How To Determine When The Trend Has Changed

Hello readers, it’s been a long time since I posted any new articles onto the site but you’ll be happy to know that along with today’s article lots more will be coming to the site very soon.

Today’s article isn’t going to be your typical trading article because it’s my response to an email somebody sent me a few day’s ago. When I started writing my reply to this email I had no idea I was going to become an article, I thought it would be a relatively small email which would be complete in a day or two. Fast forward 12 days and what was originally a small email has now become a huge 7957 word article on a couple of different trading topics but mostly on how to determine when the trend in the market has changed. I did want try to turn this article into some proper articles which were formatted in the correct way, but I thought I’d just leave it as it is because formatting them would’ve only taken longer and I want to give you guys something new to read because it’s been such a long time since I did any new articles.

Hope you enjoy the article.

 

Question 1

I only trade daily and 1hour supply and demand / buy and sell zones. The 1hour zones I’ll trade in the standard S + D way, i.e wait for the market to enter the zone and then look for signs of a reversal taking place before entering a trade. The most common sign for me would be an engulfing candle either on the 1hour chart or on the 5 or 15 minute charts. The engulf has to look right in order for me to enter a trade, by that I mean the engulfing candle has to be significantly larger than candle it’s engulfing, otherwise I won’t use it as a signal and will instead watch for other reversal signs to appear.

I trade the daily supply and demand / buy and sell zones a little bit differently to the 1hour zones.

With these zones, what I’ll do is wait for the market to enter a daily zone and then watch the swing structure on the 1 hour chart to see if there are any signs of the bank traders getting trades placed to make the market reverse. If I see multiple swings highs ( or lows if it was a daily demand zone )  forming around the same price as one another, I’ll look to get a trade placed after I see the second swing high has formed. You can sometimes get a trade placed after the first swing high has formed, but the structure of the swing has to look a certain way in order to do it.

I can’t really explain how it’s supposed to look because it’s always different and depends on a lot of other factors which I don’t have time to explain in this article.

The daily supply zone you marked on the image is okay for trading, but I’m not sure how much of a reaction it will cause in the market. If I was going to enter a trade like this, what I would do is when the market enters the zone go onto the 1 hour chart and wait for multiple significant swings highs to form around the same price as one another, just like you saw when you traded the institutional pin on the AUD/USD reversal ( good trade by the way )

You basically want to see a structure similar to that form when the market is inside the GBP/CHF daily supply zone.

Once at least two significant swing highs have formed, I’ll wait until the market comes back up towards the high of the swing and enter a sell trade with the stop above the high of the daily supply zone, just in case another swing ends up spiking above the high of one of the swings which have already formed.

How the market moves out of the daily supply zone will give me some kind of indication as to where the market might be heading in the future. If the drop out of the zone is very sharp, with multiple big bearish large range candles, it would be a signal we might see the market fall all the way down to the lows of the move up. It wouldn’t confirm it, but it would be a strong sign.

The focus then would be on weather the market actually falls down towards the lows or whether it moves back up to the daily supply zone. If it moves back up, the way in which moves up is something you’ll need to keep an eye on as it may give you a clue as to what the banks are doing in the market. If the move up was sharp, similar to the drop, it could be a sign the move down out of the daily supply zone was because the bank traders were taking profits off buy trades placed at the lows of the move up, where you’ve marked 2 – 3 in the image. In this case you’d start watching the supply zone which caused the drop to take place as the reaction to the zone would again give you an idea of what the market might be doing. Plus there would probably be one or two demand zones which have formed during the move up into the supply zone. If the market drops out of the daily supply zone for a second time, these demand zones are the points you need to be watching for a continuation higher, because if they have been created by the bank traders placing buy trades, the banks will not let the market fall a large distance below the zones as they still want to get more buy trades placed into the market.

