Day Trading With Price Action Volume 3 Price Patterns (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 trường2 – Strategies: cuốn này nói về 10 system tương ứng với 10 mô hình Price action được nói đến trong cuốn 13 – 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

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2ND EDITION

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Day Trading with Price Action Volume III: Price Patterns

PDF eBook Edition Cover Design by Beverley S

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First Edition, 1 September 2014

Second Edition, 5 April 2016

Published by Galen Woods (Singapore Business Registration No 53269377M)

All charts were created with NinjaTrader™ NinjaTrader™ is a

No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, without written permission from the publisher, except as permitted by Singapore Copyright Laws

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encourage you to first seek professional advice with regard to whether or not it is appropriate to your own particular financial circumstances, needs and objectives

The author and publisher believe the information provided is correct However we are not liable for any loss, claims, or

damage incurred by any person, due to any errors or omissions,

or as a consequence of the use or reliance on any information contained within the Day Trading with Price Action Course and any supporting documents, software, websites, and emails

Reference to any market, trading time frame, analysis style or trading technique is for the purpose of information and

education only They are not to be considered a

recommendation as being appropriate to your circumstances or needs

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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Charts, setups and trade examples shown throughout this

product have been chosen in order to provide the best possible demonstration of concept, for information and education

purposes They were not necessarily traded live by the author

U.S Government Required Disclaimer: Commodity Futures Trading and Options trading has large potential rewards, but also large potential risk You must be aware of the risks and be willing to accept them in order to invest in the futures and

options markets Don't trade with money you can't afford to lose This is neither a solicitation nor an offer to Buy/Sell futures

or options No representation is being made that any account will or is likely to achieve profits or losses similar to those

discussed on this web site The past performance of any trading system or methodology is not necessarily indicative of future results

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

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Chapter 1 - Introduction 1

1.1 - The True Purpose of a Trading Setup 1

1.2 - What to Expect 2

1.3 - The Holy Grails 4

1.4 - Overview of Price Patterns 5

1.5 - Ground Rules 7

Chapter 2 - Congestion Break-out Failure 9

2.1 - The Psychology Behind 9

2.2 - Identifying the Congestion Break-out Failure 10

2.2.1 - Congestion 10

2.2.2 - Break-out 14

2.2.3 - Failure 15

2.2.4 - Long Congestion Break-out Failure Setup 16

2.2.5 - Short Congestion Break-out Failure Setup 16

2.3 - Trading the Congestion Break-out Failure 17

2.3.1 - 6E 60-Minute Example 17

2.3.2 - FDAX 10-Minute Example 19

2.3.3 - ES 10-Minute Example 20

2.3.4 - CL 5-Minute Example 22

2.3.5 - ZN 60-Minute Example 24

2.4 - Conclusion 25

Chapter 3 - Congestion Zone 27

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3.2 - Identifying the Congestion Zone 31

