Showing posts with label Price Action. Show all posts
Showing posts with label Price Action. Show all posts

Saturday, March 1, 2025

Market Logic is Based on Liquidity, Volume, and Inefficiency | orderbloque

There are three main tools for market analysis that you will need once and for all. No more patterns and unnecessary clutter that only hinder and bring failures. The logic of the market is very simple and based on just three main elements: Liquidity, Volume, and Inefficiency. All price action can be described using just these three concepts. 
 
 » The logic of the market is based on liquidity, volume, and inefficiency. «

► Liquidity: At the top of this chain is liquidity, the primary driver of the market. Without liquidity—without buy or sell orders—the market would come to a standstill. It's crucial to understand that while any element on the chart can provide liquidity, the key factor is the quantity: volume.
► Volume: The second most important element is volume—the foundation of all our market logic and strategy. Volume directly reflects the amount of liquidity, or money, that has entered the market.
► Inefficency: The third element is inefficiency, which arises from the influence of volume on price. Inefficiencies are graphical representations of volume at a specific moment in time, varying by time frame, and serve as tools for analyzing the chart.
 
Price always moves from liquidity to inefficiency and vice versa, or from internal liquidity to external liquidity and vice versa. Hence, when looking at any chart, the Points of Interest (POIs) are always price levels or zones where liquidity rests in the form of stop orders, unfilled, and partially filled orders, namely Fair Value Gaps (FVGs), Order Blocks, Rejection Blocks, Support & Resistance at previous highs and lows, or Fractal Points. 
 

All these concepts and terms are briefly defined and outlined below, and explained in detail with context and chart examples in the following video.

How Fair Value Gaps (FVGs), Order Blocks (OB), and Rejection Blocks (RB) operate.
 
Balanced and Unbalanced State of the Market
To understand the deeper logic of inefficiencies and market movements, we need to consider two main factors. The first factor is the state of the market at a certain point in time: balanced or unbalanced. What does this mean? 
 
 
When the market is in a balanced state, the volume of buys and sells is equivalent, and price hardly moves, with neither buyers nor sellers dominating the market. This is very rare and usually occurs on days with very low volatility. The second type is the unbalanced state, which is more typical of any market. This occurs when buy volume exceeds sell volume, causing price to rise, or when sell volume exceeds buy volume, causing price to fall.
 
Efficient and Inefficient Price Delivery
The second factor is the efficiency of price delivery, which also comes in two types. The first type is efficient delivery, where, in the context of a certain market movement, both buyers and sellers are present, allowing for a more even exchange of assets. 

 Efficient Price Delivery and Inefficient Price Delivery.

It is important to note that price delivery is always an unbalanced process in which one side—either buyers or sellers—dominates. 
 
The second type is inefficient price delivery, which occurs when the exchange of assets is uneven in certain price ranges between buyers and sellers. This means that there are areas in the market where orders remain unexecuted or are only partially filled, which is a key sign of inefficient pricing. Inefficient price delivery causes a Fair Value Gap (FVG). 
 
Fair Value Gaps (FVGs)
A Fair Value Gap (FVG) is a formation consisting of three candles where the shadows or wicks of the first and third candles do not overlap each other in both bullish and bearish variants, indicating an imbalance in buying or selling pressure.
 
 A Fair Value Gap (FVG) is a 3 candle pattern where the shadows 
of the first and third candles do not overlap, indicating an imbalance.
 
 A FVG has three levels: the upper and lower boundaries, and the 0.5 level, 
where, ideally, price action should revisit and bounce off, making it a potential entry point for a position.

Regarding the validity of the FVG when it is tested, it’s quite complex because much depends on timing. However, the key point is that price should not close below the lower boundary when the FVG is bullish and should not close above the upper boundary when the FVG is bearish. A close above the upper boundary in a bearish FVG or below the lower boundary in a bullish FVG would be considered an inverted fair value gap, which may signal a continuation of the movement. Everything else is permissible, but much depends on the context. 
 
 Examples of bearish and bullish FVGs.
 
Support and Resistance (SnR)
Support occurs when two candles form on the chart. The level where the bearish candle closes and the bullish candle opens is called Support. This is where buyers show activity and prevent the price from falling lower (Sell and Buy Candles).


Resistance occurs when two candles form on the chart. The level where the bullish candle closes and the bearish candle opens is called Resistance. This is where sellers show activity and prevent the price from rising higher (Buy and Sell Candles).

Order Block (OB)
A Bullish Order Block is a price movement where the Resistance level was broken with subsequent confirmation by the candle body closing above it.
 

A Bearish Order Block is a price movement where the Support level was broken with subsequent confirmation by the candle body closing below it.
 
