It is astonishing fact that most of us still get confused when it comes to reading a market. This is the biggest killer in and differentiating factor between Wining and Losing trades. No matter what trading strategy traders use, they must always be able to read the chart with naked eyes without any indicators. Below is an example where I have tried to explain it a bit in steps. Lets walk this through together.
Reading A Market Trend:
1. On a chart we always start with a Swing High or Swing Low. In this example we have a Swing High. We call that Initial Structure High ( ISH ). In case of bull market we will call that as Initial Structure Low. We see that the market has been in heavy action in Step 1. it creates a New Structure Low (NSL) i.e. Swing Low.reading market trend structure reversal
2. Then in in Step 2 it reverses from NSL and tries to retest upwards and gets rejected. However it comes back down to NSL and does not violate it. This is the first major sign of trend reversal as no new Lows are being made. Remember, for a market to stay in it has to create new lows.
3. Market then rallies to create a NSH which violates the previous high (Marked In Yellow). This satisfies the second condition for an Up Trend. Remember for an Up Trend we need two conditions i.e. Higher Lows and Higher Highs. This confirms that market trend has shifted.
4. In 4th step we enter a consolidation phase where price moves in a range. In consolidation phase the price does not violate Highs and Lows. It stays in a range.
5.In 5th step, we see that market breaks out of the range upwards creating further new highs. Now for it to stay in up trend it must respect previous low. It is common for the price to come back to retest those lows but it must not violate previous lows.
How To Take Trading Opportunity (S.E.T.):
1. Stop Placement: If we were to take a trade at the market we must have our stops below previous major lows.
2. Entry and Targets: For targets always look at the previous highs. The new previous high from here is the Initial Structure High. So a retest of that High will be our target. But if we are conservative in trading your first target must always be 127.2 of last high. However, this in this chart gives a little less than 1:1 Risk/Reward ratio. If that does not work for us we can either wait for the market to go down a bit and take the entry at market to give us better R/R ratio.