3.2.1 - Drawing the Congestion Zone 31

3.2.2 - Merging Congestion Zones 33

3.2.3 - Long Congestion Zone Setup 35

3.2.4 - Short Congestion Zone Setup 37

3.3 - Trading the Congestion Zone 39

3.3.2 - ZN 60-Minute Example 42

3.3.3 - NQ 3-Minute Example 44

3.3.4 - 6A 30-Minute Example 45

3.4 - Conclusion 48

Chapter 4 - Trend Bar Failure 50

4.1.1 - Finding Numerous Counter-Trend Traders 51

4.1.2 - Finding What Makes Them Freak Out 51

4.2 - Identifying the Trend Bar Failure 52

4.2.1 - Long Trend Bar Failure Setup 54

4.2.2 - Short Trend Bar Failure Setup 54

4.3 - Trading the Trend Bar Failure 55

4.3.1 - 6J 20-Minute Example 55

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4.4 - Conclusion 64

Chapter 5 - Deceleration 66

5.2 - Identifying the Deceleration 68

5.2.1 - Deceleration Pattern 68

5.2.2 - Long Deceleration Setup 69

5.2.3 - Short Deceleration Setup 72

5.3 - Trading the Deceleration 72

5.4 - Conclusion 80

Chapter 6 - Anti-Climax 81

6.2 - Identifying the Anti-Climax 82

6.2.1 - Anti-Climax Pattern 82

6.2.2 - Anti-Climax versus Deceleration 83

6.2.3 - Long Anti-Climax Setup 87

6.2.4 - Short Anti-Climax Setup 87

6.3 - Trading the Anti-Climax 88

6.3.1 - CL 4-minute Example 88

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6.4 - Conclusion 97

Chapter 7 - Pressure Zone 99

7.1.1 - Traders Who Sold at the High of the Bar (Stage One) 100

7.1.2 - Traders Who Bought at the High of the Bar (Stage One) 101

7.1.3 - Traders Who Sold at the Low of the Bar (Stage Two) 102

7.1.4 - Traders Who Bought at the Low of the Bar (Stage Two) 102

7.1.5 - Deducing Pressure 103

7.2 - Identifying the Pressure Zone 104

7.2.1 - Pressure Zone 105

7.2.2 - Long Pressure Zone Setup 108

7.2.3 - Short Pressure Zone Setup 109

7.2.4 - Pressure Zone & Congestion Zone 110

7.3 - Trading the Pressure Zone 111

7.3.2 - 6A 4-Hour Example 112

7.4 - Conclusion 120

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Chapter 8 – Anxiety Zone 121

8.2 - Identifying the Anxiety Zone 125

8.2.1 - Anxiety Zone 125

8.2.2 - Long Anxiety Zone Setup 130

8.2.3 - Short Anxiety Zone Setup 131

8.2.4 - Important Notes 131

8.3 - Trading the Anxiety Zone 132

8.3.5 - NG 6-Minute Example 139

Chapter 9 - Weak Pullback 143

9.2 - Identifying the Weak Pullback 147

9.2.1 - Weak Pullback 147

9.2.2 - Weak Pullback in Bull Trend 148

9.2.3 - Weak Pullback in Bear Trend 149

9.2.4 - Trading the Weak Pullback 151

9.2.5 - Long Weak Pullback Setup 152

9.2.6 - Short Weak Pullback Setup 154

9.3 - Trading the Weak Pullback 155

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Chapter 10 – High Quality Setups 165

10.1 - Support and Resistance 166

10.1.1 - 50% Retracement 167

10.2 - Confluence of Setups 170

10.3 - Form of Individual Setups 172

10.3.1 - Outside Bars 173

10.4 - Checklist for Assessing Setups 176

Chapter 11 – Tracking Market Bias with Trading Setups 178

11.1 - Assessing the Success of a Trading Setup 179

11.1.1 - Long Trading Setup 179

11.1.2 - Short Trading Setup 181

11.1.3 - Imperfect Setups 183

11.2 - Tracking the Market Bias 187

Chapter 12 - Re-entries 195

12.1 - The Psychology of Re-entries 195

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12.2 - Re-entry Criteria 197

12.2.1 - Long Setup Re-entry 201

12.2.2 - Short Setup Re-entry 202

12.2.3 - More Tips for Re-entries 204

12.3 - Re-entry Equivalent 204

Chapter 13 - The Meaning of Form 210

13.1 - The Need for Bending Rules 210

13.2 - Principles for Discretionary Trading 213

13.3 - Records of Discretionary Trades 225

13.4 - The Real Meaning of Form 226

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Chapter 1 - Introduction

1.1 - The True Purpose of a Trading Setup

A trading setup is a set of specific conditions that must be met before we enter the market It determines when we enter the market For many traders, their understanding of trading setups stops here They miss the most important role of a trading

setup

Conditions that dictate where we enter, also determine where

we exit The trading setup that signals the entry also offers a natural stop-loss point If we enter the market randomly, we can only exit it randomly as well If we enter the market with a bullish price pattern, we can exit the market when price action negates the pattern

Our trading setup determines our entry price It also determines our exit price if the market goes against us The difference between these two price levels is our trade risk, which is the maximum amount we stand to lose, ignoring slippage and

commissions Hence, a trading setup limits and highlights our trade risk

It follows that a reliable trading setup is not one that offers a good entry It is one that offers a good exit when the market moves against you (i.e a stop-loss) A reliable trading setup highlights a price point which is likely to hold up along the

direction of the market bias The higher the quality of the setup, the more reliable is the associated stop-loss level

