More on Structure

Markets cannot be traded without defining a structure, a frame work within which prices move. Nobody knows and will never know the exact structure of the market. It is an approximation, just a thumb rule

We need a directional price move to make money from market. So most of the people define a simple structure like HH/HL  LL/LH  for a trend and try to trade this frame work.( Pic 2). Trade tactics is an entry either on BO or on a pull back. Most of the time pull backs are not that simple. We rarely find single leg pull backs in text book fashion. When the trend is not very strong pull backs become complex and become ranges ( Pic 3)

Later, traders understand this structure is inadequate as markets do not trend most of the time and in between it ranges. Solution is either to stay out or learn to sell the highs and buy the lows of Ranges (Pic 1)

We consider ranges as the building blocks of trends. Successive higher or lower ranges are considered as trend. We try to buy the lows and sell the highs of these ranges. In a higher range we prefer to buy the lows to stay with the trend. Selling highs are preferred when price is trading in a lower range. If you plot ranges in a time, price graph it will look like Pic no 4. Ranges may overlap and can gap up also.

When price escapes and move over to a new area nobody knows where it can range later. Ranges form when price get trapped between demand supply areas. The concept of DPs and Flips helps us in this regard. Most of the time Decision Points and Flips act as range extremes. ( Pic5)

Pic 6 represents a typical range. A range forms when price gets trapped between demand and supply zones. Sellers are aggressive when price moves to the higher area. Buyers dominate the lower area as represented by shaded side bar. There will be a mid point for all the ranges where price simply drifts as neither the buyers nor the sellers are aggressive there.

Price move inside the range itself is mostly random and most of the time just noise. It is extremely important to have the entry and exits as close as possible to the range extremes for a good RR. Average range of NF in 3M time frame is within 20-25 points. Waiting for confirmation reduces the profit and increases the psychological pressure.

I feel, we need to take more TST and TT entries. I will try to write more about these types of entries in next week.