Question 2

Don’t be too concerned about which bank traders trade or created which supply and demand / buy and sell zone. It’s far more important to understand how many orders were coming into the market during the time the zone was forming, as that will give you an idea of how big the size of trades the bank traders placed at the zone were, which will in turn allow you to gauge the kind of reaction the zone will create when the market returns to it in the future.

If you think about it, there are basically three different time horizons traders in the market can operate off. The short-term, the medium term and the long-term. The are some time frames which best represent each time horizon. The 1 minute and 5-minute charts give the best representation of the short-term price action, the 1 hour best shows the medium term price action and the daily chart is the best for seeing the long-term price action.

To determine how many orders were coming into the market during the time the supply or demand zone was forming, you have to look at each of the time frames which best represent each time horizon to see what the market looked like for the traders who were operating off that time horizon. ( You’ll see what I mean with this in a minute )

With the daily demand zone you’ve marked, it’s unlikely the bank traders were able to get a large number of buy trades placed here due to the fact not many people were selling at the time the banks wanted to place their buy trades.

If we look at the structure of the daily demand zone on the 1hour chart, you can see there were three main points where the bank traders could have got their buy trades placed to cause the market to move up ( the swing lows marked with arrow ). The size of the buy trades the bank traders placed at these lows, would have been determined by how many sell orders were coming into the market at the time they wanted to place their trades. More sell orders = bigger buy trades. In order to figure out how many sell orders were entering the market before each one of these lows formed, you would have to have a deep understanding of how large groups of retail traders think, as it’s their sell orders the bank traders will be using to get most of their buy trades placed.

Now unfortunately, just having an idea of how many orders were coming into the market at the point where the banks got their trades placed is not enough for you to determine whether the supply or demand / buy or sell zone is going to cause a strong reaction to take place upon the market returning to the zone. You have to look at the zone in comparison to the other zones that have formed and work out which zones are strong and weak in relation to one another.

Here’s a daily demand zone that formed a few days before the demand zone in the previous image formed.

If you were to compare these two zones to find out which one was stronger, the one in the image above would be considered to be stronger than the one in the previous image, due to the fact a lot more sell orders were coming into the market at the point where the banks got their buy trades placed ( the swing lows marked with arrows ). Because there were a higher number of sell orders coming into the market, it meant the bank traders would have been able to get much bigger buy trades placed, as the size of the buy trades they can place depends on the number of sell orders coming into the market from other traders placing trades, and to a lesser extent, closing losing trades.

The main reason there were more sell orders entering the market is because a far greater number of traders were interested in going short due to the fact the market looked a lot more bearish before the swing lows seen above formed than it did before the swing lows seen in the image before the last formed.

Here’s an image of how the market looked right before the bank traders entered their buy trades and caused the swing lows seen in the previous image to form.

You can see how not only was the market trending lower before the swing lows formed ( as evidenced by the lower lows and lower highs ), but it had also just suffered a huge drop which caused the price to continuously fall for 9 hours. This big drop, coupled with the fact the market was trending lower, meant that a large number of medium term traders ( traders who operate on the 30 minute and 1 hour charts ) will have been entering short trades at the time when the bank traders came into the market and placed their buy trades. In addition to a large number of medium term traders going short, there will have also been a huge percentage of short-term traders entering sell trades at the time the banks decided to place their buy trades, due to the fact the large move down which precedes the formation of the swing lows looks like a really big downtrend on the 1 minute and 5 minute charts.

Note:

I’ll talk more about the importance of trend in understanding how large groups of traders think in my next article. It’s a primary component to finding out the strength of a supply or demand zone but it’s not something which I’m going to go into detail about here, mainly because the article in which I talk about it in more detail is almost complete and this article itself has already become far to big for me to add any more information to it. 

So at the time when the bank traders entered the market and placed their buy trades, we know there was quite a lot of medium term traders going short, and a really large number of short-term traders going short, due to them perceiving the sharp move down as a downtrend. The last group of traders we need to look at are the long-term traders operating on the daily chart. We need to see what the market looked like on the daily chart just before the swing low created by the bank traders placing buy trades formed, in order to determine whether there was a large number of long-term traders entering short trades at the time the bank traders got their buy trades placed.

