Day Trading With Price Action Volume 2 Market Bias (File gốc)

Đối với những Newbie hoặc những bạn tuy đã tham gia thị trường lâu, nhưng vẫn loay hoay chưa tìm được cho 1 mình 1 hệ thống giao dịch phù hợp, hoặc là đã có rồi nhưng vẫn có tinh thần học hỏi, tìm hiểu sâu hơn về nhịp chạy của thị trường, thì theo cá nhân mình thì phương pháp Price Action có lẽ sẽ là 1 chủ đề mà các bạn nên dành thời gian để tìm hiểu. Do đó, hôm nay mình xin chia sẻ với các bạn bộ sách của Galen Woods: How to trade with Price action. Review sơ qua về cuốn sách: 1 – Kickstarter: cuốn này giới thiệu sơ qua về Price Action, các mô hình nến và mô hình giá phổ biến trên thị trường 2 – Strategies: cuốn này nói về 10 system tương ứng với 10 mô hình Price action được nói đến trong cuốn 1 3 – Master: kết hợp mô hình giá với các Indicator, cách nhận diện Trader bị mắc bẫy và cách tận dụng nó để kiếm lợi nhuận,v.v

2ND EDITION

Day Trading with Price Action

Volume II: Market Bias

Galen Woods Trading Setups Review Copyright © 2014-2016 Galen Woods

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Copyright © 2014-2016 by Galen Woods (Singapore Business Registration No 53269377M) All rights reserved

First Edition, 1 September 2014

Second Edition, 5 April 2016

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All charting platforms and chart layouts (including time frames, indicators and parameters) used within this course are being used to demonstrate and explain a trading concept, for the purposes of information and education only These charting platforms and chart layouts are in no way recommended as being suitable for your trading purposes

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CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED

PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS UNLIKE

AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF

CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY

SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO

SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT

OR LOSSES SIMILAR TO THOSE SHOWN

Chapter 1 - Introduction 1

Chapter 2 – Finding a Tradable Time Frame 3

2.1 - Price Action Time Frame Index (PATI) 6

2.2 - Finding Tradable Time Frames with PATI 9

2.3 - Minimum Tradable Time Frame (MTTF) 12

2.4 - Useful Notes for Finding the Optimal Trading Time Frame and Market 14

2.4.1 - Optimal Trading Environment (OTE) Index 14

2.4.2 - Insufficient Trading Opportunities 16

2.5 - Alternative Chart Types 18

2.6 - Conclusion 21

Chapter 3 – Swings 23

3.1 - Defining Swings 24

3.1.1 - Exercises: Price Swings 34

3.1.2 - Solutions: Price Swings 37

3.2 - Swing Pivots 39

3.3 - Pivot Types 43

3.3.1 - Basic Pivot 45

3.3.2 - Tested Pivot 46

3.3.3 - Valid Pivot 56

3.3.4 - Exercises: Pivot Types 75

3.3.5 - Solutions: Pivot Types 78

3.4 - Swinging It: Putting Them Together 80

3.5 - Conclusion 86

Chapter 4 – Trend Lines 88

4.1 - Drawing Trend Lines 90

4.1.1 - New Trend Lines 90

4.1.2 - New Valid Pivots 93

4.1.3 - Contains All Price Action Before The Trend Extreme 95

4.1.4 - When to Stop Adjusting a Trend Line 98

4.1.5 - Not Too Many Trend Lines 101

4.2 - Interpreting Trend Lines 102

4.2.1 - 6E 60-Minute 103

4.2.2 - ES 5-Minute 107

4.2.3 - 6J 30-Minute 112

4.3 - Conclusion 115

Chapter 5 – Evaluating Market Bias 117

5.1 - Our Thought Process 118

5.2 - Step-by-Step Guide 122

5.2.1 - Trend Line Break 124

5.2.2 - Multiple Trend Lines 132

5.2.3 - Large Gap Between Price And Trend Line 141

5.2.4 - Almost Flat Trend Lines 146

5.2.5 - Short-Lived Trend Lines 148

5.2.6 - A Struggling Trend 151

5.3 - Conclusion 154

Chapter 1 - Introduction

In trading, the market bias is king

The market bias is simply the tendency of a market to move in a certain direction Is the market more likely to move up or move down?