The true purpose of a trading setup is to offer a stop-loss level

to help us limit our risk It is not a money-making signal It is a risk control tool

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Having a reliable stop-loss level is a key piece in our quest

towards positive expectancy, a concept so critical that we will spend the entire Volume IV discussing it For this volume, we will focus on learning how to identify high quality trading setups

1.2 - What to Expect

As explained in Volume I, price action works because of the human psychology that responds to price changes Psychology explains how past and current prices affect future prices

Thus, for each price pattern, we will start by explaining the psychology behind it We seek to understand the perspective of the losing traders in the market We must understand the losing traders well, because they are our paymasters If you can find traders who are poised to lose, you can be the one that takes their money from them

As you will learn, the psychology underlying each price pattern

is essential for evaluating the quality of trading opportunities In fact, the underlying concept of each price pattern is more

important than their visual forms

The psychological explanations I provide might not be correct, and they are certainly not the only explanation underlying each price pattern And even if they are correct, they are not always

so However, these explanations make enough sense for me to trust these patterns and trade them effectively

You will also learn to recognise these price action patterns

without a doubt A price pattern encapsulates specific market behaviour but it is not always a trading setup There are

additional criteria before it becomes a trading setup

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For instance, in Chapter 5, you will learn to spot the bearish Deceleration pattern However, for a Deceleration setup, we will need a bearish bar to function as the setup bar before the

market crosses above the pattern’s limit line

(If you need help identifying the price patterns on your charts, the Indicator Pack that is available separately will be useful It contains indicators that mark out the price patterns for you The purpose of these indicators is to facilitate your learning They are purely optional You can definitely employ the trading

method explained here without them.)

Thus, other than having clear rules to identify price patterns, there are also objective rules trading them You will be able to recognise the trading setups in any market Identifying price patterns and their respective trading setups is an objective process, but assessing their quality is subjective The best way

to teach something subjective is through examples, which you will find plenty in this volume

I have included examples from a variety of futures markets and time frames to demonstrate the versatility of the patterns You will notice uncommon time frames like 45-minute and 4-minute

I am not using these time frames because they are giving me any trading advantage As explained in Volume II, any day trading time frame that is above the Minimum Trading Time Frame (MTTF) is amenable to price action analysis Personally, I prefer trading at or slightly above the MTTF as they offer more trading opportunities Thus, if you see uncommon time frames

in our examples, it is because that is the MTTF for that market

at that point in time

A price action setup in itself is not a trading opportunity We need to filter them according to our market bias and evaluate them against our exit strategy We have learned how to figure

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out the market bias in the previous volume In this volume, we will reinforce that skill as we try to identify the market bias before discussing each setup We will mention reward-to-risk considerations briefly in this volume as we discuss the setups However, the evaluation of each setup against our exit strategy (including our reward-to-risk ratio) is fully discussed in the next volume covering “Positive Expectancy”

The final few chapters of this volume deal with the

characteristics of the best setups, and advanced trading

techniques including re-entries and tracking the market bias using price patterns

1.3 - The Holy Grails

Trading gurus have a habit of giving new names to old trading concepts, and publishing them as unique works That irritates

me There is nothing wrong with naming them We need

nomenclature to facilitate communication I have named the setups in this volume too (In fact, call them whatever you want, as long as you find them useful in your trading.)

Most price action setups are named according to how they look like (for e.g Inside Bar, Hammer) or some poetic phrase (for e.g Three Black Crows, Evening Star) However, for the setups

in this volume, as much as possible, I have named them

according to the underlying concepts I believe that these

names are useful in reminding us that as price action traders,

we are trading market concepts, and not merely visual or

mystical patterns

Naming setups is acceptable The problem appears when traders claim them as unique discoveries or first-of-a-kind

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The market repeats itself The same human psychology and market behaviour have always been around Many smart minds have devoted themselves to studying market behaviour The inevitable conclusion is that most trading methods have already been expounded on, in some way or another We are standing

on the shoulders of giants, and I am deeply grateful to them

The price patterns in this volume are based on timeless trading ideas which I have interpreted according to how I look at the market My intention is to explain them in a useful way for day traders of all levels

I must emphasize that these price patterns are not the Holy Grail More importantly, I did not discover them I am not the only trader that has mastered them I am not claiming these price patterns as my exclusive discoveries

