Structure continued…… Support and Resistances..

Some say that the support and resistances are a self fulfilling prophecy. Self fulfilling prophecy is defined as follows:

“ If a greater proportion of the crowd say something is true, it will become the truth irrespective of the background information“.

If 90% of the traders believe that the support and resistances work, they will take the decisions depending on their beliefs and hence generate the net orderflow to drive the price in a particular direction.

No mater what the reason is, we know support and resistances work and we can use them to our advantage.

Just remember the following points,

Resistances are the roofs for the stock. They oppose the upward movement.

Supports are the floor for the stock. They oppose the downward moment.

Assume you are there in a room and trying to jump up. What is the maximum height that you can reach?? Of course the roof as it opposes the further movement to the upside. The same is true for the floor.

Now you must ask this question. Is there a possibility for the support and resistance to break. Of course there is. Lets get back to the above room example once again. But now, instead of you, assume the incredible hulk is jumping inside the room , There is no way that the normal roof can oppose his strength. The roof will be broken and he continues to move in the upside direction.

The same happens in the market. If the net orderflow that is trying to push the price of the stock higher is strong enough, the resistance will be broken. Similarly, if the net orderflow that is trying to push the price down is strong enough, the support will be  broken. And the support or resistance once broken changes its polarities, ie. support becomes a resistance in future and the resistance becomes support in the future.

Now lets get back to the base concept where we have started all this. ie. Structure.

I restate that here again as a review and information consistency,

Price moves in a structural framework of Support and Resistance

1. If the framework is broken, it will enter into the new framework with a polarity shift in support/resistance.

2. Just understand what are supports and resistances for now. Don’t go deep into the construction of them as I have not explained it yet.

Summary:-

Resistances act as roofs for the price movement.
Supports act as floor for the price movement.
Support once broken turns into resistance for the future price movement.
Resistance once broken turns into support for the future price movement.

Structure.. It’s necessity in the uncertain environment

What is the structure? Why do we need it ?

Structure is a thing constructed. A complex entity constructed of many parts.

There is a famous saying in trading. “ Trading is 10% strategy, 20% money management and 70% psychology“. That 70% part includes understanding your own psych and also the psych of the other traders. It is impossible to predict what’s going on in other’s mind and how they will react with 100% accuracy. Of course we can predict that to some extent but it is not cent percent accurate. So we can predict how market might go, but we can never say how market will go. 

So, we need a structure to understand that and to keep the odds in our favor before taking a decision. I think you understand the necessity of defining the structure. Simply said this is the battlefield where we are going to plan and fight with other traders.

Many theories tried to define the structure of the market. We have Elliot Wave theroy, Gann theory etc. I heard somewhere that people use planetary movements to take trading decisions  But it is not wrong guys. When the environment is uncertain, there is no wrong and right theories. If something works for you, use it. If something doesn’t work for you, discard it. But don’t judge it.

According to YTC price action trader book,
Market moves in a framework of support and resistance and when the framework is broken, it enters into a new framework of support and resistances. 

Before going into the explanation of the above point, I have few things to explain. I said that market is a collection of traders taking trading decisions. Those decisions results in the net orderflow and the net order flow drives the market in a certain direction.


The core reason of the market movement is traders taking decisions. Traders are humans and they have memory. We humans don’t like to change a habit so easily. So does the market. Market has memory and it behaves in a certain fashion when price approaches a certain level where it has felt some unexpected force in the past.

 Market has inertia and it resists the change of environment and it tries to continue the same behavior. Until market shows clear evidence of reversal, don’t take decisions against the direction. I hope you are clear with the explanation till now. If you aren’t, please read this article again before proceeding further

Discretionary-trading Levels of Supply/Demand Imbalance

This is the first article in the series of concepts of  discretionary-trading

It might look like spoon feeding at the start as I want to explain everything I use as detailed as possible so that it gives a clear idea about how I see the market and how I identify low risk and decent reward opportunities. And let me say that again, every single point that I am going to write in this series is important and don’t underestimate the .power of simplicity.

So what are these supply/demand levels? Are they same as support and resistance levels? 

Yes.. They are almost the same. But I would like to call it with a different name so that I can differentiate how I pick levels from the chart to deal with markets, which is a bit different to what a lot of other traders do. I never take levels from the future like Fibonacci retracements and extensions, pivot calculations of S/R etc. as I strongly believe that the future in the market cannot be predicted. I am not saying that they don’t work. They might work for you.