Answering this question is the cornerstone of successful trading After you master the art of interpreting the price action context and deciphering the market bias, you have a thousand and one ways to trade profitably

However, there is no easy answer to that question This is

because the market is lying constantly Don’t blame it You are part of it Not to mention that the market has to lie It has no choice

It has to deceive traders into thinking that it is moving down, in order to move up It has to convince traders that it is rising up,

in order to fall further

The logic is simple Price rises until there is no one interested to buy at a higher price Then, it falls Price falls until nobody

wants to sell at a lower price Then, it rises This story repeats and gives birth to the market swings we see on all trading time frames

It follows that for the market to trend either up or down, it must

do so through a series of rising and falling In bull trends, the total magnitude of the rising swings is larger than that of the falling swings The opposite is true for bear trends – the total magnitude of downswings is larger than that of upswings

In a bull trend, each time it falls, it is tricking some poor bearish traders into the market, before rising up again In a bear trend, each pullback upwards represents the same trickery in reverse Facing such a deceptive market, how do we determine its bias?

The key is to focus and stay relevant This is also where the difference between “market bias” and “trend” matters

In this series, I will use these two terms interchangeably But, there is a subtle difference between them

Trend exists on many levels Major trend, intermediate trend, minor trend, monthly trend, daily trend, hourly trend, and the list goes on Trying to figure out the trend of all degrees is not only impossible, but impractical for trading The secular trend lasting several years is not relevant for the day trader Similarly, the 5-second trend is worthless to the pension fund investing with a long-term horizon

Think of market bias as the relevant trend We need to figure out the degree of trend that is useful for our trading time frame

We must constantly try to interpret the trend that actually gives

us an edge in our trading The trend in the appropriate trading time frame dictates our market bias Our job is to find the

relevant trend (i.e the market bias), and focus on it

In this volume, you will learn the essential tools for determining the market bias Our approach uses pure price action that

involves observing market swings and drawing trend lines You will learn how to implement these basic concepts to the market objectively Towards the end of this volume, you will integrate them to form your assessment of the market bias

(For clarification, the charts in this series are in the GMT +8

Chapter 2 – Finding a Tradable

Time Frame

Our main analysis tool is the price chart It is a visual depiction

of market prices over time Our choice of trading time frame affects how many bars we have in our charts and how the bars look Hence, the trading time frame has an important influence over our analysis context

Thus, deciding our trading time frame is Step Zero

An oft-repeated claim of price action traders is that price action works in all time frames This claim is largely true However, some trading time frames are not amenable to price action analysis

Price action involves pattern recognition By claiming that price action works in all time frames, we are assuming that charts of all time frames are visually similar

Compare Figure 2-1 to Figure 2-2 Both charts show 6A futures One chart shows 30-minute bars while the other shows 30-second bars

Do they look the same? If not, how are they different?

Figure 2-1 6A futures 30-minute chart

Figure 2-2 6A futures 30-second chart

The 30-second chart in Figure 2-2 consists of mainly two types

of bars:

 Dojis (bars that open and close at the same price)

 Marubozus (bars that open and close at opposite

Figure 2-3 6A futures 1-hour chart

This simple visual examination shows that not all charts are created equal When a chart consists of entirely Dojis and

Marubozus, many price action patterns disappear Good luck finding a decent pin bar from the 30-second chart

In conclusion, very fast charts are different from their slower counterparts It is difficult to find meaningful price patterns on very fast charts

However, what do we mean by “very fast charts”? How do we know if a time frame is too fast for price action analysis? How do

we know if a time frame is tradable?