You can see on the daily chart the market looks even more bearish!, with a large bearish engulfing candle pushing the market down the day before the banks came into the market and got their buy trades placed. Plus, the market had also been in a really long downtrend before the banks placed their trades, which means most of the traders using the daily chart will have been going short when the banks placed their buy trades, because they, along with most other traders in the market, associate the length of a trend with the probability of the market continuing to move in the direction of the trend. i.e the longer the trend is, the more certain traders become that it’s going to continue indefinitely.

So because the market looks really bearish on each one of the three-time horizons we know most of the traders in the market operate off  ( I can’t show you what the market looked like on the 1 minute or 5 minute charts because of MT4 issues ), it means we know there was a huge number of sell orders coming into the market at the time when the bank traders decided to place their buy trades, because of the fact most of the traders in the market were selling.

Our next job is find out how many sell orders were coming into the market at the point where the banks got their buy trades placed to cause the other demand zone to form, as that will give us some idea which zone is the strongest.

This image shows what the market looked like to the medium term traders just before the banks placed their buy trades which caused the daily demand zone you mentioned in your email to form. The first swing low which formed as a result of the bank traders placing their buy trades is marked in the top right of the image with an up arrow.

It’s evident the market looked a lot more bullish before this swing low formed than it did when the swing low which created the previous demand zone formed. With the other demand zone we saw how the market was making lower lows and lower highs before the swing low formed, but with this demand zone we can see the market was actually trending higher prior to the formation of the swing low, making multiple higher highs and higher lows in the days before the swing low formed in the market.

Because the market was trending higher it means less traders would’ve been interested in going short when they saw market drop, due to the fact they will have believed the drop which created the swing down to be a retracement to the up-swing. If the drop had been bigger and caused the market to fall down to where I’ve marked the black line, a lot more traders would’ve been going short because the size of the drop makes the market look as though it’s reversing.

If we switch to the daily chart you can see the market looked even more bullish to the long-term traders. No swing down even took place on here so few traders would’ve been interested in going short before the swing low formed.

Unfortunately I still can’t show you what the market looked on the 1 minute or 5 minute charts before the swing low formed, but I know just from looking at the drop on the 1 hour chart, that most of the short-term traders will have been entering sell trades before the swing low formed, due to how big the size of the drop would’ve appeared to them.

So because we know there was far higher number of sell orders entering the market during the formation of the daily demand zone marked in green, than there was during the formation of the daily demand zone marked in blue, it means whatever buy trades the bank traders might have placed to cause the demand zone in green to form, were much bigger than the buy trades they might place to cause the demand zone in blue to form.

Essentially, this means if the market starts to fall you should expect to see a bigger reaction take place when the market reaches the demand zone marked in green, than when it hits the demand zone marked in blue, because of the fact the demand zone marked in green may have possibly been created by the bank traders placing bigger buy trades into the market.

Note:

We don’t know yet if the two demand zones above have formed because the bank traders are placing buy trades to make the market reverse or are taking profits off sell trades placed at an earlier date. All we know at this point is they may have formed for one of these two reasons, we can’t confirm which one it is until the market has broken past certain swing lows and highs that have formed in the market. ( More on this in a minute )

There’s obviously a little more to it than what I’ve explained above, but I don’t have the time to give you a full rundown on how to determine which zones are stronger than others and how you would maybe use this information in your trading. The three articles I’ve got coming out in a January will give you a much more detailed understanding of how you determine the strength of a supply or demand zone. The first article will teach you how to figure out how the majority of retail traders trade, which will allow you to come up with an idea as to how many buy or sell orders were coming into the during the creation of a supply or demand zone.  The second article will give you some background as to where the banks place their trades to cause supply and demand zones to form and why they have to place their trades here instead of at other locations in the market.