But absence of a rational reasoning about anything in trading doesn’t suit my personality and my way of trading with tight stops. Enough of this BS. So what are they?

The price point that had initiated the move, which has broken the  last pivot point is what I call a supply/demand imbalance level.
The pivot point can be a swing high, or swing low, or the high/low in a single candle retracements (which I call as trap levels). I repeat, I  don’t consider each and every swing high/low as a supply/demand imbalance level.
That’s it. Now lets look at some charts to spot those levels.

1.Swing highs and Swing lows as the levels:-

I explained long back how I identify swing highs and lows. If you miss that, feel free to read that first before moving forward in this article.

Now that you know how to identify the swing highs and lows on the chart, it’s time to filter which of them can create a huge imbalance in the next test so that we can use them either to take an entry, or to scale out the already existing position.

 The image is self explanatory and feel free to comment if you have any doubt regarding that. There are other levels(trap levels) in this chart that are not swing highs and lows,  which can cause some imbalance in the future,  I didn’t mark them intentionally as the primary purpose in this chart is to identify only swing highs and lows that has the potential to create a good imbalance in the future on first interaction.

2. Trap levels as imbalance levels:-

I call single candle pullbacks as trap levels. A trap level on 5min. chart might appear like a swing high or a swing low in  1min. chart. And a trap level on 1min might not appear at all on 5min chart.  Lets look at the following chart to make that clear.

Let me explain exactly how I use them for entries

In a trending market,

1. Levels from the higher timeframe – I use them for TTF trend reversal trades(constructing the S/R structure) on the first interaction. ie. BOF, TST when the trend is weak. Also for BPB trades when market is entering into the new framework of support and resistance.

2. Levels from the lower timeframe   – I use them while I am looking for pullback and complex pullback trades in TTF trend on the first interaction. Not for CT trades. Never!!

3. Levels from the trading timeframe – For trend definition in TTF. Series of demand levels is uptrend. Series of supply levels is downtrend.

3. Range Boundaires:-

Apart from these, you already know how I define the range boundaries and when I’ll call it a range basically. So I am not going into that again in this article. If you miss that, you can read it here..
These are the three types (and only ) of supply/demand levels I use in my trading.

If the level is below the current market price, it is a demand level. If it is above, it is a supply level.
Understanding the concept of these levels forms the basis of my trading philosophy. You can see there is nothing complex in finding these levels. No complicated calculations like Fibonacci, pivot points of S/R and all. Everything is straight forward and from the market data. And it is well known that market respects it’s own levels.

Know the opposition

I was asked a lot of times by my fellow traders, how I am maintaining my win% to such a good number, how I am identifying that the trade is not working and scratching it before getting into a full stop out, how can I sit patiently, blah.. blah.. blah….

There is only one answer to all these questions. I never sit idle in front of the charts. I watch every tick movement in my TTF and LTF and I try to maintain the feel for the market every moment whether I am in a trade or not.

You might already know by now the blue print of my trading plan. I will give a brief explanation of it as a quick presentation.

• First I structure the market using HTF and TTF.
• Then I find the future bias.
• Then the type of setup(s) to look for.
• Then the price level to initiate trade.
• Then I’ll wait until price approaches that level and then look for exhaustion or failure to continue beyond the level, to time the entry.

I follow the procedure in the same order. If I got stuck at a step, I will start again from step 1 and I don’t jump to the next step.

Simple, isn’t it??

If trading is that simple, the success ratio in this business would have been high. Let me try to explain why it is not that simple.

The first three steps, namely, structure, bias and the type of setup needs a hell lot of hard work to master. They demand a lot of understanding about the market dynamics and  understanding about the strategy you are using , especially when you use price action for trading.

Technically, you need a lot of screen time, reviews and exposure to different market environments which obviously needs a lot of clock time (say years). On top of that, if you approach the market with an idea  get rich quick, that learning curve will extend more. You need to find which structural boundaries work and which doesn’t, which trend definition work and which doesn’t, how to find the proper future bias in different scenarios in different market environments etc.

There is no way you can learn it without hard work and experience. So, the first thing you need to look for is to survive until you get enough experience to at least master these. There is no skill related stuff in these three steps. I repeat, it’s all about experience, reviews and the screen time. No other short cut. So, plan for the survival (at least 2 years) before actually thinking about making money in markets.

Identifying the price level also needs a lot of reviews and exposure as it depends on the context and the environment that the market is in. Let us say you are expecting a pullback setup.

To take that trade, you need to identify the price level where you expect that the pullback most likely ends before price actually reaches there. There will be a lot of such levels that can provide the orderflow to end the pullback.

