Impulsive Vs Corrective…

If you have ever come across Elliot wave theory, you might have heard about these two words, ‘Impulsive moves’ and ‘Corrective moves’. I’m not a great fan of other aspects of the EW theory, but Impulsive moves and corrective moves forms some foundation of my trading. Let me introduce some theory behind these two. Don’t some complicated rocket science. They are pretty straight forward.

1) Characters of Impulsive moves/swings :-

• Strong and powerful.
• Quick
• These swings are made up of candles with relatively larger bodies.
• The candles in the swing are overly bullish/ bearish. ie. most of the candles in the swing are of the same color.
• These swings generally breaks the recent swing high/low.

2) Characters of Corrective moves/swings:-

• Slow in pace
• These swings are made up of candles with relatively smaller bodies
• Not overly bullish/bearish. Sometimes we can see same color weak candles, and sometimes we see a mixture of bullish and bearish candles.
• These swings generally just retraces some portion of the previous impulse move.

There is nothing new I have explained till now as you might have already come across these concepts by now. The real question is, how can we use this information in our trading?

1) Defining a trend:-

• An impulsive move, followed by a corrective move and which is followed by another impulsive move. The trend is in the direction of that impulsive move.

• An impulsive-impulsive combination or a corrective-corrective combination generally ends up as a range. Check the trend structure when you see these combinations, because trying to trade the ranges thinking that it is a trend is the reason behind most of the failures in day trading.

The philosophy

Have you ever heard this quote, ” You don’t trade the markets, you trade your beliefs. ”

MY TRADING PHILOSOPHY:-

“In a news free environment, market reverses at a price level that causes a supply/demand imbalance. It travels in the new direction until it hits a level that cause a supply/demand balance again. “

The reversal can be that of a swing or a trend. That depends on how strong the level is and how weak trend is.

I know defining a good bias is easier said than done in real time, But it is simple and gets better and better with experience. Once you identify the trend structure and the strength of the trend, everything is pretty straight forward.

Once that bias is identified, I relax and watch the price action to see whether the newly added candles are supporting  bias or there need to update anything about the trend structure and bias. I don’t do anything until a counter bias move starts. Why?? Because I want to snatch the money from those traders who are fighting the high probable bias, when they realize that they are wrong. So I want them to take a position before I take a position. Also I would like to benefit from those traders who try to enter late into the swing . These two groups of traders gives my bread and butter.
Here it comes. How long will I wait when market is moving against my bias?

What does the philosophy say? Market reverses it’s direction when it hits a level that can cause some supply/demand imbalance.  So I wait until market reaches the level that can cause some supply/demand imbalance.  The level can be HTF S/R while looking for a reversal, or it can be minor S/R or trap level from LTF while looking for a with trend trade, or a range boundary when market is ranging. During that waiting, I also make sure that the trend structure in TTF remains intact. Change of trend structure, changes the bias and also changes the tactics. Without any doubt, I am a contrarian.

We don’t know whether the market respects the level that we are looking at or not. That’s the reason why I don’t place blind limit orders.The price interaction with the level will let us know whether it’s time to give an entry or wait for some more time,

Does that mean the reversals always happen at the HTF S/R, and the pulbacks always end at LTF levels? 

Definitely no. There is no statement that has the word ‘always’ in the markets. If someone uses that, he/she must be lying. It’s not about what it should do and what it shouldn’t do. It’s all about where the odds will be in favor and risk will be less.

If you need only odds, go with the breakouts. But the risk will be huge.

If you need lesser risk, trade with the blind limit orders at good levels with a volatility based stop. But the odds will be less.

Trading is all about balancing these two. Nothing else. Both the above methods will not suit my personality. So I wait until price reaches the level, gives  a price level to hide the stop and then  fire the entry as close to that stop as possible.  Stop always comes before the entry. (I used always here. But it’s not a lie.. )

What if the market reverses in air without reaching my level?

Who cares!!! Let it do whatever it wants. Move onto the next opportunity. We need not trade each and every swing. Just update the trend structure and bias if that is needed and then wait for another counter bias move to start.

But the positive thing about sticking to the SD(supply/demand) levels is, historic charts prove that most of the big moves start at good levels irrespective of the timeframe. I am sticking to those good levels, so I don’t miss much of them unless I hesitate and miss an entry when the setup builds up or when the exit is early out of some emotions. Missing out of hesitation and early exits happen when we slip out of zone trying to catch every 5 or 10 tick movement or because of the fear of missing out and stuff.

