the default setting for
16:13:51stochastic oscillator is 14 periods
16:13:54which can be days, weeks, months or any
16:13:57intraday time frame. There are two
16:13:59variables that control the sensitivity
16:14:02of this indicator. They are percentage K
16:14:04and percentage D. Now what do these
16:14:08variables imply? A default 14 period
16:14:10percentage K would use the most recent
16:14:13close price along with the highest high
16:14:15over the last 14 periods under
16:14:17consideration and the lowest low over
16:14:19the last 14 periods under consideration.
16:14:22On the other hand, percentage D is a
16:14:24three period simple moving average of
16:14:26percentage K variable. This percentage D
16:14:29line is plotted alongside the percentage
16:14:32K line to act as a signal or trigger
16:14:35line. This looks very similar to the
16:14:37MACD indicator where there is a MACD
16:14:39line and a signal line and the signal
16:14:42line is a 9 period exponential moving
16:14:44average of the MACD line. So you can
16:14:46watch a detailed video on MACD indicator
16:14:48from the I button. So what the stoastic
16:14:51indicator does is that it takes the
16:14:53highest high and the lowest low over the
16:14:56last 14 candles and then it compares it
16:14:59to the current closing price. It is as
16:15:01simple as that. We will see this with
16:15:03the help of two examples very soon. But
16:15:05before that, the indicator uses two
16:15:08simple mathematical formulas to
16:15:10calculate the percentage K and
16:15:12percentage D values. The K line formula
16:15:15is given by percentage K is equal to CP
16:15:19minus L14 multiplied by 100. The whole
16:15:22divided by H14 minus L14. This is not as
16:15:26hard as it seems. Here CP is the most
16:15:29recent closing price. L14 is the lowest
16:15:32trading price of the asset in the
16:15:34previous 14 periods or candles. H14 is
16:15:38the highest trading price of the asset
16:15:40in the previous 14 periods or candles.
16:15:42Percentage D is the three period simple
16:15:45moving average of the percentage K line.
16:15:48The percentage K line is the slow moving
16:15:50indicator and percentage D is the fast
16:15:53moving indicator which is measured by a
16:15:56three period moving average of
16:15:58percentage K. Once again, these two
16:16:00lines are similar to the MACD line in
16:16:02the sense that one is faster than the
16:16:05other. As a general rule of thumb, the
16:16:07stoastic oscillator suggests that when
16:16:10the market is moving upward, the asset
16:16:12price will close near the highs and so
16:16:14will the stoastic values. Similarly, the
16:16:17stochastic oscillator value will close
16:16:19near the low when the market is trending
16:16:22downward and as the asset price closes
16:16:24near the lows. This means the indicator
16:16:27can have different sets of values under
16:16:30different market conditions. Let us
16:16:32understand this in greater detail using
16:16:34some examples. The first example is when
16:16:37we have a high stochastic number. So
16:16:40when your stoastic oscillator is at a
16:16:42high value, it means that the price
16:16:44closed near the top of the range over a
16:16:47certain period of time or a certain
16:16:49number of candles. Now take a look at
16:16:51this chart and consider the 14 most
16:16:54recent candles. Then mark the lowest
16:16:56low, the highest high and the most
16:16:59recent close price of these last 14
16:17:01candlesticks. And as you can see, the
16:17:03high is at 110.61
16:17:06rupees. The lowest low is at 108.76
16:17:10rupees and the most recent close is at
16:17:12110.21 rupees. Now all we need to do is
16:17:16to equate these values onto the
16:17:18equations. So we can calculate the range
16:17:21between the high and low price which
16:17:23comes out to be 1.8. 855 which is simply
16:17:26obtained by subtracting the high price
16:17:28and the low price values and we can also
16:17:31calculate the difference between the
16:17:32highest high and the recent close which
16:17:35comes out to be 0.399.
16:17:38Now all we need to do is to divide 0.399
16:17:41by 1.855
16:17:43to check how close the price is to the
16:17:45absolute high of the range. Now the
16:17:47calculation gives us 0.215 215 or
16:17:5121.5%age
16:17:52when multiplied by 100. This means that
16:17:55the current close is 21.5%age
16:17:59away from the top or in other words it
16:18:01is 79.5%age
16:18:04above from the bottom and indeed the
16:18:06stochastic in this example is at 79.5.
16:18:10So therefore the stochastic indicator
16:18:12tells us how far the price has closed
16:18:15with respect to the highest high or the
16:18:17lowest low of a given price range. And
16:18:20as you have seen the calculation is
16:18:22quite simple. All you need to do is to
16:18:25just check the total distance of the
16:18:27range between the highest high and the
16:18:29lowest low and see how close the price
16:18:32is closing to the highest high or the
16:18:34lowest low. Moving on to example number
16:18:36two that is when we have a low
16:18:38stochastic number. A low stochastic
16:18:41value indicates that the momentum to the
16:18:43downside is strong. In this chart we can
16:18:46already see that the price has moved
16:18:48significantly lower over the last 14
16:18:50candles. And we can also see that the
16:18:53current close is relatively close to the
16:18:55absolute low. Only a small candlestick
16:18:58wick is sticking out lower. Just by
16:19:00understanding that we can already assume
16:19:02that the stoastic indicator has to be
16:19:04very low since the stoastic measures how
16:19:07close the price is closing to the lowest
16:19:09low and how far away from the price is
16:19:12the highest high. And indeed the
16:19:14stoastic indicator shows a value of
16:19:1713.5%age.
16:19:19This means that the price is just
16:19:2113.5%age away from the lowest low and is
16:19:2486.5%age
16:19:26away from the highest high. I hope
16:19:28things make sense. Now, similar to how
16:19:30we use RSI, this indicator can also be
16:19:33used to identify overbought and oversold
16:19:36trading signals for any asset. Thereby,
16:19:38it lets you spot price reversals in the
16:19:41market. For instance, if the value of
16:19:43stoastic indicator for a stock is more
16:19:45than 80, then the asset price is
16:19:48considered to be in the overbought
16:19:49region. And if this value is less than
16:19:5220, then the asset is set to be in the
16:19:54oversold territory. But as with the case
16:19:56of RSI, this indication of overbought
16:19:59and oversold territories should merely
16:20:02be taken as clues of future price
16:20:04movements and not as a conclusive
16:20:06evidence of the price reversal. Now
16:20:09before moving ahead, let me mention the
16:20:11three types of stochastic indicators
16:20:14that you will be able to find. Now there
16:20:16are three versions of stoastic
16:20:18oscillator and these are fast, slow or
16:20:21full oscillators. Now the fast
16:20:23stochastic oscillator is based on Mr.
16:20:26George Lane's original formula for
16:20:28percentage K and percentage D that we
16:20:31have already discussed. Now this is the
16:20:33most common and most used stoastic
16:20:36indicator. But the problem is that in
16:20:38this fast version of the oscillator the
16:20:41percentage K line can appear rather
16:20:43choppy and percentage T as mentioned is
16:20:46the three period symbol moving average
16:20:48of percentage K. As a matter of fact,
16:20:50Mr. George Lane use percentage D to
16:20:53generate buy or sell signals based on
16:20:55bullish or bearish divergences. And Mr.
16:20:58Lane even points out that a percentage
16:21:00Divergence is the only signal which will
16:21:04cause you to buy or sell. Don't be
16:21:06afraid. We will talk about divergences
16:21:08later on in this video. Now, because
16:21:10percentage D in the fast stoastic
16:21:13oscillator is used for signals, the slow
16:21:15stochastic oscillator was introduced to
16:21:18emphasize its importance. So the slow
16:21:20stochastic oscillator smooths percentage
16:21:23K with a three period simple moving
16:21:25average which is exactly what percentage
16:21:27D is in the fast stoastic oscillator. So
16:21:31percentage K in slow stochastics is
16:21:33actually percentage D in fast stoastic
16:21:36oscillator while percentage D in slow
16:21:38stochastics is the three period simple
16:21:41moving average of the slow percentage K
16:21:43line. This means that the slow
16:21:45stochastic indicator is more smooth or
16:21:48less choppier when compared to the fast
16:21:51stoastic oscillator. Now you can note
16:21:53down the difference in formulas if you
16:21:54want. Now a full stochastic oscillator
16:21:57is a fully customizable version of the
16:21:59slow stochastic oscillator. This
16:22:02indicator in trading view is actually a
16:22:04full stochastic oscillator. But since
16:22:06the variable was fixed to 1433, it is a
16:22:10slow stochastic oscillator. But you can
16:22:13set the look back period, the number of
16:22:15periods for slow percentage K and the
16:22:18number of periods for the percentage D
16:22:20moving average as you wish. But it is
16:22:22not generally recommended to change
16:22:24these values as the default values works
16:22:27well most of the time. Now that we have
16:22:29understood in depth how the indicator is
16:22:31formed and based on what principle it
16:22:34works, we now need to know what type of
16:22:37indicator it is. Is it a leading
16:22:39indicator or a lagging indicator? Now
16:22:41most of the time we compare stochastics
16:22:44with RSI. But as we already know RSI is
16:22:47a leading indicator which provides
16:22:49signals prior to the actual price move.
16:22:52But unfortunately stochastics is
16:22:54considered a lagging indicator. So a
16:22:57lacking indicator like stochastics
16:22:59follow price action and give signals
16:23:01after the price has already moved as
16:23:04opposed to leading indicators that are
16:23:06designed to anticipate future price
16:23:08movements. And you may ask why
16:23:10stochastics is lagging. Now the reason
16:23:12being a stochastic indicator is based on
16:23:15historical data and is calculated using
16:23:18the closing prices of an asset over the
16:23:20recent 14 period. Now it compares the
16:23:23current closing price to the high and
16:23:25low range of the prices over this 14
16:23:28period which helps identify whether the
16:23:30asset is overbought or oversold. Now
16:23:33because stochastic indicator is based on
16:23:35historical data, it is slow to react to
16:23:38the market conditions and can be slower
16:23:41to identify the turning points in the
16:23:43market. Now this is why it is considered
16:23:45as a lagging indicator. And this means
16:23:47that the signals generated by the
16:23:49indicator can be delayed and may not
16:23:52always be accurate. But as always, it is
16:23:55important to keep in mind that even
16:23:57lacking indicators can be useful for
16:23:59confirming signals which are generated
16:24:02by leading indicators and it is also
16:24:05useful for identifying trends. But as a
16:24:07matter of fact, it should not be used as
16:24:10a standalone indicator. We need
16:24:12confluences or we need more
16:24:14confirmations. We compare RSI and
16:24:17stochastics more often because of the
16:24:19fact that both these looks and function
16:24:22similarly even though the calculations
16:24:24are entirely different. So let's see if
16:24:26there is any relationship between the
16:24:28stoastic oscillator and the relative
16:24:31strength index or RSI. The first
16:24:33similarity is that both of these tools
16:24:35are price momentum oscillators that are
16:24:38widely used by traders. I have seen a
16:24:41lot of traders for the sake of
16:24:42increasing the accuracy of a buy or sell
16:24:45signal, they often use the stoastic
16:24:47oscillator and the RSI in tandem. You
16:24:50can argue that the objective of both
16:24:52these technical indicators may be
16:24:54similar which is measuring momentum in
16:24:56the price move. But as stated just now
16:24:58the underlying theories are different. C
16:25:01the stochastic oscillator work on the
16:25:03theory that the price of an asset tends
16:25:06to close near its high during market
16:25:08uptrends and close near its low during
16:25:10market downtrends. RSI on the other hand
16:25:13works by measuring the velocity at which
16:25:16the price of an asset moves. So this
16:25:18helps us realize the fact that when we
16:25:21are faced with a market that moves in
16:25:23trends that is either uptrend or
16:25:25downtrend then RCA can be a very useful
16:25:28indicator for identifying overboard and
16:25:30or soul conditions. However, when the
16:25:33market moves sideways or in a choppy
16:25:36price action then the stoastic indicator
16:25:39is of more use. For some of you it may
16:25:41not be clear. So let me explain in
16:25:44detail. Consider a trending market. So
16:25:47in a trending market the asset price
16:25:49tends to move in one direction making it
16:25:51more difficult to identify the
16:25:53overbought and oversold conditions. So
16:25:55in a strong uptrend for example the
16:25:57asset price may remain overbought for an
16:25:59extended period of time making it
16:26:01difficult to determine when to sell.
16:26:04Similar is the case when a strong
16:26:06downtrend isn't. But when dealing with a
16:26:08sidebase market, the asset price tends
16:26:11to move within a range with a clear
16:26:13resistance level at the top and a
16:26:15support level at the bottom. And when
16:26:17the assets price approaches the
16:26:19resistance level, it is more likely to
16:26:21become overbought. And when it
16:26:23approaches the support level, it is more
16:26:25likely to become oversold. So in this
16:26:28type of markets, RSI may provide very
16:26:31less useful information as it may give
16:26:34false signals due to the lack of trend
16:26:36momentum. But fortunately, stochastics
16:26:39is considered to be better used in
16:26:40sideways market because it is designed
16:26:43to identify these overbought and
16:26:45oversold conditions which are more
16:26:47likely to occur when the price asset is
16:26:49trading in a range rather than trending
16:26:52up or down. But a point worth noting is
16:26:54that stochastics still can be used in
16:26:56trending markets and you can use it in
16:26:58conjunction with other indicators and
16:27:01analysis such as moving averages, trend
16:27:03lines, support resistance levels, etc.
16:27:06Now let's move on to the application
16:27:08side of this indicator. Now let us
16:27:10discuss the main uses of stochastics. I
16:27:14will be explaining three main uses of
16:27:16this indicator. There may be other uses
16:27:18but the ones that I will be talking
16:27:20about are the most popular ones. These
16:27:23include identifying oversold and
16:27:24overbought levels, bullish and bearish
16:27:27divergences and finally bullish and
16:27:30bearish setups. So let's start off with
16:27:32the first use. As we have discussed, the
16:27:36stochastic indicator is designed to
16:27:38identify overbought and oversold
16:27:40conditions in the asset price. Now, if
16:27:42you don't know what these are, let me
16:27:44clear it up to you. An overboard
16:27:46condition occurs when the closing price
16:27:48of an asset has been consistently high
16:27:51over a recent selected period, which is
16:27:53usually 14 period for stochastic
16:27:55indicator, and the price is approaching
16:27:58the upper end of the particular asset
16:28:00range. This suggests that the asset may
16:28:03be overvalued or expensive and there is
16:28:06a good possibility that a price reversal
16:28:08or correction may be imminent. Likewise,
16:28:11an oversold condition occurs when the
16:28:13closing price of an asset has been
16:28:15consistently low over a recent selected
16:28:18period and is approaching the lower end
16:28:21of the particular asset's price range.
16:28:23This suggests that the asset may be
16:28:25undervalued or cheap and there is a good
16:28:28chance that a price reversal or
16:28:30correction may be imminent. Now the
16:28:32overbought and oversold levels are
16:28:34determined by the settings of the
16:28:36stoastic indicator which can be easily
16:28:38adjusted as per your requirement.
16:28:41Typically the overbought level is set at
16:28:4380 and the oversold level is set at 20.
16:28:46I personally prefer to use this default
16:28:48setting. Now the idea of overbought and
16:28:50oversold is very simple. When the
16:28:52stoastic indicator is above 80, it is
16:28:55considered to be overbought, meaning
16:28:57that the stock is overvalued or
16:28:59expensive. And when the indicator is
16:29:01below 20 level, it is considered to be
16:29:04oversold, meaning that the asset is
16:29:06undervalued or cheap. Now, this
16:29:08overbought and oversold levels of
16:29:10stoastic indicator can be used as a part
16:29:12of our trading strategy to identify
16:29:15potential buying or selling
16:29:16opportunities. Now let me mention a few
16:29:19ways in which you can put the overbought
16:29:21and oversold levels of stoastic to good
16:29:23use. Number one is to use the overbought
16:29:26and oversold levels as potential
16:29:28signals. Now you can use the overbought
16:29:31and oversold levels as signals to buy or
16:29:33sell an asset. For example, if the
16:29:35stoastic indicator is overbought, it may
16:29:38be a potential signal to sell the asset.
16:29:40And if the indicator is in the oversold
16:29:42territory, then it may be a potential
16:29:44signal to buy the asset. Now don't start
16:29:47commenting right now. Just listen to me
16:29:49first. Second method is to use the
16:29:51overbought and oversold signals as an
16:29:53indication of a trend reversal. Now you
16:29:56can use these levels as an indication of
16:29:58trend reversal. Meaning that if the
16:30:00stoastic indicator provides an overboard
16:30:02signal and if the asset price starts to
16:30:05decrease then it can be a signal that
16:30:08the uptrend is over and a downtrend may
16:30:11be starting. Similarly, if the stoastic
16:30:13indicator is oversold and if the asset
16:30:15price starts to increase, then it can be
16:30:18a signal that the downtrend is over and
16:30:20that an uptrend may be starting. But it
16:30:23is better to use both these method in
16:30:25conjunction with other indicators or
16:30:27price action. And one price action
16:30:29method that you can use in tandem is to
16:30:32look for a break in the trend structure.
16:30:34That is an uptrend structure is
16:30:36considered to be broken when the price
16:30:38breaks and closes below the higher low
16:30:41while a downtrend structure break
16:30:43happens when the price breaks and closes
16:30:45above the lower high levels. You can
16:30:47learn about the market structures and
16:30:49lot more in my free price action trading
16:30:52course. Now the third method is to use
16:30:54overbought and oversold as an indication
16:30:56of trend continuation. Traders can use
16:30:59these levels as an indication of trend
16:31:01continuation. That is if the stoastic
16:31:03indicator is overbought and if the asset
16:31:06price continues to increase then it can
16:31:08be a signal that the uptrend is
16:31:10continuing. Similarly, if the stoastic
16:31:12indicator is oversold and if the asset
16:31:15price continues to decrease then it can
16:31:17be a signal that the downtrend is
16:31:19continuing. But I'm not a big admirer of
16:31:22this particular method because I would
16:31:24rather trade trend continuation with the
16:31:26help of RSI signals rather than
16:31:29stochastic signals. Now let's go to the
16:31:31second use case of this indicator that
16:31:33is bullish and bearish divergences. You
16:31:36may already be aware of what divergences
16:31:39are. But briefly speaking divergences
16:31:42form when a new high or a new low in
16:31:44price is not confirmed by the indicator
16:31:47or in other terms the price and the
16:31:49indicator gives opposite signals or
16:31:52contrary signals. Specifically, a
16:31:54bullish divergence forms when the price
16:31:57records a lower low on the down move,
16:31:59but the stoastic oscillator forms a
16:32:01higher low. This shows a decreasing
16:32:03downside momentum or a weakening of the
16:32:05sellers, which could in turn predict an
16:32:07upcoming bullish reversal or correction.
16:32:10On the other hand, a bearish divergence
16:32:12forms when the price records a higher
16:32:14high on an uptrend, but the stoastic
16:32:16oscillator forms a lower high. This
16:32:19indicates decreasing upside momentum or
16:32:21the weakening of buyers that could
16:32:24predict a potential bearish reversal or
16:32:26correction. Now let's look at how we can
16:32:28spot divergences using the stoastic
16:32:31indicator. First of all, you have to add
16:32:33the stoastic oscillator to your chart
16:32:35and it will typically have two lines
16:32:37like I said that is percentage K and
16:32:39percentage D lines. Now you have to
16:32:41focus on the percentage K line if you're
16:32:43using either the fast or the slow
16:32:45stochcastics. Now you have to look for
16:32:48the percentage K line to make a higher
16:32:50low while the underlying asset price
16:32:52makes a lower low. This divergence can
16:32:55indicate that despite the price moving
16:32:58lower, the underlying momentum as
16:33:00indicated by the stoastic oscillator is
16:33:02getting stronger. This is a bullish
16:33:05divergence signal indicating that a
16:33:07potential trend reversal to the upside
16:33:09is possible. Similarly, you have to look
16:33:12for the percentage K line to make a
16:33:14lower high while the underlying assets
16:33:17price makes a higher high. This
16:33:19divergence can indicate that despite the
16:33:22price moving higher, the underlying
16:33:24momentum as indicated by the stoastic
16:33:26oscillator is getting weaker. This is a
16:33:29bearish divergence signal which could
16:33:31indicate a possible trend reversal
16:33:33towards the downside. So in short, if
16:33:36you see a bullish divergence signal, you
16:33:38may want to consider buying an asset.
16:33:40And if you see a bearish divergence
16:33:42signal, then you may want to consider
16:33:44selling the asset. But this signal as a
16:33:48standalone indication may not always
16:33:50work. It gives better results if you
16:33:52incorporate divergence signals with
16:33:54price action like a break-in structure
16:33:57or a long tailed rejection pin bar, etc.
16:34:00Now another way to look for a
16:34:02confirmation of an actual reversal is
16:34:04using the center line of the indicator.
16:34:06For example, a bearish divergence
16:34:08reversal can be confirmed with a support
16:34:10level break on the price chart or a
16:34:13stoastic oscillator break below the 50
16:34:15level which is actually the center line.
16:34:17Now similarly a bullish divergence
16:34:20reversal can be confirmed with a
16:34:22resistance level break on the price
16:34:23chart or a stochastic oscillator break
16:34:26above 50 level. Now this 50 level is an
16:34:29important level to watch out for. We
16:34:31know that stochastic oscillator is a
16:34:33rangebound indicator that moves between
16:34:36zero and 100 which makes 50 the center
16:34:39line. You can think of it as the 50yard
16:34:42line in football. So a particular team
16:34:44has a higher chance of scoring a goal
16:34:46when it crosses the 60 line on either
16:34:49side. On the same note, when the
16:34:51stochastic oscillator crosses above 50,
16:34:54it signals that prices are trading in
16:34:56the upper half of their high low range
16:34:58for a given look back period.
16:35:00Conversely, a cross below 50 means that
16:35:03prices are trading in the bottom half of
16:35:05the given look back period. But being a
16:35:07price action based trader, I like my
16:35:09odds when there is a price action signal
16:35:11associated with an indicator signal. You
16:35:14can call me a bit biased towards price
16:35:15action but I have tried to explain the
16:35:18different ways in which you can approach
16:35:19a divergence. So it is up to you to
16:35:22decide how to use it. Now let's talk
16:35:24about the third use which is bullish and
16:35:26bearish setups. A stochastic bull and
16:35:29bear setup is very similar to the
16:35:31overbought and oversold method. So a
16:35:34bullish setup occurs when the stoastic
16:35:36oscillator is in the oversold territory
16:35:38that is below 20 level and then crosses
16:35:41above the 20 level indicating that the
16:35:44market may be trending upward. So in
16:35:46this case a signal is generated only
16:35:49after confirmation that the oscillator
16:35:51is above the 20 level. Similarly, a
16:35:54bearish setup occurs when the stoastic
16:35:56oscillator is in the overboard territory
16:35:58that is above 80 levels and then crosses
16:36:01below the 80 level indicating that the
16:36:03market may be trending downward. Here
16:36:05also a signal is generated only after
16:36:08the confirmation that the oscillator has
16:36:10crossed below the 80 level. Now this
16:36:12method is also used to identify
16:36:14potential buying or selling
16:36:15opportunities in the market. So when you
16:36:17see a bearish or bullish signal, you can
16:36:20use this information to make trading
16:36:22decisions. So if you use a bullish
16:36:25signal, you may want to consider buying
16:36:27the asset. And if you see a bearish
16:36:29signal, you may possibly want to
16:36:31consider selling the asset. Even though
16:36:33this looks very promising, let me warn
16:36:35you, there can be a lot of false signals
16:36:38that can be generated and thereby a lot
16:36:40of losses. So make sure you use other
16:36:42indicators and price action to improve
16:36:45your odds of getting a profitable trade.
16:36:48Now let me talk about a few common
16:36:49mistakes that traders make when using
16:36:52the stoastic indicator and discuss on
16:36:54how you can avoid this. And if you can
16:36:56avoid these mistakes then you will save
16:36:59yourselves a lot of money in the long
16:37:00run. The first mistake is going long
16:37:03just because the market is oversold and
16:37:05shorting just because the market is
16:37:06overbought. I have talked about this in
16:37:09the previous section itself. But the
16:37:11crust of this statement is very simple.
16:37:13We know the stoastic oscillator is an
16:37:15indicator that measures momentum in the
16:37:17market. So when it is at overboard level
16:37:20that is above 80, it means that the
16:37:22market has strong bullish momentum. And
16:37:25the last thing you want to do is to
16:37:26blindly go short just because the
16:37:28stoastic oscillator is overbought. And
16:37:31most of the time if you go short just
16:37:33because the market was overbought it
16:37:35would be a painful experience because
16:37:37the market can remain overbought or
16:37:40oversold for a longer period of time
16:37:42that you can expect. You can just take
16:37:44the example of Adani stocks which stayed
16:37:46overbought for many months and all those
16:37:48who shortened during that rally be
16:37:51staying with a red account. So always be
16:37:53cautious with this strategy and try to
16:37:55use it with some other confirmation
16:37:57signals also. Next, let's move on to the
16:38:00second deadly mistake made by traders,
16:38:02which is ignoring the market trend. The
16:38:05stoastic indicator can generate a lot of
16:38:08false signals if the trader is not aware
16:38:10of the underlying trend in the market.
16:38:13You should always consider the current
16:38:15market trend when using the stoastic
16:38:17indicator and avoid taking trades
16:38:20against the trend. Usually it is better
16:38:22to identify trends on a larger time
16:38:25frame depending on your trading style
16:38:27and then move down to the lower time
16:38:29frames for taking positions. I have
16:38:32already made a detailed video on this
16:38:33topic. You can learn about time frame
16:38:35selections there. Now the third mistake
16:38:38is very common with RSI and stochastic
16:38:40both. It is thinking that the market
16:38:42will reverse just because you have
16:38:44spotted a divergence. Remember what you
16:38:47have learned. A bearish divergence
16:38:49occurs when the market makes a higher
16:38:51high but the indicator of the stoastic
16:38:54indicator shows a lower high which means
16:38:57that the two signals diverge from one
16:38:59another. Right now most trading
16:39:01textbooks courses etc will tell you that
16:39:04when you spot a divergence it means a
16:39:07reversal is about to occur. But this is
16:39:10not the complete truth. There are
16:39:12chances for reversal, I admit. But
16:39:14sometimes it could just be a minor
16:39:16correction or retracement. And on some
16:39:18other occasions, the market won't even
16:39:20care if there was a divergence. So to
16:39:23avoid making such mistakes, you can use
16:39:25the stochastic oscillator along with
16:39:27other technical tools like RSI. And as a
16:39:30general rule of thumb, when you can't
16:39:32confirm a reversal, it is always better
16:39:34to continue trading in the direction of
16:39:36the trend and not against it. The fourth
16:39:39mistake is something you might not have
16:39:41heard about or might not have taken into
16:39:43account. It relates to not considering
16:39:46the volatility in the asset. See the
16:39:49stoastic indicator can be affected by
16:39:51volatility of the market. You should be
16:39:53aware of this and you should adjust the
16:39:55indicator accordingly. So when the
16:39:58market is experiencing a very high
16:40:00volatility, the stochastic indicator can
16:40:02generate more false signals. This is
16:40:05because the indicator is based on
16:40:07historical data and during periods of
16:40:09high volatility. The recent historical
16:40:12data may not be representative of the
16:40:15current market conditions. Therefore,
16:40:17high volatility can cause the indicator
16:40:18to move faster than usual making it
16:40:21harder to interpret the signals. So,
16:40:23under such conditions, it is better to
16:40:25decrease the sensitivity of the
16:40:27oscillator by increasing the period
16:40:29under consideration. Moving on, the
16:40:32fifth mistake is not using confluences
16:40:34or not considering other indicators. Let
16:40:37me remind you the stochastic indicator
16:40:40should be used in conjunction with other
16:40:42indicators and analysis such as support
16:40:45and resistance levels, trend lines and
16:40:47other momentum indicators, moving
16:40:49averages, etc.
16:40:52Have you ever had the thought of having
16:40:54an indicator that gives the benefit of
16:40:57both RSI and stoastics? Fear not, we
16:41:01have one such indicator called
16:41:03stochastic RSI which is already
16:41:05available in trading view and as the
16:41:08name suggest it is a technical indicator
16:41:10that combines the concepts of stoastic
16:41:12oscillator and relative strength index
16:41:15or RSI. It looks and functions just like
16:41:18our normal stoastic indicator but I find
16:41:20it more related though not the same to
16:41:23the slow stochastic indicator that we
16:41:25have already discussed. This indicator
16:41:27is designed to indicate whether an asset
16:41:31is overbought or oversold similar to the
16:41:34standard stoastic oscillator. However,
16:41:36instead of using the assets price to
16:41:38calculate the indicator, it uses RSI
16:41:41which is actually a momentum indicator
16:41:43that compares the magnitude of recent
16:41:45gains to recent losses in the assets
16:41:47price. I won't go into the calculation
16:41:50part of this indicator. Maybe you can do
16:41:52your own research if you want to learn
16:41:53more. Now let's talk about some
16:41:55potential advantages of using this
16:41:58stoastic RSI as a technical indicator.
16:42:01The first benefit is that we are
16:42:03combining the strength of two popular
16:42:05indicators. That is by combining RSI and
16:42:08stoastic oscillator. The stoastic RSI
16:42:11allows you to take advantage of the
16:42:13strength of both these indicators. That
16:42:15is RSI can help you identify the
16:42:17momentum changes while the stoastic
16:42:19oscillator can help you identify
16:42:21overboard and oversold conditions. The
16:42:24second advantage is greater sensitivity
16:42:26of the indicator. Now because the
16:42:28stoastic RSI uses RSI as its base
16:42:31instead of price, it is more sensitive
16:42:33to momentum changes than the standard
16:42:36stoastic oscillator. Now this increased
16:42:39sensitivity can help traders identify
16:42:41trend changes more quickly. In addition
16:42:43to these, this indicator can identify
16:42:46divergences better. And as the name
16:42:48suggest RSI is a relative strength
16:42:51indicator which makes it a great tool to
16:42:54identify divergences. So therefore
16:42:56stoastic RSI is a great tool to identify
16:42:59bullish and bearish divergences. But as
16:43:02always the indicator is not without
16:43:04drawbacks. There are several limitations
16:43:07of using stochastic RSI as a technical
16:43:10indicator which includes false signals
16:43:13and like all indicators the stoastic RSI
16:43:16can generate a lot of false signals. For
16:43:18example, an overbought or oversold
16:43:21signal may not always lead to a price
16:43:23reversal. I have tried to emphasize this
16:43:26many times. You need to always look for
16:43:28additional confirmations. Now the second
16:43:30drawback is its lagging nature. Just
16:43:33because we have incorporated RSI in our
16:43:35calculation, it doesn't mean that this
16:43:38is a leading indicator. Since stoastic
16:43:40RSI is still based on historical data,
16:43:43it can be slow to react to current
16:43:45market conditions. This lack can be
16:43:47especially pronounced during strong
16:43:49market trends or high volatility
16:43:51conditions. Then there is always a
16:43:54matter of interpretation. As the signals
16:43:56generated by stoastic RSI are based on
16:43:59relative strength calculation, the
16:44:01results can always be subjected to
16:44:03depretation meaning that different
16:44:05traders might interpret the same signal
16:44:08differently leading to different trade
16:44:10ideas and different trade management.
