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

3 Bar Patterns - The Smallest Fractals of Market Structure | Larry Williams

»  Any time there is a daily low with higher lows on both sides of it, that low will be a short-term low. We know this because a study of market action will show that prices descended in the low day, then failed to make a new low, and thus turned up, marking that ultimate low as a short-term point. A short-term market high is just the opposite. Here we will see a high with lower highs on both sides of it. What this says is that prices rallied up to the zenith of that middle day, then began to move back down, and in the process formed a short-term high. For our purposes in identifying short-term swing points, we will simply ignore inside days and the possible short-term points they produce.  «

 

This is how Larry Williams defined market structure. This concept is universal and applies to all bars of all time frames.

 

• A Short-Term High (STH) is a bar with a high greater than or equal to the high of the bar to the left and greater than the bar high to the right. Neighboring bars should not be inside. If they are inside bars, the bars that follow them should be analyzed.
• A Medium-Term High (MTH) has Short-Term Highs to the left and and to the right that are below the high of this bar.
• A Long-Term High (LTH) has Medium-Term Highs to the left and and to the right that are below the high of this bar.
  

And for the lows it’s all vice versa: 

• Short-Term Low (STL) = bar with higher lows on both sides
• Intermediate-Term Low (ITL) = higher STL on both sides
• Long-Term Low (LTL) = higher ITL on both sides

In other words: 3 bar patterns are the smallest fractals and building blocks of market structure. Since price is always either in consolidation, in an uptrend or in a downtrend 3 successive price bars must form either a directional pattern (higher highs, higher lows or vice versa), a continuation pattern (inside bar) or a reversal pattern (outside bar, pin bar, head & shoulder, M&W patterns) (see also HERE):

 

  

Reference:

 Larry Williams (1990) - Long-Term Secrets to Short-Term Trading

Arthur A. Merrill (1980) - M & W Wave Patterns.

In Any Bar Chart Only 8 Possible Range Patterns | Larry Williams

Larry Williams presented a free session at the November 2014 Las Vegas Traders Expo in which he discussed 8 possible Range Patterns. He showed that from any bar to the next there are only 4 possible outcomes:

1. Down Range: Last Bar's high is lower than prior Bar's high; and last Bar's low is lower than prior Bar's low.
2. Up Range: Last Bar's high is higher than prior Bar's high; and last Bar's low is higher than prior Bar's low.
3. Inside Range: Last Bar's high is lower than prior Bar's high; and last Bar's low is higher than prior Bar's low. On a Daily S&P500 Chart this occurs approximately 12% of the time.
4. Outside Range: Last Bar's high is higher than the prior Bar's high; and Bar's low is lower than the prior Bar's low. On a Daily S&P500 Chart this occurs approximately 12% of the time.
   

Price action cannot occur in any other way. Within these 4 Range Patterns each last bar can either be an up bar or a down bar. So there are actually 8 possible Range Patterns:

1. Down Range, Down Day
2. Down Range, Up Day
3. Up Range, Down Day
4. Up Range, Up Day
5. Inside Range, Down Day
6. Inside Range, Up Day
7. Outside Range, Down Day
8. Outside Range, Up Day

Using these 8 patterns some powerful strategies can be created. Larry Williams presented back-tested statistics associated with trading these patterns using a simple entry and exit technique. He stressed that they were not the best entry or exit techniques but shown because they were easy to understand and program. This strategy is intended only to show where we have a bias or advantage in the marketplace.

• Entry: At market close
• Stop Loss: Based on $ Stop
• Exit: First Profitable Opening

His message was that we could go home and verify using our own software. His results for testing this on the e-mini S&Ps from 2002 forward [to 2015] were as follows:

So, the Down Range, Down Close day [1.] offers the best potential short term 'long' setup based on net profit. This was the take-home message of the presentation.

Larry further dug into the Down Range, Down Close setup to uncover which day of the week offered the best trade: The stats support the 'Turnaround Tuesday' concept.

And further investigating by Trading Day of Month revealed that 1, 17, 19, 22 and 23 were the best days, showing 92% winners and $47,500 net profits with 107 trades.

It was also found that a Down Range Larger Range day was better than a Down Range smaller Range day. $205 Avg 80% Win, vs $33 Avg 85% win,

Also naked close was better than a covered close (naked close meaning that the close was outside of the previous day’s range). $155 Avg 83% Win vs $30 Avg 83% Win

And combining these two concepts:
Down Range, larger range, Covered close: $60 Avg, 83% Winners
Down Range, larger range, Naked close: $215 Avg, 85% Winners

References:

Larry Williams (2015) - Presentation in Moscow.
Chris White (2015) - Range Type Scanning and Backtesting in EdgeRater.

 Robert F. Smith (2019) - What Do We Know to Be True About Price Action? 

TPR (2018) - Contraction > Breakout > Expansion | Toby Crabel's Price Patterns.