On the other hand, I have included references to similar or relevant concepts by other traders I encourage you to cross-reference our works to learn more effectively I do not believe in worshipping any trader, regardless of how successful they are Doing that closes us to new ideas from other traders Instead of rejecting unfamiliar ideas, we should learn openly from different traders You will find success somewhere within these

differences, instead of within one particular trading guru

A word of caution: If anyone tells you that they have found a brand new market secret that will make you tons of money, turn and run

1.4 - Overview of Price Patterns

This volume explains eight price action setups and how to trade them

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Chapter 1 - Introduction The Congestion Break-out Failure introduces the concept of

market congestion It takes advantage of the fact that most break-outs from congestions fail

The Congestion Zone uses the same sideways price action to

project support and resistance areas which we will use to spot trading opportunities

The Trend Bar Failure is the simplest price action pattern It

finds counter-trend traders in their worst positions

The Deceleration finds price thrusts with hidden weakness As

that weakness becomes more apparent, we fade the thrust

The Anti-climax is an unsustainable climatic move When it

goes against the market bias, we have a trading opportunity

The Pressure Zone is the repeated buying or selling

concentrated within a price range After spotting a Pressure Zone, we join in the fun

The Anxiety Zone is the ultimate failure pattern We spot

attractive counter-trend setups, and go with the assumption that they will fail

The Weak Pullback finds pullbacks against the market bias,

which shows no signs of strength Its premise is that a reversal requires a show of counter-trend strength When there’s none, what we have is a retracement and not a reversal

Price action is seldom precise Support and resistance are often not a price level, but a range of prices This is why three out of the eight price patterns above are based on price zones These zone patterns define price ranges that we should pay closer

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Although each chapter focuses on one trading setup, in the trading examples, I frequently refer to different patterns, as they all help to confirm each other and complete our market perspective Indeed, the best trading setups often consist of more than one price pattern

1.5 - Ground Rules

All trend lines in the trading examples are drawn according to the techniques explained in Volume II

For all long setups:

 Take them only when the market bias is bullish

 Place your buy stop order one tick above the high of the setup bar

 Place your stop-loss order one tick below the low of the setup bar

For all short setups:

 Take them only when the market bias is bearish

 Place your sell stop order one tick below the low of the setup bar

 Place your stop-loss order one tick above the high of the setup bar

Hence, according to the order entry rules above, our trade risk

is always represented by the range of the setup bar plus two ticks (The dollar amount depends on the number of contracts you are trading.)

Figure 1-1 below illustrates how the range of the setup bar represents our trade risk for a long setup The same goes for short setups

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Figure 1-1 Trade risk

With these ground rules in mind, let’s begin

Buy stop order

Setup bar

Trade risk

Stop-loss order

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Chapter 2 - Congestion Break-out Failure

2.1 - The Psychology Behind

Generally, traders need the market to move in order to make money.1 Hence, when the market is not moving much (i.e

congesting), traders get impatient Impatience is followed by hallucination

They start to see trading opportunities when there are none They buy and sell the tiniest move out of the congestion Most

of these trades result in small losses which irritates the

impatient and hallucinating traders further

Eventually, price breaks out with a clear move In this case, let’s say price has broken out upwards You can be sure that these traders are not going to let the market take off without them All

of them are going to jump right into that break-out

Uh-oh The break-out is failing and price is falling

Remember, these are traders who have already been tricked many times before They have been hopping on and off different positions They are jittery They are not going to hesitate to exit

at the slightest sign of a break-out failure

Their exit will push the market down Their exit from their long positions is our short entry

This is the psychology behind the Congestion Break-out Failure within the context of a bearish market

1 Except in a short volatility options position

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2.2 - Identifying the Congestion Break-out Failure

There are three components to this setup

Congestion is also called a trading range, because price is

trapped within a range Basically, it is moving sideways and is not making headway in either direction With this

understanding, what should a congestion pattern look like?