To choose the best level between them, you have to consider the strength with which the trend is moving and the impact that the level you are examining has caused in the recent past. So, you must study a lot of samples of the pullback trades in different trending environments to know where they ended, test them in live and then make them a part of the trade plan.  For me, there is no trade if I failed to identify a proper price level to initiate the trade. This increased my win% to a significant proportion. It needs a little bit of skill while reviewing and also while identifying the levels in live as you have to consider the context to choose the proper level.

Then the next step is identifying the exhaustion, which is the main topic of this article. Trust me, it is not at all easy and I suggest you to stick to the stop entries 2 ticks away from LWP when price is trading at the level you are interested in until you train your mind to identify exhaustion properly. You might notice that I use the word feel for the market a lot of times. Even that comes under this category.

Then you need to know who are on the opposite side of your trade. I mean to say, if you are looking for a BOF setup, breakout traders and breakout pullback traders are on the opposite side of your bias. 

If you are looking for a PB/CPB setup, counter trend traders are on the opposite side. For TST, with trend traders. For BPB, counter trend traders.

To enter in a trade, first you need to make sure that those who are in the opposite side of your trade got into a position and are feeling emotions when price is not moving in their favor, beyond the level you have chosen.

I would like to talk a bit more about this. Let’s divide the traders into three categories..

• Gamblers, who don’t know what they are doing, not even a single word in technical analysis, but are trading for a random money and for adrenaline rush.

• Beginner traders, who know few basics about technical analysis like candlestick patterns, chart patterns, indicators, some price action related stuff etc, but with a very limited exposure to the markets (less than 3 years). They think that they can beat the market with the knowledge they gathered about the markets. Honestly, these are the guys who gonna suffer serious drawdowns as they trade with their arrogance, hope and belief without respecting the risk and the context that the market is in. They always pat their backs by looking at the hindsight charts and the way the market respected their analysis after the fact. As a matter of fact, these are the guys who pay our wages.  

• Professionals, who are skillful, disciplined, hard workers and have a decent exposure to different states of the markets. They know what they are doing and they always respect the risk.

In the above three,  we must always trade with the professionals. Never ever trade against them. So, the first question I ask myself before placing an entry order is, am I fading professionals? 

Between the gamblers and the beginners, most of the money professionals get is given by the beginners as they are arrogant and are controlled by the hope and the belief on the acquired knowledge. Gamblers on the other hand, don’t know anything about the markets.When they lose, they accept that they had lost as they don’t know anything about markets. 

But beginners think that they know everything about markets and hence take positions aggressively even after proving that they are wrong by the market, just to donate their money to the professionals.

To narrow down my on going analysis, I just assume that there are no gamblers against me and I am fading only beginners. With this assumption, I can name those traders who are taking positions in the wrong context as beginners. With a little knowledge on classical chart and candlestick patterns, I will know whether they have taken a position or not before my entry and against my bias. Then I assume myself as one of those beginners who took the position against the trade that I am actually planning to take. 

Then I will try to feel the emotions that they are going through when price is interacting with the level that I have chosen and then time my entry when the emotions completely takes over.

No candlestick patterns, no high/low breakouts, no indicator based entry triggers. This is what I do to time the entry and this is what I mean when I use the word feel for the market. 

I don’t have a problem to miss an entry while doing this process. I prefer to sit aside rather than hurrying into a trade without knowing what exactly is happening in the markets.

Your battle is half won when you identify who you are fading and how their emotions are at the given moment. This is a fantastic information to have to make your trading better.

I am a big fan of Sun Tzu’s book, The art of war. This quote will give the entire concept of this article.

"If you know about your enemy and know yourself, you don’t need to bother about victory.

 If you don’t know about your enemy,but you know yourself,  for every victory, you will face a defeat. So you win 50% of your battles.

 If you neither know about your enemy nor yourself, you are doomed to failure. " (Courtesy - JCK)

Price Action discretionary - trading Set up

5 Types of Set up

1. PB - (Pull Back)
2. CPB - (Corrective Pull Back)
3. BOF - (Break Out Failure)
4. BPB - (Breakout Pull Back)
5. TST - (Test Setup)

Deep look into the setups..

Lets do some question and answer session before going into the actual topic. As it is a static medium, I will play the role of the host and the interviewer for sometime. I really want you to understand this.

Why people don’t leave trading despite of their losses?

