Broadening Formations & The Third Universal Truth | Robert F. Smith

The Third Universal Truth is this: There is only ONE price pattern. Everything trades in a continuous series of broadening formations because there are only three scenarios that can possibly play out from one bar to the next. Therefore only THREE types of bars exist: the Outside Bar, the Inside Bar, and the Directional Bar. It is impossible for price to do anything else. Range expansion on both sides occurs ONLY because Outside Bars exist. 

Broadening Formation on quarterly, monthly, weekly, and daily Apple Inc (AAPL) charts.

Inside Bar = 1 | Directional Bar = 2 | Outside Bar = 3

Almost every book on technical analysis claims that the broadening formation is extremely rare, when the truth is it is one of the only things that can possibly happen. A broadening formation is a pattern where ranges continue to expand on both sides, thus an outside bar is a broadening formation when you shorten the time frame of the chart. It must be because by definition the range is expanding on both sides. While many traders will talk about stocks making higher lows and lower highs, one thing is that securities will always trade in a series of higher highs and lower lows. Even if a stock is in a steady uptrend from, say, $80 to $100, somewhere along the way that stock will make a series of higher highs and lower lows on some time frame. 

 

 Basic Diagram of the Broadening Formation.

While this may seem irrational, it helps to analyze this statement from the perspective of supply and demand. When a stock reaches a new high, it means that a new group of buyers have been identified above the previous high. Eventually, that buying pressure exhausts, and the stock retreats. This new group of buyers becomes trapped, and this will create pressure to the downside, either on a short-term time frame or a long-term time frame. Inevitably, the stock will eventually get pushed towards a previous low, whether it's a recent low on a 15 minute chart or a major inflection point on a monthly chart. As the stock pushes towards this low, those buyers at highs will succumb to the selling pressure, drive the stock to a new low that is bought up by the sideline traders or natural buyers, and the stock will resume higher until it reaches the next new high. This series repeats itself, which creates a formation that can be fit into a triangle.

 

 Nasdaq (Daily Bars)

Inside Bar = 1 | Directional Bar = 2 | Outside Bar = 3

Every chart shows but Broadening Formations, nested series of Range Contractions and Range Expansions

on yearly, quarterly, monthly, weekly, daily and lower time frame charts. Full Time Frame Continuity occurs when all time frames point in the same direction, providing a more reliable assessment of the market's direction.

Nasdaq (4 Hour Bars)

Inside Bar = 1 | Directional Bar = 2 | Outside Bar = 3

 

Broadening Formations = ICT Seek & Destroy Profile

 

How to find a Broadening Formation?

1. Identify an Outside Bar on a Higher Time Frame.
2. Remember an Outside Bar takes out BOTH sides of the previous bar's range. This is how we gauge the potential magnitude of an expected move.
3. An Outside Bar = A Broadening Formation on a Lower Time Frame chart. This is a FACT. Ignore previous Technical Analysis textbooks.
4. Locate the High of the Outside Bar and DRAW BACK to a previous Higher High (HH Point #1 to #2). Generally try and use an extended line type drawing tool on your charting software as this will extend the line forward.
5. Locate the Low of the Outside Bar and DRAW BACK to a previous Lower Low (LL Point #1 to #2).
6. View the same chart on a Lower Time frame and watch the magic happen. Now you have a Broadening Formation.
7. Note depending on your charting software you may have to adjust your lines at key high and low points when switching between different time frame charts this is normal and due to the difference in candlesticks between timeframes.

Reference:

Robert F. Smith (2020) - What Do We Know to Be True About Price Action?

Robert F. Smith (2020) - The STRAT Method of Trading.

Robert F. Smith (2021) - The Broadening Formation Phenomenon A-Z (videos).

Robert F. Smith (2022-2023) - YouTube Channel.

Michael J. Huddleston (2017) - ICT Weekly Seek & Destroy Manipulation Profile.

 Darya Filipenka (2023) - ICT Optimal Trade Entry (OTE).

Darya Filipenka (2023) - ICT Draw on Liquidity.    

Darya Filipenka (2023) - ICT Advanced Market Structure.