Rejection Block (RB)
A Rejection Block is a two-candle formation where the range of shadows forms a zone of interest, and it doesn't matter which one is longer or shorter. 
 

In the bullish variant, it begins at the Support level. In the bearish variant, it begins at the Resistance level. 

Fractal Point (FP)
A Fractal Low (FL) is a three-candle formation where the minimum of the middle candle is lower than the minimums of the first and third candles. Five-candle fractals are considered potentially stronger.


A Fractal High (FH) is the opposite three-candle formation, where the middle candle has the highest maximum compared to the adjacent candles.
 
Dealing Range (DR)
The Dealing Range is a price movement that can be identified using two opposing fractal points (High and Low), regardless of direction. This formation displays the balance between buyers and sellers during a specific time period and helps to more clearly define potential zones of interest.


The Dealing Range is divided into two main zones - Premium and Discount with an Equilibrium level in the middle.
 
High Resistance Logic
High Resistance is considered a movement that has interacted with liquidity (Fractal Raid) or inefficiency (FVG rebalance) usually on the same timeframe, resulting in the formation of (OB, RB, FVG), plus a fractal point has formed as a level confirming the extreme. 

 
Posted by at
Labels: , , , , , , , , , , , , ,

Wednesday, February 26, 2025

How Algorithms Impact Market Direction: 80% of Breakouts Fail | Richie Naso

The first thing you need to truly understand is that algorithms control the stock market; not the large institutional players, not the massive hedge funds, but price auction algorithms. Algorithms are there to create volatility and liquidity; they have no mind, they are programmed to go to technical areas, certain levels, to take out buy and sell orders. The market operates on a day-to-day basis with both premium and discount levels. When the market moves toward a premium level, the algorithms target that area to create liquidity. Conversely, when the market moves lower, the algorithms aim for the discount area to generate liquidity.
 
 Equilibrium Level and Premium -Discount Zones.

Algorithms dictate the direction of the market, especially in the near term. The mathematical equations used in these algorithms are designed by humans, based on historical data. When the market is trending lower and algorithms reach a significant technical level (support/resistance, supply/demand zones, previous highs and lows of sessions, days, weeks, months, imbalances, order blocks, 50%-levels, round numbers, option strike prices) and the market is trending lower, algorithms will activate and target that technical area. They recognize that the area is a support level. They also understand that they can manipulate investor emotions to make them believe that the market is bottoming out. 
 
Premium-Discount Zones for Short and Long Setups.

As a result, when the algorithm hits that technical area, it aims to trigger emotions that lead investors to sell or short in response to what appears to be a breakdown. These breakdowns are often referred to as "failed breakout trades," and they tend not to succeed. In fact, they fail in more than 80% of cases.

 
 » Some of the best trade setups are failed breakouts. «

Why? Because it’s a contrived effort by the mathematical logic of the algorithms, designed to make investors do exactly what the algorithms want. The goal is to get people to go short at the bottom and encourage long investors to sell their positions at the lowest point, clearing the way for an upward movement. First, shorts need to be covered. Then, longs who sold at the bottom will be motivated to buy back shares, creating another emotional impulse. Typically, this leads to a poor trade for those who sold too early.

» The goal is to get people to go long at the top. «
 
The same principle applies in both directions—whether the market is moving up or down. For instance, in a false breakdown, algorithms may manipulate the market to sell. In a false breakout, they may prompt buying. In both cases, the effect is similar: short covering and long investors buying at the wrong time. To sum it up, the algorithms exploit emotional responses. There is no support for short positions when the market is trending down, and the longs who are caught at the top are forced to sell. This creates the momentum for the market to move in the opposite direction.

 » 80% of Breakouts fail. «

This is why some of the best trades are failed breakdowns—buying against technical levels that are collapsing. This is when and where you should buy, while everyone else is being pushed out of the market. You don’t want to short a failed breakdown in a technical area, nor should you buy a breakout in such an area. Instead, you should do the opposite in these situations. 
 
» Algos do what they are programmed to do. They take no prisoners. «
 
My most successful trades, without question, occur when stop orders are triggered. People use stop orders to protect themselves from losses. This is where you should enter the market—against stop orders. If stop orders are triggered and the market has to sell down, you should buy. Conversely, if stop orders are triggered on the way up, you should sell. The key is to position yourself on the other side of stop orders.
 
To sum it up, algorithms are written by programmers, and have to be designed to go somewhere. Where do they go? To technical areas. Those algorithms are heading there, without a doubt. They aim to shake out longs and get people to go short or vice versa. So, what do the smart players do who are at the bottom of these algorithms, scooping up all this action? They feed into these people. That's the purpose of algorithms. We take advantage of what they give us. Printing money. That’s what we do. And we do it every day. 
 