The basic price range on any chart is the bar range Each price bar has a price range defined by its high and low If the market

is congested, then the next bar is more likely to stay within the range of the preceding bar than moving out of it The prime example is an inside bar as shown in Figure 2-1

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Figure 2-1 Inside bar within the range of the previous bar

However, we know that the market is deceptive False outs are common in a congested market, just like how false reversals are common in a trending market

break-Thus, we will allow for intra-bar break-outs of the range Even if

a bar moves above the high or below the low of the preceding bar, it does not rule out the possibility of congestion What we will depend on is the conclusive outcome of the bar, which is its closing price As long as the bar closes within the range of the previous bar (like in Figure 2-2), we consider the possibility that the market is congesting

Bar range

Inside Bar

Completely within the range of the preceding bar

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Figure 2-2 Intra-bar break-out

But there is a problem Figure 2-2 does not look like a

congestion pattern In fact, it is a bullish reversal pattern This

is why I said that there is a “possibility” that the market is

congesting It is possible, but we are unable to confirm it, not until we see repeated instances of bar combinations similar to what is shown in Figure 2-2

Hence, our definition of a congestion pattern goes like this

When at least three consecutive bars close within the range of their respective preceding bar, we have a

congestion pattern

Figure 2-3 illustrates a congestion pattern

Bar range

Closed within the range

of the preceding bar; possible congestion

Broke out of the range

of the preceding bar

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Figure 2-3 A lengthy congestion pattern

1 This was the first bar that closed within the range of the

previous bar (i.e the bar right before it) Looking at the chart now, we know that the congestion started with this bar

However, at that point in time, we would have jumped the gun

by claiming that the market was congesting We needed

2 Congestion confirmed here

1 Congestion

started here

3 Broke out of the range of the preceding bar and ended the congestion

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As you can see, a congestion pattern is made up of at least three bars but can theoretically go on forever

This is how I look out for congestion There are many ways to define congestion Some methods employ price action2 and others use indicators like price volatility envelopes Including my definition, all methods of defining congestion have only one thing in common None of them are perfect

Nonetheless, the method described above is a working definition that has so far proven to be effective in my trading

2.2.2 - Break-out

We are already acquainted with the break-out bar from Figure 2-3 Basically, it is the bar that ends a congestion pattern, and the one that immediately follows a congestion pattern

If it closes above the high of the previous bar, it is a bullish break-out bar If it closes below the low of the previous bar, it is

a bearish break-out bar

Figure 2-4 shows another congestion example In this case, the break-out bar is bullish

2 If you are interested in other methods to define congestion using price action, you might want to take a look at Joe Ross’ works regarding his definitions of congestion,

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Figure 2-4 Bullish break-out from congestion

1 This bar tested the low of the previous bar but closed within its range

2 With three consecutive bars that were unable to escape the clutches of their respective preceding bar range, a congestion pattern was formed

3 The congestion lasted for another two bars before a strong bullish bar broke out

2.2.3 - Failure

Break-out failures must be immediate At least that is the kind

we are looking to trade The best failure trades fail immediately, causing a knee-jerk exit of break-out traders

Hence, in our trading rules as stated below, we demand the immediate failure of a break-out before considering a trade

2 Congestion confirmed here

1 Congestion started here

3 Bullish break-out bar

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2.2.4 - Long Congestion Break-out Failure Setup

Refer to Figure 2-5

Figure 2-5 Long Congestion Break-out Failure setup

1 Congestion pattern

2 Bearish break-out bar

3 Next bar must be a bullish bar3 (Setup bar)

4 Place a buy stop order one tick above the setup bar

5 Cancel the order if it is not triggered by the next bar

For another example of a long setup, look at Figure 2-3

2.2.5 - Short Congestion Break-out Failure Setup

Refer to Figure 2-6

3 Throughout the book, a bullish bar refers to a price bar that closed higher than it

3 Bullish bar (Setup bar)

1 Five-bar

congestion pattern

2 Bearish break-out bar

4 Place a buy stop order here

5 Cancel the order if this bar does not trigger it

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Figure 2-6 Short Congestion Break-out Failure setup

1 Congestion pattern

3 Bearish bar (Setup bar)

4 Place a sell stop order one tick below the setup bar

5 Cancel the order if it is not triggered by the next bar

For another short setup example, look at Figure 2-4

2.3 - Trading the Congestion Break-out

1 Three-bar

congestion pattern

4 Place a sell stop order here

5 Cancel the order if this bar does not trigger it

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Figure 2-7 Market bias change confirmed by a Congestion Break-out Failure

