Example of how Imbalance creates trends and balance creates ranges

Market fundamentals

Let's talk a bit about market fundamentals. If you want to survive and obtain ongoing success in trading, you'd better rely on fundamental principles that don't change not setups. There are bunch of setups over there, candlestick configurations and other stuff.

But if you know principles, you will be more flexible and your success will be more solid

What you can rely on trading markets?

1. Imbalance creates trends, balance creates trading ranges

Yes, exactly this sequence. Not "trend is your friend", but imbalance is your friend, because trend is an outcome, imbalance is a market condition that creates this outcome.

"Trend-oriented" mindset often pushes traders seek for bad trade locations, when opportunity no longer exists. Imbalance is what you really need.

Though trading is not a science, it has some unwritten laws beyond price action:

First - big market participants create trends and rely on fundamental analysis. Biggest players don't rely on charts in decision making process.

They have charts for just one thing - to know how crowd thinks and where majority will step in the markets. Big players need "hot spots" on the market (when many traders are in) to have liquidity. Their positions require liquidity and without liquidity they will be unable to accumulate enough volume for their positions.

Imagine player with pip size equal to 100.000 USD or higher. Of course, he will need liquidity and will build his position long enough.

That's why they monitor charts to know when traders will step in. But the reason they need to build a position is not techical analysis. Reason is fundamental analysis and analysis of real supply and demand.

It's hard to spot "big playesr"

One thing will help you. Address yourself a question - who loses on the market? Who is caught in short or long positions? If you understand that long players are losing, you automatically know that bigger timeframe short player opposes them. Smart money players create imbalance and absorb volumes.

Who provides liquidity, who consumes it? Like Warren Buffet said - if you find yourself near the poker table and don't know who loses money - it's you who loses it.

2. Keep an eye on hot spots in the market

What is a hot spot? They are: important extremums, round numbers, option barriers, in a nutshell - spots that traders are watching. If you know that volumes are there, big guys are also there.

Every trend can be divided into several parts - young trend, mature trend and culmination.

Young trend and culminational phase represent great imbalance but with one nuance - big players are building positions in young trend, and covering their positions during culmination.

If you see "obvious" trend and see very hot market, be aware - avoid being a laggard.

Price Action Basics

Hi everybody! Let’s continue our study in price action and market logic.

How do you think, what is the main goal of the marketplace? Some would say – market brings together supply and demand, and that would be right answer, but it would be too abstract.

Liquidity – what trader needs to know?

The goal of the marketplace is not just to gather buyers and sellers and give them opportunity to trade, but to facilitate trading. What does it mean – to facilitate? It means that big market participants that mostly benefit from liquidity, will be interested in active trading from all types of traders.

The more traders are involved, the better execution large speculator or commercial trader will have.

Exchanges, for example, hire special companies, that are called «market makers» and pay them salary for keeping two-sided quotes – therefore every investor will be sure that he will be able to get a fill for his position.

But even though, two-sided liquidity providers are unable to keep market in a balanced state when there is some aggressiveness in the market and liquidity is not very high.

Trends often occur when there are not enough traders involved and market has to advertise more and more to attract liquidity. So, big market participants are often not interested in trends, they would rather prefer balanced state of market to have opportunity to slowly accumulate their positions. It’s tough job – to accumulate position on the rising market.

But we as traders are interested in trends, aren’t we? Of course, idea of a trend is different for day-trader and for position trader. Let’s now talk about short-term perspective.

See the picture below – how do you think, where liquidity can come to the market, in point A, B or C?

Obviously, points A and B are extremes of the bracket, and there are always traders that will try to fade extremes, as well as traders that will try to play breakouts.

In point «C» there are not too many traders involved – they don’t know how to calculate the risk and where to place their stops, that’s why I can call this area «no mans’ land» and areas at the extremes «hot spots of liquidity»

If market is trading without significant support from other timeframes, it will tend to go from one extreme to another, yet it’s tough to calculate risk at the extremes, because you don’t know who will win in short-term time perspective – buyers and sellers, buyers can create a breakout, collect stops of sellers, then market will go lower, or sellers can drive the market down and buyers will liquidate.

So, when the crowd is there, don’t expect that price action will be predictable and smooth.

In my own trading, if I see that market conditions are balanced, I rather try to work near «no man’s lands» in the direction to «hot spots» where I cover my positions.

Key here is aggressiveness – if market is aggressive and volatile and liquidity is not enough, it will tend to reach extremes – market needs liquidity, after all it is an auction which goal is to facilitate trading. Liquidity is located near hot spots – I exit there, I don’t know who will win and I even don’t want to predict it.

Price Action Basics and Its behavior

We would like to continue our studies on price action and Here I would like to tell you how apple trade went well although, there was strong selling after upside breakout, I was confident that buyers will step and move the price way beyond.

I want to start this post with this strange sentence. We will talk about trading logic. How do you make decisions? Do you look for signs of buyer and seller and act accordingly?

Keep you trading simpler !

