Market structure and price action study.1

MARKET STRUCTURE AND PRICE ACTION STUDY.

A new exelent artickle from Al Brooks

Posted in: Trading Business, Trading Process and Strategy | November 21, 2014 at 5:37 pm , by Lance BeggsNo comments

“Fortune favors the prepared mind.”

… Louis Pasteur

In a recent article I discussed the importance of regular study of market structure and price action. See here if you missed it – A Simple Step to Becoming a Better Trader

After every trading session, find something you can learn from. Perhaps a market structure feature. Perhaps an interesting sequence of price action. Perhaps a trade management insight. Whatever you find to be of most value!

Document it.

Store it in your journal.

Review your journal as often as possible.

The article included two examples of market structure & price action study, to get you started in creating your own journal.

One of these provided an example of the following rule of thumb – A strong momentum drive into the close with no follow through overnight provides an initial expectation of a rangebound environment.








Last Friday’s Crude Oil market offered a very similar example. As a result of my prior study and journaling, I was able to commence the session with an expectation of a rangebound market within clear areas of potential support and resistance.

This is why we create and use our journal. The process of documentation and subsequent review allows us to internalise valuable “Rules of Thumb”, allowing for quick recognition of similar situations in future.








Alright…. let’s look for some important points we can take out of this.

(1) Firstly, it wasn’t perfect. Why is that? Well every day is unique. The price movement each day is a result of the orderflow in the market that day. And that orderflow is the result of the buy and sell actions of the market participants. Traders, on different days, will base their buy and sell decisions upon different factors.

There is a common saying that, “the market doesn’t repeat, it rhymes”.

As such, every actual occurrence will be unique.

The best tool for operating in an environment of uncertainty, are rules of thumb, not fixed rules. And that’s exactly what our Market Structure and Price Action Journal provides… rules of thumb discovered through a combination of observation and our understanding of how psychological heuristics and biases influence the decision making of market participants.

Our journal provides the following lesson: “A strong momentum drive into the close with no follow through overnight provides an initial expectation of a rangebound environment”.

This is a rule of thumb… it’s not a fixed, permanent and guaranteed rule.

The rule of thumb was far from perfect in this case. But it allowed me to start the session with a clear expectation of resistance somewhere in the vicinity of the congestion prior to Friday’s momentum drive.

The area of resistance capped price nicely, as anticipated. Although to be honest I’d have preferred the lower edge of the area to have more influence.

The session lows did not reach our initial area of support. Rather, support formed through a failed break of the opening range low. (Opening range theory should also be a topic in your Market Structure and Price Action Journal… alerting you to this potential additional level of support!)

So the first important point is… rules of thumb… not fixed rules.

(2) Secondly, I’d like to repeat and reinforce the final note added to the above image: As always… an initial expectation should be amended if subsequent data suggests otherwise!

Had price rallied from the open with strength, for example, I may have amended my expectation to include the possibility of a break through resistance, looking for trading opportunity LONG on some form of breakout pullback.

(3) And finally, if you trade CL and did not have the same initial thoughts of a potentially rangebound market… why not? Are you using a Market Structure and Price Action Journal? And did it have an entry based upon the examples in the prior article?

If not, consider starting a journal now. The rules of thumb that it provides will prove in time to make it the greatest trading book you have ever read.

Happy journaling,

Lance Beggs

Big thank you Lance for sharing this. Have printed these two post out and attached them to my screen so I can fully digest your message. Again thank you bro.

Bob

Just wondering if you can discuss this concept a bit more. My perspective is that at the end of the day, it’s the same market participants operating at the same time according to their employer’s policies, protocol and procedures. And while the “need” to exchange currencies vary from day to day the actual act doesn’t. So given “similar market conditions” it can be accepted/anticipated that the real players will do similar actions for no other reason than company protocol instructs requires them to do that. Keen to hear your thoughts

1 Like

[B]First of all I will inform im not the writer of this article Lance wrote it,

This article is a fragment of what you need to learn and understand and put into you mental library in you head .

A while ago I posted 24 point over sign to spot possible reversal taken from Al Brooks …

Test how gifted you are in trading

How many of them have you printed in you head ,how many of those point you don’t understand at all… !!![/B]

Example bull reversal in a bear trend …

  1. Strong bull reversal bar ,large bull tend body and small tails or no tails.
  2. The next two three bars also have bull bodies that are least the average size of the recent bull/bear bar.
  3. The spike grows to five to 10 bars with out pulling back for more than a bar or so ,and it reverses many bars ,swing highs ,and bears flag of the prior bear trend .
  4. One or more bars in the spike have a low that is just one tick above the close of the close of the prior bar .
  5. One or more bars in the spike have an open that is above the close of the prior bar.
  6. One or more bars in the spike have a close on the high of the bar or just one tick below its high.
  7. The overall context makes reversal likely, like higher low or lower low test of the bear after a strong break above the bear trend line.
  8. The first of second bar of the breakout has a close that is above the highs of the many prior bars.
  9. The first pullback occurs only after three or more bars.
  10. The first pullback lasts only one ore two bars , and it follows a bar that is not a strong reversal bar.
  11. The first pullback does not hit a breakeven stop ( the entry price).
  12. The spike goes very far and breaks several resistance levels like the ma, prior swing high ,and trends lines and each by many ticks.
  13. As the first bar of the reversal is forming ,it spend most of it time near its high and the pullbacks are less than a quarter of the height of the growing bar.
  14. There is a sense of urgency .You feel like have to bay but you want a pullback ,yet it never comes.
  15. The signal is the second attempt to reverse within the past few bars ( second signal).
  16. The reversal began as a reversal from an overshoot of a trend channel line from the old trend.
  17. It is reversing a significant swing high or low(e.g., it breaks below a strong prior low and reverses up).
  18. The high 1 and high 2 pullbacks have a strong bull reversal bars for signal bars .
  19. It has trending “anything “:closes highs ,lows ,or bodies.
  20. The pullback are small and sideways.
  21. There where prior breaks of earlier bear trends lines (this isn’t the first sign and bullish strength).
  22. The pullbacks to test the bear low lack momentum ,as evidenced by its having many overlapping bars with many being bull trend bars.
  23. The pullback that test the bear low fails at the Ma or the old bear trend line.
  24. The breakout reverses many resent closes and highs . For example, when the is a bear channel and a large bull bar forms ,this breakout bar has a high and close that are above the highs and closes of five or even 20 or more bars .A large number of bars reversed by the close of the bull bar is stronger sign than a similar number of bars reversed by only its high.