Many trading strategies prescribe the exact time frame to trade The prescribed time frame might work for a certain market within a certain time-period given a certain market volatility This is because the tradable time frame depends on the market volatility, which differs across markets and over time When the market changes but the trading time frame stays constant, the trading strategy might not work well

To solve this issue, I have devised the Price Action Time Frame Index (PATI) The PATI is a robust concept for finding suitable trading time frames for price action trading

2.1 - Price Action Time Frame Index (PATI)

We observed that time frames that are not tradable are made

up of mostly Dojis and Marubozus Hence, the PATI seeks to find

a time frame that is not overwhelmed by Dojis and Marubozus

In doing so, we verify that the time frame is tradable

The PATI measures the number of Dojis and Marubozus in the last 10 bars

PATI

Percentage of Dojis and Marubozus in the last 10 bars

If the PATI value is 0.2, it means that only two bars out of the last 10 bars are Dojis or Marubozus If the PATI value is 1, it means that all of the last 10 bars are either Dojis or Marubozus The latter clearly describes a time frame that is not tradable Why are we using a look-back period of 10 bars?

Most price action patterns are two-bar patterns (inside bar, key reversal bar) or three-bar patterns (three-bar reversal, three-bar pullback) This means on average, 10 bars will encompass around three price patterns which are adequate for ongoing price action analysis Hence, 10 bars is a reasonable look-back period for ongoing analysis of recent price action

The PATI crystallises the idea that excessive frequency of Dojis and Marubozus in a time frame is not amenable for price action analysis With this concept in mind, you are already armed with

a perspective that alerts you to non-tradable time frames

If you need a tool to find tradable time frames objectively, in our Indicator Pack (available separately), you will find the PATI indicator

The PATI indicator value moves between 0 and 1 It represents the percentage of bars within the look-back period that are Dojis

or Marubozus If the value exceeds 0.5, it means that more than half of the bars in the look-back period are Dojis or Marubozus

It is a warning that the time frame is not tradable

NOT TRADABLE

A time frame is not amenable to price action analysis if the PATI exceeds 0.5

In Figure 2-4, we applied the PATI indicator on a 5-minute chart

of 6E futures (24-hour session) The parts highlighted in red are areas when the PATI value is higher than 0.5 These areas are warning us that this time frame is not great for price action trading, at least not for a full 24-hour session

Figure 2-4 6E 5-minute chart in 24-hour session with the PATI indicator

According to the PATI indicator in Figure 2-4, from

approximately 7:00 p.m to 7:00 a.m (GMT), the 5-minute chart is not tradable Unsurprisingly, this unfriendly period

contains the period when both the New York and London

markets are closed

Like any other trading parameter, the look-back period of 10 bars is not set in stone The PATI indicator allows you to choose the look-back period

Feel free to experiment with it However, if you choose a back period that covers too few or too many bars, the PATI value is no longer meaningful If you want to tinker with the

look-to classify after-hours trading as non-tradable and the regular session as tradable

2.2 - Finding Tradable Time Frames with PATI

To assess if a time frame is tradable using the PATI indicator, follow these steps:

1 Load at least 30 days of recent market data in your

preferred trading time frame This is your sample period

2 Make sure that you load the data within your trading session (For instance, if you trade the New York session, load only the price bars within the regular session and exclude after hours data On the other hand, if you trade the forex market round the clock, you must load all the price market data within your sample period.)

3 For a tradable time frame, the PATI value must be lower than 0.5 at any point in the sample period

4 If the PATI value exceeds 0.5 at any point within the sample period, that time frame is deemed as non-

tradable In that case, keep increasing your time frame until the PATI value is below 0.5 for the entire sample period

There is an exception to the rule mentioned in Step 4 If the PATI value exceeds 0.5 on (pre/post) holidays when market

movements are expected to be muted, the time frame is still

tradable Of course, remember that you should not trade during these exceptional periods

You can check online for the trading holidays observed by

different exchanges.1 You can also get the information from your broker

According to the PATI criteria, the 5-minute 6E chart shown in Figure 2-4 is not tradable as the PATI exceeded 0.5 for long periods Take note that we used the 24-hour session on the chart Hence, we were assessing the tradeability of the 5-minute time frame with the assumption that you will be trading the entire 24-hour session

As the underlying market of 6E futures is the EUR/USD currency pair, you might want to consider trading only during the

London/New York overlap when the volatility is usually higher

In Figure 2-5, we constrained our trading session to that

particular 4-hour period each day and reapplied the PATI

indicator on the 5-minute time frame The PATI indicator is below 0.5 for the entire chart This confirms that the 5-minute time frame is tradable during the London/New York overlap

