Long or Short?
Even with an accurate understanding of swing highs, swing lows, consolidations, contractions and expansions, it may still be unclear which way to point. Should we be looking for longs, or should we be looking for shorts?
NZDUSD 4H – Pepperstone MT4
Once again, the structure of the market can come to our aid. In particular, just by observing the open of each day and week, it becomes clear which direction the market is facing.
NZDUSD 4H Chart with Week Open lines drawn – Pepperstone MT4
It should be self-explanatory: it’s visually evident that as long as price is below the weekly open, it makes more sense to look for shorts. When the price is above the weekly open, it makes sense to look for longs.
NZDUSD 1H Chart with Weekly & Daily Opening lines – Pepperstone MT4
Once again it should be easy to notice that when price is above both weekly AND daily open lines, there’s quite a strong force at work. These are the best days to look for continuation. The weekly and daily opening lines also allow you to discern retracements from reversals:
- if price is above the weekly open, but is below the daily open à retracement
- if price is below the weekly open, but is above the daily open à retracement
- if price shifts from above to below the weekly open à reversal short
- if price shifts from below to above the weekly open à reversal long
What’s behind market structure?
So now we have all the key building blocks in place to understand market structure:
- continuation
- swing highs & swing lows
- weekly & daily opening levels
But why are these points important? What lies behind market structure and makes the market move in this repetitive way? The answer lies within the behavioural traits of market participants.
These kinds of price levels or zones are usually associated with a relatively large number of transactions (from both buyers and sellers) and that makes them consistent focal points. Because these areas tend to promote more trading, these areas see even more trading volume and have a tendency to reinforce themselves. This is why areas of support and resistance usually repeat or stay in force.
Then, there comes the time when the agents of support or resistance simply exhaust themselves and the price pattern breaks through the zone. This brings us to an important twist. These focal points harbour buyers and sellers. Often, once the buyers are exhausted, the zone becomes a good selling point (and vice versa). This might not seem very logical at first, but when we take into consideration the market's psychology, it can make more sense.
NZDUSD Daily Chart – Pepperstone MT4
In the chart above, let's assume traders sell at point 1. The market has a good decline, going to point 2 and the traders are feeling good. Then the market takes a bad turn and rises above their entry point, going towards point 3. Now the traders are concerned about holding onto a losing proposition, but still don't want to book a loss. They hold, hoping that the market will turn around and reach their entry point, so they can reverse their positions at point 4. So at point 4, the marketplace is flooded with buy orders. At point 1, we had resistance. At point 4 (same area) we have support. The opposite would be true for a support-becomes-resistance.
USDCAD 4H Chart – an established downtrend, until price false breaks the previous week’s low, and flips to positive on the current week. We start looking for counter trend longs up to the previous week’s high print. That’s where the first important decision will be made.
USDCAD 1H Chart – drilling down a little more, we can see how price continued to print higher lows and higher highs through the previous week’s high, and then gave an evident pullback situation on the hourly chart. But the move has been quite aggressive with very strong momentum. In times like this, you can also drill down to smaller time frames, so long as you understand which way you’re pointing, and what levels you should be watching.
USDCAD 15Min chart – so long as we keep an eye on the important levels, and we play in line with evident momentum, we can drill down to sub-hourly time frames to look for high probability entries. We are still counter trend, until we break & hold above the prior week’s high.
USDCAD 15Min Chart – price offers a 15min entry above prior week’s high and through the Asian session’s high, and then pulls back the next day offering a nice evident entry where many short term, novice traders would have been looking to fade the newly established upwards trend. Instead, we know that we are above a prior week’s high and momentum is to the upside, so we simply look to buy these dips and also buy evident consolidation breaks.
Keep it simple and subtle
- By clearing your charts and paying attention to market structure, you will avoid confusion and always be preparing your trades using the same angle;
- You will always know which way to be pointing;
- You will always know how to discern a retracement from a reversal;
- You will have the possibility to trade any asset, on any time frame.