16:44:12Another drawback which we can associate
16:44:15with almost all technical indicators is
16:44:17that can be affected by market
16:44:19manipulations. That is like all
16:44:22technical indicators the stoastic RSI
16:44:24can be affected by market manipulations
16:44:27especially in low volume markets. So
16:44:29always try to trade in only those
16:44:31instruments with ample liquidity. Now
16:44:34let's go to the most important part of
16:44:36the video which is trading strategies or
16:44:39signals associated with stoastics. I
16:44:42will try to provide the most common
16:44:44signals and the ways in which traders
16:44:46are using the stoastic indicator. These
16:44:48include identifying breakout signals,
16:44:51trend following signals, multi-time
16:44:53frame signals, and range and reversal
16:44:55trading strategies. Let's start with the
16:44:58breakout trading first. So, here's the
16:45:00basic idea. When you see that the
16:45:02stochastic is suddenly accelerating in
16:45:05one direction and the two stochastic
16:45:07lines are widening, then it can signal
16:45:09the start of a new trend. But if you can
16:45:12also spot a breakout out of a sideways
16:45:14range on your price chart, then it is
16:45:16even better. Here's how you can use
16:45:18stochastics to find breakouts. First
16:45:21things first, you have to add the
16:45:22stochastic oscillator to your chart
16:45:24which will have two lines percentage K
16:45:26and percentage D. The next step is to
16:45:29identify areas of values around the
16:45:31current market price like key levels of
16:45:33supports or resistances, previous highs
16:45:36or previous lows or even round number
16:45:38levels. Then you have to look for the
16:45:40percentage K line to be either in the
16:45:42overboard territory that is above 80 or
16:45:45in the oversold territory that is below
16:45:4820. Along with that you have to observe
16:45:50whether the price is reaching a
16:45:52potential support or resistance level.
16:45:54And if you see something like that
16:45:55happening the next step is to look for
16:45:58the percentage K line to cross above the
16:46:0080 level while still being in the orb
16:46:03territory. This can indicate a potential
16:46:06bullish breakout through the resistance
16:46:08and you may want to consider buying the
16:46:10asset. Similarly, you can look for the
16:46:12percentage K line to cross below the 20
16:46:15level while being in the oversold
16:46:17territory. This can indicate a potential
16:46:19bearish breakout through the support
16:46:21level and you may want to consider
16:46:23selling the asset. You can also use
16:46:25other indicators and analysis and even
16:46:28volumes to confirm the breakout signal
16:46:30and you can set the stop- loss and
16:46:32targets accordingly. I have already made
16:46:34a video on how to set a logical
16:46:36stop-loss. You can watch it to learn
16:46:38more. Moving on to the second method,
16:46:40which is the trend following strategy.
16:46:43The idea is quite straightforward. As
16:46:45long as the stoastic is above 80
16:46:48overboard levels, it confirms a strong
16:46:50bullish trend and a stoastic below 20
16:46:53oversold level points to a strong
16:46:56bearish trend. So during strong trends
16:46:58that is when the stoastic is in the
16:47:00oversold or overboard area don't try to
16:47:03fight the trend instead try to follow
16:47:06the trend hold on your trades and stick
16:47:08with the trend I know this is a vague
16:47:10way of explaining you could ask me how
16:47:13will we identify a strong trend in the
16:47:15first place and when should we apply
16:47:17this method now the most important thing
16:47:20to keep in mind is to train with the
16:47:22trend and not against it. One way to do
16:47:25this is using a combination of 200
16:47:27period simple moving average and
16:47:29stochastic to predict market turning
16:47:31points. So if the price is above the 200
16:47:34period simple moving average, it means
16:47:36that the overall market sentiment is
16:47:39bullish, then we will only look for long
16:47:41trading setups and we will enter a trade
16:47:44when the stoastic line is turning up
16:47:47from the 20 oversold level and we will
16:47:49remain in the trade until the stoastic
16:47:51indicator below the 80 overbought
16:47:54levels. Meaning that we will stay in the
16:47:57trade as long as the uptrend persist. On
16:48:00the contrary, if the price is below the
16:48:02200 period moving average, meaning that
16:48:04the overall market bias is bearish, then
16:48:07we will only look for short trading
16:48:09setups and we will end in a trade only
16:48:12when the stoastic is turning down from
16:48:14the 80 or levels and we will remain in
16:48:17the trade until the stoastic indicator
16:48:20once again moves above the 20 oversold
16:48:22levels. Meaning that we will ride the
16:48:24trend as long as the downtrend persist.
16:48:27This can help you better time your entry
16:48:29and train with the trend. One more way
16:48:32to further improve the chances of a
16:48:34successful trade is to include support
16:48:36and resistance levels also. So when
16:48:38looking for a long trade setup in
16:48:41addition to other two steps, make sure
16:48:43to take a trade from a previous support
16:48:45level. This will also help to figure out
16:48:47a very tight and logical stop-loss in
16:48:50case the trade don't work out in your
16:48:51favor. And if you're looking for a short
16:48:54trade setup, then try to take an entry
16:48:56from a previous resistance level. The
16:48:59number of trades might reduce because of
16:49:01this, but it will definitely give good
16:49:03rewarding trades. Now moving on to the
16:49:05third strategy, which is using multiple
16:49:08time frames. Whatever your trading style
16:49:10is and whichever time frames that you
16:49:13use for your trading, keep in mind that
16:49:16whenever you think about a trade, you
16:49:18want to know where you are with respect
16:49:20to the big picture. Now what is this big
16:49:23picture anyway and why is it important?
16:49:25Big picture refers to the higher time
16:49:28frame depending on your trading style.
16:49:30Maybe you are an intraday trader with a
16:49:32trade entry time frame of 5 minutes then
16:49:35possibly 1 hour time frame is your
16:49:37higher time frame. The reason why we
16:49:39should care about long-term trend is
16:49:41because if you want to find high
16:49:43probability trades then you want to be
16:49:46trading with the higher time frame trend
16:49:48and not against it. Now the question is
16:49:51how do you do it and how will you use
16:49:53the stoastic indicator to filter your
16:49:55trades? Here's how. Let's say you want
16:49:57to go long on the 1 hour time frame
16:50:00which is your trade entry time frame.
16:50:02But before you do so, we will have to
16:50:04check the daily time frame which is your
16:50:06trend time frame and see where you are
16:50:08in the big picture. The idea is to make
16:50:11sure that the higher time frame trend is
16:50:13in alignment with the lower time frame
16:50:15trend. that is you want to make sure
16:50:17that the daily time frame is not in an
16:50:19downtrend and with the stoastic
16:50:21indicator overbought. So if this is the
16:50:24case then the market is likely to head
16:50:26lower and you don't want to be entering
16:50:29a long position in the 1 hour time
16:50:31frame. So once you look at the higher
16:50:32time frame you will realize if something
16:50:35is right or not. In this particular case
16:50:37we can see that the higher time frame is
16:50:39in a downtrend and the stoastic is at an
16:50:42overbought level. So the chances are the
16:50:44market is likely to continue trading
16:50:46lower and you don't want to go long in
16:50:49your 1 hour trade entry time frame.
16:50:51Instead, what you should do is that if
16:50:53your daily time frame is in a downtrend
16:50:56with stochastic being overbought, then
16:50:58you'll only look for short trading setup
16:51:01on your lower time frame. Your entry
16:51:03trigger can be any bearish signal like a
16:51:06bearish breakdown from support level on
16:51:081 hour time frame or anything else.
16:51:11Similarly, you can derive a setup for
16:51:13high time frame uptrend and stochastic
16:51:15at oversold levels also. Now, let's talk
16:51:18about the final strategy which is a
16:51:20combination of support, resistance,
16:51:22stochastic and reversal setups. Let's
16:51:25say the price is moving up and down
16:51:27within a range. Most technical
16:51:29indicators will not work properly in
16:51:31such choppy price action. Be moving
16:51:34averages, RSI, MACD but not stoastics.
16:51:38If you search the internet books,
16:51:40courses, anything, they will tell you
16:51:42that the best time to use stoastic
16:51:44indicator is in range markets. And there
16:51:46is a reason why they are telling this
16:51:48because you can wait for the price to be
16:51:50overbought before shorting from a
16:51:52resistance level. And you can wait for
16:51:54the oscillator to give an oversold
16:51:56signal before taking a long trade from
16:51:58the support level. And from the looks of
16:52:01it, it seems that the stochastic
16:52:03indicator can pinpoint the tops or
16:52:05bottoms of a range with deadly accuracy.
16:52:08This is a form of reversal trading from
16:52:11a level of importance. But here's the
16:52:14thing, you should not be trading all the
16:52:16ranges. Think about the general idea of
16:52:19placing your stop-loss and targets when
16:52:21it comes to trading ranges. We will
16:52:24always try to keep stop- losses beyond
16:52:26the level from which we are taking a
16:52:28trade or we will place our stop- loss
16:52:30beyond the deepest wick of that range.
16:52:33And when it comes to targets, the
16:52:35opposite level from which you have taken
16:52:37an entry is generally your target. So if
16:52:40you have shorted from the resistance,
16:52:42then support level of the range is your
16:52:45target level. But one thing which is
16:52:47often missed out is the reward risk.
16:52:50Meaning your trade should have at least
16:52:52a 2 is to1 reward to risk ratio. This in
16:52:54turn means that you should have a range
16:52:57that is wide enough that could provide
16:52:59you with the appropriate reward to risk.
16:53:01This in turn means that you should avoid
16:53:03trading narrow ranges. In addition to
16:53:06this, you can make use of price action
16:53:08candlesticks to better time your trade
16:53:10entries. Candlesticks like deep wicked
16:53:13pin bars, morning stars or evening
16:53:16stars, engulfing patterns, etc. from the
16:53:18support or resistance level is a good
16:53:21sign for a possible price reversal. And
16:53:23when you combine this with the oversold
16:53:25and overboard signals, you can get a
16:53:27good trade. Now, in the final section,
16:53:30we will talk about how to combine
16:53:32stochastics with other tools or
16:53:34indicators. Now, as with any other
16:53:36trading concept or tool, you should not
16:53:38use stochastic indicator all by itself.
16:53:41To receive meaningful signals and
16:53:43improve the quality of your trades, you
16:53:46should combine the stoastic indicator
16:53:47with other tools. I will talk about
16:53:50three such tools. Number one are moving
16:53:52averages. Moving averages are a great
16:53:55addition and they can act as filters for
16:53:57your signals. We have talked about this
16:53:59in the previous section as to how you
16:54:02can filter trades using a 200 period
16:54:04simple moving average. You should always
16:54:06try to trade in the direction of your
16:54:08moving average. And as long as the price
16:54:10is above the moving average, you should
16:54:12look for long trades only. And when the
16:54:15price is below the moving average, you
16:54:16should look for short trades only. The
16:54:19second rule is to use price patterns. As
16:54:21a breakout or reversal trader, you
16:54:24should look for chart patterns like
16:54:26wedges, triangles, head and shoulders,
16:54:28rectangles, etc. I have already made a
16:54:313-hour long video on chart patterns and
16:54:33you may want to check that out to learn
16:54:35more. You'll find all these mentioned
16:54:37videos in the I button. When the price
16:54:39breaks such a chart pattern, it comes
16:54:41with momentum and in turn with an
16:54:42accelerating stoastic which can
16:54:45potentially signal a successful
16:54:46breakout. Now, the last tool we can use
16:54:49are trend lines. This works especially
16:54:52well when we are trading stoastic
16:54:54divergences or stoastic reversals. First
16:54:58of all, you need to find an established
16:55:00trend with a valid trend line and you
16:55:02have to wait for the price to break it
16:55:04with the confirmation of your stoastic
16:55:06indicator. Although stochastic indicator
16:55:08is a very simple tool and only looks at
16:55:11a very few data points on your chart, it
16:55:14can still provide meaningful trend and
16:55:16momentum information. Also, I want to
16:55:18highlight the importance of getting to
16:55:20know your trading tools. A wrong
16:55:22understanding and a wrong application of
16:55:24your trading tool can lead to incorrect
16:55:27training decisions. So it is essential
16:55:30that you take your time to fully
16:55:32understand the indicators or tools that
16:55:34you're using.
16:55:37We will take a look at the VWAP
16:55:39indicator which is a special indicator
16:55:41when compared to other available
16:55:43indicators in the market. This will be a
16:55:45very informative video. So do watch it
16:55:47till the end and if you haven't
16:55:49subscribed to the channel yet, please
16:55:51make sure to subscribe. Well then here
16:55:53is what we will discuss in this video.
16:55:55We will talk briefly about VWAP and the
16:55:58basic information related to VWAP. Then
16:56:00we will move on to understanding why
16:56:02VWAP is better than other technical
16:56:04indicators. Then we will have a brief
16:56:06discussion on the core concepts of VWAP.
16:56:09We will also be talking about the uses
16:56:11of VWAP and the importance of VWAP
16:56:14bands. Not to mention, we will also
16:56:16discuss about the disadvantages of using
16:56:18VWAP. And finally, we will wind up the
16:56:21video with three VWAP strategies that
16:56:23you can use to trade in the market. So,
16:56:26without wasting any time, let's get
16:56:28started.
16:56:31VWAP stands for volume weighted average
16:56:34price. VWAP is commonly used as a
16:56:37benchmark indicator and it is derived
16:56:39from a ratio of average share price for
16:56:42a stock when compared to the total
16:56:44volume of shares traded over a
16:56:46particular time frame. The indicator is
16:56:48most commonly used by short-term traders
16:56:51and algorithm based trading programs.
16:56:54The indicator helps analysts and traders
16:56:56evaluate the current price of a stock
16:56:59and determine whether it is relatively
16:57:01overpriced or underpriced compared to
16:57:03the average trading price for the day.
16:57:06What makes VWAP so popular is that it is
16:57:09used to measure the trading performance
16:57:11of smart money or large institutions.
16:57:14Professional traders who work for
16:57:16investment banks or hedge funds are
16:57:18required to trade large numbers of
16:57:20shares each day. So they cannot enter or
16:57:22exit the market by simply buying or
16:57:25selling a large position at any given
16:57:27prices. So these institutional traders
16:57:30compare their prices to the VWAP values.
16:57:33So when a buy order is executed below
16:57:35the VWAP, it would be considered as a
16:57:37good order filling because the stock was
16:57:40bought at a below average price meaning
16:57:42that the trader has bought their large
16:57:44position at a relatively discounted
16:57:46price compared to the price that is
16:57:48available in the market. So VWAP was and
16:57:51is used by institutional traders to
16:57:53identify good entry and exit points in
16:57:56the market. On the other hand, when a
16:57:58professional trader has to get rid of a
16:58:00large position, they try to sell the
16:58:02position at a price which is higher than
16:58:05the VWAP price. So in short, what we can
16:58:08understand is that VWAP is an intraday
16:58:10indicator that can be used to help
16:58:12investors decide whether to adopt an
16:58:15active or passive approach to enter
16:58:17their positions. So many traders also
16:58:20use VWAP to help them buy at a
16:58:23relatively inexpensive price and further
16:58:26sell them at a comparatively higher
16:58:28price. Now let us briefly look at how
16:58:30VWAP is calculated. VWAP is calculated
16:58:34using the opening price for each day and
16:58:36adjusting in real time right up until
16:58:39the close of the session. Therefore the
16:58:41calculation uses only intraday data and
16:58:44the formula for calculating VWAP is as
16:58:46follows. VWAP is equal to cumulative
16:58:49typical price multiplied by volume the
16:58:52whole divided by cumulative volume. Now
16:58:54the breakdown of this calculation is
16:58:57quite extensive and which is not great
16:58:59use for us. So rather than dwelling deep
16:59:01into these calculations, we will try to
16:59:04focus on the application side of this
16:59:06indicator. Since the VWAP calculation is
16:59:09based on historical data of price and
16:59:11volumes, it is considered as a lagging
16:59:14indicator. But this does not stop
16:59:16traders from using this indicator to
16:59:18establish support or resistance level
16:59:21which is suitable for intraday trading.
16:59:23And on top of this because institutional
16:59:25traders use VWAP as a benchmark for
16:59:28their execution activity. VWAP price
16:59:30level is considered to be highly
16:59:32influential in the intraday price
16:59:34action.
16:59:36Now let us see why VWAP is a superior
16:59:39indicator or what is the significance of
16:59:42VWAP. Now, VWAP combines price and
16:59:45volume together in its value. Therefore,
16:59:48analysts consider VWAP to be a more true
16:59:51representation of the average price of
16:59:53stock. One of the most important
16:59:55features of VWAP is that it is
16:59:58cumulative in nature while most
17:00:00technical indicators are periodic in
17:00:03nature over the recent number of
17:00:04candles. To understand this simply,
17:00:07think about a chart as a painting which
17:00:10is drawn candle by candle by an artist.
17:00:12Imagine if you could only see the last
17:00:159, 10, 20 or 50 candles made by the
17:00:18artist on the chart while everything
17:00:21before that disappears from the view as
17:00:23he continues painting. How would that
17:00:25feel? You will not get the feel of the
17:00:27entire picture. Right? So this is the
17:00:30same problem with periodic indicators.
17:00:32Data from beyond the arbitrary look back
17:00:34period you have selected is no longer
17:00:37factored into the calculation. Which
17:00:39means if you have selected a 9 EMA or 20
17:00:42SMA only the previous nine bars or the
17:00:45previous 20 bars are considered for
17:00:47calculation which leaves you with an
17:00:49incomplete picture of the market. Now
17:00:52when it comes to VWAP its cumulative
17:00:54nature allows you to see the entire
17:00:56painting develop over the course of the
17:00:58day while factoring in each and every
17:01:00candle and no piece of data gets left
17:01:03behind which leaves you with a realistic
17:01:05picture of the market. Moreover, VWAP
17:01:08isn't susceptible to changes in length,
17:01:11type, or time frame unlike moving
17:01:13averages. What this means is that in
17:01:15addition to providing an increased
17:01:17context, the cumulative calculation of
17:01:20VWAP prevents confusion regarding the
17:01:23selected chart time frames and indicator
17:01:25settings that exist in nearly every
17:01:28other piece of technical analysis
17:01:29indicator. It doesn't matter if you use
17:01:32VWAP in a one minute chart, an hourly
17:01:34chart, or anything in between. There is
17:01:36only one intraday VWAP. It does not
17:01:39change with time frame because the
17:01:41factors that were taken for calculation
17:01:43was just the price and the volume. So
17:01:46flipping between the time frames will
17:01:48not affect the calculation and the
17:01:50calculation remains constant. The same
17:01:52can't be said for periodic indicator.
17:01:54For example, a 20 period moving average
17:01:57on a 1 minute chart will look
17:01:59drastically different than what it would
17:02:01look like in a 1 hour chart.
17:02:05There are a few core concepts that are
17:02:07associated with the VWAP indicator.
17:02:09Number one is that VWAP behaves like a
17:02:12magnet which means it either attracts or
17:02:15repels. So our main objective should be
17:02:19identifying the market style that is if
17:02:22the price is moving towards the VWAP or
17:02:24away from the VWAP. There is this myth
17:02:27in the market that price is always
17:02:29attracted towards the VWAP. But this is
17:02:32not true in every case and such an
17:02:34interpretation will lead to an
17:02:36oversimplified approach when using the
17:02:38VWAP. If we go by this approach,
17:02:41shorting stocks that trade too far away
17:02:43from VWAP and buying those that fall too
17:02:46far below the VWAP with the exception
17:02:48that a reversal is imminent. So if these
17:02:51conditions were true, we would never
17:02:54witness sustained trends or uptrends or
17:02:56downtrends in the market. Now the
17:02:58reality is that price can either be
17:03:00drawn towards the VWAP or it can be
17:03:03actively repelled from it. So you have
17:03:05to understand this magnetism concept
17:03:08associated with VWAP or else you will
17:03:10find yourself trading in the wrong side
17:03:12of the market and thereby making a loss.
17:03:15Now the second concept associated with
17:03:17VWAP is that VWAP has inertia or in
17:03:21simple words it has the tendency to
17:03:23continue whatever it's doing. Now what
17:03:25this means is that we have given volume
17:03:27the equal weight in calculation of VWAP.
17:03:30So VWAP is intuitively more responsive
17:03:33to price movements on significant
17:03:35volume. So as VWAP absorbs more price
17:03:38and volume data over time, it becomes
17:03:40more resistant to random oscillation and
17:03:43sudden shifts. So this allows it to
17:03:45accurately reflect only meaningful
17:03:48changes in the market's value and it
17:03:50increases its credibility as a reliable
17:03:53reference point. This is what is meant
17:03:55by the inertia of VWAP where its
17:03:58resistance to change make it
17:04:00significantly more reliable than other
17:04:02short-term indicators which randomly
17:04:04gives out buy or sell signals every
17:04:06couple of minutes. Moving on, let us
17:04:09discuss some of the important uses of
17:04:11VWAP. Number one, VWAP can be used to
17:04:14determine the market trend. So for
17:04:17bullish trending days the market usually
17:04:20stays above the VWAP and for bearish
17:04:22trending days the market stays below the
17:04:25VWAP and for ranging sessions or ranging
17:04:27days the market stays almost around the
17:04:30VWAP indicator which remains more or
17:04:32less flat. Now these observations show
17:04:35that VWAP has a great potential for
17:04:37helping traders identify the market tide
17:04:40during an intraday activity. Another way
17:04:43of determining the market trend using
17:04:45VWAP indicator is by paying attention to
17:04:47the slope of the VWAP. So in a trending
17:04:50session, the slope of the VWAP will stay
17:04:53positive or negative throughout the
17:04:54session. On the other hand, when it's a
17:04:57ranging market, the market fails to move
17:04:59away from the VWAP and the VWAP will
17:05:02have a relatively flat slope, meaning
17:05:04that there is not much trending action.
17:05:07Now the second use of VWAP is that it
17:05:09can be used as a support or resistance
17:05:12zone. When price is above the VWAP, the
17:05:15VWAP line will act as a support. On the
17:05:18other hand, when the price stays below
17:05:20the VWAP, the VWAP line will act as a
17:05:22resistance to the price. Now the third
17:05:25and final use of VWAP is that VWAP shows
17:05:28who is in control or who is the
17:05:30dominating force in the market. So when
17:05:32a stock is traded above the VWAP it
17:05:35means that buyers are in overall control
17:05:37of the price and there is a buying
17:05:39demand on the stock and when a stock
17:05:41price breaks and close below the VWAP it
17:05:43is safe to assume that the sellers are
17:05:45gaining control over the price. So in
17:05:48short when VWAP is rising then buyers
17:05:50are in control. If VWAP is falling, it
17:05:53shows sellers are in control. And if
17:05:56VWAP is flat, then it indicates that no
17:05:58one is controlling the market and the
17:06:00price is in a trading range.
17:06:05The VWAP bands or the standard deviation
17:06:07bands associated with the VWAP indicator
17:06:10can save your money big time. So the
17:06:12idea of just buying when the price is
17:06:15above the VWAP and selling when the
17:06:17price is below the VWAP is drastically
17:06:20oversimplified. So in order to make
17:06:22meaningful trades we can make use of
17:06:24standard deviations in association with
17:06:27VBA. Now standard deviation in short is
17:06:30a statistical tool which is used to
17:06:32quantify the variance in a data set. Now
17:06:35by applying this standard deviation tool
17:06:38to trading with VWAP serving as the
17:06:40average line. We can plot these
17:06:42deviations as bands, an upper band and a
17:06:45lower band to create a visible unit of
17:06:48measurement and characterize the market
17:06:51movement within these bands and also to
17:06:54gauge the volatility. Now this looks
17:06:56like a Ballinger band but trust me this
17:06:59is better than a Ballinger band because
17:07:01in Ballinger bands the average line is a
17:07:03moving average. But in case of VWAP the
17:07:06average or the mean line is actually a
17:07:09VWAP line which in turn is an average
17:07:12value generated from the calculation of
17:07:14prices and volumes. So it holds more
17:07:17weightage than a moving average. Now you
17:07:20can find this VWAP indicator with bands
17:07:22in the trading view site and the
17:07:24deviation bands are automatically
17:07:26plotted and it gets adjusted as we
17:07:28receive more data throughout the day. If
17:07:31you look at it at the market open they
17:07:33typically start off small and then
17:07:35expand as the price begins to break away
17:07:38from the market average. The rate at
17:07:40which these bands change depend upon how
17:07:44far the price is away from the VWAP and
17:07:46how much volume is being transacted to.
17:07:49So applying VWAP and the deviation bands
17:07:52to a chart creates a grid-like system
17:07:55which allows you to categorize the
17:07:57market activity into different zones and
17:08:00each region has unique characteristics
17:08:03and different expectations. What this
17:08:05means is that it helps you identify if
17:08:08the market is good enough to go long or
17:08:11to go short or if there is no
17:08:13identifiable trend. This will in turn
17:08:16allow you to have a superior reframing
17:08:18on how you look at a chart. Now I have
17:08:21mentioned about the four zones that the
17:08:23VWAP would generate. The first zone is
17:08:26above VWAP but it is beyond the first
17:08:29standard deviation and in this case the
17:08:32market is expected to continue
17:08:34uptrending. If the price is above VWAP
17:08:36but it stays between the VWAP and the
17:08:39first standard deviation then it is
17:08:41expected to oscillate around the VWAP.
17:08:43Similar is the case when the price is
17:08:46below the VWAP and it is between the
17:08:48VWAP and the negative one standard
17:08:50deviation then the price is expected to
17:08:52oscillate around the VWAP and finally
17:08:56when the price is beyond the VWAP and it
17:08:58is lower than the negative one standard
17:09:01deviation then the market is expected to
17:09:03be downtrending. Price crossing between
17:09:06these VWAP zones is also an noteworthy
17:09:09events because more often or not there
17:09:11is some sort of a resistance when the
17:09:13price crosses these zones. These zones
17:09:16expand when the price sustains a trend
17:09:18and it contracts when the price
17:09:20consolidates towards the VWAP.
17:09:23Now moving into the disadvantages of
17:09:25VWAP. VWAP is a lagging indicator
17:09:29because VWAP is more sensitive to price
17:09:31and volume changes at the beginning of
17:09:33the session but it becomes less
17:09:35responsive as the session progresses.
17:09:38This is called as progressive lag. Due
17:09:40to this progressive lag, VWAP might not
17:09:42be an appropriate indicator for timing
17:09:45the market entries or in other words it
17:09:47requires a supporting price action for
17:09:50entry or knowledge about price action is
17:09:53very essential while using this
17:09:55indicator. Another shortcoming is that
17:09:57it can be only used in the intraday time
17:10:00frame only. If you try to use it for
17:10:02more than a day, it will not be able to
17:10:04portray the correct trend and it cannot
17:10:07be used at the opening of the day.
17:10:09Meaning that VWAP will be in line with
17:10:12the price and it will only expand or
17:10:14move away only when the session
17:10:16proceeds.
17:10:18Now, finally, let's talk about the
17:10:21strategies. In this video, we will talk
17:10:23about three strategies. Number one is a
17:10:25pullback strategy. Number two is a
17:10:28reversal strategy and finally a mean
17:10:31reversion strategy. Now a word of
17:10:33caution before using VWAP strategy is
17:10:36that you should avoid trading VWAP at
17:10:38the opening of the trading session which
17:10:40means after the market opens the price
17:10:43bars tend to overlap the VWAP. So in the
17:10:45first 5 minutes due to heavy trading
17:10:47happening in the market you cannot judge
17:10:49the market bias until the market tries
17:10:52to move away from VWAP. So after
17:10:54volatility decreases around 10 to 15
17:10:57minutes into the open, the stock price
17:10:59will move towards or away from the VWAP.
17:11:02So you should stay out of the markets
17:11:04until the prices diverge sufficiently
17:11:06from the VWAP. Now I'm going to give you
17:11:09some general conditions before taking a
17:11:11trade. Number one, do not try to go long
17:11:14when the price is below the VWAP and do
17:11:16not try to short a stock if the price is
17:11:18above the VWAP. But there is a catch. If
17:11:22the prices are extended way far from
17:11:24VWAP then a reversal is okay or a mean
17:11:28reversion is okay but the target has to
17:11:31be set as the VWAP line. We will discuss
17:11:33the mean reversion strategy soon enough.
17:11:35Now most important point use VWAP
17:11:38indicator with price action and volume.
17:11:41The first strategy that we'll be talking
17:11:43about is the VWAP first pullback
17:11:46strategy. Now this strategy should be
17:11:48used in trending market. Let us take a
17:11:51look at this strategy in terms of an
17:11:53uptrending day. So the first step is to
17:11:55find out if the stock is in a clear
17:11:57uptrend or a downtrend depending upon
17:12:00where the price is with respect to the
17:12:02VWAP line. After that you need to look
17:12:05for at least two to three candles in the
17:12:08same direction above the VWAP. After
17:12:10that you have to wait for the price to
17:12:12approach the VWAP line for the first
17:12:15time. that is a pullback to the VWAP
17:12:17should happen and then look for a push
17:12:20away from the VWAP line. What this means
17:12:22is that the price should not stall at
17:12:24the VWAP or consolidate rather it should
17:12:27push away from the VWAP. You can also
17:12:29look for a deep rejection from the VWAP
17:12:32line. And finally observe that if the
17:12:34upside push follow through higher or is
17:12:37it rejected back to the VWAP level from
17:12:39the previous swing high level in case of
17:12:41an uptrend. And if the price manages to
17:12:44break above the previous high, you can
17:12:46take a long entry or initiate a buy
17:12:48order keeping a stop-loss below the
17:12:51rejection candle. And when the move
17:12:53turns out to be in your favor, you can
17:12:55keep a trailing stop-loss below the VWAP
17:12:58line with suitable buffer. You can
17:13:00accept the trade when the price moves
17:13:03below the VWAP line or hits your
17:13:05trailing stop-loss. The same strategy
17:13:07can be used in downward trending markets
17:13:09also just by changing the rules. Now the
17:13:12second strategy is a reversal strategy.
17:13:15In this case we will talk about the VWAP
17:13:17reversal towards the upside. Here are
17:13:20some of the criterias of this strategy.