You need to know the technicals, the levels, and pay attention to them. Technical areas are borders, and price history is how you identify and track them. Do multi-time frame analysis; understand what failed breakdowns and failed breakouts look like; double bottoms, double tops, pin bars, three-push-patterns, three-bar reversals, and M and W patterns, all the way down to the 1-minute chart. Find out what else VWAP, EMA (9), and Keltner can do for you. Wait for price to get to technical areas, and for reversal setups to form. Price to price, level to level, zone to zone. Don't chase trades; scale into them, as single-entry trades will kill you. Understand position management; know your stop-loss level, take-profit targets, and your R, and take what the market gives you. Consider taking partial profits and holding positions through a session close or daily close. Journal your trades; some of your best trades will be losing trades that help you learn valuable lessons. Keeping things simple is the key to success as a trader.

See also: 
Posted by at
Labels: , , , , , , , , , , , ,

Saturday, February 1, 2025

M & W Wave Patterns │ Arthur A. Merrill

In 1971, Robert A. Levy made the first attempt to systematically classify price patterns. He categorized five-point patterns, defined by price swings influenced by stock volatility, and tested their significance. Although he was unable to identify any substantial forecasting power, he introduced a valuable concept: the five-point categorization of time-price patterns.

» Pick any five consecutive turning points. If the first of the four swings is upward, 
the pattern forms an M. If the first swing is downward, the pattern is a W. «
Arthur A. Merrill, 1984.
 
This method remained dormant for a decade until Arthur A. Merrill revived it and published applicable results in the early 1980s: He employed the same five-point pattern approach, but instead of Levy's volatility filter, he used a rather large 8-percent swing filter in his research study. (Of course, since time and price are fractal, Merrill's patterns are too; they appear on every price swing scale across all timeframes.)
 
Merrill's 16 M and 16 W wave patterns, and their statistical occurrences: Are some of these patterns bullish? 
Are some bearish? When a certain pattern occurred in the past, what happened to prices after the pattern?

Merrill organized five-point patterns based on the sequential order of points from high to low, creating a structured taxonomy of "Ms" and "Ws". He identified 32 distinct patterns, grouping them into two categories: 16 resembling a capital M and 16 resembling a capital W. He then highlighted six subcategories, based on classical chart pattern names used by market technicians:

Uptrends                                            M15, M16, W14, W16
Downtrends                                      M1, M3, W1, W2
Triangle                                               M13, W4
Head and Shoulders                      W6, W7, W9, W11, W13, W15
Inverted Head and Shoulders    M2, M4, M6, M8, M10, M11
Broadening                                        M5, W12 

For example, an M1 is a strongly descending pattern, while the middle patterns, M8 and M9, are flat. An M16 is a strongly ascending pattern. Similarly, a W1 is a descending pattern, the middle Ws are flat, and a W16 is an ascending pattern.
 
So, what is the practical application and benefit of Merrill's weird-looking M & W Wave Patterns in trading? They can be used to identify support/resistance levels, determine areas of interest, anticipate market direction and reversals, project extensions, define entry and exit points, and manage risk. 
 
Larry Williams,  2000.

How? You may want to watch the following video, as well as review the references and recommendations provided below.
 
 
Reference:
 
See also: 
Posted by at
Labels: , , , , , , ,

Monday, January 20, 2025

How Markets Move: The Natural Cycle of Range Change │ Larry Williams

Markets typically shift from small ranges to larger trend moves. When the market is in a large trend move, wait for it to settle into smaller ranges before getting involved. This gives more reliable setups when the market trends again. Market tops generally occur when the price closes well off its low, while market bottoms happen when the price closes near its low. Most traders get emotional during these times, buying at tops and selling at bottoms. Once you understand this, it becomes easier to make smarter trades.

Small Ranges Beget Large Ranges. Large Ranges Beget Small Ranges.

Markets move from congestion to creation (expansion), transitioning from small ranges to larger, more defined trend moves. A small range signals buildup, and a large range signals an impending trend. If I see a small net change from open to close, I know a large trend move is likely coming and am prepared to act on it. Here’s an example using the NASDAQ: Notice how volume fluctuates throughout the day: heavy volume in the morning, a dip in the middle, and a surge towards the end. 

"U" shaped intraday: Heavy volume in the morning, a dip in the middle, a surge at the end.

This pattern is consistent across markets. It’s like a freeway: traffic is heavy in the morning, dies down in the middle of the day, and picks up in the afternoon. Understanding this helps day traders identify opportunities in the morning and towards the end of the day, while avoiding the midday lull. Volume drives range, and large ranges happen at the start and end of the day. This is when short-term traders make money. We need volatility and large ranges to profit.