And the final article will put everything you’ve learned in the previous two articles together to actually teach you how to determine the strength of supply and demand zones that form in the market. I’ll also go through some examples of how you would use this information in your trading to better predict what the market might do in the future.

Like I said the articles should be out in January, most of them are almost complete, I’ve just been sidetracked by other issues occurring on the site these past few weeks so have been unable to complete them.

Question 3

The AUD/USD trade was a good one. We had multiple swings form before the pin bar formed, which suggested the banks were getting sell trades placed, plus these swings were forming at a point where we know the bank traders had placed sell trades in the recent past ( the consolidation which formed on the 16th ) which hinted that they might have made the market rise up to this point on purpose in order to get more sell trades placed into the market. I do take trades like this, but primarily at daily supply and demand / buy and sell zones. The trade above is one which I did see, but didn’t take, due to the fact I thought the market was going to rise into the supply zone created by the consolidation that formed on the 15th before reversing, as this was the stronger of the two supply zones.

Question 4

When the big spike down occurs lots of different bank traders take profits off their trades. The long-term bank traders will be the ones who take the most profit off, due to the fact they are the ones who have sold the largest amount of currency, therefore they need to find the largest group of people who are selling in order to actually take profits off their trades, because when they take profits buy orders are put into the market. If these buy orders are not matched with sell orders, then no transaction can take place and the bank traders cannot take any profits off their sell trades.

In addition to the long-term bank traders taking profits there will also be some medium term bank traders taking profits, but I doubt it would have been a lot due to the size of the spike. When the spike is over and the market has moved back up again, the medium term bank traders come into the market and place sell trades at the points I’ve marked with X’s. The way I know they placed trades here is because of how many buy orders were coming into the market when each one of these swing highs formed.

When each one of these highs formed, not many traders would have been buying due to the fact the market did not look like it was going to move higher. Because not many traders were buying, it meant not many buy orders were available in the market for the bank traders to use to get sell trades placed. In order for the long-term bank traders to come into the market and place trades, there has to be vast quantities of orders present as their trades will be the ones which cause the trend to change on all of the different time-frames in the market.

If the market had followed the path I’ve marked out with the black lines and made a big swing down followed by a big swing up, it’s likely the long-term traders may have entered the market and placed sell trades at the swing high marked with an arrow, because of the fact a much larger number of buy orders will have been coming into the market due to the size of the up-swing.

You’ll see in a minute how the price action we see from later on confirms the medium term bank traders got sell trades placed at these swing highs.

If we move on a little, you can see that once the drop created by the medium term bank traders placing sell trades has come to an end, the market starts to consolidate. You’ll notice I’ve marked some swing lows which formed during this consolidation. These swing lows are really important because they are one of the things you’ll need to monitor to determine weather the whole swing higher has been created by the bank traders placing buy trades to make the market reverse, or from long-term bank traders taking profits off short trades placed earlier on in the downtrend.

At the moment we don’t know why these lows have formed, they might have formed due to them placing buy trades to make the market reverse or it may have formed because they were taking profits off short trades. There isn’t any way to find out which one it is, until the market either comes down and breaks a certain distance below these lows ( more on this in a minute ) or moves up a certain distance past the highs of the big consolidation which took place from the 6th July to the 30th September.

This consolidation marks the most recent point in the market where the long-term traders got a significant number of their sell trades placed. We know this because of the length of time this consolidation took place and the size of the up-swings which occurred before the creation of each swing high. If the swing up which has been taking place since the 7th October has been caused by the bank traders taking profits off the sell trades they placed inside this consolidation, we will not see the market break a large distance above the lowest significant swing high which formed during the consolidation, as that would be a really strong signal whatever sell trades the bank traders placed here have been now closed, because the bank traders wouldn’t spend all that time getting their sell trades placed at similar prices to then go and get more placed at a completely different price in the market.