17:13:22The previous day should be an uptrending
17:13:24day or a bullish day and the price
17:13:27should not close below the last swing
17:13:29low. Now we will draw a horizontal line
17:13:32from the VWAP level of the last candle
17:13:35of the previous day. And we can name
17:13:37this as the P VWAP level. For a buyside
17:13:40trade, the price should close above the
17:13:42VWAP level. Look to see in the morning
17:13:45if the price moves into the previous day
17:13:47VWAP or the PWAP level. The volume of
17:13:50this move is also important. Preferably
17:13:53low volume move is the best. The price
17:13:56opens and moves down with lesser volume
17:13:59and stalls at the PVWAP level and is
17:14:02unable to close below the PVWAP. This is
17:14:04very important that is the price should
17:14:07not close below the PVWAP. Look for a
17:14:10push away from the PVWAP level. If the
17:14:12upside push followed through higher then
17:14:14look to take a long entry or initiate a
17:14:17buy order. It is best if we make use of
17:14:20price action. We will take the trade
17:14:22only if we get a good entry and good
17:14:24risk-to-reward ratio by keeping the stop
17:14:27loss below the PVWAP level. And when the
17:14:30price moves in your favor, keep a
17:14:31trailing stop-loss below the VWAP level
17:14:34with suitable buffer. You can also make
17:14:36use of the VWAP's upper band to book
17:14:38your profit. That is when the price
17:14:40reaches the upper band, you can exit the
17:14:42trade. Now the last and final strategy
17:14:45is the mean reversion to VWAP from the
17:14:48standard deviation band. This is a very
17:14:51useful strategy that can be used in
17:14:53ranging markets or when the price is
17:14:55very much overextended from the VWAP
17:14:58level. The idea is to take a buy or sell
17:15:01entry from the second standard deviation
17:15:03band keeping the VWAP line as the
17:15:06target. Now you may ask why the second
17:15:08standard deviation band and not the
17:15:10third band or only the first band. Now
17:15:12the answer is very simple and can be
17:15:14explained using the normal distribution
17:15:17curve where a single standard deviation
17:15:19band above and below the VWAP will cover
17:15:22only 68%age of the price move while the
17:15:25second standard deviation band
17:15:26encompasses more than 95%age of the
17:15:29price move. Even though the third
17:15:32standard deviation bands predicts over
17:15:3499%age of the price moves but such moves
17:15:37are rare in occurrence and so you might
17:15:39not get a suitable entry as the price
17:15:42might return to the main line before
17:15:44testing the third standard deviation
17:15:46bands which means you will not get a lot
17:15:48of trades if you use the third standard
17:15:50deviation band. Now the trade idea is
17:15:53simple. We will wait for the price to
17:15:55test the second deviation band either
17:15:58from above or below the VWAP line. Now
17:16:00keep an eye on the price action formed.
17:16:03If the candle formed at the band shows
17:16:05some sort of a rejection and then goes
17:16:08on to form a reversal candlestick
17:16:10pattern. For example, if the price is at
17:16:12the lower standard deviation band and
17:16:14the price rejects lower prices and forms
17:16:17a hammer candlestick. This can be a
17:16:20confirmation for taking a long entry. If
17:16:22the next candle crosses above the high
17:16:24of the hammer candle. Now the strength
17:16:26of this strategy is higher when the
17:16:28reversal happens near an area of value
17:16:31like a support or resistance where there
17:16:33is enough liquidity for the move to
17:16:36happen. The stop-loss for this trade
17:16:38would be below the hammer candle or
17:16:40below the support level in case of this
17:16:43example. For a short trade, the setup is
17:16:45similar, but we have to look for a
17:16:47rejection from the upper VWAP band and
17:16:50look for a bearish reversal candlestick,
17:16:52more preferably near a resistance level.
17:16:55The stop loss can be placed above the
17:16:57rejection candle or above the resistance
17:17:00level with suitable buffer. The target
17:17:03in both these setups is the VWAP line
17:17:06itself. The primary goals of technical
17:17:09analysis in trading is to identify a
17:17:11probable trend or a counter trend that
17:17:14is expected to continue and then provide
17:17:16a suitable entry at the trade at a
17:17:19credible support or resistance level
17:17:21with a predefined risk and further
17:17:23monitor the likelihood of the
17:17:25continuation or a reversal to optimize
17:17:28your exit. Now if you ask me VWAP meets
17:17:31all these criteria. The VWAP along with
17:17:34the band system helps you to forecast
17:17:36the market direction and also predict
17:17:39the dynamic supports and resistance
17:17:41level thereby giving clearcut risk
17:17:43levels that we can use both initially to
17:17:45enter the trades and also to actively
17:17:48manage them as we progress with our
17:17:50trade. Now VWAP in no way is the holy
17:17:53grail to trading but it has got some
17:17:55exceptional utility. The thing is it
17:17:58won't save you from undisiplined
17:18:00trading. VWAP is a superior indicator
17:18:02and it is recognized by institutions.
17:18:08Are you one of those traders who is
17:18:10tired of placing stop- losses that get
17:18:13triggered again and again only to see
17:18:15the price move in the exact same way
17:18:17that you wanted it to move. It's quite
17:18:19frustrating actually. I have already
17:18:21talked about the concept of placing a
17:18:24logical stop-loss for your trades. It is
17:18:26a very good video to start with if you
17:18:28have no idea how to place stop- losses
17:18:30for different trading scenarios. One
17:18:32thing that I missed on that video was
17:18:34the concept and application of a
17:18:36stop-loss specialist. Yes, it's none
17:18:38other than the ATR indicator. I have
17:18:41made a video on ATR a long time ago, but
17:18:44it was not a very comprehensive video.
17:18:46So, I thought why not make a detailed
17:18:49video on the basic concepts and
17:18:50applications of the ATR indicator. These
17:18:53are going to be the topics that we will
17:18:55be discussing in this video. We will
17:18:57start from the basics of ATR including
17:19:00the guiding principles of ATR indicator
17:19:02to its calculation, the shortcomings of
17:19:05ATR and a few observations and finally
17:19:08we will go in depth into the
17:19:10applications or uses of ATR. Let's start
17:19:13from the very basics. What is ATR? The
17:19:16average true range or ATR is an
17:19:19indicator that measures volatility in
17:19:21the markets. It was developed by J.
17:19:23Weller who is undoubtedly one of the
17:19:26biggest contributors to technical
17:19:28analysis and he mentioned about ATR in
17:19:30his book new concepts in technical
17:19:32analysis systems which was published in
17:19:351978.
17:19:36Unlike indicators like Ballinger bands
17:19:39or moving averages, the ATR is usually
17:19:42plotted below the price rather than on
17:19:45or over the price. The ATR indicator
17:19:47talks about the market volatility only
17:19:50and nothing more than that. does not
17:19:52indicate the direction of the trend or
17:19:54the momentum but just the volatility.
17:19:56And why do you have to care about market
17:19:58volatility in the first place? To put it
17:20:00simply, volatility is a measure of price
17:20:03fluctuations in the market. If there is
17:20:05high volatility, then price swings
17:20:07happens very quickly and unpredictably
17:20:10resulting in high risk highreward
17:20:12trading conditions. And while during low
17:20:14volatility conditions, the price swings
17:20:16are more calm and relaxed. So both the
17:20:18risk and reward drops significantly. But
17:20:21the real reason why you need to be
17:20:22bothered about volatility is due to
17:20:24targets and stop- losses. Let me
17:20:27explain. Do you think a tighter
17:20:29stop-loss would work in a highly
17:20:31volatile market condition? And
17:20:33similarly, do you think a very wide
17:20:34target is likely to get achieved in a
17:20:37low volatile market? The possibility of
17:20:39them working in the favor of your trade
17:20:41is very dim. This is where the ATR
17:20:44indicator comes into picture. We will
17:20:46talk about all this stuff as we move
17:20:47further forward in this video. But for
17:20:49now, let's look at how the ATR indicator
17:20:52is calculated. This is an important step
17:20:54because it gives you clarity as to how
17:20:56the indicator functions and why it will
17:20:59work in real market condition. And this
17:21:01is also one of those things that I need
17:21:03you to be cautious about since there are
17:21:05a hell lot of indicators flying around
17:21:07these days giving out buy and sell
17:21:09signals, but nobody shares the logic
17:21:11behind them even if you pay for them. So
17:21:14always make sure that you know what the
17:21:16basic idea behind the indicator is
17:21:19before you use them. Right? Let's look
17:21:21at the calculations now. How are adear
17:21:23values calculated? Well, it can be done
17:21:25using one of the three methods depending
17:21:27on how the candles are formed. To
17:21:30calculate the average true range, the
17:21:32first step is to calculate the true
17:21:34range or TR. For doing this, the current
17:21:37price bar is compared either to itself
17:21:39or to the previous bar's close price.
17:21:42and the true range is taken as the
17:21:44greatest of the following calculations.
17:21:47So here's how you should do it. The
17:21:49first method is to subtract the current
17:21:51candle's low price from the current
17:21:53candle's high price. The second method
17:21:56is to find the absolute value of the
17:21:58difference between the current bars high
17:22:00and the previous candle's close price.
17:22:02And finally, the third method is to find
17:22:04the absolute value of the difference
17:22:07between the current bar's low price and
17:22:09the previous candle's close price. And
17:22:11as I have mentioned the true range will
17:22:13be the maximum of these three values.
17:22:16Now there is a reason why we use
17:22:18absolute values in methods 2 and three.
17:22:21It is just to ensure that the final
17:22:23result is a positive number. After all,
17:22:25Mr. Wellis Wilder was only interested in
17:22:28measuring the distance between the two
17:22:30points and not really the direction. So
17:22:32if the current period's high is above
17:22:34the prior period's high and its low is
17:22:36below the prior period's low, then the
17:22:39current period's high low range will be
17:22:41used as the true range. This is referred
17:22:43to as an outside day that would use
17:22:46method one to calculate the true range.
17:22:48This is a pretty straightforward method.
17:22:51Now methods two and three are used
17:22:53either when there is a gap or an inside
17:22:55day where the high and low range of the
17:22:57current period candle is within the
17:23:00previous candle's highs and lows. So if
17:23:02a gap occurs when the previous close is
17:23:04greater than the current high, it
17:23:06signals a potential gap down or when the
17:23:08previous close is lower than the current
17:23:11low, it signals a potential gap up. So
17:23:13you can learn more about gaps and how to
17:23:16trade them in my price action playlist.
17:23:18Now let us understand these three
17:23:19methods with examples. So in the first
17:23:22example, the current candle's range is
17:23:25larger than the previous candle, which
17:23:27means an outside candle is formed. So we
17:23:30will use method one that is to find the
17:23:32difference between the current candle's
17:23:34highs and lows. Now in the second
17:23:36example you can see a small high or low
17:23:38range formed after a gap up. In this
17:23:40case the true range will equal to the
17:23:43absolute value of the difference between
17:23:45the current high and the previous close.
17:23:47And in the third example there is a
17:23:49small higher low range formed after a
17:23:51gap down. In this scenario, the true
17:23:54range is equal to the absolute value of
17:23:57the difference between the current low
17:23:58and the previous close. Now let's
17:24:01consider a final example to understand
17:24:03things better. Look at this. Even though
17:24:05the current close price is within the
17:24:07previous higher low range, the current
17:24:10higher low range is quite small. In
17:24:12fact, it is smaller than the absolute
17:24:14value of the difference between the
17:24:16current high and the previous candle
17:24:18close, which is quite obviously the true
17:24:20range. Now, typically the average true
17:24:23range is based on 14 periods and can be
17:24:25calculated on an intraday, daily, weekly
17:24:29or monthly basis. But by default, most
17:24:32charting platforms use a 14 period ATR.
17:24:35For this example, the ATR will be based
17:24:37on daily time frames. Let us take a look
17:24:40at the general method for finding ATR.
17:24:42First, since there must be a starting
17:24:45value, the first true range value is
17:24:47simply the high minus the low of the
17:24:49first candle under consideration. Once
17:24:51the true range is computed for the
17:24:53desired period, the ATR can be
17:24:55calculated as the average of the true
17:24:57ranges over the past n periods under
17:25:00consideration. Now the formula that is
17:25:02used to calculate the current period ATR
17:25:05is given by current period ATR is equal
17:25:07to previous period ATR multiplied by n
17:25:11minus one plus current period row range
17:25:14the whole divided by n. So for instance
17:25:16in case of a 14 period ATR n will be
17:25:19equal to 14 and n minus one will be
17:25:22equal to 13. While in case of a 7 period
17:25:25ATR n will be equal to 7 and n minus one
17:25:28will be equal to 6. The first 14-day ATR
17:25:31is the simple average of the daily true
17:25:34range values for the past 14 days. From
17:25:37the next period onwards, each current
17:25:39period ATR is moved by incorporating the
17:25:42previous periods ATR value. Or simply in
17:25:45case of 14 periods, the current ATR is
17:25:47equal to prior ATR multiplied by 13 plus
17:25:51current true range the whole divided by
17:25:5314. This simply means that you have to
17:25:56multiply the previous 14-day ATR by 13.
17:25:59Then add the most recent days to range
17:26:02value and then finally divide the total
17:26:05by 14. So what are the key takeaways
17:26:08from these calculations? First point,
17:26:10the larger the range of the candles, the
17:26:13greater the ATR value and the smaller
17:26:15the candles range, the smaller the ATR
17:26:17value. Second observation, as the
17:26:20volatility expands, the ATR indicator
17:26:22would point higher because when you look
17:26:24at the range of candles, they are
17:26:26increasing over time because volatility
17:26:29is associated with large price swings
17:26:31and candles. So basically, the larger
17:26:34the range of the candles, the larger the
17:26:36ATR value is going to be. Now, let me
17:26:39talk about a few mistakes that traders
17:26:41are likely to make when dealing with the
17:26:43AGR. or maybe let's talk about a few
17:26:46drawbacks of ATR. First of all, ATR is
17:26:49not a trending indicator. A rather
17:26:52common mistake that traders make while
17:26:54using ATR is assuming that the
17:26:56volatility and trend go in the same
17:26:59direction. But this is not right. Recall
17:27:01the fact that average true range
17:27:03indicator measures the volatility of the
17:27:06market. This means volatility can be low
17:27:09while the market is trending higher and
17:27:11it can be the other way around. So the
17:27:13thing that I want to point out is that
17:27:14ATR indicator does not tell you the
17:27:16direction of the trend. This is not a
17:27:19trend indicator that tells you whether
17:27:21the trend is going to go up or down. So
17:27:23let's take a look at a case where the
17:27:25market is clearly going higher. But the
17:27:27ATR value here is going lower. So as I
17:27:30have clearly stated just now, the ATR
17:27:32indicator measures volatility in the
17:27:34market. It only looks at the range of
17:27:36the candles. In this case, you can see
17:27:38the range of the candles is getting
17:27:40smaller. And that is exactly the reason
17:27:42why the ATR indicator values are
17:27:44decreasing. So don't presume that if ATR
17:27:47line is rising, it means the price must
17:27:50be in an uptrend. It's not necessarily
17:27:52true because the price could either be
17:27:54in an uptrend or in a downtrend. So to
17:27:57identify trend either look into price
17:27:59action or use other trend based
17:28:01technical indicators. What the ADR tells
17:28:04us is that if ATR line is rising,
17:28:07volatility is increasing and if ATR line
17:28:10is falling, volatility is decreasing.
17:28:13Now, the second drawback is that ATR
17:28:15values of different stocks or indices
17:28:18cannot be compared. Now, ATR is based on
17:28:21the true range which uses absolute price
17:28:24changes. As such ATR reflects volatility
17:28:27as an absolute level or in other words
17:28:30ATR is not shown as a percentage of the
17:28:33current gloss price. This means low
17:28:35price stocks will have lower ADR values
17:28:38than high price stocks or indices. For
17:28:40example, Reliance stock has an indra
17:28:43value ranging between 25 to 85 while
17:28:46data motor stock have a much lower ATR
17:28:49value between 5 to 25 while index like
17:28:53bank nifty have a much higher ATR value
17:28:55ranging anywhere between 400 to,500.
17:28:58So because of this ATR values of
17:29:01different assets cannot be compared. Now
17:29:04let me talk about a few observations of
17:29:06ATR indicator. First of all, ATR is not
17:29:09a directional indicator like MACD or
17:29:13RSI, but rather a volatility indicator
17:29:16that reflects the degree of interest or
17:29:18disinterest in a price move. Strong
17:29:21price moves in either direction are
17:29:23often accompanied by large true range
17:29:26values due to long ranged candles. This
17:29:29is especially true at the beginning of a
17:29:31price move. On the contrary, wheat price
17:29:33no as you may have already guessed are
17:29:35accompanied by relatively narrow ranges.
17:29:38So as such ATR can be used to validate
17:29:41enthusiasm or interest behind a price
17:29:43move or a breakout or a reversal. For
17:29:46example, a bullish reversal with an
17:29:48increase in ATR values would show strong
17:29:50buying pressure and it will reinforce
17:29:53the reversal. Similarly, a bearish
17:29:55support level breakdown with an increase
17:29:57in ATR would show strong selling
17:29:59pressure and it will reinforce the
17:30:01support level break. Now, if you are
17:30:03someone who uses ATR on an intraday
17:30:06chart, such as in 1 minute or 5 minute
17:30:09or 15 minute time frame charts, then
17:30:11usually ATR will spike higher right
17:30:14after the market opens. When major
17:30:16exchanges like NSE and BSE opens at 9:15
17:30:19a.m., the ATR moves up during the first
17:30:22minute. And that is because the open is
17:30:24the most volatile time of the day and
17:30:27the higher ATR simply indicates that the
17:30:29volatility is higher than it was at the
17:30:31previous day's close. Now, after the ATR
17:30:34spike at the open of the day, the
17:30:36indicator typically spends most of the
17:30:38day declining. The oscillations in ATR
17:30:41indicator throughout the day don't
17:30:43provide much information except for how
17:30:45much the price is moving on an average
17:30:47each minute. In the same way, you can
17:30:49use a daily ATR to see how much an asset
17:30:52price moves in a day. While intraday
17:30:55traders can use 5 minute or 15inut ATR
17:30:58to estimate how much the price could
17:31:00move in 5 or 15 minutes. This simple
17:31:02strategy could help establish profit
17:31:05targets or stop-loss orders which we
17:31:07will discuss next.
17:31:10Let's start with setting up stop-loss
17:31:12using ATR to counter price volatility.
17:31:15Now, let me ask you something. Are you
17:31:17one of those traders who is tired of
17:31:19getting stopped out of your trades
17:31:21prematurely? Now, the reason for this is
17:31:24pretty simple. It is because you are
17:31:25using one of the simplest stop- losses
17:31:28called the hard stop-loss in which you
17:31:30simply place a stop-loss a certain
17:31:32number of points from your entry point.
17:31:35This is not a very logical method of
17:31:37placing a stop-loss. Moreover, having a
17:31:39hard stop-loss in a dynamic market
17:31:42doesn't make sense. Think about it. Why
17:31:44would you place a 20 point stop-loss in
17:31:46both a quiet and volatile market?
17:31:48Similarly, why would you risk 80 point
17:31:51stop-loss in both calm and volatile
17:31:53market conditions? Your stop-loss will
17:31:56greatly depend on the nature of the
17:31:58asset that you're trading on. You can't
17:32:00just keep the same stop-loss for a
17:32:02similar trade for a wild index like Bank
17:32:04Nifty and a more calm index like Nifty.
17:32:07And that's because your stop- loss may
17:32:09be too tight for Bank Nifty because Bank
17:32:11Nifty is a more volatile index. So, what
17:32:14is the solution? The simple hack is to
17:32:16give your trade breathing room. This
17:32:19means your stop loss should be wide
17:32:21enough to accommodate the price swings
17:32:23of the market. Now, you might be
17:32:24wondering, how much is wide enough for
17:32:27my stop loss? Well, here's where you can
17:32:29use the ATR indicator to help you. ATR
17:32:32is an excellent tool for determining the
17:32:34size of a stop-loss at the time of
17:32:36entering your trade because it measures
17:32:38the volatility. It informs you about the
17:32:41magnitude of stop-loss that must be
17:32:43placed when a trade is entered. So, a
17:32:45high ATR reading is indicative of high
17:32:48volatility and it tells you that a wider
17:32:51stop-loss must be placed to avoid
17:32:53getting whips. Similarly, a low ATR
17:32:56reading is reflective of low volatility
17:32:58and tells you that a narrow stop-loss is
17:33:00enough due to the lack of directional
17:33:02trend in the market. Actually, there are
17:33:04two ways in which I use ATR for setting
17:33:07my stop losses. The first method is very
17:33:10straightforward. All you have to do is
17:33:12to find out what the current ATR value
17:33:14is. Then select a multiple of ATR value.
17:33:18So, a multiplier of anywhere between 1
17:33:20to three is good enough. And finally add
17:33:22or subtract that amount to the nearest
17:33:24resistance or support level from which
17:33:26you have taken a trade entry. So if you
17:33:28have taken a long trade from a support
17:33:31and you have a multiplier of one then
17:33:33set your stop loss 180R below the lows
17:33:36of the support. Or if you have taken a
17:33:38short position from the resistance and
17:33:41you have a multiplier of two then set
17:33:43your stop loss 2 ATR above the highs of
17:33:45the resistance. You can also use this
17:33:47method when referencing a deep candle's
17:33:50wick or a price pullback or retest etc.
17:33:53The concept remains the same. You can
17:33:55tweak the value of the multiplier as you
17:33:58like depending on your risk takingaking
17:34:00ability. Now this is a very good method
17:34:02for both intraday and swing trading. But
17:34:05there are times when it is not practical
17:34:07to use a 100 point stop-loss. It affects
17:34:10a trader's position sizing and reward to
17:34:13risk especially if you are an intraday
17:34:15trader. Moreover, the price has to move
17:34:17at least 100 points to give a 1 is to1
17:34:20reward to risk. So in such a situation,
17:34:23even with a multiplier of one, the
17:34:25stop-loss as well as the risk associated
17:34:27with a single trade is very high.
17:34:30Therefore, in such scenarios, the ATR
17:34:32multiplier method doesn't make much
17:34:34sense. That's when we have the second
17:34:36method which is the ATR percentage
17:34:39stop-loss method. As I have already
17:34:41mentioned, a higher ATR indicates a more
17:34:44volatile market while a lower ATR value
17:34:47indicates a less volatile market. Now,
17:34:50by using a certain percentage of ATR,
17:34:52you can ensure your stop-loss is dynamic
17:34:55and it changes appropriately with market
17:34:57conditions. For example, let's say for
17:34:59the first four weeks or first four days
17:35:02depending upon the trading type and time
17:35:04frame that you follow, you notice that
17:35:06the average daily ATR range was around
17:35:0925 to 65. In such a scenario, an
17:35:12intraday trader want to use 10 to 50%age
17:35:14of the ATR stop-loss. Meaning that the
17:35:17stop loss is placed 10 to 15%age of the
17:35:20ATR value from the entry price. So if we
17:35:22take 50%age then the stop loss would be
17:35:25anywhere from 13 points to 33 points
17:35:27from your entry price. Now a swing
17:35:30trader might use 50%age or 100%age of
17:35:33the ATR as stop loss or follow the
17:35:35conventional ATR multiplier method.
17:35:38Let's say the daily Reliance ATR range
17:35:40from April 2022 to September 2022 ranges
17:35:44anywhere between 46 to 84. As such, a
17:35:47swing trader who uses 15%age of ATR
17:35:50value would have its stop-loss of 23
17:35:53points to 43 points from the entry
17:35:56price. Now with that clear, let's learn
17:35:58how to use ATR to write trends in the
17:36:01market. Here we will make use of the
17:36:03concept of volatility stop- losses. I
17:36:06have already discussed this particular
17:36:08concept in my how to set a logical
17:36:10stop-loss video. But to give you a brief
17:36:13context, a trailing or volatility
17:36:15stop-loss is a way to exit a trade if
17:36:18the asset price moves against you. But
17:36:21it also enables you to move or trail the
17:36:23exit point if the price is moving in
17:36:26your favor because during trending
17:36:28markets, you will get big price moves
17:36:30and more profitability. And who would
17:36:33want to miss such an opportunity? So
17:36:35many intraday traders and swing traders
17:36:37use ATR to figure out where to put their
17:36:40trading stop losses. At the time of a
17:36:42trade, look at the current ATR reading.
17:36:45The thumb rule is to multiply the ATR by
17:36:48two or three to determine a reasonable
17:36:50stop-loss point. So if you are buying a
17:36:52stock, you might place a stop loss at a
17:36:55level twice or thrice the ATR value just
17:36:57below the entry price. And if you're
17:36:59shorting a stock, you would place a stop
17:37:01loss at a level twice or thrice the ATR
17:37:04above the entry price. Now, if you're
17:37:07long and the price moves favorably, the
17:37:09stop loss also continues to move twice
17:37:12or thrice the ATR below the price. In
17:37:14this long trading scenario, the stop
17:37:16loss only moves up and not down. Once it
17:37:19is moved up, it stays there until it can
17:37:22be moved up again or when the trade is
17:37:24closed as a result of the price dropping
17:37:27to hit the trailing stop-loss level. Now
17:37:29the same process works for short trades
17:37:32only in that case the stop loss only
17:37:34moves down. Now let us understand this
17:37:37with the help of an example. Let's say
17:37:39the ATR value is X. What you can do is
17:37:42that you can decide upon a multiple of X
17:37:44to trade your stop loss. Let's say for
17:37:46example you want to write trends and you
17:37:49don't know how much buffer space you
17:37:51should give to your trades. So if the
17:37:52stop loss is too tight you might get
17:37:55stopped out on the price retracement or
17:37:57corrective moves. So you have to give it
17:37:59enough room or buffer space so that you
17:38:01can accommodate the retracement that
17:38:03comes along with it. So decide upon an
17:38:05ETR multiplier which may be 2 3 4 5 etc.
17:38:09So one example you can use is 5x meaning
17:38:13a multiple of five as your average true
17:38:15range. So if your average true range
17:38:17value is 20 then multiply it by five
17:38:20then your trading stop loss is basically
17:38:22100 points from the highs or loss
17:38:24depending on your trade type. Now if you
17:38:27are long then subtract x * ATR from the
17:38:30highs and that is your trailing stop
17:38:32loss. And if you are short then add X
17:38:36times to the ATR value from the lows and
17:38:39that's your traing stop loss. But all
17:38:41these calculations and plotting is hard
17:38:44work. So to make your life easier there
17:38:46is a very useful indicator called the
17:38:49Chandler stops which performs this
17:38:51function brilliantly. What it does is
17:38:53that the Chandler stock would take the
17:38:56highs and it calculates what is the ATR
17:38:59value which is X. In this case, assume
17:39:02that I have used five as my multiplier.
17:39:04So I am using 5 * ATR for buffer. Now
17:39:08what the indicator will do is that it
17:39:10takes five multiplied by X and this is
17:39:13the level which is your trailing stop
17:39:14loss. So all you need to do is to hold
17:39:17on to your trade if the market is above
17:39:19this particular level which is 580R from
17:39:22the highs. And if the market does not
17:39:24break below it, you just hold on to your
17:39:26trades. And it is as simple as that. Now
17:39:29this is a very simple tool that helps
17:39:31you ride massive trends in the market.
17:39:33So now you can ask me which is the best
17:39:35ATR multiplier to use. The truth is
17:39:38there is no best ATR multiplier. But
17:39:41there is the fact that the tighter your
17:39:43multiplier the smaller the trend you
17:39:45will capture and the larger the
17:39:47multiplier you using the longer the
17:39:49trend you will write. It really depends
17:39:51upon your risk appetite as to how big of
17:39:54a multiple that you want to use. But as
17:39:56a rough guideline, if you are using a
17:39:58smaller ATR multiplier, then you will
17:40:01write small trends and the time held on
17:40:03the trade is shorter. And if you use a
17:40:05bigger ATR multiplier, then you will
17:40:07ride bigger trends and the time held on
17:40:09the trade is longer. So if you use a
17:40:12multiple of two or three, you tend to
17:40:14capture short-term or medium-term trends
17:40:17and anything above five or more, you'll
17:40:19be able to capture long-term trends.
17:40:22Moving on, let us now understand how to
17:40:24set targets using ATR indicator. Now, if
17:40:27you don't want to write trends, we can
17:40:29also use the ATR indicator to set a
17:40:31profit target. And here's how it works.
17:40:34We already know that the ATR indicator
17:40:36tells you how much a market can
17:40:38potentially move for a particular period
17:40:40by accounting the market volatility. So,
17:40:43let's say Reliance has a daily ATR of 50
17:40:46points. It means price could move on an
17:40:49average of 50 points on a day. This
17:40:51means if you are a day trader, you can
17:40:53have a target profit of 50 points give
17:40:55or take and there's a good chance that
17:40:57it will be hit. Of course, you don't
17:40:59want to blindly set a 50 points target.
17:41:02Instead, combine it with market
17:41:04structure or areas of values like
17:41:06support and resistances, swing highs,
17:41:08swing lows, etc. So that you know where
17:41:11the price might reach for that day. My
17:41:13point is that entries and exits should
17:41:15not be based on ATR indicator alone. ATR
17:41:18is just a tool that should be used in
17:41:20conjunction with an existing strategy to
17:41:23help filter trades. Only if a valid buy
17:41:25or sell signal occurs based on your
17:41:28particular strategy should the ATR
17:41:30indicator help confirm the trade
17:41:31targets. Now let's consider another
17:41:33example. Let's say Nifty moves an
17:41:35average of 100 points a day. You went
17:41:37long at the support level based on a
17:41:40reversal strategy and you are not sure
17:41:42where to take profits. There are three
17:41:44possible resistance levels which you can
17:41:46possibly achieve your target. First is
17:41:4930 points away. The second is 60 points
17:41:52away and the last level is 150 points
17:41:55away. Which resistance level would you
17:41:57choose for your targets? The 30 points
17:41:59target is likely to hit within the day,
17:42:02but you are leaving in lot of money on
17:42:04the table as the market could move up
17:42:06100 points a day on average given there
17:42:08was no big news or event to trigger a
17:42:10gap up. While the 150 points target is
17:42:13unlikely to be hit within a day as it's
17:42:16more than the ATR value. So the 60 point
17:42:19target is your best option as it is
17:42:22within the daily ATR value and offers
17:42:24more profitability than 30 points level.
17:42:27So here's the takeaway when using ATR
17:42:30indicator for determining your targets.
17:42:32The first step is to identify the daily
17:42:35ATR value. And secondly, when you set
17:42:37your profit target, combine it with
17:42:39market structures, areas of values and
17:42:42ensure this target distance is less than
17:42:44the daily ATR value. And if you are a
17:42:47swing trader, you can refer to the
17:42:49weekly or monthly ATR value for
17:42:51determining suitable target levels. Now
17:42:54let us learn a breakout technique using
17:42:56ATR to identify strong and explosive
17:43:00breakouts. As you may know markets are
17:43:02always changing. It moves from a period
17:43:05of low volatility to a period of high
17:43:07volatility. Then it moves back from a
17:43:09period of high volatility back to a
17:43:11period of low volatility. It is like a
17:43:13cycle that repeats over and over again.
17:43:16This is typically how the market moves.
17:43:19I have explained this in my market
17:43:21structure video. So if you have noted
17:43:23when the market is in a low volatility
17:43:25environment there is a good chance that
17:43:27the volatility could expand in the near
17:43:29future giving powerful price walls. So
17:43:32how do you use this knowledge to find
17:43:34explosive breakouts using ATR before it
17:43:37actually happens? Before we get into it
17:43:39let me make it clear that this
17:43:41particular strategy works well on longer
17:43:43time frame ATRs mostly on daily, weekly
17:43:46and also the monthly time frames. You'll
17:43:49understand the reason why in a little
17:43:51while. Basically, the idea is to pay
17:43:53attention to the ATR value, especially
17:43:55the multi-year low ATR values. Notice if
17:43:58the ATR value has slammed into
17:44:01multi-year lows, this pretty much
17:44:03indicates that the market is probably in
17:44:05a range and the volatility is shrinking
17:44:08to the absolute lows. So when the market
17:44:11finally breaks out it comes with a
17:44:13expansion in volatility which is
17:44:15associated with strong price moves
17:44:17towards either the upside or the
17:44:19downside. Now the reason why this method
17:44:21is not particularly reliable in lower
17:44:24time frames. ATR values swings every day
17:44:27from highs to lows which is not really
17:44:29indicative that the market is
17:44:31rangebound. It just means that the
17:44:33market volatility is declining. But when
17:44:36we consider ATR of much higher time
17:44:38frames like weekly or monthly and if the
17:44:41values are coming out very low in terms
17:44:43of a few months or years then there is a
17:44:45good chance that the market could
17:44:47potentially be in a range and thereby
17:44:49you could get a highly profitable trade
17:44:51on the direction of the breakout from
17:44:53the range. So just look at this example
17:44:55of zil stock on a weekly time frame.