Darya Filipenka (2023) - ICT Market Maker Buy Model and Sell Model (MMXM).

 

 Robert Franklin 'Rob' Smith (1964-2023).
Life and death of a sporty American reborn Christian trader. R.I.P.

 

#TheStrat Setups with Entry, Stop and Target Levels. 

#TheStrat Risk/Reward Ratios are mostly sub-optimal.

ICT Optimal Trade Entry (OTE) strategies do improve poor #TheStrat RR-Ratios significantly.

 

28 #TheStrat Setups = 14 bullish + 14 bearish. 

 Inside Bar = 1 | Directional Bar = 2 | Outside Bar = 3

ICT Optimal Trade Entry (OTE) | Darya Filipenka

Timing is an important factor in trading, and a well-defined strategy can significantly increase your chances of success. The ICT Optimal Trade Entry (OTE) strategy is one approach that traders can utilize to identify high-probability trade setups. It’s important to pinpoint the specific time and day when the OTE is most likely to occur. Typically, this happens between 8:30 AM and 11:00 AM, New York local time.

 

Market Structure - As the market rises and declines and makes higher highs/lower lows, each new swing higher/lower in price is anchored or directly reacting to another swing higher or lower. Every swing in price has an equal counter swing it is unfolding from and attempting to fulfill. 

 

Market Structure Shift (MSS) - comes from the HL or LH levels, it will serve as one of the reasons for us to enter the trade. A market structure shift is depicted as a significant level on the chart where the prior trend Is invalidated. When the market is in an uptrend, the market structure shift level is typically identified as a point where a lower low is formed. Conversely, in a downtrend, the market structure shift level Is often observed at a juncture where a higher high emerges. Notably, these market structure shifts tend to arise following a displacement, signaling a potential shift in the overall trend direction.

1. The Premium Zone represents the price correction range situated above the 0.5 (50%) level in the context of a downward momentum. Traders pay attention to this zone when considering selling opportunities.
2. The Discount Zone refers to the price correction range located below the 0.5 (50%) level in the case of an upward impulse. Traders observe this zone for potential buying opportunities.
3. The Equilibrium Zone denotes the price range where the asset's average price is located. In other words, it represents the fair price zone or the level of balance between buyers and sellers.

 

 Concept of Premium & Discount.

Traders and market makers seek opportunities to buy at a Discount and sell at the Premium zone. As a result, traders often disregard the 0.236 and 0.382 Fibonacci levels in their analysis and instead wait for the price to move above or below the equilibrium level. We focus on the Premium / Discount Zones, since the price does not always enter the OTE zone. Sometimes it is enough for price to adjust by 0.5 (50%) in order for the big man to gain or lose a position.

 

To select the high and low points of a dealing range, follow these steps:

1. Run a Fibonacci retracement tool from the highest high to the lowest low within the dealing range. This will help establish the overall range of price action.
2. Pay attention to areas where the algorithms consolidate. These consolidation areas indicate fair value and are important in determining the proper dealing range.
3. Consider the nearest high when the 50% Fibonacci level aligns with the common consolidation area. This will help identify the appropriate high point of the dealing range.
4. Select the lowest low as the low point of the dealing range. This ensures that the range encompasses the relevant price action and aligns with the areas where algorithms are active.

To implement the OTE strategy, follow these steps:

1. Determine the current market structure, whether it has a bullish or bearish bias. This ia crucial as Fibonacci levels work best within a trending market.
2. Identify significant swing highs and lows to draw the Fibonacci grid. These highs and lows are often visually prominent and easy to label.
3. Use the Fibonacci retracement tool to assess the correction potential in an uptrend (from bottom to top) or downtrend (from top to bottom).

Using OTE during Silver Bullet: After identifying the MSS, I recommend drawing an OTE retracement from the Swing Low (High) to the Swing High (Low). The optimal entry point for trades is typically at the 62% retracement level of that range. Once the trade is entered, the first target is typically set at the -27% extension level, and the second target is set at the -62% extension level. Wait for price to trade back into the FVG (Fair Value Gap) and then reprice out of the FVG towards the targeted pool of liquidity. Usually a FVG lines up with the 62% retracement level.  

