Chart patterns

To be a price action trader means having a deep understanding of the various different price action patterns that form in the market.
As some of you reading this will probably already know, there are three basic types of pattern that can form in the market:
• Price Action Reversal Patterns
• Price Action Continuation Patterns
• Price Action Candlestick Pattern

Price Action Reversal Patterns

Reversal patterns are probably the most important set of price action patterns you need to really have a deep understanding of, as they can give you early clues about a movement in the market that is coming to an end. The six patterns I'm going to be showing you in this section are all multi-swing shape patterns, which means that each one of the patterns forms from more than one upswing and downswing taking place in the market, and they all look similar to common shapes upon their completion.

The Head And Shoulders Pattern

The first price action reversal pattern we're going to look at is the head and shoulders pattern. Without doubt one of the most popular and well known price action patterns in the market, the head and shoulders formation is one which all price action traders need to memorize and understand if they want to become good at spotting reversals using price action. As you've probably already guessed, the head and shoulders pattern is a reversal pattern which has a swing structure very similar to that of person's head and shoulders.

Support & Resistance Switch-over

Support

A support level is a price level where the price tends to find support as it is going down. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level.

Resistance

A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level.

Most Traders will be aware of the many different types of Support and Resistance methods used by traders. Proactive Support and Resistance methods are ‘predictive’ they often outline areas where price has not actually been. They are formed based upon current price action that through analysis has been shown to be predictive of future price action. Proactive Support and Resistance methods include Elliot Wave, Fibonacci, Calculated Pivots, & Trend lines. Support and resistance levels can be identified by trend lines. Some traders believe in using pivot point calculations. The more often a support/resistance level is "tested" (touched and bounced off by price), the more significance given to that specific level. If a price breaks past a support level, that support level often becomes a new resistance level (Support and Resistance switch-over). The opposite is true as well, if price breaks a resistance level, it will often find support at that level in the future. Various methods of determining support and resistance exist. 

A price histogram is useful in showing at what price a market has spent more relative time. Psychological levels near round numbers often serve as support and resistance. More recently, volatility has been used to calculate potential support and resistance.

Trapping volume

At a peak formation low or a peak formation high, several spikes may appear which are all apparently contained by a trend-line.  But what is really happening here?  The MM is trapping volume and it is important to notice that each subsequent spike it is not lower (or higher) than the previous so that any new trades taken in the direction of the spike do not have an opportunity to become profitable.  They become trapped.

So in the example below, the peak low is identified and followed by 2 further downward spikes.  The important feature to notice is that each of the spikes is higher than the previous which prevents short position holders from taking any profit whilst potentially encouraging new shorts in this region. In a similar way to the mechanism of trapping volume, a wedge or pennant pattern works in much the same way except that it is trapping volume in both directions.
On the lower boundary of the wedge, the peaks become slightly higher each time it comes down to the line.  This has the effect of ensuring that none of the trades that are taken short in these regions can turn a profit.  Similarly, on the upper boundary of the wedge, the same thing is happening with each of the peaks becoming progressively lower and trapping the higher level longs and pulling them down.

There is no way of predicting which direction the price will ultimately breakout.  This will be determined by the net volumes that occur.  In other words, if there is a greater build-up of short positions over the long positions, then the wedge will break up.

Price manipulation & stop hunts

Precisely because the Forex market is so leveraged, most market players understand that stops are critical to their long-term survival. The notion of ‘waiting a loser out,’ as some equity investors might do, simply does not exist for most Forex traders. Trading without stops in the currency market means that sooner rather than later, the trader will face forced liquidation in the form of a margin call. 

With the exception of a few long-term investors who may trade on a 100% cash basis, the overwhelming majority of Forex market participants are speculators. Because of this unusual duality of the Forex market (high leverage and almost universal use of stops), ‘stop hunting’ is a very common practice.  Although it may have negative connotations to some readers, stop hunting is a legitimate form of trading.  It is nothing more than the art of flushing the losing players out of the market. In Forex terms, they are known as ‘weak longs’ or ‘weak shorts.’  Much like a strong poker player who may take out less capable opponents by raising stakes and ‘buying the pot,’ large speculative players (like investment banks, hedge funds and money centre banks) like to gun stops in the hope of generating further directional momentum.  In fact, the practice is so common in the Forex markets that any trader unaware of these price dynamics will probably suffer unnecessary losses. In trading currencies, market makers function as intermediaries in sales and purchases between two parties and two currencies.  For example a bank will function as a market maker when it collects sellers of the US Dollar to then sell to investors who have Euros in exchange.  The value of each currency is based on the current market value. To beat the Market Makers you need to understand the basic objectives of their activity.  Overall, the Market Makers are traders and their objective is to make money. 