There might be so many reasons. They might always find some hope to recoup their losses. But the answer I am interested here is, trading is exciting. It is exciting for the people who gamble or novice traders, as they get pleasure from occasional profits (which comes out of luck). It is exciting for the professionals, because they enjoy the uncertain market environment by respecting the odds and risk.

Why trading is exciting? 

You might have got the answer from the above explanation.  To bring this discussion forward, I am only concerned with the professional’s excitement. They know that the future cannot be accurately predicted. Everything works on odds and risk. His job, as a trader is to think about a trade when the odds are in his favor and the initial risk to take the trade is contained. He uses different methodologies to calculate those odds(we use price action for that), which is a different story. He knows that every moment in the market is unique.

The last sentence in bold is the one I am interested in this article. We all know that already, but we never truly understand that one sentence. If we have understood that, we won’t be trying to form rigid rules to take action in the markets. In the methodology we use, we have formed some rigid rules and to identify structure, bias, setup and stuff to understand the language of markets. But there is something that cannot be kept into rules, like required price interaction with the setup level, signs of exhaustion, etc.. They are unique for every trade you take. You might find some similarities from the trades you take, but no two entries exactly resemble the same type of price interaction and exhaustion.

So, how to handle that uniqueness?

The only thing that we can do to handle that is to understand what we are doing before doing something. The more you understand, the more effective your performance is.
We use five different setups PB, CPB, BPB, BOF, TST. Each setup is different in terms of price interaction with the setup level. I am trying to form different scenarios of price interaction for different levels, and I will share it once it is done. Those interactions will answer the ‘HOW’ questions regarding setups.

Before that, you must get answers to ‘WHY’ questions. Let us do that here. Please try to understand each and every word  as it is so important.

Why we take PB setups?

When market moves in a trending environment, novice traders and traders who take profits from the existing with trend trades will either stall the movement or causes a counter trend weak movement by causing some net orderflow against the direction of the trend.

When that order flow hits a level that can provide sufficient orders in the direction of the trend to block that counter trend movement, those CT traders who are trading that pullback look to exit as market is not moving in their direction beyond some level. Their exits will create some movement in the direction of the trend and that will attract some retail with trend traders to position themselves as market is cooled down after the previous impulse move and is starting to move in the direction of the trend. This will change the polarity of the net order flow, ie. from counter trend to with trend. We must enter before that polarity shift if we want to be positioned with lesser risk.

Why we take CPB setups?

A CPB trade in your TTF might look like a single leg PB trade in a time frame higher than your’s. So, the explanation I have given for the PB setup will be applicable for the CPB trades.
In addition to that, it has an added factor, ie. the trap order flow.
To understand this,
1. let us consider that the trend is up and has formed a swing low without breaking the trend violation pivot.
2. The upswing started from this swing low failed to extend beyond the highest high of the uptrend, and in turn gave a breakout of the intermediate swing low, recently formed, without breaking the trend violation pivot.
3. Those novice traders who want to position themselves early in the counter trend trade without thinking about the context of the market will consider this breakout as an early sign of trend change and initiate their shorts.
4. When price hesitates to extend beyond after the breakout, they will look to cover their shorts and that might cause a polarity shift in the ordeflow,
5.  if enough shorts got trapped. Then the with trend traders will come and the whole story repeats again.
6. The end result is the trend continuing after the this two legged pullback. It can also be seen as a BOF of the intermediate SH/SL.

Why we take BOF setups? 

BOF setup is my favorite of all the five, as most of the breakout fail. There is only one fundamental reason behind taking BOF setups, ie. Price unacceptance after the breakout.  As simple as that. There is no rocket science behind that. But we need a lot of screen time and  reviewing to understand when we can conclude that unacceptance.

But who will cause the polarity shift of the order flow in BOF setups to bring us profits?

“Buy at support and sell at resistance.”
“Volatility contraction must result in volatility expansion.”

You might have heard these sentences a million times by now. Trading evolved, people evolved, minds evolved and some people are still using the old tactics in trading. This is how novice traders think,
" A broken resistance becomes a support." So, it is sensible to buy at the resistance when it is broken out.  So, they place stop buy entry orders just above the resistance, to get an early entry into the move after the breakout without considering the context that the market is in.  When market is moving no where after their entry, they will look to exit from their breakout trades which can cause the polarity shift in net orderflow if enough breakout traders got trapped. So, this is the only thing that we need to look at when our bias tells us for a possible BOF, ie, confirm unacceptance of price, then confirm trap and then pull the trigger.

There are so many possible price interactions, but keep this generalized flow charts.