Think about simple thing – price action itself (trend, movement) will not allow you to benefit from that. Some movements are continued, some are reversed. It depends on current market conditions, but probability of success will be close to 50/50 if you simply follow price action (subtract spreads and rapid volatility spikes and you will get perfect strategy for failure).

So, what works?

If you dig deeper than simply following price action, you will understand that supply and demand will drive the market. But supply can be short-term, then transform into demand and vice-a- versa. So, you have to rely on professional supply and professional demand and be able to distinguish it between other fluctuations.

All that we learn here is designed for that. Professional demand (or supply) in most cases is ongoing demand. But are we naive enough to think, that professional buyer will uncover his actions for you in easy identifiable and straight forward way?

No, they don’t do that! There are numerous attempts to capture signs of professional activity using volumes. Some traders think that if they have volumes, they have real information. Poor guys!

Volumes are also misleading. So, one can not be successful in trying to capture big buyer from the market… if he thinks in conventional way.

Market tells you a story and you should understand this story

Combining nuances and clues (even number of volumes if you like) in the whole picture. Here are several examples:

1. Market breaks out from a level and keeps level above. You see strange passive behavior of sellers – market shows you levels with very low volatility and holds there twice! If sellers were interested in this market, they would probably responded immediately. But you see no participation – something wrong with the supply is going on here.

Therefore you can anticipate that big guys are buyers! They’ve collected all supply below and no one wants to go against them at least for a while.

Not surprisingly price breaks out to the upside again.

2. There’s neutral day after the breakout. If there were short-term traders who have made this breakout, they would liquidate pretty soon. But nothing happens – nothing at all! All day price goes back and forth with very low tempo. It means that probably those buyers were big (institutional) buyers. Every time you analyze the market, you make narrative. Be sure that your narrative is reasonable and relies on solid market logics There are some important principles:

1. Insitutional buyers will sell on the upside breakout (not downside)

2. Low volatility after high volatility (directional breakout) shows lack of participation. The less liquidity (participation) we have near current levels, the more odds that market will auction higher.

Is it complex?

Yes, it is. But this is mindset that requires from you some disbelief, some critical view, some commitment to dig deeper and see what is hidden. That what trading is about.

Update of the charts of Previous week

"I do it for a while and that should be the last update of trade setup for this month. Because feeling very stress and tired after back to back day night updates of the charts".

All the updates of the charts I posted during last week.

Let's take it one by one with the charts I posted last Week !!

First of all take a look at the chart Eur/usd

The chart of euro I posted last week and I told you when price fall of a strong trend, and the follow through does not seems encouraging then price use to find a first bottom and reaction from that bottom is quick enough to give you Idea of the "context" and that time it was correctional bottom and break out "Area of Protection" and finally It become a rotation center and that rally today had a good strong solid breakout to test at-least 1.3890 area.

Reaction time was minimal so we should have been ready with limit buy orders to pick such strong strengths and get out quickly if momentum fades out.

Secondly, take look at the chart Eur/CAD !!

I post that chart as My favourable chart of the week last week as I fetch good pips with a trade and that rally from the balance area was bouncing so strongly and finally it give another entry today at 1.5270 and ready to cover quickly or book some profits or take that momentum till the end of the day.

Next one of real interest is Eur/Nzd

Eur/nzd set up was strong and that setup had strong accumulation area and then breakout which did not had a follow through but downside rally was very slow and keep bouncing out of a new low on hourly and create another opportunity for balance market to get through that protection area strongly and If that type of momentum had to fade out then they should have reason of failure, otherwise you should keep buying on shorter-time frames.

Here is the update gbp/chf

Suddenly, a strong pair to watch as It is still not confirmed that trend is matured trend and ready to reverse on medium term. "Strong" rally after the top is seen, but that protection area giving support to the pair regularly, and Now it would interesting to watch how shorts follows up. I would remain short with small stops and if I am stop out then I would look at the bullish bar that reverse from here, And If it was another liquidate trap then it give us better opportunity to short at higher prices.

Eur/jpy trade update

The setup I mentioned, last Friday worked very nicely although there was a new low found but it was for a very short period but reading the context and taking low risk reward opportunity, should be the plan and when You read the complete chart and logic then you would found it useful to enter as I have found price "breaking the floor" and all the liquidate bullish engulfing trap succeed and Place a new low.

Price rebound, but rally from that low was fading so I expected a new low and that what it did. Though, I had to cover quickly as bullish engulfing from low was about to test the area again, though book the profit at 141.16

How to evaluate your trading

The main reason of this post is that you should be aware of whether you are trading "good" or not? Because when you are aware of that then there are much better chances that couple of losses won't effect your overall result and your winning "ratio" is much more than you winning "percentage". Let's emphasis more on that topic !

Evaluating your trading

Question that every trader asks himself from time to time can sound like this – «Is my trading good»? In other words, is it robust, does it have the edge, will it be profitable in a long run?

Some beginner traders say – «it’s very simple, if you earn money, your trading is good, if you lose money, your trading is bad». But it’s not that easy in a world of real trading – good trading does not necessarily correlate with short-term profits, bad trading does not bring profits in short-term perspective.

