I posted the following image on social media on Tuesday, showing a nice example of a false breakout and reversal from a period of volatility contraction.
The important point though… and the one which offers the most value to you… is not the image itself but rather the text that was posted alongside the image.
I received the following questions on Twitter:
(1) What does my price sequence study involve?
The study relates to observations in price action or market structure. It does not typically involve study of the trades taken during the session. I have a separate part of my review process for trades.
Sometimes it is structured and will focus on a particular topic for a week or so. Maybe I will decide to study transitions from one market environment to another. Or to study price behaviour on the break from a higher timeframe trap. Or maybe… well you get the point. If there is a particular topic of interest to me then I might focus solely on that topic for a period of time.
See here if you want a list of possible "categories" for your Market Structure & Price Action study – http://yourtradingcoach.com/trading-business/market-structure-and-price-action-journal-categories/
But other times, when there is no particular topic of interest, the study will be unstructured and based on any observation which I find interesting. Often this will be a sequence which I didn't read well. Perhaps something I didn't see coming. Or something I didn't react to quick enough.
For example, the shift in sentiment occurring from point B to C in the volatility contraction above, is one that I was too slow to recognise and react to. So it became the focus of my study that day.
(2) How much time do I devote to this study?
Typically no more than 10 minutes. The topic will become obvious during the session. All it typically takes is a quick review, along with identification and recording of lessons learnt.
(3) What are some questions I ask?
That is largely going to depend upon the topic you're studying. And it should be self-evident. But it should relates to (a) how did price behave, (b) how could I have recognised this more quickly, and (c) how should I have responded to this information?
Let's look at a few more examples from Tuesday and Wednesday this week:
Tuesday offered a brilliant example of the saying, "The market doesn't repeat, it rhymes".
Note the similarity – volatility contraction, expansion, and then opportunity available in the opposite direction as the expansion leg fails.
Let me be perfectly clear – I am NOT a pattern trader. But volatility contraction and subsequent expansion is one pattern that I do often see. And one that I do often take advantage of.
Typically it's through seeking YTC PAT PB opportunity, on the first pullback after the breakout, expecting the expansion leg to continue to drive with momentum.
For whatever reason, I've been slow to react to a failure of the expansion, for two days in a row now. I missed it on Monday. I missed it on Tuesday. Through reinforcing this lesson, I aim to ensure I will NOT miss it again.
Thankfully, I'm not going to bore you with another example of a false breakout from volatility contraction.
Let's start with a higher timeframe chart:
Ok, so nothing surprising so far. The review basically confirmed my real-time thinking.
But then the review also picked up something that I "should have" been aware of intra-session, but did not consider at all.
Let's look at the overnight data leading into the session open.
Nothing changes here in terms of decision making. The failure of the second break is still the critical point at which I should accept that my "feeling" of a bearish market bias was wrong.
But this additional information does add weight to the earlier analysis. And it's information I should have been aware of intra-session.
If the market sentiment was indeed bearish, then one of these breaks of a key overnight level, SHOULD have held. The fact that they couldn't hold confirms that my "feeling" about market sentiment is likely wrong. Watch for a break to the upside and further dominance by the bulls.
I do take note of key overnight levels pre-session. It's clear though, with hindsight, that this information did not make it into the session (at least not in the forefront of my mind).
Lesson: Greater emphasis is required on pre-session levels.
I'm not going to do another. But I just can't resist sharing this.
From Thursday, on the 3 minute timeframe:
This is one of the key benefits of a Market Structure & Price Action Journal. Over time you start to see familiar patterns of price behaviour. All of which builds skill in real-time assessment of market bias and real-time recognition of opportunity.
Now it's your turn:
I received this request on Facebook, following the original social media post: "Please post something on Indian markets like NIFTY or BANKNIFTY. Thanks".
My response: "I don't trade the Nifty so can't help you with that market. But I highly recommend you commence creation of your own Market Structure & Price Action Journal. You'll achieve far greater value from that daily practice, than from anything I could provide."
Re-emphasising the point from the original social media post:
Regardless of your market, your timeframe, or your strategy. Give it a try and see if you get the same benefit that I received.