The same concept also gets applied to the swing lows which formed during the consolidation we looked at in the previous image ( marked with up arrows on the image ). If these lows have formed as a result of the bank traders placing buy trades, we’ll not see the market move a large distance below them as that would suggest they have been created by the bank traders taking profits off their trades, due to what I’ve said above. They wouldn’t invest all that time into making sure to place their buy trades at similar prices to one another to then go and place more buy trades at a price way below where the others have been placed.

So basically, if the market moves a certain number of pips past the swing highs which formed during the consolidation ( marked with down arrows ) it would mean the swing up the market has been in since the 7th October has probably been caused by the bank traders placing buy trades to make the market reverse. If the market ends up falling a certain number of pips past the swing lows that formed during the consolidation seen after the spike, it would mean the swing up is likely to have been created by the bank traders taking profits off the sell trades placed earlier on in the downtrend.

You’ll understand this better in the next example.

 

Question 5

The long term trend would be considered to be down when the market breaks a certain number of pips past the highest swing low ( marked with a tick ) which has formed from the bank traders placing buy trades inside the daily buy zone you’ve marked as a weekly demand zone. The reason why is because the buy zone and the swing lows found within, mark the most recent points in the market where the long-term traders got a significant number of their buy trades placed.

We know they placed buy trades here due to the fact the market moved up a large distance past the swing highs which formed at the top of the downswings ( marked with down arrows ). If these swing highs had formed due to the bank traders placing sell trades to make the market reverse, we wouldn’t see the market break a large distance beyond them, because we know the bank traders like to get their trades placed at similar prices when causing reversals to take place in the market.

It’s for this same reason that a break below the highest swing low seen inside the buy zone would be a signal the long-term trend is now down, because the banks wouldn’t place their buy trades at prices close to one another and then go and get more placed at a completely different point in the market. If you look at the swing down I’ve drawn with black lines, you can see the swing low which would form as a result of a possible move up, would be 610 pips away from the highest swing low we know was created by the bank traders getting a large number of their buy trades placed.

610 pips is way to far away from the other lows for it to have formed from the bank traders placing buy trades. All of the lows in the consolidation formed within 100 pips of each other, it doesn’t make sense the banks would get their buy trades placed this close together and then get more placed 610 pips away.

The same concept I’ve explained above, of the market breaking a certain number of pips past the most recent point where the banks got a large number of their trades placed, is also used to determine what the trend is on the other time-frames in the market.

Here’s the beginning of the reversal which caused the market to fall into the daily buy zone seen in the previous image.

You can see before the market reversed a supply zone formed. This supply zone has formed because the bank traders are either placing sell trades to make the market reverse, or are taking profits off the buy trades they may or may not have placed at the swing lows which formed on the 21st – 24th – 25th – 26th and 27th of October ( marked with arrows ). When the market drops and the supply zone is created, there isn’t any way for us to determine the reason why it’s formed. All we know at this point, is that if the market moves a certain number of pips past the swing highs that formed before the drop, it’s a sign the drop has been caused by the bank traders taking profits off their buy trades, because we know that if it had been created by them placing sell trades to make the market reverse, they wouldn’t get more sell trades placed far away from where the trades which caused the drop have been placed.

Now if the market was to fall a certain number of pips below the swing lows which formed before the buy zone, it would be a signal the supply zone has formed as a result of the bank traders placing sell trades to make the market reverse. Because if the supply zone had formed as a result of the bank traders taking profits off buy trades, they wouldn’t let the market fall a large distance below the most point where these buy trades have been placed ( the swing lows marked with arrows ) because we know they get their trades placed at similar prices when creating reversals.

As you can see from the image, the drop from the supply zone does actually cause the market break through the swing lows seen within buy zone but it does not break them by a large distance, which means at this point we still don’t know if the 1hour trend has reversed, due to the fact we can’t confirm whether the supply zone has formed from the bank traders placing sell trades to make the market reverse or from taking profits off buy trades placed at the swing lows.