Figure 2-5 6E 5-minute chart showing only the London/New York overlap

If you are really bent on trading the full 24-hour session, you will need to increase your trading time frame For instance, as shown in Figure 2-6, the 45-minute 6E chart is tradable as the maximum value of the PATI is 0.4

Figure 2-6 45-minute 6E chart is tradable

With the PATI indicator, we can easily find out if a time frame is suited for price action analysis Day traders have a knack of descending into lower and lower time frames to find more

trading opportunities However, as I have explained, some time frames do not produce meaningful price action patterns Hence, applying the PATI indicator on your trading time frame is an important step that will keep you out of trouble

2.3 - Minimum Tradable Time Frame (MTTF)

If you are trading a new market, you probably do not have a preferred trading time frame In that case, the concept of the Minimum Tradable Time Frame (MTTF) is useful

The MTTF is the minimum time frame that is tradable for a given market Time frames that are higher than the MTTF are

tradable Hence, the MTTF is a useful benchmark to remember With the PATI indicator, you can find the MTTF quickly and

see if it is tradable If not, move up to the 5-minute time frame Keep increasing the time frame until you find a time frame that

is tradable according to the PATI

For your reference, I have listed the MTTF for some of the

common futures contracts

 CL 2-minute (regular session)

 ES 10-minute (regular session)

 6E 20-minute (24-hour)

 6A 25-minute (24-hour)

 6J 45-minute (24-hour)

 FDAX 2-minute (XETRA session)

These MTTF values are not definitive They will certainly change

as the market volatility evolves.2 However, we do not need to worry as the PATI indicator will warn us if there are changes to the tradability of our time frames

Hence, it is essential that you review the MTTF for the markets you trade at regular intervals to make sure that your time frame

is still tradable (i.e above the MTTF) I perform a check at least once a month This is especially important if your trading time frame borders the MTTF

Do not follow the MTTF blindly Common sense should prevail If the MTTF is so fast that it’s impossible for you to conduct your analysis You should move your time frame up

For instance, even if the MTTF for a particular market is 1

second, you should not trade with the 1-second chart because it’s impossible to perform any meaningful analysis, at least not without some help from automated trading systems

2 In fact, the example MTTF values above have been updated to reflect changes since the last edition of this book

2.4 - Useful Notes for Finding the Optimal Trading Time Frame and Market

These are some useful notes for finding the sweet spot in day trading, in terms of your trading market and time frame

At this point, especially if you are new to trading, you can skim through this section

You will appreciate the ideas here better after you’ve tried

trading with a variety of time frames and markets Make a note

to return to this section after you’ve gained more price action trading experience

2.4.1 - Optimal Trading Environment (OTE) Index

Trading in an environment that offers high reward-to-risk ratio

is what most traders want Hence, I’ve developed a useful index

to help you find the best day trading markets

Traders profit from market movement If the market does not move, we cannot make money We need the market to move

In fact, we want the market to move as much as possible We want to see high market volatility This is why the volatility of the market is an indication of the potential reward size

A useful measure of volatility for day traders is the average

daily range The higher the daily range, the greater the

potential reward for your trades

Now, let’s talk about risk As a rule, smaller time frames give you the ability to select finer entries Finer entries mean smaller trade risk However, as discussed, the MTTF is the lower limit for us Going below the MTTF might jeopardise the validity of our analysis Hence, an indicator of potential trade risk is the

Remember that we are looking for markets that offer high

potential reward-to-risk opportunities It follows that we want markets with a high average daily range and a low average bar range given the MTTF From this, we get the Optimal Trading Environment (OTE) Index

OTE Index Formula

Average Daily Range / Average Bar Range (given the MTTF)

Let’s apply this concept to the four futures markets below.3

Market 30-Period

Average Daily

Range

Average Bar Range of the MTTF 4

OTE Index

Table 2-1 Optimal Trading Environment Index

According to the OTE Index, FDAX is more ideal for day trading compared to ES despite its popularity CL and FESX are

comparable

3 Figures computed on 11 December 2015

4 The period of the average bar range is the number of bars in five trading sessions, given the MTTF This is to account for any day of the week variations