17:44:57Whenever the stock reaches multi-year
17:45:00lows on the ATR value, the stock is
17:45:02expected to give a good price move in
17:45:04either direction which is indicative of
17:45:07high volatility breakout rate. Swing
17:45:09traders and positional traders can
17:45:11capitalize on these volatility shifts to
17:45:14make much better trading decisions. So
17:45:16all you have to do is to check if the
17:45:18market is in a range. See if the
17:45:20volatility is low as represented by ATR.
17:45:23Then wait until the market breaks out or
17:45:26breaks down which indicates the
17:45:28volatility is picking up. Then plan your
17:45:30trades accordingly and the breakout of
17:45:32the range happens. So whenever the
17:45:34volatility is low especially when it is
17:45:37approaching multi-year lows you want to
17:45:39tell yourself that if the market does a
17:45:41breakout a big price move could follow
17:45:44and this is a very powerful trading
17:45:46technique. Now finally let us learn how
17:45:49to use ATR to predict market reversals
17:45:52or price exhaustions. See the market
17:45:55can't move up or fall down forever
17:45:57without exhaustion. Most of the time the
17:46:00market will need a break to recharge
17:46:02just like we human beings do. This means
17:46:05there is a good possibility that the
17:46:07market could exhaust itself after
17:46:09hitting its limits. Now you might be
17:46:11thinking how to tell where is the limit?
17:46:14Well, you can find that out using the
17:46:16average true range indicator. Now,
17:46:18here's how you can do it. First of all,
17:46:20identify the current ATR value and then
17:46:23multiply it by two or three. So, if the
17:46:25market moves two times the ATR value,
17:46:27then it could possibly be exhausted.
17:46:29Now, I don't suggest you trade this
17:46:31concept in isolation. Instead, combine
17:46:34it with support and resistances or other
17:46:36areas of values and then there is a high
17:46:39chance that you'll find yourself
17:46:41identifying market reversals ahead of
17:46:43anyone else. For example, if you look at
17:46:45the weekly ATR value and it shows you
17:46:48300 points. What it's telling you based
17:46:50on the previous period's data is that
17:46:52the market tends to move about 300
17:46:55points over the last few weeks. And if
17:46:57in this week the market has moved let's
17:46:59say 500 or 600 points, it's telling you
17:47:02that the price has already exhausted its
17:47:04ATR value. Think of it like energy being
17:47:07used and the market is exhausted. So if
17:47:10you see a market that has exceeded its
17:47:12ATR value by two or three times, then
17:47:15there's a high possibility that the
17:47:17market could show signs of reversals. So
17:47:19if the weekly time frame has about 300
17:47:22points on its weekly ATR and the market
17:47:24has already declined more than 500
17:47:26points lower then I'm not asking you to
17:47:29go long suddenly in the anticipation of
17:47:31a bullish reversal because the market
17:47:33could even stay in a range for a while.
17:47:35But think of this as a signal to alert
17:47:37you that this market has already moved
17:47:40more than 500 points in comparison to
17:47:42its weekly ATR value which was only
17:47:44about 300 points. Now you have to look
17:47:47for evidence that supports your analysis
17:47:50of the possibility of the market
17:47:52actually reversing back higher. So you
17:47:54can look for potential area of values
17:47:56like support levels, dynamic supports
17:47:59like moving averages where potential
17:48:01buying pressure could step in. You can
17:48:03also take the help of bullish reversal
17:48:05candlesticks like bullish engulfing
17:48:07patterns, rejection pin bars like
17:48:09hammers etc. Or you can use a
17:48:12combination of both these setups to
17:48:14support your analysis. Now this should
17:48:16give you a hint that you don't want to
17:48:18be shorting in the market anymore. And
17:48:20if you are in a short position, you
17:48:22might want to exit out of the trade by
17:48:24booking profits or losses whatever. Then
17:48:26you can get onto a long position in the
17:48:28anticipation that the market is about to
17:48:30reverse higher. Now this is how you can
17:48:33use the ATR indicator by basically
17:48:35looking at how much the market has
17:48:36exceeded its actual ATR value. You can
17:48:39use this method even in lower time
17:48:41frames, but as always, it works best
17:48:43with higher time periods.
17:48:50I'm going to talk about how to analyze
17:48:52an option chain properly. Even if you
17:48:54are someone who is new to the world of
17:48:56options trading or if you are having
17:48:58difficulty in understanding many
17:49:00concepts associated with options or even
17:49:03if you are confused for that matter,
17:49:05don't worry because this video will
17:49:07clear most of your doubts and queries.
17:49:09Understanding how to analyze and
17:49:12interpret an option chain data can help
17:49:14you better your chances when it comes to
17:49:17identifying trade opportunities and also
17:49:19to take only convincing trades that have
17:49:22a higher probability of success. So with
17:49:24that idea in mind, this video will cover
17:49:27the following topics. First we will look
17:49:30at a typical option chain. Understand
17:49:32every important section of it and learn
17:49:35about the important jarens and how they
17:49:37are being represented within an option
17:49:39chain. Then we will have a detailed
17:49:41discussion about open interest and
17:49:44change in open interest. We will learn
17:49:46how to interpret and use the open
17:49:48interest data to read the market in a
17:49:50precise manner.
17:49:53You can get the option chain from
17:49:55different sources. You can get it from
17:49:57the NSA website or you can access them
17:49:59from Obstra or Sensible. But let me make
17:50:02use of the option chain from NSE website
17:50:05for this video. Before going any
17:50:07further, let me clarify some basic
17:50:09concepts associated with options
17:50:11trading. I hope you are aware of what
17:50:14the concept of option contract is. Now,
17:50:16the contract is also called as a
17:50:18derivative just because the contract
17:50:20itself has no value. It deres its value
17:50:23from an underlying which may be a stock
17:50:26or an index. For example, a Reliance
17:50:28option contract gets its value from the
17:50:31underlying Reliance stock. So any change
17:50:33in the value of the stock is associated
17:50:36with a change in the options contract.
17:50:38So in the option chain you have the
17:50:40option to select the desired underlying.
17:50:42It can be a particular stock or an
17:50:45index. Now in the indices section there
17:50:47are four available options to choose
17:50:49from of which only nifty and bank nifty
17:50:52have the ample liquidity. Next you will
17:50:54get the option to select the expiry date
17:50:57similar to a food product that has an
17:51:00expiry date which is the last day till
17:51:02which it can be consumed safely and
17:51:05after which it has to be scrapped.
17:51:07Similarly an option contract has a far
17:51:10month, near month and current month
17:51:12expiry. Here you can see three different
17:51:14option contracts which expire on three
17:51:17different months and all of them expire
17:51:19on the last Thursday of every month. Now
17:51:22when it comes to index options, there
17:51:24are weekly expireies also available
17:51:26along with the monthly expireies. Same
17:51:29with monthly expireies, the weekly
17:51:31contracts also expire every Thursday. So
17:51:34different expireies come with different
17:51:36premiums and totally different
17:51:38expectations about the market. Now the
17:51:41next component is the strike price. In
17:51:44order to understand the strike price,
17:51:45let us shed some light on spot price
17:51:48first. The spot price is the current
17:51:50market price of the underlying which is
17:51:53considered as a reference while
17:51:55selecting a particular strike price. For
17:51:57example, Reliance stock is trading at
17:52:00the current market price of 2,400 rupees
17:52:03in the spot market. This is the spot
17:52:05price or the underlying price for
17:52:07Reliance. You can see the spot price
17:52:10just below the contract symbol in the
17:52:12option chain. Now on the other hand, the
17:52:15strike price is an anchor price or the
17:52:17price that you expect Reliance to be
17:52:19trading at the end of the day or at the
17:52:21end of an expiry and at which both
17:52:24option buyer and option seller enter
17:52:26into an agreement. It is like a
17:52:29reference point for many other
17:52:31calculations like the break even point,
17:52:33intrinsic value of option etc. So there
17:52:36are a lot of strike prices available to
17:52:39choose from and we will get to that in a
17:52:41moment. Now coming to the main portion
17:52:43of an option chain, you can see that
17:52:45there are two sections. The left side is
17:52:48the call section and the right side is
17:52:50the put section. Now let us briefly
17:52:53understand what they imply. Call options
17:52:56gives the buyer of an option the
17:52:58opportunity to benefit from increasing
17:53:00prices of stock or an index. So when you
17:53:03have a bullish sentiment in the market
17:53:05and you expect the prices to move higher
17:53:08then you can buy a call option contract.
17:53:10On the other hand, if you expect the
17:53:12market to move lower or expect the
17:53:14prices to fall, then you can think of
17:53:16selling a call option. Now when it comes
17:53:18to a put option, you buy a put option
17:53:21when your sentiment is bearish and you
17:53:24expect the market to crash lower. On the
17:53:26other hand, you sell a put option when
17:53:29you have a fairly bullish or neutral
17:53:31view of the market. If we look closely,
17:53:34we can observe colored or highlighted
17:53:36sections and plain sections in an option
17:53:38chain. To understand this, we need to
17:53:41learn about the moneyiness of options.
17:53:44Now moneyiness of option is a
17:53:46classification method that classifies
17:53:48each option strike based on how much
17:53:51money a trader is likely to make if he
17:53:54were to exercise his option contract
17:53:56today. Now there are three broad
17:53:58classifications in the money options, at
17:54:01the money options and out of the money
17:54:03options. But for practical purposes we
17:54:06can expand this classification to
17:54:08include two more types of options that
17:54:10is deep in the money and deep out of the
17:54:13money options. Let us make a note of
17:54:15each one. A call option is set to be in
17:54:18the money if the strike price is less
17:54:21than the current spot price of the
17:54:23security. For instance, Reliance is now
17:54:25trading at 2,390
17:54:28rupees. Then the option strikes like
17:54:312360
17:54:33and 2340
17:54:35etc. which are lesser than the spot
17:54:37price are set to be in the money
17:54:39strikes. On the other hand, a put option
17:54:42is set to be in the money if the strike
17:54:44price is more than the current spot
17:54:46price of the security. For instance,
17:54:48Reliance is now trading at 2390 rupees.
17:54:52Then the option strikes like 2420,
17:54:562440
17:54:58etc. which are greater than the spot
17:55:00price are set to be in the money
17:55:01strikes. Now the in the money strikes
17:55:04are usually highlighted in this
17:55:06particular option chain. The in the
17:55:07money strikes are indicated in yellow. A
17:55:10call option is set to be at the money if
17:55:13the strike price is almost equal to the
17:55:15current spot price of the security. So
17:55:18for instance, the Reliance is now
17:55:19trading at 2,395.
17:55:22Then the option strike of 2,400 which is
17:55:25very close to the spot price is set to
17:55:28be an at the money strike. Similar is
17:55:30the case for put options. A put option
17:55:32is set to be at the money if the strike
17:55:34price is almost equal to the current
17:55:37spot price of the security. The ATM
17:55:39strikes are usually represented at the
17:55:41center of the option chain. But the
17:55:43strike changes as and when the
17:55:46underlying price or the spot price
17:55:47changes. A call option is set to be out
17:55:50of the money if the strike price is more
17:55:53than the current spot price of the
17:55:55security. For instance, Reliance is now
17:55:57trading at 2390 rupees. Then the option
17:56:01strikes like 2420,
17:56:0424, 460 etc. which are higher than the
17:56:07spot price are set to be OTM strikes. A
17:56:10put option is set to be out of the money
17:56:12if the strike price is less than the
17:56:15current spot price of the security. For
17:56:17example, Reliance which is trading at
17:56:192390 rupees. The option strikes like
17:56:222360,
17:56:242340
17:56:26etc. which are lesser than the spot
17:56:28price are said to be out of the money
17:56:30strikes. The out ofthe- money strikes
17:56:32are not highlighted and are represented
17:56:34in plain or white colors. Now what are
17:56:37deep ITM and strikes? The strikes which
17:56:41are too far away from ATM options are
17:56:44called as deepm and strikes. Most often
17:56:48these strikes are illlquid and are less
17:56:51often traded. Moving on, beside the
17:56:54strike price we can see bid and ask
17:56:56quantity and bid and ask prices. Now bid
17:57:00and ask are market terms which
17:57:02represents demand and supply for a
17:57:05particular stock. The bid price
17:57:07represent the highest price that someone
17:57:10is willing to pay for a share. The ask
17:57:13price however is the lowest price where
17:57:16someone is willing to sell a share. Now
17:57:18the difference between the bid and ask
17:57:21is called as a spread. Now the bid size
17:57:24represents the quantity of a security
17:57:26that the investors are willing to
17:57:28purchase at a specified bid price. In a
17:57:32similar manner, the ask quantity
17:57:34represents the total number of sellers
17:57:36in a particular strike who are willing
17:57:39to sell at the specified ask price. So
17:57:42in short, the bid and ask data helps you
17:57:45visualize the available prices and
17:57:48quantities for a particular strike. Now
17:57:50beside the bid and ask are the LTP or
17:57:54the last traded price and the changes in
17:57:57LTP. So LTP is actually the premium of
17:57:59the option at a specified strike price
17:58:02and the change in LTP is the percentage
17:58:05change in premium compared to the
17:58:07previous day's closing price. Now this
17:58:10helps to decide if the options are
17:58:12priced cheap or expensive. Now there are
17:58:14several factors that decides the option
17:58:16pricing but LTP can give you a bird's
17:58:20eye view. We will talk about option
17:58:22pricing in a different video but for
17:58:24this video let us limit our discussion
17:58:26to option chain. The next element is
17:58:29volume which you may all be familiar
17:58:31with. So in simple words volume refers
17:58:34to the number of contracts that are
17:58:36traded in a given period of time. I have
17:58:39already made a video on market volumes
17:58:41from a price action perspective. So if
17:58:43you want you can check that out. The
17:58:45next component is IB or the implied
17:58:48volatility which itself is a broad
17:58:50topic. So we will discuss it in an
17:58:53upcoming video. Right. The final two
17:58:55elements are open interest and change in
17:58:58open interest. Now open interest denotes
17:59:00the number of contracts that are active
17:59:03or which are not settled. Now both
17:59:05volume and open interest are two key
17:59:08technical metrics that helps describe
17:59:10the liquidity and activity of options
17:59:13and future contracts. In terms of
17:59:15options, we are more interested in
17:59:17analyzing the open interest risk because
17:59:19it is of great use to us. But before all
17:59:22that, let me tell you with whose point
17:59:24of view you should look at an option
17:59:26chain. To be frank, writers or sellers
17:59:29of options are more important and we
17:59:32should view the option data from the
17:59:34perspective of a seller. Now there are
17:59:37many reasons for this statement. First
17:59:39of all, takes conviction to sell as
17:59:42there is unlimited risk associated with
17:59:44selling options and therefore more money
17:59:47is required. Secondly, sellers are
17:59:49usually someone with bulk amounts of
17:59:52money like big institutions or smart
17:59:54money and option buyers are usually the
17:59:57retail traders as it is convenient to do
17:59:59option buying with less capital. So in
18:00:02short going by the idea that
18:00:04institutions are usually right we view
18:00:07data from the perspective of an
18:00:09institution. With that idea in mind let
18:00:11us focus on open interest. The first
18:00:14question that has to be answered is how
18:00:17does changes in option interest occurs.
18:00:19We all know how data is calculated but
18:00:22the open interest calculation is a bit
18:00:25different but interesting to learn. If
18:00:27both participants in a trade are
18:00:30initiating a new position, the open
18:00:32interest will increase. And if both the
18:00:35participants are liquidating an already
18:00:38existing open position, then the open
18:00:40interest will decline. However, if one
18:00:43participant is initiating a trade while
18:00:46the other is liquidating or squaring off
18:00:48an old trade, then the open interest
18:00:50will remain unchanged. So let us
18:00:52understand this with an example. Let's
18:00:54say person A and person B are trading
18:00:57the same option contract. So if A buys
18:01:00one contract to enter a long trade, the
18:01:03open interest increases by one. Now the
18:01:06person B also goes long and buys six
18:01:09contracts thereby increasing the open
18:01:12interest to seven. Now if another person
18:01:14C decides to short the market and sell
18:01:17three option contracts, then the open
18:01:20interest again increases to 10. The open
18:01:23interest would remain at 10 until the
18:01:25traders exit their positions at which
18:01:28point the open interest declines. For
18:01:31example, the open interest declines to 9
18:01:34when person A sells his one contract.
18:01:36Now, when the person C decides to exit
18:01:39his position, he buys back his three
18:01:41contracts and brings the open interest
18:01:43down to six. At this point until the
18:01:47person B decides to sell her six
18:01:49contracts, the open interest will remain
18:01:52constant at six. So even though open
18:01:54interest and volume are related
18:01:56concepts, one key difference is that
18:01:59volume counts all the contracts that
18:02:01have been traded while open interest is
18:02:03the total of all the contracts that
18:02:06remain open in the market. Now keep in
18:02:08mind that we are talking about the
18:02:10number of contracts and not the number
18:02:13of shares. Now I want to talk about a
18:02:16common misconception about open
18:02:18interest. I've seen many people make
18:02:20this assumption that when prices are
18:02:23rising they assume that more long
18:02:25positions are being created than short
18:02:28positions. But the fact is that the
18:02:30longs will always be equal to the
18:02:32shorts. But it is just that the longs
18:02:35are dominating the shorts in the
18:02:37transaction and that is the reason why
18:02:39the prices are rising. Now you may ask
18:02:41me if the number of shares bought is
18:02:44always equal to the number of shares
18:02:46sold then how does the price rises or
18:02:48fall. Now the simple answer is buying
18:02:51pressure or selling pressure. So if
18:02:53buyers of a contract are dominating the
18:02:56sellers and they are willing to buy at
18:02:58higher prices the prices will eventually
18:03:01rise and if the sellers are dominating
18:03:04the buyers by selling at even lower
18:03:07prices the prices will fall as a result.
18:03:10But buyers will always be equal to the
18:03:13sellers. Because for a transaction to
18:03:15happen, there is always a seller for
18:03:18every buyer. So if the open interest is
18:03:21rising, it means new contracts are being
18:03:24added. But since the prices are rising
18:03:26with it, it means that the longs are
18:03:29dominating the shorts in the
18:03:31transaction. If the open interest is
18:03:33rising but the prices are falling, this
18:03:36means that more contracts are being
18:03:38added. But this time the shorts are
18:03:40dominating the longs in the transaction.
18:03:43Now with that cleared let me talk about
18:03:45the uses of open interest data. Now
18:03:48there are a few uses of open interest
18:03:50data that you should be aware of. The
18:03:52first one is that it helps to identify
18:03:54the potential supports and resistance
18:03:57levels in the market. Further it also
18:03:59helps to determine the direction of a
18:04:01trend and the sentiment of the market.
18:04:04Now let us first discuss on how to
18:04:06identify the support and resistance
18:04:09levels using open interest data. So in
18:04:11the option chain you have to find the
18:04:14column on both sides which are having
18:04:16the highest open interest that is on the
18:04:18call side and put side you have to find
18:04:20the column with the highest open
18:04:21interest. Then you have to note the
18:04:23corresponding change in open interest
18:04:25also. Now on the put side, the strike
18:04:28which has the highest open interest
18:04:29number and also having a positive change
18:04:32in open interest can act as a support
18:04:34level. This is because we assume that
18:04:37the put contracts are being sold by the
18:04:39big institutions with the view that the
18:04:42price will not fall below a specific
18:04:44price level or strike price. And most
18:04:46often these institutions are right and
18:04:49there is a high chance that the strike
18:04:51level will not be crossed. And a
18:04:53positive change in OI implies that put
18:04:56writers are selling extensively because
18:04:59they feel that the strong will not fall
18:05:02below the respective strike level. Now
18:05:04on the contrary if there would have been
18:05:06a negative change in OI it implies that
18:05:09the putr writers are squaring off their
18:05:11positions because they feel that the
18:05:14stock will fall below the respective
18:05:16strike level. Now when it comes to the
18:05:18call side the strike which has the
18:05:20biggest open interest number and a
18:05:23positive change in open interest can act
18:05:25as a resistance level. Similar to the
18:05:27previous case, here also we will assume
18:05:30that the open interest is created by the
18:05:32sellers of the call option and they have
18:05:35the view that the price will not move
18:05:37above a particular strike level which
18:05:39will resist the prices. Now most often
18:05:42they are right and there is a high
18:05:44probability that the level will not be
18:05:46crossed. On top of that, a positive
18:05:48change in open interest implies that the
18:05:51call writers are selling extensively
18:05:54because they feel that the stock will
18:05:56not rise above the respective resistance
18:05:58level. Now, on the opposite, if there
18:06:01would have been a negative change in OI,
18:06:03it would imply that the call writers are
18:06:06squaring up their open positions because
18:06:08they feel that the stock will rise above
18:06:11the respective strike level. Now it is
18:06:13easier to visualize the support and
18:06:15resistances using open interest with the
18:06:18option chain provided by sensible rather
18:06:21than the NSE site because in NSE website
18:06:24you have to crunch the numbers more to
18:06:26come to a conclusion about the
18:06:28resistance and support levels but with
18:06:30sensible you can visually see the
18:06:32probable resistance and support level as
18:06:35they are highlighted properly with
18:06:36suitable colors. So you can make use of
18:06:39it if you want. Now we will study what a
18:06:42particular strike price is showing us. A
18:06:45strike price can reveal any of the
18:06:47following. It can be a long buildup, a
18:06:50long unwinding or long liquidation, a
18:06:52short buildup or short covering. Now let
18:06:55us understand what each of this means.
18:06:58If the price is rising and the open
18:07:00interest is also rising, this signals a
18:07:03long buildup. Now if the price and OI
18:07:06are both rising, it means that new
18:07:08contracts are being added which are
18:07:10dominated by the longs and that is why
18:07:13the price is rising with every new
18:07:16contract addition. A long buildup on a
18:07:18call option depicts that market
18:07:20participants are ready for bullish
18:07:22action on the index or instrument.
18:07:24Whereas a long buildup on a put side
18:07:26depicts that the market participants are
18:07:28ready for bearish action on the index or
18:07:31instrument. So for the C side the long
18:07:34buildup is viewed as a positive event
18:07:36while for a put side it is viewed as a
18:07:39negative event. In the second case the
18:07:41price is falling and the open interest
18:07:43is falling. It means that the fall in
18:07:46price is due to long liquidation. It is
18:07:49also called as long unwinding. Now
18:07:51notice why the open interest is falling.
18:07:53The reason why the open interest is
18:07:56falling is that the positions are being
18:07:58squared off and the number of open
18:08:00contracts in the market is reducing. But
18:08:03since the price is falling with it, it
18:08:06means that either the long positions are
18:08:08being squared off or new short positions
18:08:11are dominating the transaction. Now
18:08:13think about it. How will long positions
18:08:16be squared off? The simple answer, they
18:08:18will square off by selling. And this is
18:08:21exactly why the prices are falling in
18:08:23this case. Now the prices are not
18:08:26falling because of the new short
18:08:28positions that are being created. The
18:08:30reason being the open interest is also
18:08:32falling. So the real reason for the
18:08:34price fall is because the longs are
18:08:37squaring off their positions. It can be
18:08:40a trap for the unaware traders and they
18:08:42can be led into thinking that new short
18:08:45positions are being created. But this is
18:08:47not true. Now the long liquidation or
18:08:50unwinding on call options depicts that
18:08:52the market participants are losing hope
18:08:55in the bullish action of an index or
18:08:57instrument and this may signify a start
18:09:00of a bearish trend whereas a long
18:09:03unwinding on the put side depicts that
18:09:05the market participants who were bearish
18:09:08on the instrument or index are now
18:09:10witnessing a loss of steam on the beer
18:09:13side and this may be considered as an
18:09:15inception of a new bullish trend. So for
18:09:17the call side long unwinding is viewed
18:09:20as a negative event while for the put
18:09:22side it is a positive event. Now in the
18:09:25third case if the prices are falling but
18:09:28the open interest is rising this is
18:09:30called as a short buildup. So if the
18:09:32prices are falling and the open interest
18:09:35is rising it straight away means that
18:09:38the shorts are dominating the longs.
18:09:41Since the open interest is rising, it
18:09:43means that new contracts are being
18:09:45added. But since the price is also
18:09:47falling, it means that the new contracts
18:09:49which are being added are dominated by
18:09:52shorts and not the longs. So a short
18:09:55buildup on call side depicts that the
18:09:58market participants are writing the
18:10:00calls on a particular strike price which
18:10:02would act as an immediate resistance
18:10:04when moving ahead. Whereas a short
18:10:07buildup on the put side depicts that the
18:10:09market participants are writing puts on
18:10:11a particular strike price which would
18:10:13act as an immediate support level for
18:10:16the current scenario. So for the call
18:10:18side, the short buildup is viewed as a
18:10:20negative event while for the put side it
18:10:22is viewed as a positive event. Lastly,
18:10:25if the price is rising but the open
18:10:28interest is falling, this is called as
18:10:30short covering. Now if the price is
18:10:33rising but the open interest is falling
18:10:35it means that the rise in the price is
18:10:37due to short covering and not new long
18:10:40positions being created. Now notice why
18:10:42the open interest is falling. It is
18:10:44falling because existing positions are
18:10:47being squared off and the number of open
18:10:49contracts in the markets are reducing.
18:10:51But since the price is rising with it,
18:10:54it means that the short positions are
18:10:57squaring off in the transaction. Now,
18:10:59how will short positions be squared off?
18:11:01Simple answer, they will square off by
18:11:03buying. Now, that explains why the
18:11:06prices are rising. So, the price is not
18:11:09rising because the longs are dominating
18:11:12or new long positions are being created.
18:11:14Instead, it is rising because the short
18:11:16positions are dominating the squaring
18:11:19off process. So, it can act as a trap
18:11:21for those unaware traders who can be led
18:11:24into believing that new long positions
18:11:26are being created. But this is not true.
18:11:29Now short covering on the call side can
18:11:31signify that the writers are squaring
18:11:34off their positions and they are
18:11:36considering it as a weakening of
18:11:38resistance which is actually a good sign
18:11:40for the index or instrument to expect a
18:11:43breakout. Whereas short covering on puts
18:11:46signifies that the writers are leaving
18:11:48their positions and considering a
18:11:50weakening of support which is actually a
18:11:53bad sign for the index or instrument. So
18:11:55for the call side short covering is a
18:11:58positive event while for the put side
18:12:00this is a negative event. Now we have
18:12:03already discussed in the previous
18:12:04section how the relationship between
18:12:07price and open interest gives us an idea
18:12:09about the sentiment of the market. Now
18:12:11let us identify the market direction
18:12:13using this concept for call and put
18:12:15options. Now let us study the call
18:12:18option interest first. So a rise in the
18:12:21call option price along with a rise in
18:12:24the open interest will indicate that
18:12:26there is a long call buildup which is a
18:12:29bullish sentiment. Similarly, a fall in
18:12:32the call option price but with a rise in
18:12:34the open interest can indicate a short
18:12:37buildup in the call side which in turn
18:12:39indicates a bearish sentiment. Now if
18:12:42there is a rise in the call option
18:12:44prices but a fall in the open interest
18:12:46can be observed it indicates that there
18:12:48is called unwinding or short covering
18:12:51that is happening and finally a fall in
18:12:53the call option prices along with the
18:12:56fall in the open interest indicates a
18:12:58long liquidation or long unwinding in
18:13:01the calls. Now let us discuss the same
18:13:03with put side. A rise in put option
18:13:06price along with a rise in the open
18:13:09interest will indicate a long buildup in
18:13:12the put side which in turn indicates a
18:13:14bearish sentiment. Further a fall in the
18:13:17put option price but with a rise in the
18:13:19open interest indicates short buildup in
18:13:21the put side which further indicates
18:13:23bullishness. The third scenario is where
18:13:26there is a rise in the put option prices
18:13:29but with a fall in the open interest.
18:13:31This is a result of put unwinding or
18:13:34long liquidation on the put side and
18:13:36finally a fall in the put option price
18:13:39along with a fall in the open interest
18:13:42it will indicate a short covering or the
18:13:44possible start of the put buying. Now
18:13:47let us combine both calls and puts and
18:13:49try to make a relation out of them. So
18:13:52if a call option writer is adding the
18:13:54position or increasing the positions and
18:13:57a put option writer is exiting their
18:14:00positions or decreasing their positions,
18:14:03this indicates a bearish sentiment. Now
18:14:06if a put option buyer is adding more
18:14:08positions or increasing their positions
18:14:11and the call option buyers are exiting
18:14:14their positions or squaring off or
18:14:16decreasing their positions, this also
18:14:18signals a bearish sentiment. Now if a
18:14:21call option writer is exiting his
18:14:23positions but the put option writers are
18:14:26adding more positions then this is a
18:14:29bullish sentiment. Finally if the call
18:14:32option buyers are increasing or adding
18:14:34their positions and the put buyers are
18:14:37decreasing or exiting their positions
18:14:39this also indicates bullish sentiment.
18:14:42So these are the important relations
18:14:44that you need to be aware of when you
18:14:46are looking at an option chain. So in
18:14:48sensible option chain you can see other
18:14:50elements like delta, vega, gamma, theta
18:14:54etc which are called as option Greeks
18:14:56which by itself is an extensive topic
18:14:58for discussion. So make a separate video
18:15:01or videos on each of them so that you
18:15:03can improve your option chain analysis
18:15:06skill to master the world of option
18:15:08trading. So make sure you practice
18:15:10reading the open interest data and
18:15:12option chain as a whole so that you will
18:15:14get a knack of how to analyze and
18:15:16interpret the data that has been
18:15:18provided in the option chain.
18:15:23Why you should learn or understand the
18:15:25intricacies of options pricing? Anyhow,
18:15:28it's not going to make you any money.
18:15:30But I suggest you think again because
18:15:33renowned trader and hedge fund manager
18:15:36Edward Oorp would not agree with you. If
18:15:39you know Edor then you know he is a real
18:15:42deal. This partial differential equation
18:15:44that you see on the screen was the game
18:15:47changer. Using a similar option pricing
18:15:49model and some of the mathematical
18:15:51models and probability theory at Thorp
18:15:54managed a hedge fund called Riston
18:15:57Newport Partners. Instead of publishing
18:15:59it, he kept his findings a secret and he
18:16:02used this formula to achieve substantial
18:16:05financial success for himself and his
18:16:07investors. This went on until 1973 when
18:16:12Black Shaws and Merton published their
18:16:14work for the public. The hedge fund
18:16:16managed by ATOR which operated from 1969
18:16:20to 1988 reportedly generated an
18:16:23annualized return of around 15 to 20%age
18:16:26which was substantially higher than the
18:16:29broader market performance for that
18:16:31period. It is actually a very
18:16:33interesting story and you can watch the
18:16:35detailed video on the veritation
18:16:37channel. Anyways, in this episode I will
18:16:41not go into the history of option
18:16:43pricing or its significance. Instead, I
18:16:46will try to help you understand how
18:16:48options are priced by breaking down this
18:16:51complex looking black and short equation
18:16:54into seven components or factors that
18:16:57drive the option pricing. In essence, I
18:17:00will help you understand things like why
18:17:02Nifty 24,000 put option is trading at
18:17:05100 rupees and not at 50 or 150 rupees.