If we move on a little, you can see soon after the market breaks through the swing lows it consolidates for a while before making a sharp move higher. When this move higher takes place, you need to redraw the buy zone to incorporate the new swing lows which have formed during the consolidation, as these lows may have been created by the bank traders placing more buy trades into the market.

When the market re-enters the supply zone and begins to fall again, it does not mean the supply zone has formed due to the bank traders placing sell trades. It just means they may have decided to get more sell trades placed or chosen to take more profits off the buy trades they might have placed at the swing lows seen before move up occurred.

Now as you can see, the market continues to drop until it has broken through the swing lows that formed prior to the sharp move higher taking place. When these lows get broken, it does not confirm the supply zone and the drops it has created have been caused by the bank traders placing sell trades to make the market reverse. Until the market has dropped a certain number of pips below the highest swing low you suspect has been created by the bank traders placing buy trades, the drop through the lows still has the potential to have occurred because the bank traders want to get more buy trades placed into the market.

The highest swing low created by the bank traders placing buy trades is marked on the chart with a tick. When the market drops 61 pips below this low ( where I’ve marked confirmation 1 )  it’s a sign the 1 hour trend is now down, because the banks would not make the market fall such a large distance away from the point where they’ve got a set of their buy trades placed, if they wanted to get more buy trades placed into the market. Even though the market breaking 61 pips below the highest swing low is a sign the 1 hour trend may now be down, it’s best to wait until the market has broken the same distance below the swing low which has been created by the bank traders placing the biggest number of their buy trades into the market, because if they had another big set of buy trades to place, it’s likely they’d place them around the same point as where their other big set of buy trades have been placed.

If you look at the image again you can see I’ve marked three of the swing lows with X’s.  If the bank traders had in fact been placing buy trades at the swing lows, the three marked with X’s are the ones which would have formed as a result of them placing their biggest buy trades into the market, due to the fact the number of sell orders that were coming into the market at time these lows formed, were much greater than the number of the sell orders coming into the market at the time when any of the other swing lows inside the buy zone formed.

The highest of these three swing lows is the one which the market needs to break by 61 pips as that’s the highest point where we know the banks could have got a large number of their buy trades placed. Once the market has fallen 61 pips below this low ( marked as confirmation 2 ), the 1 hour downtrend is confirmed to be down and you can now begin looking for entries short.

So answer your original question……….

The trend, on whatever you’re viewing, is considered to be down when the market has fallen below the most recent point in the market where you suspect the bank traders have got a large number of their buy trades placed. It could be a consolidation ( most of the time it is ) but often it will be a retracement. Once you’ve found the consolidation or retracement where they’ve placed their trades, you’ll then need to find the swing lows ( or swing highs depending on the market direction ) where their trades were placed, and watch how far the market moves past them when it returns, as the distance it moves past them will tell you whether their trades have been closed or if they remain open. ( or if they were ever there at all, because sometimes you won’t know if the lows/highs have formed as a result of the bank traders actually placing trades into the market )

To know whether the trend is up, you follow the exactly same process given above, only you’re watching to see how far the market moves above the swing highs of the consolidation or retracement not the swing lows.

The amount of pips the market needs to move above the swing highs or below the swing lows in order for you to know what caused the swing highs/ lows to form is different for each currency and each time-frame. The 61 pips you saw in the EUR/GBP example is not the actual number of pips the market had to break through the swing lows, I just made it up to make the example easier to understand.

There is a method I use to determine how far the market should travel past a swing high or low before you consider that high or low to be broken, unfortunately it’s not something I can put in this article because it would take too long explain, but I am going to do an article on it as soon as I get the three supply and demand articles I’m working on now finished, so be on the lookout for it in late January early February time.

