Why Should You Trade Based on Trading Pattern in Market Structure?
Have you ever look at the price chart for any asset class and found infinite amount of possibilities to how prices move? Hence, came various types of technical analysis method and countless trading indicators available to help make sense of trading pattern.
But here’s the problem, as time goes by, you will notice that trading indicators, be it lagging or leading indicators provides trading signals that aren’t accurate half the time. Specifically many false signals.
One thing is for sure, even if you are a fan of trading indicators, there are specific markets structures that favors your indicators or trading strategies. Ultimately, no matter what trading tools you use, it’s super important to gain understanding of identifying market structure or price action.
So How To Trade With Some Edge To Your Trading?
To answer that question is to understand what moves prices of anything in the world? Prices move up or down whenever there is an imbalance supply & demand. Simply speaking when either the buyer or seller have a stronger influence in the market, it forces price to move with forces favoring one side.
Naturally when there’s more buyer, there will be less supply and the prices goes up. More Sellers, generates too many supply and prices goes down. However, price fluctuation does develop a certain trading pattern and obey a certain price level for some period of time.
For example, prices bounces of a certain price level are known as Support/Resistant line for some period of time. It is almost as if prices will not pass that price level for a while. More importantly, traders around the world know this and follow such a concept. So it might be a self fulling prophecy when price reaches those levels.
This is particularly true for important price levels like the Support Resistant line and Supply & Demand zones.
Before we go into the key levels, we go into a basic structure of Trending and Ranging prices levels below!
Types of Market Structures
Traders can typically classify market structures into three different class, On Trend, On Trading Ranges, and Interfaces Between Trends and Ranges.
- This type of price movement signifies that there is an imbalance between buying/selling forces which favors towards one direction.
- Fundamental Trend Trading Pattern consist of Impulse, Retracement Impulse in both uptrend or downtrend. This exist in all Time Frames from 1 Min chart all the way to the Monthly Charts.
- Traders usually aim to ‘ride’ the momentum by entering a trade during a retracement also known as pull back. It is when the price reverse for a moment before resuming the trend impulse move.
Read More on Trend Trading By Clicking the Button Below!
- Price action within a trend is often not difficult to identify as there are obvious signs that gives insight and confirms that there are imbalance buy/sell forces.
- On the other hand, trading ranges is a little bit more complicated than that simply because prices fluctuates in a random manner within a price range.
- Hence, we have to carefully look at the integrity of the Support & Resistant Level and the beliefs about how long it will last.
- Traders usually aim to enter a trade of bounces from the Support or Resistant level to avoid the randomness of price levels within the ranges.
Interfaces between Trends and Ranges
Even the strongest market trends comes to an end at one point, so it is important to understand a trend termination Trading pattern that signifies the end of a trend.
But it is also essential to examine what follows after a trend ends after a price ranges. Due to this reason, traders will find these phase to be uncertain and potential volatility. Although it may present great trade opportunity, but it is also a phase where potential losses are also great.
Say that a price was trending and coming to an end, there are three possible transition situations (simplified model) before coming to range. Applies to transition from range to trending price as well
- Breakout: Market breaks out of trading range and enters a trend
- Trend Termination into trading range: A trend ends and market enters a trading range
- Trend Reversal: A trend ends and reverses into a trend in the opposite direction
Also there is a need to consider situations where the above situation fails. Such as:
- Market breaks out of trading range, a new trend doesn’t develop and market ends up into a LARGER trading range
- A Trend appears to come to an end, but trend termination failed and market continues to trend after. Meaning, it could look like a trend goes into a trading range and resume their initial trend
As you can probably guess, these phases would be a pain and it is complicated trying to trade the phases. If you are rather fresh in the trading scene, you may want to avoid exposing yourself to risk in this phase and keep the game simple. Especially in market structure that are fairly uncertain.
Of course there are some trading pattern we shall go into for each of these situation in terms of technical analysis. If you already have some experience, you are free to explore each of this phases and choose maybe 2 or 3 situation as your bread and butter.
Else, you may want to focus on higher probability trading setups while trading on key price levels. Specifically high probability Support Resistant level & Supply and Demand zones. Or Sticking to Trending Setups an entering at a confirmed trend @ Pullbacks.
Hope this article help and I am writing more in depth in each of the phases soon.
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