18:17:09This will help you accurately assess the
18:17:12value and the potential risk of options.
18:17:14It will also help avoid unnecessary
18:17:17losses, optimize the timing of your
18:17:19trades, and also make more informed
18:17:21decisions as to when to buy, sell or
18:17:24hedge options. We will begin by
18:17:27discussing the main elements forming an
18:17:29options price. We have learned in our
18:17:32previous episode that option price which
18:17:35is also known as the option premium is
18:17:37the price that an option buyer must pay
18:17:40to the option seller to acquire the
18:17:42right to exercise the option agreement.
18:17:45But did you know there are actually two
18:17:48elements to an option price? There is an
18:17:50intrinsic value and there is a time
18:17:53value. In other words, option price is
18:17:56the sum total of intrinsic value and
18:17:59time value. Let us now understand what
18:18:01each of these elements mean. Let's begin
18:18:03with the intrinsic value of an option. I
18:18:06hope you already have a fair idea about
18:18:08what intrinsic value is. But for the
18:18:11sake of context, let's brush up our
18:18:13memory once more. Basically, intrinsic
18:18:16value of an option measures the extent
18:18:18to which an option is in the money or
18:18:21ITM. In its raw form, IV can be
18:18:24calculated by finding the difference
18:18:26between the strike price of an option
18:18:28and the corresponding spot price of the
18:18:30underlying. At any point in time, the
18:18:33intrinsic value of an option could be
18:18:36either positive or zero. It can never be
18:18:39a negative value. A positive intrinsic
18:18:42value occurs when the holder of the
18:18:44option contract stands to benefit by
18:18:47exercising his right to the option.
18:18:49While a zero intrinsic value occurs when
18:18:52the holder of the option contract would
18:18:54not benefit by exercising his right to
18:18:57the option. For instance, if the strike
18:19:00price of a call option is 100 rupees and
18:19:02the prevailing spot price of the
18:19:04corresponding underlying is 120 rupees,
18:19:07the call option would have a positive
18:19:09intrinsic value because the call buyer
18:19:12can benefit by exercising his right to
18:19:14buy the underlying upon expiry at 100
18:19:17rupees and then sell it in the market
18:19:20for 120 rupees thereby making a profit
18:19:23of 20 rupees which is nothing but the
18:19:26intrinsic value. On the other hand, if
18:19:29the strike price of a put option is 100
18:19:31rupees and the prevailing spot price of
18:19:34the corresponding underlying is 120
18:19:36rupees, the put option would have no
18:19:38intrinsic value because the put buyer
18:19:41would not benefit by exercising his
18:19:43right to the option and he would rather
18:19:45be better off by selling the underlying
18:19:48at the prevailing market price. We have
18:19:50also talked about the formula to find
18:19:52the intrinsic value of call and put
18:19:55options upon expiry. In the raw form,
18:19:57intrinsic value of a call option is the
18:20:00difference between the spot price and
18:20:02the strike price. I have also provided
18:20:04the polished formula for the same. So, a
18:20:07call option will have a positive
18:20:08intrinsic value when the strike price is
18:20:11below the current market price. On the
18:20:14other hand, a call option will have no
18:20:16intrinsic value or zero intrinsic value
18:20:19when its strike price is equal to or
18:20:22above the spot price. So if this value
18:20:25is positive, it means the call option
18:20:28has an intrinsic value. If it is zero or
18:20:30negative, it means the call option has
18:20:33no intrinsic value. Likewise, the
18:20:36difference between the strike price and
18:20:37the spot price upon expiry gives the
18:20:40intrinsic value of a put option. So a
18:20:43put option will have a positive
18:20:44intrinsic value when its strike price is
18:20:47above the current market price. On the
18:20:50other hand, a put option will have no
18:20:52intrinsic value when its strike price is
18:20:55equal to or below the current market
18:20:57price. So if this value is positive, it
18:21:00means the put option has an intrinsic
18:21:02value. And if this value is zero or
18:21:05negative, it means that the put option
18:21:07has no intrinsic value. So always keep
18:21:10in mind that intrinsic value cannot be
18:21:13negative. As such if the intrinsic value
18:21:16of a call or a put option turns out to
18:21:18be negative as given by the basic row IB
18:21:22formula then it is to be considered as
18:21:24zero. Now the next element in the option
18:21:27pricing is time value. While intrinsic
18:21:31value is the tangible portion of the
18:21:33option price. Time value is the
18:21:36intangible portion of the option price.
18:21:38It is also known as the extrinsic value
18:21:41of an option. The time value of an
18:21:43option is determined not by the price of
18:21:46the underlying but rather by the time to
18:21:48expiration of the option. So the greater
18:21:51the time to expiration, the greater
18:21:53would be the time value of an option and
18:21:55vice versa. And as the time to
18:21:57expiration reduces, so does the time
18:22:00value. And upon expiration, the time
18:22:02value of an option would become zero.
18:22:05This might be a new concept for you. So
18:22:07let us consider a real life example.
18:22:10Let's say you have taken a transparent
18:22:12glass and you pour beer into it. You
18:22:15know beer right? The alcoholic beverage
18:22:18with bubbles. So when you pour beer into
18:22:20the glass, two layers are formed. There
18:22:23is a liquid layer at the bottom with
18:22:25actual beer in it and to the top of it
18:22:28is a frothy form layer with bubbles. You
18:22:30fill the entire glass. Now the entire
18:22:33quantity of liquid layer and form layer
18:22:36forms the option price or premium at the
18:22:39start of the contract. The form layer is
18:22:41considered as the time value while the
18:22:43liquid layer represents the intrinsic
18:22:46value of the option. You know what
18:22:48happens to the form layer in the glass
18:22:50as time passes. The form layer settles
18:22:53slowly and after a while the form layer
18:22:55vanishes completely leaving behind only
18:22:58the beer layer. This is exactly what
18:23:01happens to the time value of options. As
18:23:04the option moves closer to the expiry
18:23:06the time value reduces and upon
18:23:09expiration the time value completely
18:23:11vanishes or becomes zero leaving behind
18:23:14only the beer or is just the intrinsic
18:23:17value of the option. In some cases the
18:23:20glass is completely filled with
18:23:22formally. So as time passes there will
18:23:24be nothing left in the glass. Just like
18:23:27this, some options will only have time
18:23:29value as its premium and during
18:23:31expiration, the time value becomes zero
18:23:34and that option would not have any real
18:23:37value or intrinsic value. Meaning that
18:23:39the option would expire worthless. I
18:23:43hope the example made it easy for you to
18:23:45understand. Now the real reason why time
18:23:48value gradually ros is because of a
18:23:50concept called time decay. We will talk
18:23:53about this when we discuss about option
18:23:56Greeks. Anyways, the greater the time to
18:23:58expiration, the higher is the
18:24:00probability of the option price moving
18:24:02in favor of the option buyer and the
18:24:05vice versa is also true. So as time to
18:24:08expiration reduces, so does the
18:24:10probability of an option price moving in
18:24:12favor of the option buyer. So time value
18:24:14of an option could also be thought of as
18:24:17a part of option price that an option
18:24:20writer receives for taking the time
18:24:22risk. We have already talked about this
18:24:24in one of our previous episodes if you
18:24:27remember. As you know by now the price
18:24:30or premium of an option is readily
18:24:32available on the option chain. While the
18:24:35intrinsic value of an option has to be
18:24:37calculated by finding the difference
18:24:39between the strike price and the spot
18:24:41price of the underlying. The value that
18:24:43is left over in the option price
18:24:45equation that was mentioned earlier is
18:24:48actually the time value of the option.
18:24:50Let's take an example to clear things
18:24:52up. Let us assume that the strike price
18:24:55of a call option is 100 rupees. The
18:24:58current price of the underlying is 120
18:25:00rupees and the option premium is 25
18:25:03rupees. The intrinsic value of this call
18:25:06option is 20. Now that we know the
18:25:09option price and the intrinsic value,
18:25:11the time value of the call option can be
18:25:13calculated as 5 rupees. This 5 rupees is
18:25:17the excess premium that a seller would
18:25:19make for taking the time risk. On the
18:25:22other hand, what if the strike price of
18:25:24an option is 100 rupees, the current
18:25:26price of the underlying is 90 rupees and
18:25:29the option premium is 5 rupees. In this
18:25:32case, the intrinsic value would be zero
18:25:35because negative intrinsic values are
18:25:38considered as zero. As such, the entire
18:25:41option price of 5 rupees would reflect
18:25:43the time value of the option. In other
18:25:46words, this option would only have time
18:25:49value and no real value or intrinsic
18:25:52value. So an important thing to make out
18:25:54of this is that for options whose
18:25:57intrinsic value is zero, the entire
18:25:59option premium reflects the time value
18:26:02of the option. Now that you have a good
18:26:04understanding about the pricing of
18:26:06options, it is time to move on to the
18:26:09most important part of this video. We
18:26:11are going to deal with the factors that
18:26:14impact the price of an option. In the
18:26:16previous episodes, we have defined an
18:26:19option as a derivative contract that
18:26:21gives the holder or buyer of the
18:26:23instrument the right but not the
18:26:26obligation to buy or sell an underlying
18:26:29asset at a certain fixed price on a
18:26:32predetermined expiry date. From this
18:26:35definition itself, we can spot a few
18:26:37factors that impact the option price.
18:26:40These factors are the right to buy or
18:26:43sell which is nothing but the type of
18:26:45option contract, the underlying asset
18:26:48which includes the market price of that
18:26:51asset, a fixed price which is nothing
18:26:53but the strike price and a predetermined
18:26:56date which is nothing but the expiry
18:26:59date. Besides all these factors, option
18:27:02price is also strongly influenced by
18:27:04volatility which is a measure that is
18:27:06not tangible unlike the above four
18:27:09elements but rather it must be
18:27:11estimated. In addition to this option
18:27:14price is also impacted by interest rates
18:27:17and in case if the underlying is a stock
18:27:19it is also impacted by dividends. So the
18:27:22factors that impact the price of an
18:27:24option are the following. So it includes
18:27:27the type of option, the underlying
18:27:29price, the strike price, time to
18:27:31expiration, volatility, interest rates
18:27:35and finally dividends in case the
18:27:37underlying asset is a stock. Let us now
18:27:40understand in detail how each of these
18:27:43factors impact the price of an option.
18:27:46Let's start with the type of option
18:27:47under consideration. Whether the option
18:27:50is a call option or a put option will
18:27:52have a noticeable impact on its price.
18:27:56For instance, in case of a call option,
18:27:58the option price will rise when the
18:28:01underlying price goes up and it falls
18:28:04when the underlying price declines. On
18:28:06the other hand, in the case of a put
18:28:08option, the option price will fall when
18:28:11the price of the underlying goes up and
18:28:13rises when the price of the underlying
18:28:16goes down. So if a trader is long a call
18:28:19option or short a put option he will
18:28:22benefit during times when the underlying
18:28:24price is rising and vice versa.
18:28:27Similarly if trader is long a put option
18:28:30or short a call option he will benefit
18:28:32when the underlying price is declining
18:28:35and vice versa. Look at this 15 minutes
18:28:37chart that compares the intraday
18:28:40movement in Nifty index with a
18:28:42corresponding movement in Nifty 24,900
18:28:45call option. You can observe in the
18:28:47chart that as the price of the Nifty
18:28:50index increased, so did the price of the
18:28:53Nifty 24,900 CE. Also notice the minor
18:28:57down move in the option price whenever
18:28:59Nifty declines. Meanwhile, if you take a
18:29:02look at this 15-minute chart that
18:29:04compares the intraday movements in Nifty
18:29:06index with corresponding movements in
18:29:0824,800 put option, you will notice that
18:29:11as the price of Nifty dropped, the price
18:29:14of the Nifty 24,800 PE went higher. You
18:29:18can also observe that the intermittent
18:29:20recoveries in Nifty were accompanied by
18:29:23a noticeable decline in the option
18:29:25price. From these examples, we can see
18:29:27that the type of an option, whether it
18:29:30is a call or a put option, strongly
18:29:32influences how the price of the option
18:29:35moves. Now, for each of the factors that
18:29:38are to be mentioned next, the impact of
18:29:40the option price is affected by whether
18:29:43the option is a call or a put. So, with
18:29:46that in mind, let us look at the next
18:29:48factor, which is the underlying price or
18:29:51spot price. As you may know by now,
18:29:54option price is impacted by the price of
18:29:56the underlying asset. The price of the
18:29:59underlying asset is a variable as it
18:30:01keep fluctuating over the life of the
18:30:03option contract. An increase in the
18:30:06price of the underlying benefits the
18:30:08holder of a call option in case the
18:30:10underlying price moves above the strike
18:30:12price or even above the break even price
18:30:14of the option and vice versa.
18:30:16Alternatively, a decrease in the price
18:30:19of the underlying benefits the holder of
18:30:21a put option in case the underlying
18:30:23price moves below the strike price or
18:30:25maybe even below the break even price of
18:30:27the option and vice versa. In other
18:30:30words, the value of a call option will
18:30:32increase and that of a put option will
18:30:34decrease as the underlying price
18:30:36increases and moves above the strike
18:30:39price or breakin price. While the value
18:30:41of a put option will increase and that
18:30:44of a call option will decrease as the
18:30:46underlying price decreases or move below
18:30:49the strike price or break even price. We
18:30:51can consider the example of nifty index
18:30:54and nifty options provided earlier. So
18:30:57as the price of the underlying changes
18:30:59so does the price of the option. The two
18:31:02charts shows that as the underlying
18:31:04price moves up, the value of a call
18:31:07option increases while that of a put
18:31:09option decreases. The opposite is also
18:31:12true as the underlying moves down.
18:31:15Therefore, the underlying price has a
18:31:17strong influence on the price of an
18:31:20option. Next up is strike price. While
18:31:23the underlying price is a variable
18:31:25price, the strike price on the other
18:31:27hand is a fixed price. It remains
18:31:30constant throughout the life of the
18:31:32option contract. By now you may be aware
18:31:35that the moneyiness of an option can be
18:31:38measured by looking at the difference
18:31:39between the strike price and the
18:31:41underlying spot price. We know that if
18:31:44the strike price is below the underlying
18:31:46price, the corresponding call option is
18:31:49in the money and the corresponding put
18:31:51option is out of the money. On the other
18:31:54hand, if the strike price is above the
18:31:57underlying price, the corresponding call
18:31:59option and put option are out of the
18:32:01money and in the money respectively.
18:32:04Hence, the position of the strike price
18:32:07relative to the underlying price has an
18:32:10impact on the price of an option because
18:32:12it directly impacts the intrinsic value
18:32:15of an option which as we have already
18:32:18discussed is a key component of the
18:32:20option price. The lower the strike price
18:32:23is below the underlying price, the
18:32:25higher will be the price of the call
18:32:26option and the lower will be the price
18:32:29of the put option. Similarly, the higher
18:32:32the strike price is above the underlying
18:32:34price, the higher will be the price of a
18:32:37put option and the lower will be the
18:32:39price of a call option. Take a look at
18:32:41this option chain data for Nifty
18:32:44options. The prevailing spot price of
18:32:46Nifty is around 24,820.
18:32:50just focus on only two things. The
18:32:53strike prices which are located at the
18:32:55exact center of the table and the last
18:32:57traded price or LTP for both call
18:33:00options and put options. As we already
18:33:03know, the rows that are highlighted in
18:33:05yellow indicates options that are in the
18:33:08money while the ones that are in white
18:33:11indicates options that are out of the
18:33:13money. In this case, the at the money
18:33:15strike is 24,800.
18:33:18You can observe that in case of call
18:33:20options, the lower the strikes relative
18:33:23to the underlying price, the higher is
18:33:26the option price or LTP and vice versa.
18:33:29For instance, it can be seen from the
18:33:32table that a call option with a strike
18:33:34price of 24,500
18:33:36is much more expensive than a call
18:33:39option with a strike price of 25,000.
18:33:41Similarly, in case of put options, the
18:33:44higher the strikes relative to the
18:33:46underlying price, the higher is the
18:33:49option price or LTP and vice versa. For
18:33:52instance, it can be seen from the table
18:33:55that a put option with a strike price of
18:33:5725,000 is much more expensive than a put
18:34:01option with a strike price of 24,500.
18:34:04I hope the effect of strike price is
18:34:07understood. Moving on, the next
18:34:10influential factor is time to
18:34:12expiration. While the strike price has
18:34:15an impact on the intrinsic value of an
18:34:17option, the time to expiration has an
18:34:20impact on the time value of an option.
18:34:23So the greater the time to expiration,
18:34:25the higher will be the probability of
18:34:27the option moving in favor of the buyer
18:34:30or ending up in the money. This means
18:34:33the higher will be the time value of an
18:34:35option and subsequently the higher will
18:34:38be the option price or premium.
18:34:40Similarly, the lower the time to
18:34:42expiration, the lower will be the time
18:34:45value of an option and subsequently the
18:34:47lower will be the option price or
18:34:50premium. A crucial thing that we have
18:34:52discussed earlier is that as time passes
18:34:55by, the time value component of the
18:34:57option price will decay at an
18:34:59exponential pace. During the initial
18:35:02life of an option contract, the pace of
18:35:04time decay will be slow. However, as the
18:35:07time to expiration reduces or comes
18:35:10closer, the pace of time decay will
18:35:12start accelerating. During the later
18:35:15stages of an options contract, the pace
18:35:18of time decay will be very fast. At the
18:35:20expiry the time value of an option will
18:35:23fall to zero. We will understand this
18:35:25better when we take up the concept of
18:35:27option Greeks. But for giving you a
18:35:30primary idea, take a look at this chart.
18:35:33In this chart, you can notice the speed
18:35:35of decay in time value. In the initial
18:35:38days, the pace of time decay was slow.
18:35:41But as the time passes by, the pace of
18:35:43time decay started accelerating. You can
18:35:46notice how the speed of time decay
18:35:48increased massively from 30 days left to
18:35:51expiration till the expiration date. So
18:35:54a key thing to remember is that time
18:35:56decay works in favor of an option seller
18:35:59and it works against the option buyer.
18:36:02So understanding the concept of time
18:36:04decay is a very crucial part of learning
18:36:07options and as stated before we will
18:36:10talk about this in much greater detail
18:36:12when we take up option Greeks. For now,
18:36:15just keep in mind that option price is
18:36:18strongly influenced by the time value
18:36:20component. From now on, we are entering
18:36:23a territory which we have not yet
18:36:25touched. I'm going to talk about the
18:36:27next factor, which is volatility, which
18:36:30is one of the most important factors to
18:36:33consider when trading options or at
18:36:35least when talking about trading as a
18:36:37whole. In simple layman terms,
18:36:39volatility is the rate at which the
18:36:42price of an asset fluctuates over time.
18:36:45It tells you nothing about the direction
18:36:47in which the price of the asset is
18:36:48moving. Instead, volatility just tells
18:36:51the magnitude of fluctuation in the
18:36:53price of the asset. A very commonly used
18:36:56measure of volatility is standard
18:36:58deviation, which by the way measures the
18:37:00amount of dispersion or deviation around
18:37:04a mean or average value. Beta is another
18:37:07commonly used measure of volatility
18:37:10especially in the stock market context.
18:37:13The reason why volatility is such a big
18:37:15deal or such a vital concept in finance
18:37:18is because it helps to measure the risk
18:37:20involved in an investment. I have talked
18:37:23about this in some of my other videos
18:37:25that the greater the volatility the
18:37:28greater is the risk involved in the
18:37:30investment and vice versa. And the
18:37:32greater the risk involved in an
18:37:34investment, the greater is the potential
18:37:36return that an investor can expect for
18:37:39that excess risk. As far as options are
18:37:41concerned, there are two types of
18:37:43volatility. These are historical
18:37:45volatility and implied volatility. As
18:37:49the name suggest, historical volatility
18:37:52is based on past fluctuations in the
18:37:54price of the underlying asset over a
18:37:56specific period of time, usually for a
18:37:58period of 1 year. On the other hand,
18:38:00implied volatility is used to measure
18:38:03the future volatility. Unlike historical
18:38:06volatility which is based on past data,
18:38:08implied volatility is based on what
18:38:11market participants imply the volatility
18:38:13of the underlying to be in the future.
18:38:16Given that implied volatility is
18:38:18forwardlooking, it is widely used in the
18:38:21pricing of options. Generally, implied
18:38:24volatility is expressed as a percentage
18:38:27on an annualized basis. If you look at
18:38:30the option chain on both the call and
18:38:32put side, you see a term named IV. Don't
18:38:36confuse this with intrinsic value.
18:38:38Instead, this represents the implied
18:38:41volatility. We will talk extensively
18:38:43about the volatility concept in a few of
18:38:46our upcoming episodes. Meanwhile, let's
18:38:48briefly talk about some of the important
18:38:50concepts. For your kind information,
18:38:52implied volatility is reflected in the
18:38:55time value component of an option. In
18:38:57other words, time value of an option is
18:39:00impacted not just by the time to
18:39:03expiration but also by the implied
18:39:05volatility. This means higher the
18:39:08implied volatility, higher would be the
18:39:10time value component of an option and
18:39:13subsequently the higher would be the
18:39:15option price and vice versa. Implied
18:39:18volatility is a metric often used by
18:39:21market participants to determine whether
18:39:23a trade is worth taking or not. For
18:39:26instance, traders often compare the
18:39:29current implied volatility of an option
18:39:32with the average implied volatility of
18:39:34the past n periods to see whether the
18:39:37option is cheap or undervalued or is it
18:39:40expensive or overvalued and then make a
18:39:43decision. Given the fact that volatility
18:39:46tends to revert to the mean value,
18:39:49traders, especially with a greater risk
18:39:51appetite, often use higher than average
18:39:54IVs, which is indicative of overvalued
18:39:57options to sell these options, expecting
18:40:00to profit from the volatility returning
18:40:02to the normal levels later. Similarly,
18:40:05there are traders who often use lower
18:40:07than average IVs, which is indicative of
18:40:10undervalued options to buy these
18:40:13options. again expecting to profit from
18:40:15the volatility returning to normal
18:40:17levels. I know most of you have no idea
18:40:20of what I'm talking about. But the thing
18:40:22is that volatility in itself is a very
18:40:25huge topic of discussion. Given the
18:40:28significant impact it has on the price
18:40:30of an option, it would be discussed in
18:40:32much greater detail later. For the time
18:40:34being, just keep in mind that higher the
18:40:37volatility, higher would be the price of
18:40:39an option. And the lower the volatility,
18:40:41the lower could be the price of an
18:40:43option. Now for the calculations, you
18:40:45can use the implied volatility provided
18:40:47in the option chain. Now if you scroll
18:40:50all the way down in the note section,
18:40:53you can see a remark stating that the
18:40:55implied volatility is displayed for
18:40:57reference purposes only. It is computed
18:41:00at a fixed time intervals using various
18:41:02parameters such as last traded price,
18:41:05underlying values, etc. Hence, it is
18:41:08dynamic in nature. What it means is that
18:41:10IV changes on a minute-to-minute basis.
18:41:14Moving on, the next factor is interest
18:41:17rate. Interest rate or risk-free rate
18:41:20also affect the price of an option,
18:41:22although not as much as each of the
18:41:24variables that we have already talked
18:41:26about does. The reason why this is the
18:41:28case is because interest rates don't
18:41:30tend to move as frequently and as much
18:41:33as the other variables such as the
18:41:35underlying price, time to expiration,
18:41:37and volatility tend to move over the
18:41:40life of an option contract. Even with
18:41:42that being said, as the interest rate
18:41:44has an impact on option price, it is
18:41:46worth understanding how interest rates
18:41:49impact option prices. So a rise in
18:41:52interest rates benefits the value of a
18:41:54call option but it would affect the
18:41:57value of a put option. The reason why
18:41:59this happens is because as interest
18:42:01rates go up the opportunity cost of
18:42:04investing in a certain financial
18:42:06instrument such as stock also goes up.
18:42:09Why does this happen? This happens
18:42:11because a rise in interest rates make
18:42:13the interestbearing instruments such as
18:42:16uh fixed deposits, government bills and
18:42:19T bills more attractive. At the same
18:42:21time, it makes buying shares on borrowed
18:42:24money more expensive because the cost of
18:42:27borrowing also goes up as banks will now
18:42:29charge a higher interest on borrowings.
18:42:32Due to this reason, buying call options
18:42:34on stocks rather than buying stocks
18:42:37outright on borrowed money becomes more
18:42:39attractive given that the cash
18:42:41requirement on buying options is much
18:42:44lower because of the greater leverage
18:42:46that options provide. Therefore, the
18:42:48value of call options tends to go up
18:42:50because of a potential rise in the
18:42:52demand for them. Buying a put option on
18:42:54the stock on the other hand would lead
18:42:56to a cash outflow from the trading
18:42:58account because you need to pay the
18:43:00total cost of the option when you're
18:43:02buying. For put options, an increase in
18:43:05the interest rates usually results in a
18:43:08decrease in their prices. This occurs
18:43:10because the present value of the strike
18:43:12price which will be paid when the option
18:43:15price is exercised at a future date is
18:43:17worth less when discounted back at a
18:43:20higher interest rate. This makes the put
18:43:22option less valuable as the benefit of
18:43:25holding the option or the right to sell
18:43:27at a predetermined price is reduced when
18:43:30the money today is expected to be worth
18:43:33more than the same amount in the future
18:43:35due to a higher interest rate.
18:43:37Therefore, the value of put options
18:43:39tends to go down because of a potential
18:43:41decline in the demand for them. Hence,
18:43:43rising interest rates benefits call
18:43:46options and hurt put options. The
18:43:49opposite is also true when interest
18:43:51rates go down. Now, where to find the
18:43:54interest rate applicable? For this, you
18:43:57need to scroll all the way down to the
18:43:59bottom of the NSE option chain. In the
18:44:02note section, it says 10%age interest
18:44:05rate is applied while computing the
18:44:07implied volatility. You can consider
18:44:09this rate for calculations. Of the
18:44:12factors impacting option price that we
18:44:14have studied so far, interest rates are
18:44:17arguably the least important factor in
18:44:20terms of how much they impact the option
18:44:22price. Other factors such as underlying
18:44:25price, strike price, time to expiration,
18:44:28and volatility are much more important
18:44:30inputs in valuing an option than
18:44:32interest rate is. For now, remember that
18:44:36rising interest rates benefits call
18:44:38options and it hurts put options while
18:44:41falling interest rate benefits put
18:44:43options and it hurts call options. Now
18:44:47the final factor that impacts the price
18:44:49of an option is the dividend. As
18:44:52mentioned earlier, this factor is only
18:44:55applicable to stock options and not to
18:44:57any other type of options. In fact, this
18:45:00factor applies to only those stocks that
18:45:03are expected to pay a dividend during
18:45:05the life of an option contract, which is
18:45:07usually 90 days. An important thing to
18:45:10remember here is that when options are
18:45:12priced, it is assumed that they would be
18:45:15exercised only on the expiration date.
18:45:18Also, at the time of pricing options,
18:45:20the dividend that a company would
18:45:22potentially give on the stock up to the
18:45:24expiration date of an option contract is
18:45:27taken into consideration. But you might
18:45:30have this doubt as to how exactly does
18:45:32dividend impact the price of an option.
18:45:35Well, for a fact on the X dividend date,
18:45:38which is actually the cutoff day for
18:45:40determining which shareholders are
18:45:43eligible to receive the dividend
18:45:44declared, assuming everything else is
18:45:46constant, the price of the stock reduces
18:45:49by as much as the amount of dividend
18:45:52that is payable by the company to its
18:45:54shareholders. Given that the price of
18:45:56the stock drops on the X dividend date
18:45:59to account for the dividend payable, the
18:46:02price of a call would gradually drop
18:46:04while the price of a put would gradually
18:46:06rise to reflect this drop in value of
18:46:09the stock. In other words, if the
18:46:12company is projected to give a dividend
18:46:14during the life of the option contract,
18:46:16the price of a call option would be
18:46:18cheaper or undervalued while the price
18:46:21of a put option would be expensive or
18:46:24overvalued assuming all other things are
18:46:27constant. Hence, the higher the
18:46:29dividend, the lower would be the price
18:46:31of call option and the higher would be
18:46:33the price of a put option. Just like the
18:46:36interest rate component of option
18:46:38pricing, the dividend component does not
18:46:40have much of an impact on the price of
18:46:43an option unless the dividend amount is
18:46:45substantially large. This is because any
18:46:48potential dividend that would be paid on
18:46:50a stock during the life of an option
18:46:52contract is gradually reflected into the
18:46:55price of an option well ahead of the X
18:46:58dividend date. of the factors
18:47:00influencing option price that we have
18:47:02studied so far in this episode. Dividend
18:47:05along with interest rate is arguably
18:47:08less relatively important compared to
18:47:11other factors. In fact, the type of
18:47:13option underlying price, strike price,
18:47:17volatility and time to expiration have a
18:47:20much more relevance on the price of an
18:47:22option. I have plotted a table which
18:47:25shows the impact of these seven factors
18:47:28on both call and put options. You could
18:47:30take a screenshot for future reference
18:47:32if you want. In this table, direct
18:47:35impact means that a specific factor has
18:47:38a direct impact on the price of an
18:47:39option while inverse means that a
18:47:43specific factor has a inverse impact on
18:47:46the price of an option. For example, the
18:47:48underlying price impacts the call option
18:47:50directly. Meaning a rise in the
18:47:52underlying price leads to a rise in the
18:47:55price of the call option as well.
18:47:57Meanwhile, the strike price impacts a
18:47:59call option inversely. Meaning the lower
18:48:02the strike price, the higher would be
18:48:04the value of a call option. I hope you
18:48:06get the logic. Now, last but not the
18:48:09least, let us look at the magical
18:48:11partial differential equation that has
18:48:14changed the derivative market for good.
18:48:16We will look at the partial differential
18:48:18equation first. In this partial
18:48:20differential equation, the term V
18:48:22represents the price of the option as a
18:48:25function of time and the spot price of
18:48:27the underlying. R denotes the risk-free
18:48:30interest rate. Sigma denotes the
18:48:33volatility of the underlying asset. S
18:48:35represents the spot price of the
18:48:37underlying asset. And T denotes the time
18:48:40to expiration. As you can notice,
18:48:42certain terms like strike price and
18:48:44dividend are not explicitly represented
18:48:47in this partial differential equation.