Bias in favor of BOF–> Breakout–> Breakout pullback which tests the broken out level–> Failure to extend beyond High/Low made after the breakout.

Why we take BPB setups?


Again, the explanation given for the PB setup applies here,except that the orders providing price level here is an S/R. We will have a trap order flow here as well. Statistics say that around 75% of the breakouts fail. Hence, so many novice traders fade the breakouts in the first attempt before it gives a BPB and they might get trapped as the broken level can provide enough orderflow to cause a polarity shift. But remember, bias and context must be our utmost preference. See whether the context and bias favors a BPB or BOF, before even thinking about the entry. (Courtesy - JCK)

Trading Trends.. Summary

Keep It Simple And Stupid… Trading (especially day-trading) is a stressful activity and no matter how good and emotionally stable you are, you will be forced to on board the emotional roller coaster in some situations. I need not emphasize much on what emotions can do as you already got some experience with them in your trading career. The root causes of those emotions can be many. But we can put them all into a single box,“Not accepting the risk and Not having the right expectations”. The consequences of the emotions can be many.

But again we can put them into a single box, “Perception distortion”. You might have the world’s best trading strategy, but when you don’t accept the risk and you don’t carry the right expectations, you can’t see the market the way it is. That’s the situation where you find the beauty of having a trade plan that’s simple and effective. If your trade plan itself is complex with a dozen indicators, you freak out. But when it is simple, you can easily get back to the step one of the plan and start again.

There are two golden rules if you wanna play the game of trading defensively

1. Once you have a clearly defined trend (cycle method), say no to counter trend trades when market is trading within the structural framework boundaries. Think about them only at HTF S/R levels that too when the trend is weak.

2. Never fade strength (impulsive swing) no matter how strong the trend looks. Always wait for a corrective move against the trend to time an entry in the direction of the trend.

Step by Step  :-

1. Define the trend.

Make sure the first leg is impulsive, and there is price acceptance after breaking the swing high for uptrend or swing low for downtrend.

2. Wait for a signal candle against the trade in TTF.

You don’t have any business with the charts until you see a signal candle against the trend as we don’t enter in the middle of an impulsive swing. In an uptrend, a red candle is a signal candle against the trend. In a downtrend, a green candle is a signal candle. Don’t break your head questioning whether this is a signal candle or not. Just consider the one that has the opposite color of the trend.

3. Wait for the trigger candle and see how it closes in TTF.

Once you have a signal candle, you can determine the LWP. A trigger candle is the one that breaks the LWP. If the trigger candle fails to close beyond LWP, that’s a good sign as we want weakness against the trend to look for a with trend trade.

4. Confirm that the swing started against the trend is corrective.

So many characteristics for corrective swings. So let me give two things that I look for,
a) If a candle closes within LWP and the other extreme of the signal candle after breaking LWP of the swing (any candle in the swing), it’s a corrective swing.
or
b) Wait for two attempt failures.. Let us say that the trend is down and you are looking at a rally, and there is no candle closed below the LWP of the swing, then I wait for two candles that breaks the high of the previous candle(s) but closes below that high to call it a corrective move, of course with a decelerating momentum.

5. Mark the supply/demand level using LTF and wait for the market to reach there to time the entry.

Note:-

If the entry is with a limit order, the candle that you have entered must turn into a signal candle or a trigger candle. If the candle closes against the trade after the entry instead of turning into a signal candle, better to scratch and reenter rather than hoping for something to happen.

Repeat the above over and over again until one of the following things happen,

1. Trend change.

Breaking trend violation pivot and price acceptance beyond TVP, Range confirmation.

2. Breakout of HTF S/R level.

Once price breaks a HTF S/R level, we need to see price acceptance beyond that level to take a with trend trade. More about it in the coming articles.

3. Rejections from new highs and new lows.

For example, the uptrend is healthy as far as there is price acceptance after breaking the swing highs. The downtrend is healthy as far as there is price acceptance after breaking the swing lows. If price is not accepted, that is a sign of weak trend and that makes sense to wait for a CPB or a trap type entry, rather than a single leg pullback. (Courtesy - JK (Jagadeesh Kolli)

Acceptance, Non- Acceptance and Rejection

Acceptance, non-acceptance and rejection.. These are the three words which almost all the discretionary price action traders (successful traders to be precise) use a lot while explaining the trades they have taken.Everything appears clear in hindsight, but can we sense those acceptance and rejections during live when candles are printing on the hard right edge after breaking a level? Good news.. Yes we can..

You might be wondering where the hell do we use these three terms in our trading