The major difference between them and other traders is that they have the ability, through access to massive volumes, to move price at their will.  So to make money, they aim to buy at a lower prices and then sell at higher prices. They achieve this by: 

• Inducing traders to take positions 
• Create panic and fear to induce traders to become emotional and think irrationally.   
• Hit the Stops and Clear the Board. 

Multiple time-frame confirmations

Price is fractal. This simply means that what happens on the 1 hour or 4 hour time-frame will inevitably take place on higher time-frames like the daily & weekly charts. The only difference is that it takes longer for confirmations to happen on higher time-frames. 

A trend on higher time-frames has had more time to develop, which means that it will take a bigger market move for the pair to change course. Support & resistance, supply & demand zones are more significant and valid on higher time-frames. It is possible to trade a double top on the 1 hour chart, make a profit, & close the trade. After market price has completed the 1 hour double top,it will reverse and start forming a double top confirmation on the 4 hour time-frame. This process continues until confirmations have formed on all time-frames, then market price moves to a new and different price range to begin the process all over again. Most traders often make their trading decisions based exclusively on a single time-frame. They spend all their energies in analysing the technicals on their trading time-frame without giving much thought to what might be happening in bigger time-frames. Market direction is clearest on bigger time-frames like the daily & weekly. a single time-frame can work out fine in some cases, however, a more robust approach would entail looking at several time-frames in order to get a better handle on the potential viability of a trade set-up. For the average trader multiple time-frame analysis can seem a bit overwhelming and confusing.

One major reason that traders avoid multi time-frame analysis is due to the conflicting information that sometimes results from this approach. This confusion often causes many traders to suffer from "Analysis Paralysis". Expand your understanding by repeatedly looking at multiple time-frames, you will eventually get used to analysing that way. It is okay to use a single time-frame for analysis, but don't let that be you!

Supply & Demand zone validation

Today we are going to focus on supply and demand zone validation. hopefully we will answer the important question of how long a zone can remain unvisited and still be considered valid. It is important to remember that in order to be a profitable & consistent trader we have to trade with the market makers & not against them.

To understand whether the banks will cause the market to return to a point where they have already opened trades; requires a timer to be set and monitored on how quickly the market price should return to the area after momentum has caused price movement to take place up or down.
 The rule I always use is the market should return to the area where you have suspected the banks have been placing their trades within 45 days. The 45 day rule applies only to supply & demand zones which you identified on the daily chart. For the 1 hour chart the market should return to the supply & demand zones within 24 hours after it has been created. You can have a little bit of a cushion because nothing in the market is dead set in stone.
It can happen that the price returns to an area 27 hours after it has been created and work out exactly as planned, just make sure the market doesn't take a significant amount of time to return to an area like 40 hours for an area found on the 1 hour chart or 60 days for an area identified on the daily chart. The banks want to get all of their trades placed as soon as possible, but because they operate off different time-frames it means we have to use different rules as their time horizons are not the same.

It is all due to the way the market structure will react once the banks have got some of their trades placed. It doesn't occur as numerous as the typical reversal when all of the bank trades will be placed at a very similar price, but it occurs often enough that it should be taken into consideration when drawing areas based off where the banks have placed their trades.

Wall street mindset

Today we will be discussing how market makers trade the market. We will outline how big financial institutions & corporations like investment firms, banks and hedge funds dominate the foreign exchange market.


Observations claim that the transactions these institutions make account for more than 70% of the total daily volume the foreign exchange market generates. And that more than 30% of the same trading volume in the foreign exchange market comes from a participation of just two major banks.
Considering the fact that banks control such a large percentage of the market, it makes studying them and knowing how they operate a big priority for us as traders. Understanding the conditions that need to be present in order to open a trade or to subtract profits off a trade, is highly important because it causes movement in the market, movement that we can & should take advantage of if we understand why it is happening. We know that the one thing which causes a large percentage of retail traders to enter into trades is a trend; therefore all we need to do to figure out when the bank traders are probably going to enter the market is look for a currency which has been in a trend for a long time.
We can't pinpoint exactly when the banks will enter into trades because determining the duration of a trending market will depend on the time-frame being observed and information which we don't have access to, such as how many buy/sell orders are currently coming into the market.

Despite this, at least we have a guideline in place which we can use to get an idea of when they are likely to enter their trades i.e. after the market has been moving in one direction for a significant length of time. below is an example of how market makers signal a change in market direction, which is swing lows or swing highs that form a similar price levels

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