18:48:49However, strike price is a crucial term
18:48:52when applying boundary conditions and
18:48:54solving the equation to determine the
18:48:56option price. So, I will represent black
18:48:59shores and mer equation to determine the
18:49:02pricing of European styled options. So,
18:49:05the equation for European call option is
18:49:08displayed on the screen here. And in
18:49:10this equation, C indicates the call
18:49:13option price at a time t. N of D1 and N
18:49:17of D2 represents the cumulative
18:49:20distribution function of the standard
18:49:22Nman distribution whose expansion is
18:49:25also provided here. S represents the
18:49:27spot price of the underlying asset. X
18:49:30denotes the strike price of the option.
18:49:33R is the risk-free interest rate. Q is
18:49:37the continuous dividend yield applicable
18:49:39only to stock options. T is the time to
18:49:42maturity and sigma denotes the
18:49:45volatility of the asset. On a similar
18:49:48note, you can also have the equation for
18:49:50pricing a European put option. You can
18:49:53see it for yourself. Now, these days uh
18:49:56black shores and mer calculators are
18:49:58freely available online and I have
18:50:00attached a link to one of them in the
18:50:02description. You can plug in the values
18:50:04and see for yourselves and do comment
18:50:07down if these results are in line with
18:50:09the premium amounts provided in the
18:50:11option chain.
18:50:14The concept of strike selection is a
18:50:17highly discussed topic in options. But
18:50:19only a very few people actually know how
18:50:22to select a particular strike at a
18:50:24particular time of a particular option
18:50:26contract. And moreover, you need to have
18:50:28a proper reasoning as to why you have
18:50:31selected that particular strike or
18:50:33strikes. In this video, we are going to
18:50:36do exactly that. I will help you
18:50:38encounter most of your fears when it
18:50:41comes to options trading. I will discuss
18:50:43the strike selection process from an
18:50:45option buyer's perspective. I won't be
18:50:47discussing the strike selection for an
18:50:49option seller because it is yet another
18:50:52vast topic of discussion. Maybe I will
18:50:54make another detailed video for that if
18:50:57this video gets at least 1,500 likes.
18:51:00And make sure to watch this video till
18:51:02the end without skipping because there
18:51:04won't be any loose talks and each and
18:51:06every point is an important piece of
18:51:08information that may transform the way
18:51:10you trade options. the next time. So
18:51:12with that being said, we will start our
18:51:15discussion of strike price selection for
18:51:17option buyers. I know most of you retail
18:51:20traders are option buyers and the
18:51:23reasons for this is quite simple. First
18:51:25of all, it takes less capital to buy
18:51:27options rather than to sell them. You
18:51:30can buy a large number of lots for a
18:51:32comparatively lesser amount of money.
18:51:34Moreover, you get more value for your
18:51:36money if the trade goes in your favor.
18:51:38The returns that an option buyer can
18:51:40make is mindblowing. Also, you don't
18:51:43need to be bothered about any peak
18:51:45margin penalty or you don't have to deal
18:51:47with the complex looking Greeks like
18:51:49theta, gamma, delta, etc. And all you
18:51:52need to have is a directional bias. Then
18:51:55select the option you want to buy. Be it
18:51:57a call option if you have a bullish view
18:51:59or a put option if you have a bearish
18:52:02view. Then select the strike price you
18:52:04want to trade. And if the price moves in
18:52:06the direction that you anticipated it to
18:52:08move, then you stand to make a lot of
18:52:10money. Now, these are all the good stuff
18:52:12when buying options. But if it was too
18:52:15easy, why do most option buyers fail
18:52:18terribly in the market? Why do 80%age of
18:52:21them lost all their capital within a few
18:52:24days or weeks? Let me tell you why. The
18:52:26first and foremost reason is the lack of
18:52:29proper knowledge about the world of
18:52:31options. When you see someone making a
18:52:33killing out of the market, making lacks
18:52:35and crows within days or weeks, you
18:52:37instantly get the fear of missing out
18:52:39and you step into the market with
18:52:41hard-earned money only to see it burn.
18:52:43The second reason is the lack of
18:52:45awareness of who your friend and enemy
18:52:47is. See, when you are an option buyer,
18:52:50momentum is your friend and premium
18:52:53decay due to theta is your enemy. The
18:52:56third reason is critical strike price
18:52:59selection. Most low capital option
18:53:01buyers buy deep out of the money options
18:53:04just because it is cheap and for sure
18:53:07you are not going to make any money out
18:53:09of these OTM strikes. You need to
18:53:11realize that you trade options to make
18:53:14money rather than not to lose money. The
18:53:16fourth reason is associated with an
18:53:18inherent property of options. Options
18:53:21are decaying assets, meaning that the
18:53:24time value of option premium reduces
18:53:26with time and it is more evident when we
18:53:29get closer to the expiry. Now, one of
18:53:31the biggest reasons why most option
18:53:33buyers go broke is due to the lack of
18:53:36proper stop- losses. Most of them try to
18:53:38average their losses instead of cutting
18:53:40their losses. Your stop-loss will depend
18:53:43on the strike price that you have
18:53:45selected. So for an ATM and OTM options
18:53:48the stop losses will be different. And
18:53:50the golden point that most traders be it
18:53:53option buyers or option writers miss out
18:53:56is that in options you need to buy into
18:53:58volatility and sell into stability. See
18:54:01when markets and stocks become volatile
18:54:04options become more valuable as the
18:54:06premiums rises. In short volatility
18:54:09means that the stock or the index can
18:54:12swing wildly in either direction. As an
18:54:14option buyer, even though your risk is
18:54:16limited to the premium paid, but on the
18:54:18upside, your returns can be boundless.
18:54:21So when volatility rises, it is the time
18:54:24to buy options and not to sell options.
18:54:27Now, I don't want to confuse you with a
18:54:29lot of volatility stuff. But keep in
18:54:31mind that when volatility is rising, you
18:54:34should be buying options and when
18:54:36volatility is reducing, you should be
18:54:38selling options. It is when you play
18:54:40against these rules that you lose money
18:54:42in options. Now I will make a detailed
18:54:44video on the volatility topic. If you
18:54:47want uh please do mention in the comment
18:54:49section. Now let's look into the strike
18:54:51selection process. If you are into
18:54:53option buying, I'm hoping that you have
18:54:55a decent enough strategy be it any
18:54:57reversal strategy or breakout strategy
18:55:00or volatility contraction and expansion
18:55:03strategy or main reversal strategy or
18:55:05any other strategy where you expect the
18:55:08prices to move strongly or with momentum
18:55:10in your desired direction. Now you can
18:55:13ask me why do you want prices to move
18:55:15with strong momentum. This is where we
18:55:17will look into the significance of delta
18:55:20which is a very important option Greek
18:55:23for buyers. I will try to explain this
18:55:25concept as simply as I possibly can.
18:55:28Actually delta is the change in the
18:55:31options price or premium due to change
18:55:34in the underlying futures price or spot
18:55:37price. Delta is not an absolute measure,
18:55:40but instead it is a percentage measure.
18:55:42Think of it like the speed of a car.
18:55:44Similar to how fast or slow a car moves
18:55:47when its speed increases or decreases,
18:55:50the option premium increases or
18:55:52decreases with respect to changes in
18:55:54delta value. Similar to the speedometer
18:55:57of a car where the speed is capped
18:55:59between 0 km/h to some 150 or 220 km/h.
18:56:05The delta values are also bound between
18:56:070 and 1 in case of call options and 0
18:56:10and minus1 in case of put options. Now
18:56:13you may ask why this difference. The
18:56:16explanation is quite simple. This is
18:56:18because a rise in the price of a stock
18:56:21or its futures is positive for call
18:56:23options. Because when the stock or
18:56:26future price rises, call option premiums
18:56:28increases in value. While it is negative
18:56:31for put options because a rise in stock
18:56:34or futures price is associated with a
18:56:36decline in put option premiums. In fact,
18:56:39the negative sign is to show this
18:56:41difference and nothing else. So in
18:56:44short, call options have a positive
18:56:46delta. For example, a call option with a
18:56:48delta of.3 indicates that for every one
18:56:52point gain or loss in the underlying,
18:56:54the call option premium gains or losses
18:56:570.3 points. On the opposite, put options
18:57:00have a negative delta. So, a put option
18:57:03with a delta of minus0.4
18:57:06indicates that for every one point gain
18:57:08or loss in the underlying, the put
18:57:10option premium gains or losses 0.4
18:57:13points. Now one thing that I want to
18:57:16point out is that option premium is not
18:57:19just related to delta only but instead
18:57:21it is obtained as a result of taking
18:57:23many other factors into consideration
18:57:26such as volatility, time to expiry,
18:57:29interest rates, dividends etc. But for
18:57:32simplicity we are going to continue
18:57:34using this assumption and the difference
18:57:36between the actual value is quite
18:57:38negligible if your position sizing is
18:57:40not too large. Now take a look at this
18:57:42graph. It shows the relationship between
18:57:45different option strikes and the delta
18:57:47for call and put options. From this
18:57:49graph, it is clear that the OTM options
18:57:52have a delta value between 0 and 0.5.
18:57:57ATM option has a delta of.5 and ITM
18:58:00options has a delta between 0.5 and 1 in
18:58:04case of call options. And for put
18:58:06options, OTM strikes have a delta
18:58:08between 0 and minus0.5.
18:58:11ATM option has a delta of minus0.5 and
18:58:15in the money option has a delta between
18:58:18minus0.5 and minus1. So what we can
18:58:21infer from this information is that as
18:58:23the option strike changes from OTM to
18:58:26ATM to ITM the delta changes. Therefore
18:58:29the premium changes and the option start
18:58:32to mimic the underlying meaning that for
18:58:34every rupee change in the underlying
18:58:36value the option premium will also
18:58:38change a rupee. Let's take a few
18:58:40examples to understand these concepts
18:58:43better. Let's say the nifty spot price
18:58:45is 18,10 and so the at the money strike
18:58:49is 18,000. Now if you consider the
18:58:5218,000 at the money call option which is
18:58:54priced at 100 rupees and the delta value
18:58:57is close to 0.5. What this means is that
18:59:00for every 1 rupee change in nifty spot
18:59:03price, the 18,000 call option premium
18:59:05will increase by.5.
18:59:08So if the spot price changes to 18,20
18:59:11that is spot price increased by 10
18:59:14points then the call option premium will
18:59:16increase by 5 points to 105 rupees and
18:59:19if nifty falls to 18,000 that is spot
18:59:22price decreased by 10 points then the
18:59:2518,000 call option premium will drop
18:59:27five points to 95 rupees. Now what will
18:59:30happen to the delta value of 18,000 call
18:59:33option when nifty spot price rises or
18:59:36falls by 100 points that is it becomes
18:59:3918,100 or 17,900
18:59:43do you think the delta will still remain
18:59:45at 0.5? No. Right? When the nifty spot
18:59:49increases 100 points to 18,100 the
18:59:5218,000 call option strike which was ATM
18:59:55before now becomes an in the money
18:59:58option. Since we know that the delta
19:00:00range of ITM options is between 0.5 and
19:00:031 and so in this scenario the delta will
19:00:07vary between 0.6 and 0.7 which will in
19:00:11turn mean that the strike price premiums
19:00:13will increase faster than before. Now on
19:00:15the opposite, if the Nifty spot price
19:00:18were to fall 100 points to 17,900,
19:00:21then 18,000 call option strike which was
19:00:24at the money before will now become an
19:00:27out ofthe- money strike. So naturally
19:00:29the delta value will reduce from.5 and
19:00:32it will now range between 0.3 to 0.4
19:00:35which in turn implies that the option
19:00:37premium will now move slower than
19:00:39before. Let's look at a similar example
19:00:41for put options to have a solid
19:00:43understanding of the concepts. Let's
19:00:45assume that the nifty spot price is
19:00:4818,10 and so the at the money strike is
19:00:5218,000. Now if you consider the 18,000
19:00:55at the money put option which is priced
19:00:57at 110 rupees and the delta value is
19:01:00close to minus.5.
19:01:02This means for every 1 rupee change in
19:01:05the nifty spot price the 18,000 put
19:01:07option premium will change by minus0.5
19:01:11and for every 1 rupee drop in the spot
19:01:13price the ATM put option premium will
19:01:15rise by 0.5 rupees. So if the spot price
19:01:19changes to 18,20 that is the spot price
19:01:23increase by 10 points then the put
19:01:24option premium will decrease five points
19:01:27to 105 and if nifty moves to 18,000 that
19:01:31is the spot price decrease by 10 points
19:01:33then the 18,000 put option premium will
19:01:36rise five points to 115 rupees. Now what
19:01:40will happen to the delta value of 18,000
19:01:42put option when the nifty spot price
19:01:45rises or falls by 100 points that is it
19:01:48becomes 18,100 or 17,900.
19:01:52Do you think the delta will remain at
19:01:54-0.5?
19:01:56No, the delta will actually change when
19:01:59the nifty spot price increases 100
19:02:01points to 18,100.
19:02:03The 18,000 put option strike which was
19:02:06at the money before will now become an
19:02:09out ofthe- money option. Since the delta
19:02:11range of out ofthe- money options is
19:02:13between 0 and -0.5. So in this scenario
19:02:17the delta will vary between -0.3 or -0.4
19:02:22which will in turn mean that the speed
19:02:24of the strike price premium changes will
19:02:26be slower than before. Now on the
19:02:28contrary if the spot price were to fall
19:02:31100 points to 17,900
19:02:34then the 18,000 put option strike which
19:02:37was at the money before will now become
19:02:39an in the money strike. So naturally the
19:02:42delta value will increase from -0.5 and
19:02:46it will range between -0.6 to -0.7 which
19:02:51in turn implies that the option premiums
19:02:53will now move faster than before. So
19:02:56let's summarize what we have learned so
19:02:58far. Number one, when the spot price of
19:03:00the asset changes, the moneyiness of an
19:03:03option changes and therefore the delta
19:03:06also changes. Number two, since the
19:03:08delta changes with changes in spot
19:03:10prices, delta is actually a variable and
19:03:14not really a fixed entity. Therefore, if
19:03:16an option has a delta of 0.5, this value
19:03:20is likely to change with change in the
19:03:23value of the underlying. And third
19:03:25point, the call options delta varies
19:03:27from 0 to 1 while put options delta
19:03:30varies from minus1 to 0. I'm hoping that
19:03:34you now have a fair understanding of
19:03:36what delta is and how it changes for
19:03:39different strikes based on the type of
19:03:41option contract that we are looking at.
19:03:43So we are now ready to understand the
19:03:45concept of strike selection for buyers
19:03:47of options. This is the concept of delta
19:03:50acceleration. Okay. Have you heard about
19:03:53hero or zero trades where someone
19:03:55usually buys an out ofthe- money or
19:03:58sometimes even a deep out of the money
19:04:00option and the next day based on where
19:04:02the market opens and moves the trader
19:04:05stands to make a killing generating
19:04:07mindblowing returns or on the opposite
19:04:09he might lose all the premium he paid.
19:04:12Do you know why these people take these
19:04:14risky trades and particularly why they
19:04:17select out of the money strikes? Now
19:04:19there can be different reasons. Number
19:04:21one, out of the money and deep out of
19:04:23the money options are much cheaper, so
19:04:26you only need to deploy lesser capital.
19:04:29Number two, since the premium paid is
19:04:31lower, the amount being risked is
19:04:33considerably lower even though you stand
19:04:35to lose the entire premium amount. But
19:04:37the potential return that is available
19:04:40for the taking is limitless. But the
19:04:42most important reason and maybe one of
19:04:45the reasons that most traders don't
19:04:47realize or maybe they don't care about
19:04:50is due to delta acceleration. Let me
19:04:52explain this with the help of another
19:04:54graph. This right here is the delta
19:04:56acceleration graph whose y-axis is the
19:04:59delta value from 0 to 1 for a call
19:05:02option or maybe 0 to minus1 for a put
19:05:05option. The x-axis represents moneyiness
19:05:07of options for a change in spot price of
19:05:10the underlying. Now the concept is same
19:05:12for both types of option contracts. So
19:05:14we will discuss it based on call
19:05:16options. Now there are four delta stages
19:05:19in the graph from pre-development,
19:05:21takeoff, acceleration and stabilization.
19:05:24Now let us look into each one of them.
19:05:26Trust me this is easier than you expect.
19:05:29So stay with me on this. Before we move
19:05:32ahead with the discussion, let me give
19:05:34you an example. Think of this curve as
19:05:36the different stages of a flight. Let me
19:05:39explain. At first the airplane engine is
19:05:41turned on and it is on one side of the
19:05:43runway preparing for takeoff. But as of
19:05:46now there is no visible movement. This
19:05:48is similar to the pre-development phase
19:05:50of delta. Now the plane starts to move
19:05:54increasing its speed or we can say the
19:05:56plane is gradually accelerating against
19:05:58a headwind. Now this is similar to the
19:06:01second phase of the delta curve where
19:06:03the delta tends to take off or in simple
19:06:06terms the delta values starts to
19:06:08accelerate gradually. Now the aircraft
19:06:11acceleration increases so much so that
19:06:13the headwind lifts the plane up and this
19:06:15is where the aeroplane accelerates the
19:06:18most in order to counter the air
19:06:20resistance. This analogy can be used to
19:06:22represent the third stage of the curve
19:06:24where the delta values accelerate the
19:06:26maximum and move so quickly. And finally
19:06:30after reaching the desired height the
19:06:32plane will stabilize and cruise at a
19:06:34particular speed. Analogous to this the
19:06:37final stage of the delta acceleration
19:06:39curve is stabilization where the delta
19:06:42gets capped at a high constant value
19:06:44which is one for call options and minus
19:06:47one for put options. Now you can think
19:06:50of this the other way around also which
19:06:52is analogous to when an airplane
19:06:54prepares to perform a landing. But in
19:06:56that case instead of the flight
19:06:58accelerating it is actually
19:07:00decelerating. So the delta in the
19:07:02opposite situation will also decelerate
19:07:04and gets capped down to a lower value
19:07:07which is zero for both call and put
19:07:09options. Now pardon me for this terrible
19:07:12physics lesson but I hope you understand
19:07:14my point right now. Let's look at the
19:07:17four stages once again and come to a
19:07:20conclusion as to which strikes are the
19:07:22best to buy if you are an option buyer.
19:07:25But as a side note, delta of an option
19:07:28changes with other factors other than
19:07:30the spot price itself. But for the sake
19:07:32of simplicity of calculations, we will
19:07:34consider that the delta of a particular
19:07:36strike remains the same even if the spot
19:07:39price changes. So the first stage is
19:07:42pre-development. Now this is the stage
19:07:44when the option is out of the money or
19:07:47deep out of the money. So the delta
19:07:49value here is zero or close to zero. Now
19:07:52the delta will remain close to zero even
19:07:55when the option moves from deep out of
19:07:58the money to out of the money. For
19:08:00example, when the nifty spot price is
19:08:0318,000, then 18,500 call option is deep
19:08:06out of the money which is likely to have
19:08:09a delta of anywhere near 0.05.
19:08:12Now even if the spot price moves from
19:08:1418,000 to let us say 18,100 the delta of
19:08:1918,500 call option will not move much as
19:08:2318,500 call option is still an out
19:08:26ofthe- money option. The delta will
19:08:28still be a small non-zero number like
19:08:300.09 or something. So if the premium for
19:08:3318,500 call option when the spot value
19:08:36is at 18,000 is uh rupes 10 then when
19:08:40nifty moves 100 points to 18,100 then
19:08:43the premium is likely to move by 100 *
19:08:470.05 which is equal to 5 points. Hence
19:08:50the new premium will just be rupes 15.
19:08:53Now this may look like a very small
19:08:55change on an absolute scale but when you
19:08:57think of it in terms of percentages then
19:08:59the option has increased 50%age. So what
19:09:03is the conclusion that we derive from
19:09:05this observation even though deep out of
19:09:08the money options tend to have an
19:09:10impressive percentage returns but for
19:09:12such a thing to happen the spot price
19:09:14has to move by a large value. So as an
19:09:17options buyer would you buy deep out of
19:09:20the money options? Personally, I would
19:09:22ask you to avoid buying deep out of the
19:09:25options because first of all, the deltas
19:09:27are really small or the speed of the
19:09:30premium change is negligible and
19:09:32secondly the underlying has to move
19:09:34massively in order for the options to
19:09:36work in your favor. However, for the
19:09:38exact same reasons, selling deep out of
19:09:40the money options makes sense. Now, the
19:09:43second and third phases are takeoff and
19:09:46acceleration. This is where the maximum
19:09:48potential for making money lies and
19:09:50therefore greater the risk. Now let me
19:09:52explain. Now takeoff is a stage when an
19:09:55option transitions from out of the money
19:09:57to at the money. Consider that Nifty
19:10:00spot price is at 18,000 and the call
19:10:03option strike under consideration is
19:10:0618,200 call option which is a slight out
19:10:09ofthe- money option whose delta is close
19:10:11to 0.25 and the premium is rups 25. So
19:10:16when the spot price moves 100 points
19:10:18from 18,000 to 18,100, what do you think
19:10:22will happen to 18,200 call options
19:10:24premium? Since the delta is 0.25 and the
19:10:28change in underlying is 100 points, the
19:10:30change in the premium will be equal to
19:10:33100 *.25
19:10:35which is equal to 25 rupees. And
19:10:37therefore the new premium will turn out
19:10:39to be 25 + 25 which equals to 50 rupees.
19:10:43And that my friend is a 100%age return.
19:10:47Now isn't it clear that for the same 100
19:10:49point move of the underlying the
19:10:51slightly OTM options behaves very
19:10:54differently from deep out of the money
19:10:56options. So what have you learned from
19:10:59these observations? The slightly out
19:11:01ofthe- money option which usually has
19:11:03delta values ranging between 0.2 or 0.3
19:11:08is more sensitive to price changes in
19:11:10the underlying. Now as we have seen for
19:11:12100 points change in the underlying the
19:11:15percentage change in the slightly out
19:11:17ofthe- money options is quite
19:11:19spectacular. Now this is exactly how
19:11:21options traders double or triple their
19:11:24money by buying slightly out ofthe-
19:11:26money options when they expect big price
19:11:29moves in the underlying. But does this
19:11:31mean that we have to stick with buying
19:11:33slight out ofthe- money options as an
19:11:36option buyer? Well, we are not quite
19:11:38there yet to answer the question. Let us
19:11:41take this a step forward and see how an
19:11:44at the money option that is 18,000 call
19:11:46option in this case which has a delta of
19:11:49around 0.5 would react to the same 100
19:11:52point move in the underlying price which
19:11:54moves from 18,000 to 18,100. Let's say
19:11:57the premium of 18,000 call option is 70
19:12:00rupees. Then for a 100 rupees change in
19:12:03the spot price of the underlying the
19:12:05option premium is expected to move 100
19:12:07multiplied by 0.5 which is equal to 50
19:12:10rupees. So the new premium will become
19:12:1370 + 50 which is equal to 120 rupees
19:12:16which is a decent return of 71.4%age.
19:12:20Now are we ready to make a conclusion?
19:12:23Not yet. We have one more stage to
19:12:25consider and the final stage is
19:12:27stabilization. This is when an option
19:12:30transitions from at the money to ITM and
19:12:33deep ITMs and the delta starts to cap
19:12:36and stabilize at the maximum value of
19:12:39one for call options and minus one for
19:12:42put options. It is evident from the
19:12:44graph that the delta of call options
19:12:46will start to flatten out when it
19:12:48reaches the maximum value of one. This
19:12:51means the option can be in the money or
19:12:53deep in the money but the delta gets
19:12:56fixed to one and the delta would not
19:12:58change any further. Now let us
19:13:00understand how this works. Consider
19:13:02nifty spot price to be 18,000 and
19:13:05consider two call option strikes namely
19:13:0817,900 and 17,500.
19:13:1217,900 is a slightly in the money option
19:13:15having a delta of65
19:13:18and a premium of 120 rupees. While
19:13:2117,500 call option has a delta of.95 or
19:13:25assume it to be 1 and it has a premium
19:13:27of 340 rupees. Now if the underlying
19:13:30changes by 100 points that is nifty
19:13:32moves to 18,100 then how do you think
19:13:36the two options will behave? To figure
19:13:38that out the change in premium for
19:13:4017,900 call option will be equal to 100
19:13:44* 65 which is equal to 65 rupees. So the
19:13:48new premium will be equal to rs 120 + 65
19:13:52which is equal to 185 which is a
19:13:5454.2%age
19:13:56rise. While in case of 17,500 call
19:13:59option the premium change will be equal
19:14:01to 100 * 95 which is equal to 95 rupees.
19:14:06So the new premium will be equal to 340
19:14:10+ 95 which is equal to 435 rupees which
19:14:13is just a 28%age rise in premiums. Now
19:14:16when we observe closely we can infer
19:14:19that in terms of absolute change in the
19:14:22number of points the deep ITM options
19:14:25wins over the slightly ITM option.
19:14:27However when we consider it in terms of
19:14:29the percentage change it is the other
19:14:31way around. Clearly the slightly ITM
19:14:34options are more sensitive to changes in
19:14:36the underlying but they are certainly
19:14:38expensive than ATM and slightly OTM
19:14:41options. Now what are the conclusions
19:14:44from all these observations? So one of
19:14:46the key takeaways from this graph is
19:14:48that delta values are capped after a
19:14:51particular limit. This means that
19:14:53irrespective of how much the spot price
19:14:56falls and even if the call option goes
19:14:58from out of the money to deep out of the
19:15:00money the options delta will cap and
19:15:03will remain at zero. Similarly even when
19:15:06the delta moves beyond ITM to say deep
19:15:09ITM the delta value does not change or
19:15:12it stabilizes and stays at its maximum
19:15:15value of one. You can notice similar
19:15:17characteristics for put options delta
19:15:19also. Therefore, as an option buyer, you
19:15:22should avoid trading on deep in the
19:15:24money and deep out of the money option.
19:15:27The reasons being deep out of the money
19:15:29option is not sensitive enough to the
19:15:31underlying price moves. So, the absolute
19:15:34premium change is negligible. Now, in
19:15:37terms of deep in the money options, it
19:15:39is certainly expensive and most of the
19:15:41time it is illquid. But since it has a
19:15:44very high delta value, meaning that they
19:15:46are more sensitive to changes in the
19:15:48underlying, we could buy deep ITM
19:15:51options instead of futures contracts for
19:15:53the same underlying for a much lower
19:15:56price. For example, one lot of nifty
19:15:58futures cost roughly around 1.5 lakhs.
19:16:01While one lot of deep in the money
19:16:03options cost anywhere just from 40,000
19:16:06and above. So, it's relatively cheap.
19:16:09But the downside is that options are a
19:16:12decaying instrument unlike futures. And
19:16:14secondly, most of the time deep ITM
19:16:17options are illquid. So there might be
19:16:20large slippages. The second point is
19:16:22when you expect big price moves in the
19:16:25underlying then I will recommend you to
19:16:27buy slightly OTM options because you can
19:16:30expect to win big given the fact that
19:16:32the delta acceleration really come into
19:16:34action during the takeoff and
19:16:36acceleration phase. During big price
19:16:39moves in underlying the slightly out of
19:16:41the money options tends to move quickly
19:16:44between the different stages of ATM to
19:16:47slightly giving eye popping returns. Now
19:16:50if you don't expect very big price moves
19:16:53or you just want to scalp the market
19:16:55then at the money options are the best.
19:16:58It is more sensitive to changes in the
19:16:59spot value when compared to out ofthe-
19:17:02money options and it is much cheaper
19:17:04than slightly in the money options. And
19:17:06since at the money options delta is
19:17:08high, the underlying need not really
19:17:10move by a very large value and even if
19:17:13the underlying moves by a very small
19:17:15value, the option premium will change.
19:17:17So in short, if I were buying options
19:17:20based on some momentum strategy, I will
19:17:22definitely choose a strike having a
19:17:25delta from anywhere between 0.35 and
19:17:280.55. that is I will buy either a slight
19:17:32OTM or a slight ITM or an ATM option
19:17:35strike depending on how strong my
19:17:37conviction is regarding the price
19:17:39movement in the underlying. Now this is
19:17:41a very simple hack that you can use if
19:17:43you are an option buyer and as a closing
19:17:45note options behave differently when it
19:17:48comes to expireies. As you may know that
19:17:51during expiry all the out of the money
19:17:53options will go to zero and so will
19:17:56their deltas. This is perfectly
19:17:57explained using this particular graph.
19:18:00The horizontal axis shows the days until
19:18:02expiration and the vertical axis shows
19:18:04the delta values. So as you can see both
19:18:07call and puts are approximately at plus
19:18:10or minus 0.25 delta with 21 days to
19:18:13expiration. As time erodess there is
19:18:15less and less chance of both the OTMs
19:18:17and deep OTMs expiring in the money. So
19:18:20the corresponding delta for each option
19:18:22approaches zero as the expiration date
19:18:25closes in. So try to stay away from OTM
19:18:28strikes when you are very close to the
19:18:30expiry. I hope you guys now have a
19:18:32clarity and proper reasoning as to how
19:18:36to select a particular strike when
19:18:38buying options. Now there are a lot of
19:18:40other factors playing in the market that
19:18:42affects premium like implied volatility,
19:18:45time decay, etc. But this is a simple
19:18:48and less complicated method for strike
19:18:51selection.
19:18:58You may probably be familiar with some
19:19:00of the popular chart types be it line
19:19:03chart, bar chart, candlestick charts
19:19:05etc. All these charts have uses of their
19:19:08own. There are advantages and drawbacks.
19:19:11There is simplicity and complexity. But
19:19:14there is another type of chart that you
19:19:16should know about that uses a totally
19:19:18different technique to display market
19:19:19price action. It is a simple chart
19:19:22without much complexity but still
19:19:24manages to deliver a lot of information
19:19:26which is really cool. It is none other
19:19:28than the hyenashi chart. Before we talk
19:19:32about what hyenashi is, we need the
19:19:34answer for why in the first place we
19:19:36need to learn about hyenashi charts. The
19:19:39simple and straightforward answer to
19:19:41this question is associated with the
19:19:43details that we require as a trader. Let
19:19:45me explain. Sometimes when seeing a lot
19:19:48of details on a chart, it can lead to a
19:19:50more enhanced and refined interpretation
19:19:53of what is happening in the chart. But
19:19:55there are other times when seeing too
19:19:57much detail is equivalent to seeing
19:19:59nothing at all. Take a look at this
19:20:00chart. It is a lion chart. It looks
19:20:03fairly easy to interpret as there are
19:20:05only two major movements taking place.