1 Price swung down with clear strength to test the bull trend line That definitely warned us against taking new long setups However, we were not so sure if the market was ready for the return of the bears

2 As prices tangled with the trend line, a congestion pattern formed At the same time, we observed that the upper shadows

of these bars were growing They were signs of selling pressure and hinted at the trend line’s effectiveness as a resistance area

In fact, these long shadows form a Pressure Zone, a setup we will introduce later

3 The bullish break-out bar overlapped with the trend line Also, it did not even reach the previous swing high Given these signs of weakness, when the next bar turned out bearish, it offered a decent short Congestion Break-out Failure setup

Nonetheless, a more conservative trader might have given this trade a miss because the market bias was not crystal clear

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break-Chapter 2 - Congestion Break-out Failure

2.3.2 - FDAX 10-Minute Example

This example shows another Congestion Break-out Failure that occurred during a switchover of market bias However, in this case, the new market bias was apparent

Figure 2-8 A low-risk Congestion Break-out Failure setup

1 Price rose with good momentum and broke the descending trend line, raising the possibility of the market bias turning

bullish

2 The bullish market bias was confirmed several bars later as a valid pivot low formed, and we added a bullish trend line

accordingly

3 Almost immediately after the valid low was formed, prices fell

to test the broken bear trend line as a support area The trend line seemed to provide support as the market went into a three-bar congestion

1 Bear trend

line broken

2 Bull trend line drawn with this new valid low

3 Congestion started after

a retest of the trend line

4 Bearish break-out failed with bullish inside bar

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4 A bearish bar broke out of the congestion pattern The out bar exceeded the previous swing low by one tick Then, a Congestion Break-out Failure setup materialised as the bullish inside bar appeared The relatively small range of the inside bar provided an excellent low-risk trading opportunity

break-2.3.3 - ES 10-Minute Example

In Figure 2-9, price was far above the bull trend line Hence, it was wise to exercise caution when trading this instance of

Congestion Break-out Failure

Figure 2-9 Congestion Break-out Failure hanging in the air

1 The nine consecutive bullish bars sent the market up and away from the bull trend line Recall that in such cases, we should pay more attention to any sign of a change in market bias that might occur even before a trend line break

2 The last four bars of the bullish swing formed a bearish

Pressure Zone and a bearish Deceleration These are two setups

2 Pressure Zone

and Deceleration

3 Congestion

at the top of the trend

4 Congestion out Failure setup bar

Break-1 Price moved far away

from the bull trend line

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Should we take this setup?

We got a bull trend line and no apparent bearish momentum It was premature to adopt a bearish bias We remained bullish Hence, this setup was acceptable

However, the wide space between price and the trend line, and the earlier selling pressure at the top were making things a little uncomfortable To deal with this discomfort, you can choose to skip this trade If you decide to take on this trade, aim for a modest target, like the last extreme high of the trend

Figure 2-10 below shows what happened subsequently

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Figure 2-10 Result of warning signs

The moral of the story is to heed the market’s warning signals

2.3.4 - CL 5-Minute Example

Figure 2-11 shows an entire CL session in 5-minute bars At the start of the session, we held a bullish bias based on earlier price action (not shown in this chart) The trend line on the chart originated from the price action of the previous session, and was adjusted as explained in point 4 below

Congestion Break-out Failure

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Figure 2-11 Congestion Break-out Failure with momentum support

1 The session opened with a strong gap upwards We had to watch out for any strong bearish thrust that might compromise our bullish market bias

2 While the three-bar downthrust might have spooked some bulls, none of the tested lows showed serious bearish

momentum Thus, we remained bullish

3 Furthermore, the first strong thrust that exhibited strength was a bullish one That cemented our bullish bias

4 As this bar exceeded the last extreme high, we adjusted the trend line to accommodate the earlier pullback action The trend line in Figure 2-11 was a result of that adjustment

5 Immediately after we adjusted the trend line, a bearish bar broke out of a congestion pattern to test the trend line The trend line provided solid support and a long Congestion Break-out Failure setup emerged