OTE

The higher the OTE of a market, the more ideal it is for day trading

It is possible to further refine the OTE, by adjusting the OTE inputs according to your actual trading parameters

For instance, you plan to trade the first two hours of each

trading session You can then find out the average range of the first two hours of each session and use that as the input for the OTE numerator You can also work out a separate MTTF and the corresponding average bar range for the first two hours of each session Then, use that number as your OTE denominator

While the OTE Index is useful when choosing your day trading market, do not use it as the sole criterion for choosing the

market to trade Your specific entry and exit method, liquidity, trading hours, trading costs, margin considerations and many other factors are also in play For instance, despite having a scoring higher on the OTE Index, FDAX does not have the

liquidity of ES so its potential for slippage is greater

I’ve tried to explain the inputs of OTE clearly so that you know when you can use it It is most relevant when your risk is a function of the average bar range of your time frame And that

is largely true if you set your stop-losses using price patterns,

as we will be doing

2.4.2 - Insufficient Trading Opportunities

Have you encountered markets that are moving with increased volatility? Prices running away from you as you struggle to find

an entry point

When that happens, it might be wise to lower your time frame Lower time frames will show the finer price action from which you can find more setups

But you must have a plan for lowering your time frame, rather

First, while you may lower your trading time frame, you must not go below the MTTF of the market you are trading

Second, define the conditions that will cause you to lower your trading time frame

Why do you need to define such conditions?

This is to ensure that you are moving to a faster time frame because of increased market volatility, and not because of

boredom and impatience

How do we define such conditions? What’s our basis?

When the market shows many consecutive wide range bars, it is

a sign that the market is running amok and that volatility is growing The market is running away without pausing for us to join it Hence, there might be difficulty finding trading setups

These observations imply that in a healthy trading time frame, you will find a good mix of price bars with varying ranges, both wide range and narrow range

Thus, we can use this idea as a rule of thumb for lowering our trading time frame

5 Bar Range = Bar high – Bar low

When you get ten consecutive wide range bars, adjust your time frame lower (Refer to Volume IV Chapter 2.2.3 for the

definition of a wide range bar.)

To avoid this problem of insufficient trades altogether, consider trading as close to the MTTF as possible, provided that you are confident of performing sound analysis within the time frame

2.5 - Alternative Chart Types

Chart types that do not use a time base are common among day traders Some examples include:

However, for those wondering if our framework can be applied

to these alternative chart types, read on

Any chart with price bars that look visually like a time chart (above the MTTF) works for our trading method

Both tick and volume charts fit the bill They offer the same level of price detail as time charts A volume (or tick) chart and

a time chart are indistinguishable The price bars in both charts look like normal candlesticks Hence, it is possible to use them within our trading framework

Figure 2-7 A tick chart; Compare it to the time chart below

Figure 2-8 A time chart; Visually similar to a tick chart

Figure 2-9 Range charts are very different from both time and tick charts

On the other hand, range charts and Renko charts look very different They have price bars that always close at its

extremes For that reason, the appearance of the price bars has

a distinctive blockish look

So, range and Renko charts are out Ticks and volume charts are okay It’s your choice

This is my experience with tick and volume charts I have tried both tick and volume charts in my trading, before switching back to time charts again

The first reason is that I did not find any obvious advantage in using tick and volume charts There is also no clear

disadvantage in terms of price analysis (Although, there are serious implications if you are using volume analysis on tick charts, but that’s beyond our scope.)

charts differently, due to the difference in filtering the ticks and the start point of your charts

This is actually okay, as long as you are using one data feed consistently and are used to analysing the charts produced by that data feed

However, I feel more comfortable trading charts that are

consistent across data feeds

This aspect is also important as I am trying to share my trading method here By using time charts, I can be sure that if you open up your charts, you will be able to find the exact same chart as me

However, if I use tick charts, the chart produced from my data feed might differ from what you are seeing The differences are not fatal and the methods are still applicable, but they do affect the exact entry timing and the exact patterns formed Hence, to avoid confusion, let’s stay with time charts