 

Reference:

Darya Filipenka (July 22, 2023) - ICT Optimal Trade Entry - OTE.

Darya Filipenka (May 7, 2024) - ICT AM NY Session A+ Setup based on Quarterly Theory. 

Ayub Rana (May 2, 2024) - ICT Market Structure Shift.

Darya Filipenka (April 3, 2024) - ICT Fair Value Gap.

Darya Filipenka (March 18, 2024) - ICT Algorithmic Price Delivery & Time Macros Intro.

Darya Filipenka (March 6, 2024) - ICT Advanced Market Structure.

Darya Filipenka (2023) - Unlocking Success in ICT 2022 Mentorship: The Smart Money Guide to the Full ICT Day Trading Model.

Michael J. Huddleston (May 7, 2020) - OTE Pattern Recognition Series. (videos)

Michael J. Huddleston (Sep 29, 2017) - OTE Primer - Intro to ICT Optimal Trade Entry. (video) 

The Three-Bar High/Low System | Larry Williams

At one point in my career, I had over 30 consecutive winning trades using this next short-term trading strategy. You will first have to calculate a 3-bar moving average of the high and a 3-bar moving average of the lows. (Each bar represents the time period displayed on your chart. Use 5-minute charts for lots of signal, or 15-minute charts if you want a little less hectic trading career.) This is automatically done on all quote machines, although “in the old days” I did it by hand. You can have the old days!

• You will first have to calculate a 3-bar moving average of the high and a 3-bar moving average of the lows.
• The strategy is to buy at the price of the 3-bar moving average of the lows — if the trend is positive, according to the swing point trend identification technique — and take profits at the 3-bar moving average of the highs.
• Sell signals are just the opposite. This means you will sell short at the 3-bar moving average of the highs and take profits at the 3-bar moving average of the lows. It is downright foolish to do this unless there is a reason to take only short sales. Our reason might well be that our swing point reversal system has told us the trend is down. Then, and only then, sell the high and cover at the lows.

Now let’s try to make some order out of all this.

 

 

Figure 9.5 shows the addition of the 3-bar mowing averages and the swing lines. I have marked the points where trend changes; we switch from buying the lows to shorting the highs following these reversals. The 3-bar high and low entry points are also shown. The game goes like this; trend reversal up so we buy the 3-bar low line and take profits at the 3-bar high and await a pullback to the 3-bar low. If the 3-bar low would create a trend reversal for selling, however, pass on the trade. Sells are just the opposite; await a trend reversal down, then sell all the 3-bar highs and take profits at the 3-bar lows.

 

Figure 9.6 has all the trend reversals marked off, so you can begin paper trading by looking for the buy and sell entries and exits. I suggest you walk through this chart to get a sense of how one can trade this very short-term approach. Note these are 15-minute bars, but the concept will work on 5-minute to 60-minute bars as well.

Quoted from:
Larry Williams (1999) - Long-Term Secrets to Short-Term Trading.

My “New Reversal Day” Discovery | Larry Williams

The most common reversal day is simply one where prices sell off substantially, almost always down limit, only to reverse and close up for the day. Such a day appears in the following diagram [A + B].

 

A series of top and bottom reversals are also shown for your observation. Notice, in each case, how a temporary reaction against the main trend was ended when we had the “flush-out” day with prices selling off drastically, then recovering, to close up for the day. A reversal day is even more significant the longer the correction has been in effect.

 

MY NEW REVERSAL DAY DISCOVERY

Our second form of reversal day, and one I’ll bet you’ve never even heard about, starts with prices heading sharply lower and closing, sharply lower prices might end up limit down, or just “off sharply” but, in any event, prices take a beating and are down handsomely for the day [C].

» When prices should go lower, but don't, buy ! «

The trend reversal is indicated the next morning when prices open a good deal higher than the previous day's close. Such unusual strength is indicative of a key reversal for the market. What happens, in essence, is that prices fail to follow through with the previous day's slide. This type of action is most unusual since lower prices forecast lower openings about 85% of the time. Lower prices, with substantially higher openings, are a “sure thing” that a new move has begun.