During Entry:-

Once everything  in the pre trade analysis are in place, entry will be on the rejection from that level. It can be TST or BOF of that level. I don’t want to talk about that in this article as this one is not about entries and exits. I will skip this to the future articles as well.

While setting the targets:-

This one doesn’t need much explanation. Expectation is that the market move atleast to the next SD level once it reverses. That is where I like to take half of the profits,manage the second half when market is piercing the levels on it’s way in the direction of the trade.

There will be times, where I don’t exit the first half with a strict order at the immediate level, when the move has a lot of potential. I don’t recommend this to the beginners as it needs some experience to take exit decisions when market is printing candles at the right edge.

While managing the trade:-

Use the levels within the swing you are trading, that are formed by the market when it is moving towards the targets, to trail the stop. I don’t trail the stop if there is no level to support it unless I want to scratch the trade or don’t want to take a loss anymore or I want to manage the trade very aggressively.

This is what I meant when I said that the  trading philosophy comes in everything I do in trading. It might look simple, but let me admit it honestly, finding a single statement as simple as this that encapsulates everything in trading, and preparing a trade plan that is consistent with that one statement from the scratch is not as easy as it appears.

In spite of all these, market has the potential to surprise and that is when you have to take precautions like decreasing the position size, or moving back to SIM or totally moving your ass out of the computer Whatever it takes, make sure you are financially and psychologically ready for the opportunities that will come when the markets start to behave the way you can understand. Keeping a philosophy like this and reminding yourself about it often while trading tells you whether the market is conveying it’s information in your language or not. The moment you realize it is not your language, the best thing is to stay flat. Saying flat is also a position in trading.

Trend Transitions…

What is Trend Transitions?

Up-trend to downtrend,
downtrend to uptrend,
up/down to sideways,
sideways to trending.

You already know that uptrend is a series of higher SHs and SLs, downtrend is a series of lower SLs and SHs. Sideways is a contraction between a support and resistance.  But the transition from one trend structure to the other is not an easy task to do in realtime. But unfortunately, the whole trading completely depends on this. So, you must work on this. There is no other way.

I have a suggestion for you. You might have heard this saying, 

” You will go to the place where you want to only when you leave the place where you are right now.” 

The same is true for trend structure. A trend is said to be transitioned into a new trend structure only when the previous trend structure in not intact anymore in the timeframe you are looking at.  Let us say, you were in a ranging environment, that gave a upside breakout and moving up without completing the transition process , that range is still intact and the range boundaries are significant until the trend transition completes. Also, I don’t treat that as an uptrend (even if forms higher SHs and SLs) as the previous sideways range is still intact.

Update.. Step1 :- Triple Timeframe Analysis and Construction of structural framework Support and Resistance

Why do I need a support and resistance framework to operate in markets? 
What are my expectations from a support or resistance?

To provide necessary order flow to reverse a weak move with a TST/ BOF
and to provide necessary order flow to push prices in the direction of the strong move after breakout (a BPB).

Now what exactly do you mean by ‘move’ in the above answer?Trend? or Swing?

It can be any of those two. So, this forced me to classify the S/R levels into two types.

a) Major S/R (HTF frame work), which are capable of reversing the weak trend. I use these to look for CT trades, for TST and BOF.

b) Minor S/R (Using LTF chart), which are capable of reversing the weak swings. I use these levels to look for with trend trades, for PB and CPBs.

No CT trades within the HTF S/R framework and I must only look for CT setups when the trend is weak while approaching the HTF S/R levels.

So far so good!! Forget about the minor S/R levels for some time. My job now is to identify those levels that can reverse the trend as the first step in my analysis and discard the levels that are not capable of reversing the trend.

I only play(CT BOF/TST or WT BPB) the first interaction with the levels. In a different way, I only focus on the virgin levels and discard them after the first interaction when the price got accepted beyond the level or when the level is not behaving as per my expectations

Step1 :- Triple Timeframe Analysis and Construction of structural framework Support and Resistances…

By now , you know

1. What  the structure is,
2. What are Support and Resistances,
3. What are Pivot highs and Pivot lows
4. What is a Trend, Three possible directions of trend and Trend violation Pivots.

If you are clear with the above 4 points, you are ready to hit the charts.

How will these be identified on a chart?
How can we use them to extract profits out of the markets?

Before going into the details of the above two questions, first let me talk about the different charts you need to perform your analysis. Here, I mean charts of the same stock in different timeframes .

