Step 4 :- Identifying the High

Probable Future Direction.

Posted onMay 4, 2015AuthorJagadeesh Chandra KolliLeave a comment

Hello all,
We now have the structure, trend and trend violation point and
the strength/weakness in the trend.
Based on this information, we now need to predict the high probable future
direction of the market. It is quiet simple and we just need to remember only
6 points for that.
Before moving into that, let me give basic tenets on which those 6 rules are
postulated.
1.

The trend (inertia) in the price movement plays a very crucial

role. We will only consider the trend reversal at the boundaries of
the structural framework when weakness is shown in the trend.
No matter how weak the trend is, we never expect a reversal of
trend in between the structural boundaries until that time when
price breaks the trend violation pivot.

Look at the above images. In the first image, weakness is shown at the
structural boundary and hence we anticipated a trend reversal ( i.e price
will break the trend changing pivot). In the second image, weakness is
shown by the trend in between the structural boundaries. We anticipated a
complex pullback (3 swing retracement), rather than a normal pullback
(single swing) and expected that the price will continue to move in the
previous trend after the complex pullback (CPB). Look that the trend
violation point is not broken and price continued its uptrend after the CPB.
2.
Price always moves in the direction of strength and against the
direction of weakness.
Using the above two points, we postulate the rules for the high probable
future prediction. First, we will look at the rules that have to be applied when
price is in between the structural framework support and resistance. After
that, we will look at the rules that have to be applied when price is
interacting with the range boundaries.
WHEN PRICE IS IN BETWEEN THE STRUCTURAL SUPPORT AND
RESISTANCE :RULE 1 :When there is no weakness evident in the trend
(uptrend/downtrend), we expect that the trend will continue with a
normal pullback (single swing).

RULE 2 :If weakness is shown in the trend, we expect a complex pullback

instead of normal pullback. We dont expect the trend change.

RULE 3 :When price is in a sideways trend/range, if there is no strength

displayed at the range boundaries, we expect that the price will
continue to move in that range.

RULE 4 :When price is in a sideways trend and strength is shown on

approaching the range boundaries, we expect a range breakout.
Then we watch the price closely for evidence of weakness after the
breakout.

1.

If weakness is shown in the direction of the breakout, we

expect that the breakout will fail.

2.

If weakness is shown in the pullback to retest the range

boundaries, we expect that price will continue in the direction of
the breakout.

These are the four rules that must rotate in our mind when price is moving in
between the structural support/resistance. Now, lets look at the rules when
price is interacting with the structural support/resistance.
WHEN PRICE IS INTERACTING WITH THE STRUCTURAL BOUNDARIES
RULE 5 :When there is no evidence of strength shown on approaching the
structural support/resistance, we expect the TEST of the framework
holds, i.e, we expect that the trend will reverse.

RULE 6:When price is showing strength on approaching the structural

framework boundary, we expect a structural framework breakout.
Then we watch the price action for clues of weakness after the
breakout.
1.
If weakness is there in the direction of the breakout, we
expect that the breakout will fail and price returns to the previous

framework.

2.

If weakness is shown in the pullback to retest the structural

framework boundary, we expect that price will continue to move
in the direction of the breakout.

These are the 6 rules that we use for predicting the high probable future
direction. Dont think about entries yet. We now have high probable future
direction. Now we need to find a low risk area to enter into the high probable
direction and that will be covered in the next two steps.

Make sure you understand all these before moving into the next step.
Everything we have done until here is very very crucial for your profitability.

Step 5:- Visualizing the Future price

action and Ongoing Market
Analysis.
Posted onMay 6, 2015AuthorJagadeesh Chandra KolliLeave a comment

Hello all,
Before going into the fifth step, let me cover how we are going to update our
bias when the new information is added to the chart. This is what we call
ongoing market analysis. Remember, Ongoing market analysis is conducted
throughout the session. If you have no positions in the market, but have a
bias, we perform ongoing market analysis to update the bias with new
information. If you have a position, we perform ongoing market analysis to
manage the trade in such a way that we decrease the risk and increase the
opportunity to profit. We call this as Trade Management. No matter how
experienced you are in trading, you can never perfect the trade
management. There is always room for improvement in this area. So, the
only thing that we can do is to make our performance better than the
previous trade. Thats the reason why I always say trading is a process of
personal development and there is no shortcut to it. Instead of regretting
about the mistakes we have done, we must learn something out of it to make
the next trade better. Maintain a trade Journal and review them often. You
will be on the way to succeed in this business.
Ongoing Market Analysis :We have formed our bias ( high probability future direction) from the 6 rules
in step 4. But, that bias is formed using the data available till then.
Then what about the new data that is going to be added? Will the new
market data has the potential to effect our bias we have formed using the
past data??
Absolutely. So, we must update our bias with the addition of new
information. As I have already written in one of my previous articles that we
are not concerned with the continuous stream of data, we just need to look
at the packet of data represented in the form of candle in our chart. You can
read it here if you want.
So, when a candle is formed in our trading time frame chart, we will
question it. We will check whether the new candle is in conformance with our
bias or it is objecting our bias. If it is in conformance with our bias, we will
continue with the same opinion on future direction and wait for the next

candle. If the new candle is not in conformance with the bias, we will then
start from step 1, to form a new bias.
How will we know that the new candle is supporting or objecting our bias?
Make a note that in the 5 parameters of a candle, namely, Open, High, Low,
Close, Volume, close is the one that decides the nature of the candle. I
dont know the exact reason behind it, but most technical traders believe
that and that might automatically turns out to be a self fulfilling prophesy.
We dont need the exact reasons, if something works for us, use it. If
something doesnt, discard it. There is no right and wrong in trading. The one
that is giving you good profits is the right one for you.
Let me repeat what we are looking for. We have formed our bias, either
upside or downside using the six rules in step 4. Now when a new candle
forms, we need to know the strength of bulls and bears after the formation of
the candle. If the bias before is upside, the new candle must show bull
strength. If it is downside, the candle must show bearish strength. If that
doesnt happen, we will start from step 1 to reassess the bias.
This comes to the main point of our ongoing market analysis.
We need to know that the new candle formed is owned by bulls or
bears to make a decision.
We will do that in two steps.
1.