 There are three key cycles in market behavior: 
(1) small range/large range, (2) moving closes within ranges, and (3) closes opposite openings. 
All three cycles work equally well in any timeframe and market.
"Do yourself a big favor: Mark off all the large-range days [in the chart above], and then study the size of the ranges just
prior to explosive up-and-down days. See what I see? We are given ample warning of virtually every large-range day 
by the shrinkage of ranges a few days earlier."

The key takeaway for short-term traders is that not every day offers a high-probability trade. You need to identify days with potential for explosive moves and not expect large profits daily. It’s about finding that opportunity.

As for market tops, they usually occur when prices close near their highs, and bottoms happen when prices close near their lows. Focus on these closing patterns to determine when to buy and sell.

Trend is a function of time. The more time in a trade, the more opportunity for trend.

The most important insight in trading is that trends are the basis of all profits. Without a trend, there are no profits. But what causes trends? Trends are fundamentally a function of time—the more time you hold a trade, the more opportunity for a trend to develop. The challenge with day trading is that trends occur only about 15% of the time. Most of the time, prices are consolidating, making it difficult to catch a big trend move. Limiting yourself to a few hours of trading only targets that small window when trends are likely to occur.

 My Day Trade Secret: HTTC - Hold To The Close.

The day trader dilemma is that they have limited time to catch trends. Holding positions overnight allows you to capture longer trends and larger profits. A small bet with the potential for a big move is the key advantage of holding positions over time. 
 
 » How you know a large trend move is coming. «
 
Many day traders are afraid to hold positions overnight. However, if you do the math, you'll see that most market moves happen between the close of one day and the open of the next. Moves within the day are often smaller and less reliable. For short-term traders, the key to success is recognizing large range days and holding positions to the close. This is how you catch a big move during the day.
 
 
 » Hold To The Close. « 
S&P 500 E-mini Futures (daily bars).
 Narrow Range 4 & 7 Days and Inside Bar Narrow Range 4 & 7 Days.

 
NVIDIA (daily bars).
 Narrow Range 4 & 7 Days and Inside Bar Narrow Range 4 & 7 Days.

See also:
Posted by at
Labels: , , , , , , , , , , , ,

Friday, December 6, 2024

Memo from the Chief Economist: Lament of a Bear | David Rosenberg

One can reasonably debate whether the stock market has risen exponentially but there is no arguing that the surge in the S&P 500 these past two years has been nothing short of extraordinary. And it has clearly gone much further than I thought it would, especially in these past twelve months, and so at this point, it is worth the time and effort to discuss and interpret the message from the market.
 
 » Smells of capitulation. «

The bottom line: Tip the hat to the bulls who have, after all, been on the right side of the trade, and provide some rationale behind this powerful surge. This is not some attempt at a mea culpa or a throwing in of any towel, as much as the lament of a bear who has come to grips with the premise that while the market has definitely been exuberant, it may not actually be altogether that irrational. Read on.

 

See also:
Posted by at
Labels: , , , , , , , , , ,

Thursday, November 7, 2024

The 24 Chinese Solar Terms in 2025 │ Winter Begins Today ( 立冬 - Lì Dōng )

 Winter begins on November 7, which is 225° from the Vernal Equinox (0° Aries). 
This is what W.D. Gann referred to as a Natural Trading Day. 225° represents 0.618 of the solar year.
 
A solar term ( 節氣 ) is one of twenty-four periods in the traditional Chinese lunisolar calendar, each corresponding to a specific astronomical event or natural phenomenon. Starting from the spring equinox, these points are spaced 15 degrees, or roughly 15 days, apart along the ecliptic and are used by lunisolar calendars to remain synchronized with the seasons.

Changes in trend often occur every 30° as the Sun moves into the next sign of the zodiac.
30° roughly equals one month, 30 calendar days or 21 trading days.
 
W.D. Gann knew that the astronomical year begins on March 21st and that this was also a very important seasonal time for financial markets. He used geometrical divisions of the solar year (degrees of solar longitude as well as calendar days) to ascertain turning points. Changes in trend often occur every 30° as the Sun moves into the next sign of the zodiac.
 
Dates at 45°, 90°, 135°, 180°, 225°, 270°, and 315° solar degrees from the Vernal Equinox (0° Aries) are what Gann called Natural Trading Days, with 225° representing 0.618 of the solar year (November 7). Though 15°, 22.5° and 45° also may coincide with changes in trend, Gann stressed the importance of the cardinal points (90° apart). He also used multiples of 90° and 144°, i.e., 90°, 180°, 270°, etc., and 144°, 288°, 432°, 576°, 720°, etc. 
  
 
Combining the Chinese Solar Terms and Gann astro-methods for market timing with the following concepts may further increase the probability of accurately pinpointing market turns:
 
 
 

 

Posted by at
Labels: , , , , , , , , ,
Subscribe to: Posts (Atom)