5 Congestion Break-out Failure with trend line test

2 None of the tested lows showed good momentum

4 Exceeded the last extreme high and the trend line was adjusted to accommodate the pullback

1 First bar of the

session gapped high

above the bull trend line

3 First swing in the session

to exhibit momentum

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The quality of this setup was fine However, some traders might feel uneasy about buying near the top of a bull trend due to reward-to-risk considerations

Figure 2-12 Failure of a final break-out attempt

1 The strong bear swing that went a significant distance below

a bull trend line was a clear signal of a new bearish bias

2 As the market pulled back upwards, it got into a congestion pattern that lasted six bars

2 Six-bar congestion

3 Congestion out Failure resisted by the earlier congestion

Break-1 Strong show of

momentum by the bears

below the bull trend line

Earlier congestion

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3 The break-out above the congestion was resisted by an area

of earlier congestion, which enhanced the quality of this

Congestion Break-out Failure setup Using congestion patterns

as support/resistance areas is the basis of the price pattern setup we will discuss in the next chapter: Congestion Zone

In this example, the Congestion Break-out Failure setup seemed like the result of a weak last-ditch attempt of the bulls It was excellent

2.4 - Conclusion

You might have found this chapter slightly difficult to digest Notwithstanding that, I’ve placed this setup at the beginning of this volume There are two reasons for this arrangement

The first reason is this Congestion is not only a key feature on any price chart, it is also the cause of frustration for many

traders as they experience numerous whipsaws when the

market congests

Traders deal with congestion differently They either avoid

trading completely or insist on trading within a congested

market

The first option is safety with a cost The cost comes in the form

of missed trading opportunities Many good trades come right after a period of sideways action

The second option is pure stubbornness In this case, we are less concerned with the financial cost This is because the

emotional cost is much higher and far more destructive The experience of consecutive losses in a stagnant market will erode your confidence and discipline In the heat of the moment, you will want to make up for your losses, and you will overtrade

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However, with this setup, we will capitalise on such trading behaviour instead of adopting it

(An exception is to scalp for very small profits within the

congestion pattern However, this is not the approach covered here.)

The Congestion Break-out Failure setup seeks to strike a

balance between these two options

We step aside as soon as we realise that the market is

congesting, wait for a clear break-out, and enter only if the break-out fails immediately

Thus, we avoid being stubborn in a congested market while still paying attention to possible trading opportunities You will find that this setup does not occur often, but it is a powerful setup given the right market bias

The second reason for introducing the concept of congestion early is because I will be referring to congestion frequently as I explain the other setups

This is because congestion patterns function as effective support and resistance In fact, the next chapter focuses on this aspect

of congestion patterns

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Chapter 3 - Congestion Zone

3.1 - The Psychology Behind

We have learned about congestion patterns in the last chapter

We also know that price will eventually break out of the

congestion area The break-out either succeeds or fails The Congestion Break-out Failure setup bets on its failure

However, regardless of whether each break-out succeeds or fails, given sufficient time, price will inevitably move away from the congestion When it does, we are left with two groups of traders

For ease of explaining the two different perspectives, let’s

assume that price has broken out of the congestion with a

bearish thrust and is continuing its way down as shown in Figure 3-1

Figure 3-1 Perspectives of different groups of traders

2 The eventual

break-out

3 Traders who missed the break-out intend to sell when the market gets back here

1 Three-bar congestion

4 Traders who caught the break-out place their breakeven stops here to cover

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Chapter 3 - Congestion Zone

The first group consists of traders who got left behind Price broke out and took off, creating wealth for traders who got on board and sold the market For some reason, these traders missed the plane

Guess what they are repeating to themselves in their minds?

“If price ever gets back to the break-out point, I’ll have a

second chance to sell, and I am not going to miss it.”

Essentially, they are waiting for a pullback to the price level of the congestion area so that they can get into a short position without chasing the market

The second group is made up of traders who got on the plane They managed to join the break-out and are now smiling at their paper profits on their short positions

What does the congestion area mean to this group of traders now?

It is the breakeven point of their trades In order to prevent a paper profit from turning into a loss, they will place breakeven stops around the price range of the congestion area

While the first group of traders stands ready to buy, the second group is ready to sell It is an interesting scenario

The question is: Which side should we stand on?

I say let’s sell

The decisive break-out below the congestion area proved that the market was unwilling to buy at prices higher than the

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