19:20:08There is a sharp uptrend and a longer
19:20:10downtrend. We could say that there is
19:20:12very little information available
19:20:14because line charts erase open, high and
19:20:16low points as it only considers the
19:20:19closing prices and in addition to that
19:20:21it erases any trading gaps that might
19:20:24have occurred. So this chart may be
19:20:26filtering out some crucial information
19:20:28that might be critical to a trader
19:20:30decision-making process. Now, if you had
19:20:33to trade using this chart, it would be
19:20:35very difficult to get a deeper insight
19:20:37into the market sentiment and it will be
19:20:39nearly impossible to set detailed entry
19:20:42or exit processes based on support,
19:20:45resistance, and retracements. Now, let's
19:20:47pull up a traditional candlestick chart
19:20:49in order to see this price action in
19:20:51much greater detail. Now, you can see
19:20:53the open, high, low, and close prices of
19:20:56each trading session. You can clearly
19:20:58see which days were bullish and which
19:21:00were bearish. can even see the price
19:21:03gaps. From this point of view, it is
19:21:05also easy to see the general market
19:21:07trends. And if you are someone who
19:21:09simply follows the swing highs and swing
19:21:11lows, then it might be relatively easy
19:21:13to follow the trend. I even agree to the
19:21:16point that these traditional
19:21:17candlesticks are great at helping you
19:21:19find good entry points since they
19:21:21display potential reversals using pin
19:21:24bar candles like hammers or shooting
19:21:26stars or display breakouts using strong
19:21:28candles like a bullish or bearish
19:21:30marabosu which closes above a resistance
19:21:33level or below a support level
19:21:34respectively. But what about once you
19:21:37are in a trade? Imagine having to make
19:21:40trendbased decisions after each candle.
19:21:43When a bullish candle is followed by a
19:21:44bearish candle which is followed by
19:21:46another indecision candle, there will be
19:21:48a lot of emotions in play. There will be
19:21:51highs and there will be lows and it will
19:21:53be like riding a roller coaster. This is
19:21:56where applying the hyenashi technique to
19:21:58a price chart can help you decide
19:22:00whether to stay in a trade or get out.
19:22:02It is as simple as that. Hyenashi charts
19:22:05make candlestick charts more readable
19:22:07for traders who want to know when to
19:22:09stay in a trade and ride a strong trend
19:22:11and when to get out when the trend
19:22:14weakens. So basically hyanashi is a
19:22:16modified candlestick chart technique
19:22:18that rearranges how the price is
19:22:21displayed so that the trend traders can
19:22:23have a higher confidence level when
19:22:25deciding whether to remain in a trade or
19:22:27exit their positions. Now talking about
19:22:30details, it has a lot more detail than a
19:22:32line chart. Though not as much detail as
19:22:34a candlestick chart but in terms of
19:22:37trend analysis it has a lot more clarity
19:22:40than traditional candlestick chart
19:22:41though not as much clarity as a line
19:22:43chart. Now having understood why we need
19:22:46to consider hyenashi we are ready to
19:22:48take a look at what hyenashi is.
19:22:50Starting from the grassroot level, the
19:22:52hayanashi trading technique was
19:22:54developed in 1700s by Unahisa Homa, a
19:22:57rice merchant from Sakata, Japan, who is
19:23:00considered to be the father of
19:23:01candlestick charts also. So in Japanese,
19:23:04hiken means average and ashi means pace.
19:23:07Clubbing together, hyenashi represents
19:23:09the average pace of prices. So if you're
19:23:12new to the market, hyenashi chart will
19:23:14look similar to the traditional Japanese
19:23:16candlestick charts, but it's not the
19:23:18same. Each hyenashi candlestick has a
19:23:20body and an upper or lower shadow or
19:23:23wick. But trust me, there is a big
19:23:25difference between the two types of
19:23:27candlestick charts. You can just use
19:23:29hyenashi candlesticks like normal
19:23:31candlesticks. Most bullish or bearish
19:23:33candlestick patterns that you find in
19:23:35normal candlesticks are sometimes not
19:23:37found in hyenashi. We will discuss why
19:23:39this will happen in a short while. This
19:23:42hyenashi charting technique is used to
19:23:44help filter market noise. In addition to
19:23:46that, these candlesticks can be used to
19:23:49identify trending periods in the market,
19:23:51identify potential reversal points, and
19:23:53it can even spot classic technical
19:23:55analysis chart patterns with much ease.
19:23:57Now, you may have a question running in
19:23:59your mind. How is hyenashi different
19:24:01from a typical candlestick? In order to
19:24:03understand this better, let's put up
19:24:05both these charts side by side. The
19:24:07chart on the left is traditional
19:24:09Japanese candlestick chart and the chart
19:24:11on the right is hayanashi chart. And as
19:24:14you can see from the chart on the right,
19:24:16the hyenashi chart has smooth
19:24:18directional price moves with more
19:24:20successive bars of the same color, which
19:24:22gives a clearer picture of the price
19:24:24movements. But the traditional
19:24:26candlestick chart changes colors
19:24:28frequently from green to red and vice
19:24:30versa, making it difficult for traders
19:24:33to interpret and identify trends. You'll
19:24:36notice that hyanashi charts have a
19:24:38tendency for its candles to stay green
19:24:40during an uptrend and red during a
19:24:43downtrend. This is in contrast to the
19:24:45traditional candlesticks that alternate
19:24:47color even if the price is moving
19:24:49strongly in one direction. And also you
19:24:51can clearly see that hyenashi chart is
19:24:54much more smoother looking in terms of
19:24:56price action as it reduces the noise on
19:24:58the chart and it displays consecutive
19:25:00colored candles making it much easier to
19:25:03interpret and identify prior price
19:25:05movements and current trends. Now this
19:25:08is the reason why usually long-term
19:25:10traders use hyenashi charts as an
19:25:12alternative to traditional Japanese
19:25:14candlestick charts while other
19:25:16short-term and intraday traders use them
19:25:18in conjunction with traditional Japanese
19:25:20charts switching back and forth between
19:25:22the two. Another factor that makes
19:25:24hyenashi different from traditional
19:25:26Japanese chart is how the price is
19:25:28displayed in terms of open and the
19:25:30close. Now if you look closely at the
19:25:33hyanashi chart, you'll notice that each
19:25:35of the hyenashi candlesticks start from
19:25:37the middle of the candlestick before it
19:25:39and not from the level where the
19:25:41previous candlestick has closed. Now
19:25:43hyanashi candles acts this way due to
19:25:45the way in which they are calculated. So
19:25:48it is a no-brainer that we need to learn
19:25:50how to calculate hyenashi candles in
19:25:52order to unveil a lot more of its
19:25:54secrets. With the traditional Japanese
19:25:57candlestick charts, each candle
19:25:59represents the open, high, low, and
19:26:02close that the price makes within the
19:26:04current time period. This time period
19:26:06can be 1 minute or 10 minutes or 1 hour
19:26:08or any of them. But that's not the case
19:26:11with hyenashi candles. With hyenashi
19:26:13candlestick charts, each candle doesn't
19:26:16just include the price movement within
19:26:18the current time period. It also
19:26:19includes the price information from the
19:26:21past. Now, let's look at how this is
19:26:23done. Just like a regular candlestick,
19:26:25each hyenashi candle has a open, close,
19:26:28high, and low. Except that the open and
19:26:31close are calculated differently. This
19:26:33means that there are four parts of the
19:26:36hyanashi formula. The open of a
19:26:38hikenashi candlestick equals to the
19:26:40midpoint of the previous candle. Which
19:26:42means the hyenashi open price is equal
19:26:45to the open of the previous bar plus
19:26:47close of the previous bar the whole
19:26:49divided by two. Now this answers our
19:26:51question and this is the reason why
19:26:53you'll notice that every new candlestick
19:26:56start from the middle of the previous
19:26:57one. Now talking about the high price of
19:26:59a hyanashi candlestick, it takes the
19:27:02actual high of the current period. This
19:27:04could be the highest shadow, the open or
19:27:06the close whichever is the highest. Now
19:27:08the low price of the hyanashic
19:27:10candlestick takes the actual low of the
19:27:12current period. So this could be the
19:27:14lowest shadow, the open or the close
19:27:16whichever is the lowest. Finally, the
19:27:19close of each hyenashi candlestick
19:27:21equals the average value between the
19:27:23four parameters that is open, close,
19:27:26high, and low for the current price bar.
19:27:29So, hyanashi close price is equal to
19:27:31open plus high plus low plus close the
19:27:35whole divided by four. These
19:27:36calculations are really simple. But here
19:27:39we have a chicken and egg dilemma. Which
19:27:41came first? The chicken or the egg?
19:27:43Remember the fact that we need the
19:27:46previous candle for current candle
19:27:48calculation. So we need our first
19:27:50hyenashi candlestick before we can
19:27:52calculate the future hyenashi
19:27:54candlesticks. It has to start somewhere,
19:27:56right? Therefore the first calculation
19:27:58simply uses the data from the current
19:28:00open, high, low and close. So the first
19:28:03hyenashi close equals the average of the
19:28:06open, high, low and close. And the first
19:28:08hyenashi open price equals to the
19:28:10average of the open and close price. The
19:28:13high and low prices of the hyanashi
19:28:14candle is the high and low of the
19:28:16current candle itself. Now even though
19:28:18this first hyenashi candle is somewhat
19:28:20artificial the effects will dissipate
19:28:23over time usually within 7 to 10
19:28:25periods. Now the general idea behind
19:28:27hyanashi candlestick is that they smooth
19:28:30price action. Much of the market noise
19:28:32as displayed by the traditional Japanese
19:28:34candlestick charts are minimized with
19:28:36the help of hyanashi candlestick chart.
19:28:38But we have to note that this smoothing
19:28:41operation is due to the averaging out of
19:28:43various price levels. This means that
19:28:46the actual price movements will occur
19:28:48around the represented price. So it is
19:28:51similar to how a moving average
19:28:52functions. But the smoothing effect of a
19:28:55moving average depends on its look back
19:28:57period. For example, a 20 moving average
19:28:59takes into account the data of 20
19:29:01previous candles. But the hyenashi chart
19:29:03does not require a look back period. So,
19:29:06in that sense, it is much simpler to use
19:29:08and offers more consistent results. But
19:29:11there's a catch. For swing traders and
19:29:13positional traders who trade based on
19:29:16end of the day data, this will not pause
19:29:18a problem. But for day traders who trade
19:29:20in response to the immediate price
19:29:22movements, this might be problematic as
19:29:25a a day trader would have to wait until
19:29:27a candle has been completed. This delay
19:29:29might compromise a day trader's ability
19:29:31to be responsive to the markets. So if
19:29:34you are a day trader, it is better if
19:29:36you use a combination of these charts
19:29:38for analyzing the market. Now let us
19:29:40learn how to interpret hyanashi
19:29:42candlestick charts. On normal
19:29:44candlestick charts, we observe the
19:29:46candle body and shadows to find the
19:29:49candlestick patterns. This process
19:29:51involves looking out for various
19:29:52possible patterns on the chart. Could be
19:29:54engulfing patterns, bullish and bearish
19:29:57marabosus, morning and evening stars,
19:29:59bullish and bearish pin bars, etc. So it
19:30:02can feel overwhelming at times but when
19:30:04it comes to hyenashi candlesticks you
19:30:06can stick to a much simplified
19:30:08analytical process and trust me it is
19:30:10very easy to draw. So make sure you
19:30:12learn this properly before proceeding.
19:30:15Due to the reason that hyenashi
19:30:16candlesticks are calculated based on
19:30:18averages these candlesticks will have
19:30:21much smaller shadows or wicks than a
19:30:23regular Japanese candlestick. Just like
19:30:25with regular Japanese candlesticks, with
19:30:27a hyanash candlestick, the smaller the
19:30:29shadow or wick, the stronger the trend.
19:30:32So the logic remains the same there. Now
19:30:34green candlesticks in general represent
19:30:36bullish sentiment or a bullish candle.
19:30:39But green candlesticks without a lower
19:30:41shadow shows strong bullish sentiment.
19:30:44This candle is also known as a bullish
19:30:46shaped bottom because the candle
19:30:48actually lacks a lower wick. Similarly,
19:30:50red colored candlesticks in general
19:30:52represent a bearish sentiment or a
19:30:55bearish candle. But red candlesticks
19:30:57without an upper shadow show strongly
19:30:59bearish sentiment. This candle is also
19:31:01known as a bearish shaved head because
19:31:04the candle lacks an upper wick. Now
19:31:06these shaved hyanashi candlesticks
19:31:08represent increased price momentum. Now
19:31:10coming to the last type of candles,
19:31:12these are dodgies or spinning tops with
19:31:14substantial upper and lower shadows
19:31:17which indicates a neutral bias. It may
19:31:19either represent a possible price
19:31:21congestion or a reversal. Now, except
19:31:24for dodgies or spinning tops, all the
19:31:26other hyenashi candles have a very
19:31:28straightforward interpretation. This
19:31:30takes an enormous burden of a trader as
19:31:32you don't have to buyart a lot of
19:31:34candlestick patterns. So, with this
19:31:36information of hyenashi candles, we can
19:31:39figure out two things. The trend
19:31:41direction and the trend strength. Now,
19:31:44using hyenashi to identify trend
19:31:46direction is quite easy. As mentioned
19:31:48earlier, the hyenashi chart shows you
19:31:50the direction of a trend through its
19:31:52color-coded candles. So a green candle
19:31:55is telling you that the trend is up and
19:31:57a red candle is telling you that the
19:31:59trend is down. Now in order to identify
19:32:01the strength of a trend using hyenashi
19:32:03candles, you need to observe the shadows
19:32:05or wicks of the candles. So if you
19:32:08notice that for many green candles,
19:32:10there is no lower wick or shadow and for
19:32:12many red candles there are no upper wick
19:32:14or shadows. What this implies is that
19:32:17these candlesticks do not show a shadow
19:32:20in the opposite direction of the trend.
19:32:22So if it is an uptrend, there is no
19:32:24downside shadow and vice versa for a
19:32:26downtrend there is no upside shadow or
19:32:28wick. So when there is no shadow or wick
19:32:31in the opposite direction of trend, this
19:32:33means you are in a strong trend. So the
19:32:35main thing that you need to look out for
19:32:37on hyenashi chart to determine the trend
19:32:39strength is shadowless or wickless
19:32:41candles on one end which is opposite to
19:32:43the trend direction. Now as mentioned
19:32:46earlier these candlesticks that have no
19:32:48shadow or wick on one end are also
19:32:50called as shaved candles. That is if
19:32:53there is no lower shadow or wick the
19:32:54candle is called as a shaved bottom. And
19:32:57if there is no upper shadow or wick the
19:32:59candle is called as a shaved head. Now
19:33:02let's take some example to understand
19:33:03these thumb rules as to how to use these
19:33:06candles to our benefit while trading. We
19:33:08have already talked about this in the
19:33:09previous section but this ription will
19:33:11help you forge the rules in your mind.
19:33:14So rule number one is that green
19:33:16candlesticks signal an uptrend. So when
19:33:18hyenashi candles changes from red to
19:33:21green, it is a sign that the price might
19:33:23be about to head higher. And if you are
19:33:25currently in a short position, you may
19:33:27want to exit. And if you're currently in
19:33:29a long position, you may want to add
19:33:31more to your positions depending on your
19:33:33risk appetite. Second rule is that green
19:33:36candlesticks with no lower shadow or
19:33:39wick indicate the strong uptrend. So
19:33:41when prices are trending up and you find
19:33:44consecutive bullish hyenashi
19:33:45candlesticks with no lower shadows, then
19:33:48you are possibly witnessing a strong
19:33:50uptrend, you have to stay in the long
19:33:52position until the hyenashi candlestick
19:33:54changes color from green to red and ride
19:33:56the uptrend as long as no lower shadows
19:33:58appear and let your profits accumulate.
19:34:01Now rule number three is that red
19:34:02candlesticks signal a downtrend. So when
19:34:05hikinashi candle changes from green to
19:34:07red, it is a sign that price might be
19:34:09about to turn lower. So if you're
19:34:11currently in a long position, you may
19:34:13want to exit that position. And if
19:34:15you're currently in a short position,
19:34:17you may want to consider adding more to
19:34:19your position with respect to your risk
19:34:21appetite. Rule four is that red
19:34:24candlesticks with no upper shadow or
19:34:26wick indicate a strong downtrend. So
19:34:28when prices are trending down and if you
19:34:31see consecutive bearish hyenashi
19:34:33candlesticks with no upper shadows then
19:34:35you are possibly witnessing a strong
19:34:37downtrend you have to stay in the short
19:34:39position until the hyenashi candlestick
19:34:41changes color from red to green or you
19:34:44can just stay short and ride the
19:34:46downtrend as long as no upper shadows
19:34:48appear and let your profits accumulate.
19:34:51Now the final rule or rule number five
19:34:53is that candlesticks with small bodies
19:34:56showing upper and lower shadows
19:34:58indicates a possible trend reversal or a
19:35:01trend pause. These are indecision
19:35:03candlesticks. Dogey- like candles with
19:35:06both upper and lower shadows are
19:35:08possible turning points or reversal
19:35:10points or the dogeis for spinning tops
19:35:12could even appear during a price
19:35:14congestion or trend pullback areas where
19:35:17the price momentum is weak and further
19:35:20the price might continue in the previous
19:35:21trend direction. So either way
19:35:23confirmations are required before
19:35:25considering a trend reversal signal. So
19:35:28with that we have covered all the basic
19:35:30stuff related to hyenashi in this first
19:35:32part and I think you now have a fair
19:35:34understanding on how to read hyenashi
19:35:36charts.
19:35:39When discussing the application side of
19:35:41hyenashi charts there are four main ways
19:35:44or strategies in which I personally like
19:35:47to use hyenashi indicator for trading.
19:35:49The first method involves using hyenashi
19:35:51charts to find market turning points or
19:35:54reversal points and then take reversal
19:35:56trades from there. Now the second method
19:35:58is to ride the market trend using
19:36:00hyanashi candles and letting my profits
19:36:03accumulate over time. And the third way
19:36:05is all about timing the market for my
19:36:08long-term investments or positional
19:36:10trades. And the final method is to find
19:36:13and trade chart patterns like triangles,
19:36:15wedges, etc. using haganashi charts. Now
19:36:19let's take a look at each of these
19:36:20strategies in greater detail. We will
19:36:23begin by finding market turning points
19:36:25using hyanashi charts. So identifying
19:36:28market turning points or reversals with
19:36:30hyanashi charts involves two steps. The
19:36:33main idea is to find shifts in the
19:36:35market sentiment. Now how will you find
19:36:38such a shift in the market sentiment. So
19:36:40if you have watched the first video part
19:36:42then you might have already guessed that
19:36:44we need to first find dogeis or spinning
19:36:47tops with long upper and lower wicks on
19:36:49a hyanashi chart. This step helps us to
19:36:52locate an area or zone for us to focus
19:36:54on. But it is important to note that
19:36:57dogeis and spinning tops can highlight
19:36:59zones of either possible reversal or
19:37:02continuation where we can look for
19:37:04potential trading opportunities. In this
19:37:06particular strategy, we are only
19:37:08interested in reversal setups or in
19:37:10other words, we are not looking for a
19:37:13trend pause and continuation. So once we
19:37:15have identified a suitable zone, in the
19:37:18next step, we switch back to the
19:37:19standard candlestick chart and look for
19:37:22reversal candlestick patterns. So these
19:37:24could be pin bars, morning or evening
19:37:27stars, abandoned baby patterns, etc.
19:37:29depending on the direction of trade that
19:37:32you are looking for. So take a look at
19:37:34this chart. I have circled all the
19:37:36candlestick patterns in the hyenashi
19:37:38dogee zones which are in turn
19:37:40represented by rectangles. And as you
19:37:42can see there was an evening star
19:37:44pattern at first which is a three
19:37:46candlestick bearish reversal pattern.
19:37:49You can also observe a morning star
19:37:51candlestick pattern here which is number
19:37:52two. Now it is a bullish three
19:37:55candlestick reversal pattern. Now after
19:37:57the bullish swing that filled the
19:37:58earlier price gap and taking resistance
19:38:01from that level, the hyenashi dogey zone
19:38:03coincides with a three black rose
19:38:05pattern. This bearish candlestick
19:38:07pattern led to another downswing which
19:38:10ended with a not so perfect double
19:38:12bottom pattern structure. In the next
19:38:14two trading zones, we can find two
19:38:16morning stop patterns, but this time it
19:38:18has helped to push the bullish trend
19:38:20even further. Now this might look very
19:38:22cool and easy, but this trading approach
19:38:24is not perfect. Just take a look at the
19:38:26morning star candlestick pattern at the
19:38:28chart's bottom. The two bars before it
19:38:31formed a dark cloud cover pattern which
19:38:33is a bearish reversal pattern. So if you
19:38:36would have taken that signal and gone
19:38:38short, it would have definitely resulted
19:38:40in a losing trade. But the general idea
19:38:43is to quickly identify areas of interest
19:38:45for further candlestick analysis. Now
19:38:48you can always make use of price action
19:38:50levels like support resistances, supply
19:38:53and demand zones, pivot levels or even
19:38:55dynamic levels like trend lines or
19:38:57indicators like moving averages from
19:39:00which adequate buying or selling
19:39:01pressure could come in thereby improving
19:39:03the probability of a winning trade. For
19:39:06example, a morning star pattern from a
19:39:08previous support level could result in a
19:39:11good long trade. And similarly, a
19:39:13shooting star pattern rejection from a
19:39:15previous resistance level can be a great
19:39:17signal for taking up a short reversal
19:39:19position. Now, you can even use moving
19:39:21averages or a combination of two or more
19:39:24moving averages in association with
19:39:26hyanashi charts. So, it could just be a
19:39:2820 moving average or maybe even 10, 20
19:39:31and 50 moving averages. But the logic of
19:39:34the strategy will remain the same. You
19:39:35just have to find dodgies or spinning
19:39:37tops in hyanashi charts. then go back to
19:39:40the candlestick charts to find any
19:39:42reversal patterns. But in addition to
19:39:44that, we need to observe if the price
19:39:46takes a support at the 20 moving average
19:39:48level. If you're looking for a long
19:39:50trade or if the moving average acts as a
19:39:53resistance if you are searching for
19:39:55short trading setups then you could
19:39:57simply write the price move by switching
19:39:59back to the hyenashi chart and exit
19:40:01either when the hyenashi chart forms a
19:40:03dogee or a spinning top or you can even
19:40:06consider exiting your position if the
19:40:08price breaks beyond the moving average
19:40:10level. And if you are planning to use
19:40:12two moving averages like 10 or 20 moving
19:40:14average then in addition to all these
19:40:16factors we will also check for a
19:40:18crossover between the two moving
19:40:19averages. So these are some of the basic
19:40:22setups that you can think of. But if you
19:40:24ask me personally I like to make use of
19:40:26support and resistance levels along with
19:40:29rejection pin bar candles in traditional
19:40:31candlestick charts in association with
19:40:33hikachi charts for a higher probability
19:40:36trade setup. I even make use of CPR and
19:40:39pivot levels along with rejection pin
19:40:41bars for my reversal trades. Now let's
19:40:44discuss on how to ride the market trend
19:40:47thereby letting your profits accumulate
19:40:49with the help of highash analysis. So
19:40:51here's a question for self analysis. Are
19:40:54you one of those traders who have
19:40:55problem with looking at your charts for
19:40:58so long? Or are you someone who cuts
19:41:00your positions prematurely thereby not
19:41:02letting your profits accumulate but
19:41:04regret losing the big price move that
19:41:06you could have captured if you have not
19:41:08exited too early. Now these are some of
19:41:10the biggest issues that most traders
19:41:12face. But what if I tell you that by
19:41:15using hyenashi charts you could solve
19:41:17these problems to some extent. Now let's
19:41:19take a look at a very simple method of
19:41:22taking profits with hyanashi charts.
19:41:24This idea is very basic and easy to
19:41:27implement. So the idea is that whenever
19:41:29a hyenashi candlestick goes against our
19:41:31trade, we will exit our position. So if
19:41:34you are in a long trade, exit when you
19:41:36see a bearish hyenashi candlestick if
19:41:39you are very conservative. This could
19:41:41even be a bearish smallbodied candle.
19:41:43But if you want to remain in the trade
19:41:45for longer or you are willing to take a
19:41:47tad bit of risk in the hope that the
19:41:49price will continue to trend then
19:41:51consider exiting only when a strong
19:41:53bearish candle appears. But it is better
19:41:56to be cautious when an indecision candle
19:41:58or a bearish candle first appears so
19:42:00that you can get ready with your exit
19:42:02order and can act fast in case of any
19:42:04opposite scenario. On the contrary, if
19:42:07you are in a short trade and if you are
19:42:08very conservative or a risk intolerant,
19:42:11then exit when a bullish hyenashi
19:42:14candlestick forms. But if you have more
19:42:16risk appetite, then be cautious if a
19:42:18candle formed is an indecision candle or
19:42:21a weak bullish candle because there is
19:42:23still a chance for the current trend to
19:42:24resume. You will only exit when a strong
19:42:27bullish candle appears. Obviously, this
19:42:30waiting could reduce your profit at
19:42:32times, but the scope of riding a big
19:42:34trend once in a while can compensate for
19:42:37all these small losses. But as I have
19:42:39mentioned, it is up to you to decide
19:42:42based on what your risk appetite is. So,
19:42:44if you are a beginner, I will ask you to
19:42:46stick with the first basic method of
19:42:49exiting at the first sign of a position
19:42:51rather than waiting for a continuation.
19:42:53You can stick with this simple method as
19:42:56long as you gain confidence and once you
19:42:58learn to identify the underlying price
19:43:00action you can wait out on few occasions
19:43:03where the trend can really play out
19:43:05providing with enormous returns and also
19:43:08keep in mind that most of these hyenashi
19:43:11strategies work well in longer time
19:43:12frames. So if you are a swing or
19:43:15positional trader or even an intraday
19:43:17trader who trades on higher time frames
19:43:19that is anything above 15 minutes then
19:43:21these methods can work very nicely for
19:43:23you. But if you are a scalper or a very
19:43:26short-term trader then it is better you
19:43:28exercise caution or maybe avoid
19:43:30hikenashi altogether because the
19:43:33averaging out or smoothing effect can
19:43:35badly affect your responsiveness in the
19:43:38market meaning that you can struggle
19:43:39with fast entries and exits. Now in this
19:43:42chart I have marked the exit points for
19:43:44both long and short trades using a
19:43:47straightforward tactic. Even though
19:43:49these exit points are not perfect, they
19:43:51are more than enough for a beginner
19:43:53trader to make some profits when coupled
19:43:55with a reasonable stop-loss and a good
19:43:57reward to risk ratio. Another way to
19:43:59improve your odds is to make use of
19:44:01areas of values like supports and
19:44:03resistances to take entries. That is you
19:44:06will take a short entry only from a
19:44:08resistance level and you will enter long
19:44:10trades only from support levels. This
19:44:13will help you to filter out some of the
19:44:14bad trades leaving you with some good
19:44:16setups to trade on and also help you to
19:44:19set a proper stop-loss with respect to
19:44:21the area of value under consideration.
19:44:23But what's more interesting is that if
19:44:25you had applied the same exit method
19:44:27using a standard candlestick chart, you
19:44:29would have exited with much smaller
19:44:31profits. So with traditional
19:44:33candlesticks, it is very common to feel
19:44:35anxious watching the market move against
19:44:37you. This anxiety or fear might push you
19:44:40to exit earlier than you should. So by
19:44:42simply switching to a hyenashi chart to
19:44:44monitor your trade, you'll be able to
19:44:46remain in the trade longer and write
19:44:49potential trends and accumulate larger
19:44:51profits. Now another point to note is to
19:44:53keep a trailing stop-loss, which could
19:44:56be a chandelier stop or just a simple
19:44:58moving average depending on your trading
19:45:00time frame. so that you can ride the
19:45:02trend as long as it lasts without
19:45:04prematurely cutting your positions
19:45:06during a minor pullback. This is a more
19:45:09advanced technique and requires more
19:45:11control over your emotions and a good
19:45:14understanding about the real-time price
19:45:16action in play. So, if you are a
19:45:17beginner, then stick with the basic
19:45:19rule. Now, let's talk about the third
19:45:21method, which is timing our long-term
19:45:23investments using hyenashi charts. Now
19:45:26you might be really confused because
19:45:28generally for long-term investments,
19:45:31exact timing is not critical when
19:45:33comparing to intraday or even swing
19:45:35trades. This is because for long-term
19:45:38investments, you are more likely to have
19:45:40a bias towards fundamental analysis. And
19:45:42it is one of the main reasons why many
19:45:44of you don't even invest. And even if
19:45:47you invest, you will not even use a
19:45:48strict technical stop-loss to protect
19:45:50your capital if things go haywire. But
19:45:53the hyenashi charts can help you with
19:45:56your investments as it highlights the
19:45:58trend changes which can be useful timing
19:46:00your long-term positions. It saves you
19:46:03time and effort from overanalyzing the
19:46:05technicals and crunching over the
19:46:07fundamental data. So before we get to
19:46:10the idea, let's look at the scenario.
19:46:12This chart shows the market selloff in
19:46:14March 2020 triggered by the corona virus
19:46:17pandemic and other global concerns. Now
19:46:20this is a weekly chart of Nifty. You
19:46:22could take any other major stock during
19:46:24the crash and most of them would have
19:46:26reacted similarly. Now almost all stocks
19:46:28were available for purchase at a
19:46:30discount. Let's say you think that the
19:46:32market has overreacted and you are still
19:46:35bullish about the future. You would like
19:46:37to take this golden opportunity to
19:46:39accumulate a long-term position in Nifty
19:46:41or in any other stock. But then you have
19:46:44to remember one of the golden rules in
19:46:46the market. It is never to catch a
19:46:48falling knife. You should hope for at
19:46:51least some bullishness before you enter
19:46:53the market. Now what should we do? Now
19:46:55you could just take a look at the
19:46:56hyenashi version of the same nifty chart
19:46:59and you will clearly see a shift in the
19:47:01market sentiment as represented by a
19:47:04dogey candle which is followed by a
19:47:06bullish candle. Now you can consider
19:47:09accumulating your positions from this
19:47:10point onwards. Further, at each point
19:47:13when the hyenashi candlestick turns
19:47:15green after a short pullback, you could
19:47:18increase your market positions. This
19:47:20gives you a system to increase your
19:47:22investment position each time you detect
19:47:24bullishness in the market. Now, this is
19:47:26one example. The system is so simple
19:47:29that you don't really need to do
19:47:30extensive fundamental research. But that
19:47:33simplicity could sometimes be a problem,
19:47:35too, because dogey and spinning top
19:47:37candles may not always indicate a
19:47:39reversal. could just be a consolidation.
19:47:42So the reversal might not happen always
19:47:44and you could end up with a negative
19:47:46portfolio. But you can always improve
19:47:48your odds if you bring in additional
19:47:50confirmations. It could be price action,
19:47:5352- week data, technical analysis, or
19:47:56even fundamental analysis on the stock
19:47:58could yield much better outcomes. So
19:48:00keep in mind that the general idea is to
19:48:03invest on pullbacks if you are aiming
19:48:05for very long-term investments or
19:48:07positional trades. This will also help
19:48:09to average out your positions and you
19:48:12could also make use of indicators like
19:48:14200 period moving averages to analyze
19:48:17the overall market sentiment before
19:48:19making allocations also. Now the last
19:48:21method is to trade chart patterns using
19:48:24hyenashi charts or candles. You could
19:48:27easily find a lot of chart patterns
19:48:29ranging from double tops and double
19:48:31bottoms to triangles to wedges channels
19:48:34etc. But I like to use hyenashi charts
19:48:36to trade triangles and wedges and
19:48:39sometimes even price channels. So if you
19:48:41want to learn more about chart patterns,
19:48:43I have already made a 3-hour long video
19:48:45on this topic. You can refer to that
19:48:47video to know more. Now let's talk about
19:48:49triangles first. Now there are three
19:48:52types of hyenashi triangles. Ascending,
19:48:54descending, and symmetrical triangles.