It is particularly significant if prices close down the limit, and the next day open slightly up. Limit moves should beget more limit moves. A reversal of this pattern points to a market opportunity.

A special point of interest here is that an extremely strong signal is generated any time you have two reversal days with the second one higher, for a buy, lower for a sale. This is an unusual display of strength. I cannot recall when such a signal did not produce profits.

Quoted from:
Larry Williams (1979) - How I Made One Million Dollars Last Year Trading Commodities.

 

 

 "New Reversal Days" in the NQ — April-May 2024 (daily bars)

During June the S&P 500 tends to be true to the trend | Wayne Whaley

The S&P has a well deserved reputation for being flat as a pancake in the summer with June no exception, coming in at 31-19 over the last 50 years for a pedestrian type, 0.52% average monthly gain.  However, if the market is behaving well, the month of June has tended to follow suit. Below, I took the last 50 yrs and split them into 3 categories comprised of years where

1. January - May was negative
2. January - May was 0-8% and
3. January - May was greater then 8%.

In those 35 years in which the S&P was positive for the 1st five months of the year, the month of June was 27-8 with the 3% June moves, 12-1 in the positive direction as opposed to a 4-11 June record in those years where the 1st five months of the year were negative with the 3% June moves 1-4.

In particular, the +8% January-May starts saw June averaging a 2.34% gain. As of Tuesday's close, May 28, the S&P is up 11.24% for the first five months of 2024.

Quoted from:
Wayne Whaley (May 28, 2024) - June tends to be true to the trend.

See also:
Wayne Whaley (May 26, 2024) - Top Ten S&P 500 Seasonal Periods after a +5% January-May.

 

S&P 500 Update - High May 23-30 & Low June 13 | Allen Reminick

Today is May 27th, and in the very short term the S&P may just stay up for a couple of more days, possibly even with a new high on May 30th.

 From around July 4th high a big break into the July 16th or 24th potential lows (C wave).

Then we are looking for a breakdown into June 3rd and June 13th lows (Elliott Wave A). This will be followed by a choppy, sideways-to-up rally until roughly the July 4th weekend (B wave). 

 

 Allen Reminick - May 14, 2024.

Then there should be a big break into the 16th or the 24th of July potential lows (C wave). The last part of July is where most of the damage could be done.

Quoted from:
Allen Reminick (May 28, 2024) - Bitcoin Major High Coming for Swing Traders and Investors; S&P Update. (video)

See also:
Allen Reminick (May 14, 2024) - S&P 500 Major High May 23-24.

ICT Intraday Templates & Setups for ES/NQ/YM | Michael J. Huddleston

There are six Intraday Templates and Trading Setups for the S&P (ES), the Nasdaq (NQ) and the Dow Jones (YM) - three bullish and three bearish ones:

• Two Session Up Close OR Two Session Down Close. (1.1 + 1.2)
• AM Rally and PM Reversal OR AM Decline and PM Reversal. (2.1 + 2.2)
• Consolidation AM Rally and PM Decline OR Consolidation AM Decline and PM Rally. (3.1 + 3.2)

1.1    Two Session Up Close (Trend Day ≈ 10% of all trading days)

If we are in the middle of an intermediate or long term price swing based on what we would see on the HTF (Higher timeframes = 4 hour, daily, weekly, monthly) chart, this is the classic scenario. When we start approaching HTF opposing arrays, this profile is less likely to occur. The daily range can go straight trough the lunch hour with very little consolidation whatsoever, depending on what the catalyst was that send prices higher it could be a very strong economic news release. Don't think we’ll always get the consolidation in lunch hour, if we move higher fast there is a chance they work trough lunch. PM session would be ideal if its symmetrical to the AM session.

• Institutional Order Flow (IOF): Bullish.
• AM Trend: Returns to a Discount Array then rallies.
• Lunch Hour: Consolidates with shallow retracements.
• PM Trend: Runs the Lunch Hour Lows [Sell Stops] OR Drops into a Fair Value (FV) Discount Array then rallies into Close.

 1.2    Two Session Down Close (Trend Day ≈ 10% of all trading days)

If we are in the middle of an intermediate or long term price swing based on what we would see on the HTF chart, this is the classic scenario. When we start approaching HTF opposing arrays, this profile is less likely to occur.