 

Question 6

“It may look like an obvious question but on lower time-frames or even daily looks like an uptrend higher high and higher low on daily! This should mean the trend is up right? I will go over your books in addition to this. ( I remember touching on this but using a lower time frame example -is it the same on higher time frames? Am I even looking at a downtrend anymore?”

The reason the market looks to be in an uptrend on GBP/USD is because it is on the lower time-frames. On the 1 hour chart the trend is technically up because the market has broken past the most recent point where the banks got a large number of their sell trades placed.

If you look at the 1 hour chart you can see immediately before the move up began a consolidation took place. When this consolidation begins, the swing highs and swing lows which form mark the most recent points in the market where the bank traders could have possibly got a large number of their buy or sell trades placed. You’re not going to know if they’ve actually got buy trades placed at the lows or sell trades at the highs until the market has moved a certain number of pips past the certain highs or low themselves.

If the market was to break past the lowest swing high by a certain number of pips, it would disprove the theory the highs have formed as a result of the bank traders placing sell trades, because they wouldn’t spend all that time getting their sell trades placed at relatively similar prices only to then get more placed at a completely different price in the market.

Similarly, if we were to see the market fall a certain number of pips below the highest swing low, it would mean the lows could not have formed due to the bank traders placing buy trades, because again the banks wouldn’t put so much time and effort into getting their buy trades placed at similar prices to then get an additional set placed at a location far away from where the others have been placed.

As you can see from the image the market does eventually start to move up above the highs of the consolidation. When this move up begins, the first indication you would have that the 1 hour trend is now up, is when the market breaks a certain number of pips past the lowest swing high ( marked with a tick ) that could have formed from the bank traders placing sell trades inside the consolidation. I don’t know what the actual number of pips is for GBP/USD because I don’t really trade it, but on the chart I’ve marked it as 70 pips, because just from my experience it looks to be far enough away. So at this point you would now suspect the 1 hour trend to be up, due to the fact the market has moved quite a large distance away from lowest swing high that could have been created by the bank traders placing sell trades.

Even though the market has moved up past the lowest swing high, it is not a definite signal the 1 hour trend is now up, because of the fact the swing high will not have formed as a result of the bank traders placing a large number of their sell trades into the market.

In order to really confirm the 1 hour trend is now up, you have to see the market break 70 pips above the swing high that formed from the bank traders placing the largest number of sell trades into the market. This swing highs is seen to the far left of the image above ( marked with an X  ). The reason why most of bank traders sell trades would have been placed here is because of how many buy orders there were coming into the market at the point where this swing high formed.

If you move the market back a little to the point where the swing high formed, you can get a sense of how many buy orders were coming into the market when the high marked with an X was created.

You can see before the market dropped and created the high the market looked quite bullish. The move up leading into the high looked pretty strong with multiple bullish large range candles forming and higher highs and higher lows being made. Because the market looked quite bullish, it meant there would have been a significant number of traders going long just before the high formed as they would’ve believed the move up was a sign the previous move down has now reversed.

Note:

There would have been less traders going long at the swing high seen to the far left of the image above ( marked with a tick n between the black lines ) than the highs seen to the far right, even though the move up that preceded the formation of the swing high on the far left looks a lot stronger than the move up which took place before the high seen on the far right formed. The reason why is because of how sudden the move up actually is. When sudden movements like this occur, they cause lots of traders to lose money, but they don’t cause that many to enter trades because of the fact most of them have just lost money from the move up.

So even though the move up marked in between the black lines looks stronger and causes a bigger price change to take place, it will not have made more traders to go long than the move up seen before the formation of the swing high marked with a tick, due to the fact there was more time available for traders to actually get long trades placed.

Don’t get me wrong, a significant number of traders will have been entering long at the swing high marked with a tick in between the black lines, just not as many as there were going long at the high marked with an X  seen to the far right of the image.

