Market Structure and Price Action Study

 

"Fortune favors the prepared mind."

… Louis Pasteur

 

In a recent article I discussed the importance of regular study of market structure and price action. See here if you missed it – http://yourtradingcoach.com/trading-business/a-simple-step-to-becoming-a-better-trader/

After every trading session, find something you can learn from. Perhaps a market structure feature. Perhaps an interesting sequence of price action. Perhaps a trade management insight. Whatever you find to be of most value!

Document it.

Store it in your journal.

Review your journal as often as possible.

The article included two examples of market structure & price action study, to get you started in creating your own journal.

One of these provided an example of the following rule of thumb – A strong momentum drive into the close with no follow through overnight provides an initial expectation of a rangebound environment.

Market Structure and Price Action Journal 

Market Structure and Price Action Journal

Market Structure and Price Action Journal

Market Structure and Price Action Journal 

 

Last Friday's Crude Oil market offered a very similar example. As a result of my prior study and journaling, I was able to commence the session with an expectation of a rangebound market within clear areas of potential support and resistance.

This is why we create and use our journal. The process of documentation and subsequent review allows us to internalise valuable "Rules of Thumb", allowing for quick recognition of similar situations in future.

Here is the recent Crude Oil example:

 

Market Structure and Price Action Journal

Market Structure and Price Action Journal

Market Structure and Price Action Journal

Market Structure and Price Action Journal

 

Alright…. let's look for some important points we can take out of this.

 

(1) Firstly, it wasn't perfect. Why is that? Well every day is unique. The price movement each day is a result of the orderflow in the market that day. And that orderflow is the result of the buy and sell actions of the market participants. Traders, on different days, will base their buy and sell decisions upon different factors.

There is a common saying that, "the market doesn't repeat, it rhymes".

As such, every actual occurrence will be unique.

The best tool for operating in an environment of uncertainty, are rules of thumb, not fixed rules. And that's exactly what our Market Structure and Price Action Journal provides… rules of thumb discovered through a combination of observation and our understanding of how psychological heuristics and biases influence the decision making of market participants.

Our journal provides the following lesson: "A strong momentum drive into the close with no follow through overnight provides an initial expectation of a rangebound environment".

This is a rule of thumb… it's not a fixed, permanent and guaranteed rule.

The rule of thumb was far from perfect in this case. But it allowed me to start the session with a clear expectation of resistance somewhere in the vicinity of the congestion prior to Friday's momentum drive.

The area of resistance capped price nicely, as anticipated. Although to be honest I'd have preferred the lower edge of the area to have more influence.

The session lows did not reach our initial area of support. Rather, support formed through a failed break of the opening range low. (Opening range theory should also be a topic in your Market Structure and Price Action Journal… alerting you to this potential additional level of support!)

So the first important point is… rules of thumb… not fixed rules.

 

(2) Secondly, I'd like to repeat and reinforce the final note added to the above image: As always… an initial expectation should be amended if subsequent data suggests otherwise!

Had price rallied from the open with strength, for example, I may have amended my expectation to include the possibility of a break through resistance, looking for trading opportunity LONG on some form of breakout pullback.

 

(3) And finally, if you trade CL and did not have the same initial thoughts of a potentially rangebound market… why not? Are you using a Market Structure and Price Action Journal? And did it have an entry based upon the examples in the prior article?

If not, consider starting a journal now. The rules of thumb that it provides will prove in time to make it the greatest trading book you have ever read.

 

Happy journaling,

Lance Beggs


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YourTradingCoach - Admin

1 Comment to “Market Structure and Price Action Study”

  1. pat says:

    There is a huge amount implicit in that statement about rhyming.

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