2.6 - Conclusion

The trading time frame is our first consideration when we set up our charts While most trading methods gloss over this

important decision, we approached it directly

I introduced the PATI indicator and the concept of MTTF to find time frames that are meaningful for intraday price action

analysis

However, remember that the PATI indicator is like any other indicator You, as the trader, reserve the right to override the values and reinterpret it In fact, I expect that after you

understand the concept behind the PATI indicator (avoiding a high percentage of Dojis and Marubozus), eventually, you will

not need the indicator to find out if a time frame is tradable You would have developed an intuition that can distinguish between tradable and non-tradable charts

The PATI method described in this chapter works only for

intraday time frames Do not use it on daily and weekly charts These higher time frames are almost always tradable when evaluated with the PATI There are other more appropriate methods to identify non-tradable periods on daily and weekly charts but they are beyond the scope of this book

As a final note, I must highlight that some price action methods require descending to extremely low time frames (seconds) that are well below the MTTF Those strategies usually scalp for small profits More importantly, they employ price patterns that are visually different from traditional bar and candlestick patterns Hence, for those strategies, the concept of MTTF is not

applicable However, the price patterns in this series require a time frame above the MTTF to work

TRADABLE TIME FRAME

 Avoid time frames with an overwhelming number of Dojis and Marubozus

 Check if your time frame is tradable with the Price Action Time Frame Index (PATI)

Time frame (MTTF)

Chapter 3 – Swings

Look at any price chart and you will agree that price does not move in a straight line It does not move up or down vertically

It moves in waves, in what we call market swings

Figure 3-1 Market swings in a bull market

Look at Figure 3-1 In a bull market, price rises with a series of

up and downswings Naturally, the upswings generally exceed the downswings in length The reverse is true in a bear market

Hence, by observing market swings, we are able to glimpse into the structure of the market and get clues on whether the

market will move up or down Following market swings is our first step to deciphering the market bias

Another way to look at market swings is to think of them as a higher time frame perspective Each swing is equivalent to a bar

in a higher time frame This is why some traders use a higher time frame to evaluate market bias There are two challenges with the higher time frame approach

First, the higher time frame is usually chosen arbitrarily

Common choices are multiples of three and five For instance, if your trading time frame is 1-minute, using a multiple of five, you will use the 5-minute chart for determining the market bias However, there is often no sound basis for the choice of the higher time frame

Next, by using a higher time frame, we must split our attention between two time frames (charts) While some traders might find that manageable, I prefer to keep my trading as simple as possible and focus on one chart

By analysing market swings, we are able to factor in the price action of a higher order into our analysis without a second chart showing a higher time frame The advantage of this approach is that we are able to evaluate the ongoing price action within its larger context on the same chart Furthermore, there is no need

to decide on the periodicity of the higher time frame

Hence, we will focus on interpreting market swings to deduce the market bias using a single time frame

3.1 - Defining Swings

In the history of technical analysis, William Delbert Gann

occupies a unique position Gann was a trader who invented a myriad of trading tools using lines, angles, circles, hexagons, and squares While he might have gone a little overboard with applying geometry to financial markets and attracted some detractors, Gann’s trading methods are still widely employed by traders all over the world today

We have no interest in the controversy surrounding Gann’s obscure methods Our attention lies in his simple and elegant definition of market swings

Gann has an entire trading approach that uses market swings to trade trends Gann’s approach contains three degrees of market swings: minor, intermediate, major

Our price action approach works by looking out for the small details to let them connect naturally to point out the larger picture This is why we are only interested in the minor swings, the smallest meaningful market swings, the basic building

blocks of the market’s wave-like structure

We are not employing Gann’s trading methods. 6 We are only borrowing his definition of a market swing Gann’s definition of a market swing is perfect for price action analysis because he used bar-by-bar price movement to define market swings It focuses on the relationship between bar highs and bar lows

The first step to defining market swings systematically is to classify every price bar into one of the four types shown in

Figure 3-2

6 If you are interested to pick up more from W.D Gann, refer to The Trading

Methodologies of W.D Gann: A Guide to Building Your Technical Analysis Toolbox Click here for more details.