 

• Institutional Order Flow: Bearish.
• AM Trend: Returns to a Discount Array then declines.
• Lunch Hour: Consolidates with shallow retracements.
• PM Trend: Runs the Lunch Hour Highs [Buy Stops] OR Rises into a Fair Value Discount Array then declines into Close.
  

 

Tips for Two Session Up Close OR Two Session Down Close = trending days:
► When daily and 4H institutional order flow is bullish (two session up close)/bearish (two session down close).
► If we're in the middle of an intermediate term or long term price swing based on what we see on the HTF chart, then this is the classic scenario until we start approaching an opposing array on the 4h/daily/weekly. PM session would be ideal if its symmetrical to the AM session (measured move).
► The daily range can go straight through the lunch hour with very little consolidation whatsoever, depending on what the catalyst was that send prices higher it could be a very strong or surprised economic news release.
► Don't think we'll always get the consolidation in lunch hour, if we move higher fast there's a chance they work through lunch.
► ► How to trade: ICT always looks for SMT (Smart Money Tool / Smart Money Technique) between the 3 indices at the lows/highs on both sessions.
AM SMT: compare London lows/highs and 9:30 am lows/highs.
PM SMT: compare lunch lows/highs and the high/low formed from the 13:00 candle. One has to diverge.
AM session hold till about 10:30-11:00 and also look for 15m PD arrays.
PM session: besides the SMT we can also return to FVG or OB formed in lunch hour.

2.1    AM Rally PM Reversal (Typical Day ≈ 25% of all trading days)

Price is yet to fulfill a completion of a bullish run, but very close to where we are presently there is a higher time frame premium PD (Premium/Discount) array. The session will start off bullish until it hits the HTF PD array which causes the intraday market reversal.

 

• Institutional Order Flow: Bullish - under HTF Premium-Discount Array.
• AM Trend: Returns to a Discount Array then rallies.
• Lunch Hour: Consolidates with shallow retracements.
• PM Trend: Runs the Lunch Hour Highs [Buy Stops] and reverses into Close OR Runs the Intraday High and then reverses into Close.
• PM Trend can resume higher if AM session Discount = HTF.

 

2.2   AM Decline and PM Reversal (Typical Day ≈ 25% of all trading days)

 

• Institutional Order Flow: Bearish (IOF) - above HTF Discount Premium/Discount Array.
  AM Trend: Returns to a Premium Array then declines.
• Lunch Hour: Consolidates with shallow retracements.
• PM Trend: Runs the Lunch Hour Lows [Sell Stops] and then reverses into Close OR Runs the Intraday Lows and then reverses into Close..
• PM Trend can resume lower if AM session Premium = HTF. 

 

Tips for AM Rally PM reversal (bullish)/AM Decline PM reversal (bearish):
► When daily and 4H institutional order flow is bullish/bearish and price is near a 4H/daily TF PD array, so this model is the completion of a run. AM session is bullish/bearish until it hits the HTF pd array which causes the intraday market reversal.
► In the AM scenario you first drop into a 1H or 4H discount (bullish) / premium (bearish), then rally into HTF PD array (4H/daily/weekly).
Smart money reversal (SMR) - PM trend could either

- Run out the AM high/low and then rally or make a LH when it reverses. Just a run above a STH is also possible.
- Be just a retracement into the AM range and then continue HTF trend or really reverse on HTF. How do we know which one the PM trend will do? The PM session can resume higher/lower (reversal) if the AM session premium array equals a higher timeframe (4H, daily, weekly, monthly) premium array, it can go back into that array in PM and recapitalize that and then go lower and resume lower. If that’s NOT the case we can expect price to continue until we reach that HTF array.

► ► How to trade: ICT always looks for SMT between the 3 indices at the lows/highs on both sessions.

