Now let’s go through an example to see if you’re on the right track.
The recent price action indicates a mostly ranging market:
The last two (bear) candles indicate that the market price is moving down… but if we look at the overall picture we can see that there is no strong momentum in either direction.
So at this point, it’s safe to say that the market is right now in ‘no man’s land’.
And what do we do when the market is in ‘no man’s land’? That’s right, we’ll stand aside and do absolutely nothing.
Let’s wait for the market to first make its move.
Suddenly, we see a huge bear candle.
The market price has moved with strong momentum, and this is when we will prepare to enter a trade.
For now, we won’t be concerned about specific entry techniques. At this stage, the most important thing is to know how to:
• Interpret what the market is doing
• Tell when we shouldn’t be entering a trade
• Tell when we can consider entering a trade.
So let’s access the current situation…
Who is in charge of the market right now? The buyers or sellers?
The sellers.
• For how long have they been pushing prices in their direction?
Just in the latest candlestick. This is the first strong bearish move.
• How strong is the momentum?
It’s the strongest move in recent history.
• Does the momentum look sustainable?
Yes. There is no indication of the slowing down of momentum
At this point, we can consider taking a (sell) trade because all the signs point to a follow-through of the bearish momentum.
For the sake of practice, let’s hypothetically assume that we enter a sell trade right here.
Now let’s see what happens next…
Yes! The trade is in profit!
But we must now be careful, because the bearish momentum looks to be slowing down.
We know the momentum is slowing down because:
1. The bearish candle bodies have gotten smaller; and
2. A bullish candle approximately the same size of the previous bearish candle
has formed.
Now, let’s access this new situation.
Who is in charge of the market right now? The buyers or sellers?
The sellers continue to be in charge.
• For how long have they been pushing prices in their direction?
Prices have been pushed down over the past 4-5 candles. The bulls have not been able to push back with much strength at all.
• How strong is the momentum?
The overall (big picture) bearish momentum remains strong, but the latest 1-2 candlesticks indicate that the momentum is slowing down.
• Does the momentum look sustainable?
At this point, yes.
As long as we do not see a strong bullish candle or a reversal signal, the bearish momentum is more likely to continue, than not.
With the slowing down of bearish momentum, there is now a lower chance of the market price continuing to move down, compared to when we first entered the trade.
Thus, we will now be looking out for signs of a bullish reversal. (Hint: where is the latest Anchor candle?)
Our priority is to protect as much of our paper profits as possible, and we will do this by closing our (sell) trade at the first sign of a potential price reversal.
Let’s see what happens next…
The market made a (bullish) pullback… but the pullback has now flattened out.
What do we do here?
Well, let’s access the situation…
Who is in charge of the market right now? The buyers or sellers?
On the whole, the sellers remain in in charge. The buyers have only managed to push prices back up approximately 30% of the bearish move.
• For how long have they been pushing prices in their direction?
They have not been able to push prices back in their direction for the past 12 candlesticks.
• How strong is the (bearish) momentum?
The bullish pullback looks relatively significant and has clearly slowed down the initial bearish momentum.
• Does the (bearish) momentum look sustainable?
Prices have not closed above the opening price of the latest bearish Anchor candle (you spotted it, didn’t you?), but it is coming close to doing so.
As long as prices don’t make a further bullish move, the bearish momentum is more likely to continue than otherwise.
With no indication of a reversal, we can continue holding on to our ‘sell’ trade for now.
Let’s see what happened next.
As it turns out, the bearish move soon resumed and the market price made a new low.
However, we now see that the bearish momentum has weakened again and the latest candlestick shows strong bullish momentum.
So… what do you think? Is this a reversal? Should we close our ‘sell’ trade here? (Hint: where’s the latest bear Anchor candle?)
Let’s take a look at what happened next…
As it turns out, the market price did not close above the opening price of the latest Anchor candle, and the market sellers are still going strong.
So is now a good time to enter a new ‘sell’ trade?
Let’s take a step back and look at the overall picture by comparing the strength of the initial bearish move with the recent bearish move.
Do you see how the latest bearish move is significantly weaker than the initial bearish move?
If we step back and look at the bigger picture, we can see that the overall bearish momentum has clearly slowed down.
So unless there’s a compelling reason for the market to keep moving down from here, now is not a good time to be entering the market with a new ‘sell’ trade.
In fact, this looks like a good time for us to close our initial ‘sell’ trade to book the profit!
So what happened here?
First of all, prices continued to move down slightly… but we soon see one reversal signal followed by another: the market closed above 2 Anchor candles.
And, notice the bullish strength of the latest candle.
These are all signs that point to the growing strength of the market buyers.
At this stage, we should be very concerned about a (bullish) reversal!
As it turns out, our concern was warranted. Prices continued to move up as we expected.
How did we know beforehand that this was likely to happen? Did we have a magic crystal ball?
Nope… we clearly saw weakening bearish momentum, followed by prices closing above the opening price of 2 consecutive bearish Anchor candles. All the signs were there!
And now, we see a long top shadow on the latest candle… so what do you think
is most likely to happen next?
Did you guess that prices are likely to reverse back down again?
And notice, how prices consistently closed below the bullish Anchor candles…
so we know that the market price is most likely to continue moving down from here.
Can you see how we use the same few concepts over and over again to read the market? We don’t have a crystal ball to predict market prices, but this is pretty darn close!
So keep applying these concepts, and your trading will improve by leaps and bounds.