Triple Timeframe Analysis

(HTT) Higher Timeframe - To define the structural framework of support and resistances,(60 minutes)
(TTF) Trading Timeframe - To identify the trend and Low risk High probable (setup) areas.(3 or 5 Minutes)
(LTF) Lower Timeframe - To fine tune the analysis and to find the better entries and exits, (1 Minute)

you have to decide the timeframe you trade as per your decision taking speed. Its always better to start with the larger timeframes, as you get enough time to take a decision. You can jump to smaller timeframes once you are comfortable with the process of interpreting the information fast and taking decisions accordingly. This is how I use these three timeframes.

1. Defining the Structural Framework of support and resistances 

Recall the two principles I have written while explaining the structural framework,

Price moves in a structural framework of support and resistances.
If the framework is broken, price moves to the new framework of support and resistance using the concept of polarity change of support/resistance.

So, we need to draw the support and resistance lines to define our structural framework. It is the battlefield that we are going to lay our plans to make profit. Define the battlefield, wave the plan as a spider web inside that batllefield, let the losers fall into the web we have made, then attack them. This is how profits are made. We are at the first step , i.e defining the battlefield.

Drawing Support/Resistance Framework

Every pivot is a potential support or resistance for the future price movement. We are using higher time frame to define our framework. As per the ytc price action book, you have to consider all the swing highs and lows as structural support and resistances.

I have modified it slightly with my observations, and you can use whatever works for you. First I will explain what’s written in the book and later I will explain how I define the framework in my trading.Its always better to draw two supports and two resistances below and above the current price respectively. The more recent the levels, the more effective they are.

Step 1 – Open your higher timeframe chart. 60minute chart in my case.

Step 2 – Identify the current market price,

Step 3 – Identify  two recent pivot high/lows above the current market price and two recent pivot highs/lows below the current market price.

Step 4 – Draw horizontal lines at those points.

You are done with the framework construction. Open the trading timeframe (3minute chart in my case) with those levels drawn on it.

How I am defining the market structure in my trading

Open your higher timeframe chart.
Mark recent pivot highs and lows on the chart.
Identify those pivots, the movement from which has broken the previous pivot of opposite polarity.(Courtesy - JCK)

Structure Continued… Trend and its types..

What is the trend?

It is the direction in which the scrip that you are trading is moving. There are 3 directions in the market. Up, Down and Sideways.

Higher pivot highs and Higher pivot lows. Recent pivot high is higher than the last pivot high and recent pivot low is higher than the last pivot low. This is what we call Uptrend.

Lower pivot highs and Lower pivot lows. Recent pivot high is lower than the last pivot high and recent pivot low is lower than the last pivot low. This is what we call Downtrend.

There is no particular sequence of Higher pivot highs and lows or Lower pivot highs and lows to name it as an uptrend or a downtrend respectively. This is what we call Sideways trend.  Sideways trend moves in between a support and a resistance.

Market shifts from uptrend to downtrend, downtrend to uptrend, uptrend/downtrend to sideways, sideways to uptrend/downtrend or it continues to remain in the trend it is currently moving. Your profitability depends on deciding when to trust the trend and when to take a trade in the opposite direction of trend.

There are 6 steps to be considered before entering the trade.

1. Drawing the structural support and resistances to define the framework.
2. Identifying the trend and trend violation point
3. Finding Strength and weakness of bulls and bears within the trend
4. Identifying high probable future direction.
5. Visualizing the future price action.
6. Identifying High probable trade locations. We call these as setup areas or wholesale areas.

You know by now what are the first two steps

Structure Continued….Swing Highs and Lows / Pivots Highs and Lows..

Now you know the necessity of  Structure and  Support/Resistances.

This article explains how to identify the swing highs and lows, which helps us to draw support and resistance lines. The identification of swings highs and lows are our first step into the practical stuff of trading. You need to train your eye to identify them perfectly.

What are the Swing highs/Lows?

These are the turning points in the price.

A candle high is said to be swing high if the highs of two consecutive candles on the right and left of that candle are lower than the high of the considered candle.

A candle low is said to be swing low if the lows of two consecutive candles on the right and left of that candle are higher than the low of the considered candle.


There is always room for subjectivity in trading. Understand the objective definitions of pivot highs and lows first. You will know when to apply subjectivity once you enter into the market.
You can only find pivots in the past. You will never know the future turning points in the markets, as we need two candles on the right side to validate it. We never know what is going to happen on the right side of the chart as it is future.