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.