Figure 3-2 Examples of the four bar types (up, down, inside, outside)

Characteristics of the four bar types:

1 Up bars – Higher high, higher low

2 Down bars – Lower high, lower low

3 Inside bars – Lower high, higher low7

4 Outside bars – Higher high, lower low8

You should be able to classify every single price bar as an “up bar”, “down bar”, “inside bar”, or “outside bar” These labels describe the relationship of each bar high/low relative to the previous bar For practice, try classifying all the bars in Figure 3-2. 9

7 If the high or the low or both are equal to that of the previous bar, it is still an inside bar

8 If either the high or the low are equal to that of the previous bar, it is still an outside

1 Up bars with higher high and higher low

2 Down bars with lower

high and lower low

3 Inside bars with lower high and higher low

4 Outside bars with higher high and lower low

Note that the closing price of a price bar does not matter in the classification An up bar might close lower than it opened A down bar might close higher than it opened

For a bar that closes higher, we will use the term “bullish bar” For a bar that closes lower, we will use the term “bearish bar”

Once you have mastered the different bar types, you will be able to identify market swings with ease, with the four rules below

1 An up bar starts an upswing and confirms the end of a downswing

2 A down bar starts a downswing and confirms the end of

an upswing

3 Inside bars do not break the previous high and low

Hence, they do not affect the direction of the current swing

4 Outside bars break both the previous high and low It introduces uncertainty into the market structure

However, as each swing is a minor trend in itself and trends tend to continue, we give the benefit of the doubt

to the current swing Thus, outside bars in an upswing continues the upswing Similarly, outside bars in a

downswing continues the downswing

Figure 3-3 demonstrates how we apply these rules to define market swings The blue lines mark out the swings

Figure 3-3 Bars that start and end market swings

In Figure 3-3, we marked out five bars that changed the

direction of the market swings The two circled bars are an

inside bar and an outside bar They do not affect the direction of the market swings

Gann minor swings provide a solid method for the price action trader to keep tabs on the ebbs and flows of the market It focuses on every price bar and does not require any parameter

This is unlike percentage swings Percentage swings ignore to-bar price movement and use a parameter to filter small price fluctuations For instance, if we use 1% as the filter threshold,

bar-an upswing ends when the price falls by more thbar-an 1% A

downswing ends when the price moves up by more than 1% The obvious challenge lies with using the right percentage filter Gann swings have eliminated this problem

Most swings are confirmed by an up bar or a down bar

However, under exceptional circumstances, it is possible for a swing to form without either an up bar or a down bar

An upswing can be formed when the market rises above the last swing high without forming an up bar Similarly, a downswing can be formed when the market falls below the last swing low without forming a down bar An outside bar is always involved in such cases

Figure 3-4 shows an example of the market forming a new

upswing without an up bar

Figure 3-4 Exceptional swings

1 The market has been forming regular swings with up bars and down bars

2 This bullish outside bar broke above the last swing high

There was no up bar However, as the last swing high has been broken, despite the lack of an up bar, we must recognise that a new upswing has been formed

2 Outside bar broke above last swing high, forming an upswing without an up bar

Such exceptional swings are uncommon and indicate erratic price action Thus, when you encounter such swings, it is wise

to hold back from entering the market and wait for further price action

Let’s take a look at another price swing example Compare Figure 3-5 and Figure 3-6 on the next page Which one shows the correct mark-up of price swings?

Figure 3-5 Two swings

Figure 3-6 One swing

Figure 3-6 is the correct one

Although point A, given its protrusive appearance, might seem like a swing low, it is not Typically, an outside bar does not end

or start a price swing Without a down bar or a break below the last swing low, an upswing will continue

(Nonetheless, from a generic price action perspective, the

swings marked in Figure 3-5 are not wrong In fact, point A is certainly a swing low on a lower time frame However, it

remains that Figure 3-5 is inconsistent with the price swing framework we’ve defined earlier Stay consistent for now.)

Let us look at one more example to drive home this concept Look at the next page and compare Figure 3-7 with Figure 3-8 Which one is right?

Figure 3-7 Not the swings as we defined

Figure 3-8 The swings we want to find

Most of the time, you can mark out market swings easily by with up bars and down bars The trickier situations have been covered above If you’ve understood them, you are ready to move on

None of these bars are up bars

1 This bar started

a downswing

2 First up bar since the downswing started