AM SMT: compare London lows/highs and 9:30 lows/highs. PM SMT: compare lunch lows/highs and the high/low formed from the 13:00 candle. One has to diverge. So in the bearish scenario: If the AM high around 10:30am EST but often closer to 11:00 is below a 15m or the PD array, then we're going to be anticipating, before it even happens, outside the London lunch around 1 pm an initial rally into the 15m PD array followed by a HTF reversal. So in the AM session we're going to be holding our trade until there.
PM SMT: try to hold until 15:00 at least. If price is in the premium of the AM dealing range, we could see price continue lower/higher (when the premium array is not a HTF premium array), otherwise price will reverse there.

 

3.1    Consolidation AM Rally PM Decline (Trading Range /Neutral Day ≈ 35% of all trading days)

If unsure of what the IOF of the current day is or where we are relative to Premium/Discount on Daily/4h, chances are we likely see this scenario - especially if there is no high/medium impact news expected during 10am or later in the day.

• Institutional Order Flow: Neutral.
  
• AM Trend: Returns to a Discount Array then rallies OR expands Higher from Equilibrium to run London session Buy Stops.
• Lunch Hour: Consolidates with shallow retracements.
• PM Trend: Runs the Lunch Hour Highs [Buy Stops] and then reaches for Day's Sell Stops OR Runs the Intraday High and then reaches for ID/London session Sell Stops. PM Trend can simply consolidate into Close after Lunch Hour.
  

3.2    Consolidation AM Decline PM Rally (Trading Range / Neutral Day ≈ 35% of all trading days)

If unsure of what the Institutional Order Flow of the current day is or where we are relative to Premium/Discount on Daily/4h, chances are we likely see this scenario - especially if there is no high/medium impact news expected during 10am or later in the day.

• Institutional Order Flow: Neutral.
• AM Trend: Returns to a Premium Array then declines OR expands Lower from Equilibrium to run London session Sell Stops.
• Lunch Hour: Consolidates with shallow retracements.
• PM Trend: Runs the Lunch Hour Lows [Sell Stops] and then reaches for Day's Buy Stops OR Runs the Intraday Low and then reaches for the Intraday London session Buy Stops.
• PM Trend can simply consolidate into Close after Lunch Hour. 

Tips for Consolidation AM Rally and PM Decline / Consolidation AM Decline and PM Rally:

► In this scenario Institutional Order Flow is neutral or unclear where we're at relative to premium or discount on 4H or daily. This scenario happens a lot in index trading which can be frustrating if you don’t know the mechanics behind it. When there's a strong directional bias behind the marketplace or the underlying meanings of the market suggest higher/lower prices, DO NOT look for this scenario. This is not seek and destroy (NFP), this is simply consolidation. This happens when there’s a lack of news or trend.

AM: price returns to a premium/discount then rallies OR after the first hour of the opening range or expands higher from EQ to run SSL/BSL (Buy Side Liquidity/Sell Side Liquidity)from London or intraday.
PM: 2 scenario’s —> 1. Run on lunch hour highs/lows then rally for AM session BSL/SSL or 2. run intraday high/lows and then run for intraday or London SSL/BSL.

► ► How to trade: Which one is it going to do, lunch highs/lows or AM SSL/BSL? We are going to be looking for a 15m PD array inside a 4h/Daily PD array. So the HTF confluence is the catalyst for the reversal. If that PD Array was already reached in AM, PM will just run out lunch hour highs/lows.

If the PM session takes lunch hour SSL/BSL or AM session SSL/BSL is dependent on the AM session BSL/SSL. If these lows/highs reached into a 15m PD array inside a 4h/Daily PD array PM will just run out lunch hour highs/lows.

How to know if the PM session will run lunch or intraday highs?

HTF PD array hit in AM session = Lunch highs likely to be run.
HTF PD array NOT hit in AM session= PM session  could run the intraday high, hit the HTF Premium array, and then reverse.

 

Quoted from:
Michael J. Huddleston (2017) - ICT Mentorship Core Content - Month 10 - Index Futures - Projected Range & Objectives. (video) 

 

See also:

 Darya Filipenka (2023) - ICT Mentorship Core Content - Month 10 - Index Futures - Index Trade Setups.

Darya Filipenka (2023) - ICT Deep Dive Into Institutional Order Flow.

 Michael J. Huddleston (2015) - ICT Intraday Trading Templates.