We never know whether this trading is good or not if we don’t know whether these series of profits was a result of following trading plan or veering from it? So, here we come to basic principle of trading – short-term results don’t matter too much, they can be result of luck.

Think about it – best trading systems are not providing profit all the time, worst trading systems are not providing losses always.

Ok, but what if you don’t have rigid trading rules for entering and exiting positions? It’s reality for discretionary traders who use their judgement for making trading decisions.

Is it really impossible to evaluate your trading using your profits/losses distribution?

To answer this question, let’s divide trading styles on 2 parts: 1.

Trend-following trading approach:

In this trading approach, trader expects to have small frequency of winning trades, but his profits are much greater than average loss. For example, it’s ok for trader to have 6-7 or more consecutive losses, then to cover it with 2 trades. His equity curve will look like shown below:

You see, that in this case trader has relatively small number of winning trades (maybe less than 30%), but he successfully covers his losses with 1-2 «home runs» (big swings). You see, in this trading style it’s not recommended to evaluate trading by short-term profit and we need more time to make conclusion – is this trading approach robust or not. 2.

Short-term trading:

By short-term trading, I assume that one can either day trade or hold position overnight but still have small duration of average trade (1-2 days). Of course, the less duration of trade we have, the less is our average profit per trade. Yet In this example, we can expect to have better frequency of winning trades. And correlation between good trading and immediate results is much better for short-term trading rather than for trend-following trading or other long term trading styles.

Equity curve in this case will look like this:

You see, here we can have about 50/50 distribution – in every second trade we can get profit or at least achieve breakeven point. Why not 70/30 or 80/20? That’s a dream of every trader – to have 80% of winning trades and also keep profit/loss ratio more than 2/1 (having average profit greater than average loss).

But there are no hidden hacks and shortcuts in trading – if we improve our frequency (quantity of winning trades), we lose magnitude (size of our profit becomes smaller). Some traders are proud that they have almost no losses or 95% of winning trades, but size of their possible loss can destroy entire account.

Market is hardly predictable in short-term perspective. I personally don’t think that we should chase for high frequency of winning trades. If I will be able to get 50% of winning trades and keep 3/1 profit/loss ratio, I would be in hog heaven.

In short-term trading approach it's much easier to evaluate your trading by short-term results - the better you trade, the more winning trades you will have and vice -a-versa. That's why personally, I prefer short-term trading approach, because I can keep myself on track and quickly recognize that my trading has become defensive, too aggressive e t.c.

Starting from September 2013, my own track record of results is shown below (Every week I put down result in pips in special Excel file):

You see, my profitable weeks are almost equal to losing ones - I don't have "home runs" except one trade on XAGUSD (Silver). But frequency of winning weeks (I had 2 times greater number of winning vs losing weeks) allows me to survive in the long run (and to get profit) without "killing trades". And, what is even more valuable,

I can quickly recognize when I'm trading poorly and correct my trading behavior.

Price Reflects Everything

"Technical analysis tells us that "price reflects everything".

Is it right or not? In previous post I've shown moving average indicator as an example of how one can use price-value approach in trading. But this is just example, in reality, simple MA can't show you where value is. Let's say, MA calculates 35 closing prices (35 parameter). Do you think that every price is equal here? Area located at higher prices is more significant for the market because it attracts more volumes (aggressiveness).

So in fact weight of higher prices in calculation formula should be increased if we want to know where value is.

What am I trying to say?

Price can't reflect everything because not every price level is equally important for the market and that is why I firmly believe that support and resistance are temporary profit taking areas and does not reflect a trade location everytime.

The missing piece is time and volume

(we don't have volumes on Forex - tick volumes is not what we need, so we can make conclusions about volumes from price action - was it aggressive or not?)

If you will refer to price as to advertising mechanism, it would be much easier to understand what's going on on the market.

I will quote great trader and coach, Jim Dalton, that teaches his students in approach of auction market principles:

Price advertises opportunity

Time regulates this opportunity

Volume measures success or failure of this opportunity.

Eur/jpy technical Update.

Technical update of eur/jpy Intraday chart

What are the symptoms of a mature trend and by "mature trend" ,I means there is a chance of reversal to test the support again. We have seen breakout and price manage to hold high prices and then rapid moves. If you watch the chart closely then you always look for logic and what is the "Context".

For me, I have spotted out strong downside rally after the top with overall trend is bearish with correctional bottom (When price had a downside rally and spike again and test the low of prior bottom with a spike then it is know as correctional bottom)

Spike from that correctional bottom is strong and its not one it had two-three spikes and when we have strong and usually when we have breakout and such strong trend, then price use to "Gravitate" towards the high.

"Test" of high usually don't always means that it has to test the high as all the attempts had failed and price makes a new low and attempt to rise of that low now is not strong and no follow through

Price is ready to rally again to make a new low below its recent one and that would be strong rally and it could be another strong bullish so no harm in risking 20-30 pips (Very huge risk as I never risk more than 10-15 pips ) but still swing trading opportunity can really takes the momentum to strong bearish trend.

Chart of eur/jpy below tells what is Real "Context"