19:48:57So if the price breaks above the upper
19:48:59boundary of a symmetrical triangle or an
19:49:01ascending triangle, then it is very
19:49:03likely that the uptrend will persist.
19:49:06You could look for long trades, entries,
19:49:08stop-loss and targets can be learned
19:49:10from the chart patterns video. Now I
19:49:13would recommend you switch back to the
19:49:14traditional candlestick chart to take
19:49:16the trade entry because you will have
19:49:18more flexibility in deciding whether you
19:49:20want to enter during the breakout or do
19:49:22you want to hold on a bit and wait for a
19:49:25pullback or retest to happen so as to
19:49:27get a much better entry price. On the
19:49:29contrary, if the candle drop below or
19:49:32break below the bottom trend line on the
19:49:34descending triangle or a symmetrical
19:49:36triangle, then most likely the bearish
19:49:38trend will continue and you could look
19:49:40for short trades and keep appropriate
19:49:43entries, stop-loss and targets. Now,
19:49:45also keep in mind that breakouts usually
19:49:48require additional confirmations so that
19:49:50you don't get trapped in a fake out. So
19:49:52make sure to check for higher than
19:49:54average volume indication and check
19:49:56momentum indicators like RSI or
19:49:58stochastic to ensure a real breakout
19:50:01before taking a trade entry. Now another
19:50:03point worth noting is that in order to
19:50:06trade the trend with this hyenashi
19:50:08technique, it is advisable to use a
19:50:10trailing stop-loss like a moving average
19:50:12or channeler stop so that you could stay
19:50:15in the trend to profit from it if the
19:50:17trend is very strong. Now let's talk
19:50:19about wedges. And as you may know, there
19:50:21are two types of wedges. Rising wedges
19:50:24and falling wedges. Wedges are also a
19:50:26little more like triangles. So a rising
19:50:29wedge requires a trader to wait until a
19:50:31candlestick breaks below the pattern's
19:50:33bottom support line. And once that break
19:50:36happens, you could take a short trade
19:50:38because rising wedge is considered as a
19:50:41bearish breakout pattern. You could set
19:50:43your stop-loss and targets
19:50:45appropriately. On the contrary, if you
19:50:47have a falling wedge, then you should
19:50:49wait for the price to break out above
19:50:51the upper trend line resistance and
19:50:53there are high chances that the
19:50:54downtrend will reverse. So, you could
19:50:57consider taking a long trade entry and
19:50:59set your stop-loss and targets
19:51:01accordingly. Also, make sure to trail
19:51:03your stop- loss if you want to make most
19:51:05out of the trade in case a strong
19:51:07trending price action is in play. Now,
19:51:10you can even trade channel patterns with
19:51:12hyenashi. channels are considered to be
19:51:14neutral or bilateral patterns meaning
19:51:17that the price can either break out of
19:51:19the resistance trend line or break down
19:51:21below the support trend line. So
19:51:23whenever you are trading breakouts you
19:51:25need confirmations and this
19:51:27confirmations can come in form of a
19:51:29higher than average volume which could
19:51:31in turn signal an increased amount of
19:51:33market participation or breakout can
19:51:35also be confirmed using momentum
19:51:37indicators like RSI or stochastics.
19:51:40Sometimes using volume data and
19:51:42indicators in tandem can yield a much
19:51:44stronger signal. So in this case also we
19:51:47should try to write the price move using
19:51:49trailing stop- losses thereby maximizing
19:51:51our profits. Now at the end let's
19:51:54discuss a few benefits and limitations
19:51:57of hyenashi technique. So let's start
19:52:00with the benefits first. The most
19:52:02important point is accessibility. So,
19:52:05hikenashi is one of the most accessible
19:52:07indicators that do not require any
19:52:09installation and it can be found on any
19:52:11trading platform and it's free of cost.
19:52:14Second advantage is high chart
19:52:16readability. Hyenashi charts are very
19:52:18easy to interpret. The hyenashi
19:52:20candlesticks can be easily analyzed than
19:52:22traditional candlestick charts. So, it
19:52:25is easier to identify market trends and
19:52:27price movements. Also, you don't need to
19:52:29study all the traditional candlestick
19:52:31patterns by heart. Third and most
19:52:33important point is reliability.
19:52:35Hayanashi is a very reliable indicator
19:52:37providing much accurate results. It uses
19:52:40historical data which is quite
19:52:42dependable. Now the fourth prime
19:52:44advantage is its ability to filter
19:52:46market noise. So it filters out market
19:52:49noise and reduces all those small
19:52:50corrections making the signals more
19:52:52transparent. So this smoothing effect
19:52:54makes it easier for trend
19:52:56identification. So by filtering out
19:52:58noise, the hyenashi charts can help
19:53:00traders to plan their entries and exit
19:53:03points more effectively. Now another
19:53:05benefit is the ability to combine with
19:53:07other indicators. So just like
19:53:09candlestick charts, the hyenashi charts
19:53:12can be combined with other technical
19:53:13indicators to give even stronger signals
19:53:16on the market movement. And the final
19:53:18advantage that I have noticed is time
19:53:21frame tolerance. So hyenashi can be used
19:53:23on any time frame from hourly, daily,
19:53:26monthly etc. So market participants with
19:53:29any trading style can adopt this
19:53:31technique. However, the bigger the time
19:53:33frame, the more reliable the signals
19:53:35generated. Now let's talk about the
19:53:37limitations or drawbacks of hyenashi
19:53:40technique. The first point is time gap
19:53:42or delay in signals. Since hyenashi
19:53:45indicator uses historical data, it
19:53:47provides a delayed signal or it is a
19:53:50lagging indicator. Even then this delay
19:53:52cannot be an absolute weakness because
19:53:54it significantly reduces the number of
19:53:56false signals and can prevent false
19:53:58entries. Now the second downside is the
19:54:01lack of price gaps. Now most traders use
19:54:04price gaps to analyze price momentum,
19:54:06trigger their entries or place their
19:54:09stop-loss orders. Price gaps even
19:54:11function as supply and demand souls.
19:54:13Although hyanashi lacks price gaps, you
19:54:15can counter such a limitation during
19:54:17trading session by switching between
19:54:19traditional candlesticks and hyenashi.
19:54:21Another drawback is the unavailability
19:54:24of the complete price information. So
19:54:26hyanashi data as you may know is
19:54:29averaged hence it does not show the
19:54:31actual open and close prices. So this
19:54:33may not work very well for very
19:54:35short-term traders or scalpers. So I
19:54:38would generally recommend using Ianashi
19:54:40charts for swing trading, positional
19:54:42trading and long-term trading. This is
19:54:45because the larger the time frame you
19:54:47use, the more valid the market momentum
19:54:49detected. And if you use a time frame
19:54:51that is too small, then detecting
19:54:53momentum in the market will be much more
19:54:55difficult. Therefore, this chart is not
19:54:58very suitable, especially for traders
19:55:00using scalping techniques. Now to wind
19:55:02things up, if we depend solely on
19:55:04hyenashi chart, we might miss key price
19:55:07features like price gaps and candlestick
19:55:09patterns. This is why I recommend using
19:55:11hyenashi chart to identify noteworthy
19:55:14price action before switching to
19:55:16standard candlestick chart for further
19:55:17analysis. For instance, when the market
19:55:20is in a clear trend, there is no need to
19:55:22overanalyze. But when the market starts
19:55:24to stall or consolidate then it is time
19:55:27to assess if the market is merely taking
19:55:29a break or preparing for a reversal. So
19:55:32in a nutshell the hyenashi candlestick
19:55:34chart is a simple yet powerful tool that
19:55:37if used in the right manner can yield
19:55:39tremendous results in your trading.
19:55:44I'm about to give clarity on a question
19:55:46that is flooding the comment section of
19:55:48most of my videos be it on YouTube or on
19:55:51Instagram. The questions are none other
19:55:53than what is the best time frame to
19:55:55trade the market or what is the best
19:55:57time frame to use this strategy or trade
19:56:00that pattern so on and so forth. So I
19:56:02totally understand that the traders who
19:56:04ask these sort of questions are
19:56:06especially those who are new to the
19:56:08market and how am I so sure about that.
19:56:11The simple reason is that they are
19:56:13unaware of their own trading style. Now
19:56:15let me break this down to you. Newbie
19:56:17traders often wonder if there is a
19:56:19perfect time frame that is better to
19:56:21trade than others. But the truth is
19:56:24there is no single magical time frame to
19:56:26view the charts and make a profitable
19:56:28trade each time. So fundamentally
19:56:31choosing the best time frame to trade
19:56:32will depend greatly on a trader's
19:56:35preferred trading style and the
19:56:36strategies used. So in this video I will
19:56:39help you discover a time frame or rather
19:56:42time frames that you can make use for
19:56:44your analysis and for trading. So in
19:56:47that context I will be discussing the
19:56:49following topics. We will start by
19:56:51determining the relevant time frames
19:56:53based on different trading styles. Then
19:56:56we will discuss the multiple time frame
19:56:58analysis by identifying the trend and
19:57:00trigger signals that you can make use
19:57:02of. And we will wrap everything up by
19:57:04learning how to use the multiple time
19:57:05frames to do general market analysis to
19:57:08spot trigger signals and enter our
19:57:11trades.
19:57:14As you may already know, there are
19:57:16different types of traders and equally
19:57:18different trading styles with respect to
19:57:20the expectations, risk tolerance, and
19:57:22time frames they trade. They may be
19:57:24classified into short-term, medium-term,
19:57:27and long-term trading styles. The
19:57:29short-term traders includes the intraday
19:57:32traders and the scalpers. The
19:57:33medium-term traders are the swing
19:57:36traders. And finally, the long-term
19:57:38traders includes the positional traders.
19:57:40Now, let us take a look at each one of
19:57:42them in detail to understand what their
19:57:45mindset is all about. So, let us start
19:57:47with positional traders first.
19:57:50Positional trading is for long-term
19:57:52trades or expectations. So if you buy
19:57:55and hold stocks for several months to
19:57:57years, it is called as positional
19:57:59trading. Here the distinction between a
19:58:01positional trader and a long-term
19:58:03investor gets a little blurry. So most
19:58:06positional traders follow a combination
19:58:08of both technical as well as fundamental
19:58:10analysis before taking up a position.
19:58:13For positional trades, they usually look
19:58:15at the daily, weekly, and sometimes even
19:58:17the monthly charts. So in short, your
19:58:20objective is to capitalize on the
19:58:22long-term potential of a particular
19:58:24stock or a security. And if you do find
19:58:27a favorable setup using technical
19:58:29analysis or price action, then you will
19:58:31have to go deeper into the analysis of
19:58:33the business potential and the
19:58:35fundamentals of the company. Some of the
19:58:37positional trades can stretch anywhere
19:58:40between a few months to several years.
19:58:42Therefore, without understanding the
19:58:44business properly, it is difficult to
19:58:46get the conviction to give a large
19:58:48percentage of allocation for a
19:58:50particular stock in the portfolio. So,
19:58:52once you understand the business, you
19:58:54will gain the confidence to invest more
19:58:56and hold it for a long period of time.
19:58:59And this is one of the reasons why many
19:59:01new traders tend to avoid this approach
19:59:03and also because it takes a long period
19:59:05of time before the trades are realized.
19:59:08But from what I have understood, the
19:59:10shorter the time frame and the
19:59:12expectation, the more noise and
19:59:14confusion arises in your trading. Now
19:59:16coming to swing trades, swing trades are
19:59:19more relaxed in nature compared to
19:59:21short-term trading. They do not carry
19:59:24the pressure of finding new trades every
19:59:25day and therefore the decision-m is
19:59:28slower. So if you do not like watching
19:59:30the charts throughout the day or if you
19:59:33don't have the time to do so and also if
19:59:35you don't want to wait a long period of
19:59:37time to realize your gains then swing
19:59:40trading is your best course of action.
19:59:42The most commonly used time frames for
19:59:44swing trading are the hourly and daily
19:59:46charts. So in short, if there is an
19:59:49opportunity for a swing trade, I usually
19:59:51end up analyzing both the hourly as well
19:59:53as the daily charts to understand the
19:59:56direction of the trend along with the
19:59:57important support and resistance levels.
20:00:00My advice is that if you are a beginner
20:00:02to the stock market and you wish to make
20:00:04trading your profession in the future,
20:00:06it's always better to start as a swing
20:00:08trader and gain experience. The reason
20:00:11why I say this is that you can
20:00:13significantly improve your risk
20:00:14management because you can have a higher
20:00:16margin for error and more time to make
20:00:19your decisions. But try to avoid small
20:00:21caps and midcaps for the first few
20:00:24months. Just stick to the nifty50 stocks
20:00:26and and try to trade in small amounts.
20:00:29This way you can boost your experience
20:00:30and understanding of yourselves. So
20:00:33understanding your own nature is the
20:00:35most important thing if you want to
20:00:37become a successful trader. And this is
20:00:39one of the benefits of swing trading
20:00:41that the traders can get the advantage
20:00:43of both the styles that is a long-term
20:00:45and a short-term perspective without
20:00:48necessarily taking on the downsides that
20:00:50come with these approaches. Now coming
20:00:52to day trading
20:00:54intraday trading can be one of the most
20:00:56difficult strategies to master. Ubie
20:00:58traders implementing a day trading
20:01:01strategy are exposing themselves to more
20:01:03frequent trading decisions that may not
20:01:06last very long. So this combination of
20:01:08inexperience along with the frequency
20:01:11opens the door for increased losses and
20:01:13as I have already mentioned this can be
20:01:15prevented if the trader opts for a
20:01:17slightly longer approach like swing
20:01:19trading. Now intraday traders can use
20:01:22time frames between 5 minutes and 60
20:01:25minutes. The most commonly used are the
20:01:2715minut and the 5-minut time frames on
20:01:29the chart. In India, as you may all
20:01:31know, the market is open between 9:15
20:01:34a.m. and 3:30 p.m. And the goal of an
20:01:36intraday trader is to find a favorable
20:01:39setup, take the trade, and exit on the
20:01:41very same day. These trades are usually
20:01:44held for a period of few minutes to few
20:01:46hours. So in intraday trading, you are
20:01:49faced with multiple decisions in a short
20:01:51period of time and this can in turn lead
20:01:53to confusions, for more and mistakes
20:01:56that can prove very costly. But the
20:01:58benefit that I see with day trading is
20:02:00that day traders enter and exit their
20:02:02positions on the same day unlike the
20:02:04swing and positional traders thereby
20:02:06removing the risk of any large overnight
20:02:09moves. So at the end of the day they
20:02:11close their position with either a
20:02:13profit or loss. Now the last trading
20:02:15style that we'll discuss is the scalping
20:02:18which is the shortest form of trading.
20:02:20Scalp traders only hold positions open
20:02:22for seconds or minutes at the most.
20:02:25These short-lived trades targets the
20:02:27small intraday price movements. The most
20:02:30commonly used time frame for scalp
20:02:31trading is between 1 and 5 minutes. So
20:02:34it's up to you to use the 1 minute time
20:02:36frame on the chart or 3 minutes or 5
20:02:38minutes. Now some scalpers also use a
20:02:4015-minut time frame, but very few go
20:02:43beyond that. Now the purpose of scalping
20:02:45is to make a lot of quick trades with
20:02:48smaller profit gains. But the idea is to
20:02:50let the profits accumulate throughout
20:02:52the day due to the sheer number of
20:02:54trades being executed in each trading
20:02:56session. Now, this is a fast-paced
20:02:59trading style trying to grab on to as
20:03:01many points as many times as possible
20:03:03throughout the trading day. So, it can
20:03:05be stressful for many traders and is
20:03:07hugely timeconuming given the fact that
20:03:09you need to focus on the charts for
20:03:11several hours at a time. On top of that,
20:03:13the scalper or the day trader is in a
20:03:16position where they need the price to
20:03:17move quickly in the direction of their
20:03:19trade or they want the price momentum to
20:03:21be in their favor most of the time in
20:03:23order to make some profit. So therefore,
20:03:25day traders and scalpers become tied to
20:03:28the charts. Now obsessing over the
20:03:30charts for a longer period of time can
20:03:32lead to fatigue. Along with that, the
20:03:34shorterterm approach comes with a small
20:03:36margin of error as these stop- losses
20:03:38are placed on the shorter time frame
20:03:40which leads to a lot of noise or price
20:03:43swings. So, I don't recommend any new
20:03:46traders use this style because it can
20:03:48take a heavy toll on your psychology. It
20:03:50is always better to start with a relaxed
20:03:53phase of trading and when enough
20:03:55experience and risk management are
20:03:57gained, you can eventually step down
20:03:58your time frames, test other styles to
20:04:01see if they work. Now let's talk about
20:04:03the most important concept of this video
20:04:05that is multiple time frame analysis.
20:04:08Now the multi-time frame analysis or the
20:04:10multiple time frame analysis is nothing
20:04:12but an analysis on multiple time frame
20:04:15charts of a single stock or an
20:04:17instrument. Now there are two major
20:04:18rules for multi-time frame analysis.
20:04:21Number one, the larger time frames
20:04:23establish and dominate the trend. What
20:04:25this means is that when a larger time
20:04:27frame trend is in play, you will see
20:04:29pullbacks in the smaller time frames.
20:04:31And these pullbacks in the lower time
20:04:33frames are nothing but noise against the
20:04:36flow of prices. Or in other words, in
20:04:38order to identify the trend, you will
20:04:40always have to look at the higher time
20:04:41frame charts. The trend reversals begin
20:04:44in the smaller time frames first and
20:04:46then propagate upwards to the higher
20:04:48time frames. So this means that we will
20:04:50see a changing market structure showing
20:04:52up on a shorter time frame chart first
20:04:55before it is evident on a longer time
20:04:57frame chart. Now let us focus on what to
20:04:59look for when doing a multiple time
20:05:01frame analysis. Whenever you are
20:05:03planning to take a trade, you have to
20:05:05think about two important factors.
20:05:07Number one, the market trend or the
20:05:09general market sentiment and number two
20:05:11is the trigger signal for the trade. Let
20:05:13me explain each of them. Identifying the
20:05:16general market trend can help you plan
20:05:18your trades in the direction of the
20:05:20prevailing market sentiment. This way
20:05:22you can capitalize on the impulse moves
20:05:25and limit your losses by not trading
20:05:27against the flow of the market.
20:05:29Generally for every trading style
20:05:31mentioned earlier the overall market
20:05:33trend is given by the higher time
20:05:35frames. The reason for this is that a
20:05:37trend on a longer time frame takes more
20:05:39time to develop which means that it will
20:05:42take a bigger market move for the price
20:05:44to change course. Also, the support and
20:05:47resistance levels are more significant
20:05:49in longer time frames. Now, some of the
20:05:51general methods used by traders to
20:05:53identify the general market trends
20:05:55includes identifying using the trend
20:05:57lines. So, you may already know how to
20:06:00draw trend lines by connecting the swing
20:06:02lows and swing highs in the chart. I
20:06:04have already made a video on market
20:06:05trends. So if you want to learn more,
20:06:08please do check that out. Now the second
20:06:09method is by using the 200 simple moving
20:06:12average. Usually this method is used by
20:06:14traders over the daily time frame. So it
20:06:17can be effective for both swing as well
20:06:19as intraday trading styles. Another
20:06:21method involves the use of technical
20:06:23indicators like MACD, RSI, etc. to spot
20:06:27the long-term trend over a higher time
20:06:29frame that you are trading on. The
20:06:31second factor to consider is the trigger
20:06:34which is none other than the signal that
20:06:36alerts you of a potential trading
20:06:38opportunity within the context of the
20:06:40overall market trend. The trigger signal
20:06:42can be anything from a breakout or a
20:06:44reversal from a support or resistance
20:06:46level. It can be a popular chart pattern
20:06:49breakout or it can be based on
20:06:51candlestick analysis. The other popular
20:06:53methods includes the use of technical
20:06:55indicators like moving average
20:06:57crossovers or other indicators such as
20:06:59RSI, MACD to name a very few. Now the
20:07:03trigger signal is to be received in the
20:07:05lower time frame of your preferred
20:07:07trading style. It can be any setup of
20:07:09your liking. Now most of the time the
20:07:11trigger time frame can be the trade
20:07:13entry time frame as well. Now that we
20:07:15know what to look for in different time
20:07:17frames, let us dig a little deeper into
20:07:20how to do it by taking the multiple time
20:07:22frame analysis approach to a level
20:07:24further. Now often there are traders who
20:07:27enter their trades on let's say 15-minut
20:07:30chart, but their higher time frame is on
20:07:32a monthly time frame and it's silly. It
20:07:34is like looking for a ring on the ground
20:07:36with an astronomical telescope when you
20:07:38could have used a magnifying glass or
20:07:40simply your naked eyes to spot it. You
20:07:42get the idea, right? It doesn't make
20:07:44sense because both the time frames are
20:07:46too far away. You enter your trades on a
20:07:4815-inut time frame and then you go to
20:07:50the monthly time frame for your higher
20:07:52time frame analysis. It is actually very
20:07:54irrelevant to you. Or how about this
20:07:57case where your entry time frame for
20:07:59your trades is the daily time frame, but
20:08:02you go down to the 5minut time frame to
20:08:04time a sniper entry. Now once again this
20:08:06does not make any sense either because
20:08:08you're focusing too much on the minute
20:08:10details that are really unrelated to
20:08:12your goal. Anything you observe in a
20:08:145minut time frame will appear to you as
20:08:17noise on a daily time frame. So if we
20:08:19know our trading style and the trigger
20:08:22time frame, how do we decide on a higher
20:08:24time frame? Or conversely, how do we
20:08:26decide on our lower entry time frame if
20:08:29we know our trading style and the market
20:08:31trend analysis time frame? So the method
20:08:33that I'm going to discuss is what I have
20:08:36learned from Adam Grims and Dr.
20:08:38Alexander Elder. So the first point is
20:08:41that you have to set your trading style.
20:08:43So you have to decide if you want to be
20:08:44a swing trader or an intraday trader or
20:08:47a positional trader. Now once you know
20:08:49your trading style, you can use a factor
20:08:51of 3 to six to decide any time frame.
20:08:54Now let's see how it works. Let's say
20:08:56you are an intraday trader. As I have
20:08:58already mentioned earlier, the most
20:09:00common time frames for trade entry are
20:09:02the 5 minutes or 50 minutes. Let's say
20:09:04you are entering your trades in the
20:09:0615-minut time frame. Now, you can use a
20:09:08factor between 3 and 6. Now, you'll take
20:09:11that factor and multiply it by your
20:09:13trading time frame. For example, in the
20:09:1515-minut time frame, if you multiply it
20:09:17by 4, that's 60 minutes, which is
20:09:20equivalent to a 1 hour time frame. So
20:09:22the 1 hour time frame can be your higher
20:09:24time frame for the 15-minut time that
20:09:26you are entering your trade on. Or if
20:09:28you want to go with a factor of six,
20:09:30that is also possible. The higher time
20:09:32frame in that case will be 90 minute
20:09:35time frame, which is a factor of six for
20:09:37the 15-minut time frame as your trade
20:09:39entry time frame. So anywhere between a
20:09:42factor of 3 to 6 is perfectly fine if
20:09:44you ask me. But what it requires is
20:09:46proper back testing because a
20:09:48combination of higher and lower time
20:09:50frames that works for me may not
20:09:52necessarily work for you. So you have to
20:09:54find your own sweet spot. Likewise,
20:09:57let's say you are a swing trader and the
20:09:59daily time frame is your trading time
20:10:01frame and maybe you want to better time
20:10:03your trade entry with precision on a
20:10:05lower time frame. And how do you define
20:10:07what's a suitable lower time frame for
20:10:09you? Well, once again, you can use a
20:10:11factor of 3 to six. Now try to use the
20:10:13factor that gives you a time frame that
20:10:15is already available in the list of time
20:10:18frames in your trading chart. So in this
20:10:20case 1 day time frame is approximately 7
20:10:22hours and if you use a factor of six our
20:10:25lower entry time frame will be 1 hour.
20:10:27So you can now use the 1 hour chart to
20:10:29time your entry better on the daily time
20:10:32frame you are trading on. I hope it
20:10:33makes sense. So bear in mind that when
20:10:36it comes to multiple time frame
20:10:37analysis, anywhere between a factor of 3
20:10:40to six is a sweet spot. But I have
20:10:42specifically seen people use a factor of
20:10:45five more commonly and that too for a
20:10:47reason. Let me also explain that the
20:10:49logic remains the same. We use a factor
20:10:52of five to break up different time
20:10:53frames. So let's say in a month there
20:10:56are around 25 trading days. So if we
20:10:59divide 25 by a factor of five, we will
20:11:02get 5 days which is equivalent to 1 week
20:11:04since the Indian markets are open for 5
20:11:07days. Now a week has five trading days.
20:11:10So if we divide five by a factor of 5,
20:11:12we will get 1 day. So 1 day has around 6
20:11:16hours and 45 minutes of active trading
20:11:18hours. When noted from 9:15 a.m. to 3:30
20:11:22p.m. So when we divide this by a factor
20:11:24of 5, you'll get 81 minutes. Now even
20:11:27lower time frame becomes this 81 minutes
20:11:30divided by a factor of five which is
20:11:32approximately equal to 15 minutes. Let
20:11:35us match these time frames with the
20:11:37trading status. So for a positional
20:11:39trader the higher time frame can be 1
20:11:42month followed by 1 week for the trigger
20:11:45signal and an even lower time frame of 1
20:11:47day to enter into positions. Now when it
20:11:50comes to swing traders the higher time
20:11:52frame can be 1 day with a lower trigger
20:11:54time frame of 1 hour and your entry time
20:11:57frame can be 15-minut time frame. And
20:11:59finally, in case of an intraday trader,
20:12:01the higher time frame can be the 1 hour
20:12:04time frame with a trigger time frame
20:12:06being 15 minutes and the entry time
20:12:08frame being as low as 5 minutes or 3
20:12:11minutes. And if I were to mention about
20:12:13scalpers, the higher time frame can be
20:12:15as high as 15 minutes. The trigger time
20:12:18frame can be 5 minutes or 3 minutes. And
20:12:20the entry time frame can be 1 minute
20:12:22time frame. Now the trade exit time
20:12:24frame will not really depend on the time
20:12:26frames but it will focus on your
20:12:28expectations or your risk-to-reward. But
20:12:31if you are carrying a very large
20:12:33position, you can always use the lowest
20:12:35entry time frame as your trade exit time
20:12:37frame. Now, as I have mentioned earlier,
20:12:39you can always experiment with these
20:12:41time frames yourself. But always keep in
20:12:43mind the type of trader you are and the
20:12:45trading style you follow and you will
20:12:47not be stranded. Now that you understand
20:12:49the whats and hows of the multiple time
20:12:51frame analysis, let's move a step
20:12:54forward and take an example each for an
20:12:56intraday and swing trading scenario. As
20:12:58we all know, day traders typically have
20:13:01the whole day to monitor charts and
20:13:03therefore can trade with really small
20:13:05time frames. So if you are a day trader,
20:13:08you can identify the market trend and
20:13:10the significant support and resistance
20:13:12levels that come into play during the
20:13:14day trade on the 1 hour time frame. You
20:13:17can also make use of the 200 simple
20:13:19moving average. In this example, since
20:13:21the price trades predominantly above the
20:13:23200 moving average and is moving
20:13:25upwards, the trading bias is naturally
20:13:28bullish. Now, you can zoom into the
20:13:3015-minut time frame to spot ideal
20:13:32trigger signals for trades like a level
20:13:34breakout or a pattern breakout, reversal
20:13:37from levels, indicator signals, so on
20:13:39and so forth. The 15-inut chart allows
20:13:42the traders to get a closer look at how
20:13:44the prices are revolving on the lower
20:13:46time frame. In this example, the uptrend
20:13:49is also apparent in the 15-minut chart,
20:13:51which confirms a upward bias. So, you
20:13:54can plan to take an entry when the price
20:13:56reverses from the higher swing low
20:13:58level, which is also a support level.
20:14:01And once the signal is confirmed, you
20:14:03can take a trade at the 15-minut time
20:14:05frame. Or you can even move down to the
20:14:065m minute time frame or 3 minute time
20:14:08frame for an even better entry in terms
20:14:11of price only if it matters. Now talking
20:14:14about a swing trading setup. Now swing
20:14:16traders generally tend to have
20:14:18significantly less time to spend
20:14:20monitoring the charts when compared to
20:14:22day traders and their holding period may
20:14:24be over a day to a few weeks. So swing
20:14:27traders will look at the daily charts to
20:14:30identify the overall market trend and
20:14:32the support and resistance levels. Now
20:14:34along with that they will also look for
20:14:36chart patterns to be formed on the
20:14:38higher time frame. Now taking this
20:14:40example in a daily time frame we can
20:14:42spot that the market is in a downtrend
20:14:44and that the prices are trading below
20:14:46the 200 day simple moving average. So
20:14:48naturally our bias is towards the sell
20:14:51side. Now zoom into your 1 hour chart to
20:14:53spot short selling trigger signals or
20:14:56trade opportunities. Now we can see that
20:14:58there is a bearish crossover as the 20
20:15:01moving average crosses below the 50
20:15:03moving average which provides us with a
20:15:05trigger signal. Now you have the option
20:15:07to enter the trade at the trigger time
20:15:09frame of 1 hour or you can choose an
20:15:11even lower time frame like 15 minutes to
20:15:14initiate your sell position. Now let me
20:15:16talk about some advantages of multi-time
20:15:19frame analysis. First of all, the
20:15:20multi-time frame analysis allows a
20:15:22trader to get a micro view of the larger
20:15:25time frames and then fine-tune an entry.
20:15:28An example would be having a pattern on
20:15:30a 1 hour chart and you can then zoom
20:15:32into a five-minute chart to confirm a
20:15:35trade entry. The second advantage is
20:15:37that risk can be managed more
20:15:38effectively by combining different time
20:15:40frames. It can help a trader to move the
20:15:43stops on smaller time frames for
20:15:45patterns that complete on larger time
20:15:47frames. And finally, using multiple time
20:15:50frames from higher to lower enables the
20:15:53trader to be aware of the contrary moves
20:15:55or the opposing patterns that form on
20:15:57the smaller time frames which are
20:15:59against the longer time frame trend. In
20:16:01simple words, it helps you stop trading
20:16:03against the market trend. So to sum
20:16:06things up, in order to choose the best
20:16:08time frame, you have to consider what
20:16:10your trading style is and what trading
20:16:12strategy you wish to follow. These
20:16:14should be the factors which influence
20:16:15the appropriate time frame to be trading
20:16:17on. Thereafter you can conduct the
20:16:19technical analysis on the appropriate
20:16:21time frames. But always ensure you
20:16:24implement sound risk management in all
20:16:26your trades. So keep learning, keep
20:16:29practicing. And that is it for this
20:16:31video. I hope you learned something new.
20:16:33If you did, please do like the video and
20:16:35subscribe to the channel and do not
20:16:38forget to press the bell icon so that
20:16:40you won't miss out on any upcoming
20:16:41uploads. I will see you guys in the next
20:16:44video. Till then, see you.

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