Now this image shows how the market looked right before the lowest swing high created by the banks placing sell trades formed. ( Marked with a tick on the image )

You can immediately see the market looked a lot more bearish when this swing high formed than it did when the swing high seen the previous image formed. In the previous image we had the market making higher highs and higher lows before the swing high formed but in this image the market is making lower lows followed by lower highs, meaning not many traders will have been willing to place buy trades on the up-moves they were seeing take place. When the lowest swing high formed, very few buy orders would have been coming into the market because of the fact it didn’t look like the market was going to move higher, it looked as though it was going to continue moving lower due to drops and the lower lows and lower highs that had occurred before the swing high formed in the market.

Because not many traders were interested in going long, it meant there was not a lot of buy orders coming into the market for the bank traders to use to get their sell trades placed. There were some, but nowhere near as many as were coming into the market at the point where the swing high marked with an X formed, which is where the bank traders would have got the majority of their sell trades placed, if they have in fact been placing sell trades into the market ( remember we don’t know until the market breaks through the highs )

You can see a few hours after we get the first confirmation the 1 hour trend is up, the market advances 70 pips past the swing high we know could have been created by the bank traders placing the largest number their sell trades into the market. With the market breaking this high by such a large distance, it means the swing highs of the consolidation could have not been created by the bank traders placing sell trades, because if they had the banks would not let the market move such a big distance beyond them.

It also means the swing lows of the consolidation have formed as a result of the medium and long-term bank traders either placing buy trades to make the market reverse or from the long-term traders taking profits off short trades placed earlier on in the move down. Knowing which one it is isn’t important, because we can’t figure out what the long-term traders have done until the market breaks through the most recent point where we know they’ve got a large number of their trades placed, which is the consolidation that formed between July and September 2016.

What is important though, is that once you get that second confirmation the trend is now up, you mark an area around the swing lows of the consolidation. We now  know these lows have formed because the bank traders have either placed buy trades to make the market reverse or have taken profits off sell trades placed at an earlier time. If the market moves back down to where these swing lows have formed, we could see another move higher take place, as the drop could have been created by the banks on purpose to get more buy trades placed into market / take more profits off their sell trades.

 

 Question 7

This is a weekly consolidation. The line you’ve marked is a weekly support level too but the overall structure we’re looking at is a consolidation.

If I was going to trade this back to the highs of the consolidation ( I’m not because I think the downtrend has now started ) what I’d do is watch for multiple significant swings to form on the 1 hour chart around the point where the swing lows have formed on the daily chart. Multiple swings to me would be a signal the bank traders are taking profits of sell trades they’ve already got placed, to purposely make the market move back up to a point where they’ve already got a large number of their sell trades placed, in order to get more placed using the buy orders that would come into the market as a result of the move up.

 

Summary

Well I really hope the things I’ve talked about in this article have made sense to some of you reading this. I know a lot of the trading concepts I teach aren’t exactly easy to understand ( or explain for that matter ) but I think some of my new trading articles will go a long way into helping you understand some of the concepts talked about in this article and in others much better.

Lots more articles will be coming to the site next year, the ones which will show you how to determine the strength of a supply or demand zone should be available in January and then after that I’ll start work on the one which will show you how to find out the distance the market needs to break past the swing high or low in order for a reversal to be confirmed, that article should ready in late January or early February, not sure how long it will take yet.

If you have any questions please leave them in the comment section below, hope you have a good Christmas.

 

 

 

 

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2 comments

  1. J

    Awesome all of this info. Thank you for doing all this. Nothing but gratitude, that there are people like you with that knowledge and especially with the willing to help other people. I have a question.

    If Im not wrong, you said in other article that for you to take a zone, it must be taken from a red candle (when plotting a demand zone or a green candle when plotting a supply zone). On the example above on the QUESTION #2, precisely on the explanation of chart #7, where you draw a demand zone, you traced it taking as a base a green candle, where is was supposed to be a red candle, Is this correct? or I did not understood it right?

    Thanks in advanced

    J