By comparing the close of the candle with the range of the same
candle and
2.
By comparing the close of the candle with the previous candles range.
1. Close comparison with the range of the same candle:-

We will check whether the close of the new candle is that top 1/3, bottom 1/3
or centre 1/3 of the total range of the candle.
If the close is at top 1/3, it is a high close candle. Relatively bulls are
strong in this.
If the close is at the centre 1/3, it is a mid close candle. Neither bulls
nor bears are strong in this.
If the close is at the bottom 1/3, it is a low close candle. Bears are
relatively strong in this.

Once we classify the candle with the help of the close and range comparison,
we move on to the next step.
2.By comparing the close of the candle with the previous candles
range:-

If the close is above the high of the previous candle, we name it as

Bull candle.
If the close is in between the high and low of the previous candle,
we name it as Range candle.
If the close is below the low of the previous candle, we name it as
Bear candle.

Using the above two comparisons, we will have 9 combinations which points
to different degrees of bullishness and bearishness.
1.
2.

High close Bull

Mid close Bull

Strongly Bullish.
Moderate Bullish.

3.

Low close Bull

Less bullish. Can be considered as Bearish
in some context.
4.
High close Bear Less Bearish. Can be considered as Bullish
in some context.
5.
Mid close Bear
Moderate Bearish.
6.
Low close Bear
Strongly Bearish
7.
High close range Neutral sentiment, but slightly leaned
towards bulls.
8.
Mid close range Neutral sentiment.
9.
Low close range Neutral sentiment but slightly leaned
towards bears.
Dont be scared as it seems like greek and latin if you are a beginner. They
are not that tough and it hardly takes around 5 seconds to define this 2candlestick pattern sentiment when you start trading.
Now, we know who owns the candle, Bulls or Bears. Then the next step is to
look at this 2- candlestick pattern sentiment in the context of our bias and
make a decision.
If the bias is bullish, we expect the new candle to show some sort of
bullishness.If the bias is bearish, we expect the new candle to show some
sort of bearishness. If that doesnt happen, we will start our analysis from
step 1.
These are the three steps involved in ongoing analysis1.
Determine candlestick sentiment by comparing the close with
the range of the same candle.
2.
Determine candlestick sentiment by comparing the close with
the range of previous candle and then determine the 2candlestick pattern sentiment.
3.
Now, consider the context (i.e. bias) with the newly added
candlestick sentiment and make a decision.
The process is quiet simple and there is no reason to complicate it. Now that
you know how to question a newly formed candle to seek the an answer
about the sentiment, lets move on the fifth step of our analysis.
Step 5 :-Visualizing the Future price action:Have you remembered the article I have written about Situational
Awareness . Our productivity depends on maintaining the situational
awareness throughout the session. We should never be surprised with the
new information to let our decision making more fluid. We must be prepared
to take action by keeping our emotions at check when new information is
added.
In an environment of uncertainty, i.e. in the financial markets, you will
always be surprised no matter how prepared you are. So, you must know
what kind of future price action supports your present decision. You must

also know what kind of future price action proves you wrong. If you are
prepared for these two scenarios, you wont be effected by the emotions
caused by surprises of the market and that directly controls the damage of
your bank account.
This is what we do in this fifth step. Two questions we must ask.
1.
What kind of future price action validates my present bias?
2.
What kind of future price action invalidates my present bias?
When I say price action in the above, I am referring to the 2-candlestick
pattern sentiment. So, we visualize the future candles sentiment before it
appears on our chart.
Once you visualize these two scenarios, you can react with ease with the
addition of new market data.
Remember, we perform our ongoing analysis throughout the session. Even
after entering the trade.
Sixth step has been discussed in the previous article and this concludes our
analysis before entry. After completing these six steps, we will prepare our
entry procedure and that I am going to write in the next article. We are
approaching the end of the theory part and I will show how to implement all
these steps with the help of realtime charts once we are done with the
theory. Until then, dont lose focus and familiarize yourself with the
procedure.

Step 6 :- Identifying the low risk and

high probability setup regions..
Posted onMay 5, 2015AuthorJagadeesh Chandra Kolli4 Comments

Hello all,
We now have a prediction of how market is going to behave in the near
future. We call this future prediction as Bias. Remember, bias is just a
prediction and there is a chance of getting it wrong. So, we must be prepared
to protect our account if we are proved wrong by the market. Knowing the
high probable direction is not the green signal to enter into the trade.
We must identify the areas on chart to consider an entry in the high
probable direction where the risk is less so that we dont lose much
when market proves us wrong.
Make a note of the above point. We call the low risk high probability areas on
the chart as Setup / Wholesale areas. Once the setup area is identified, we
will wait until price comes to the identified setup area. Dont think of the

entry yet. One more point to consider. Price must show weakness on
approaching the setup area. Then we will place our entry order which we will
look into in the future articles.
Now the question is how to identify those wholesale regions?
Lets get back to our previous discussion about price and markets. We have
already understood that market is not the price chart or the net orderflow.
Market is a collection of traders taking trading decisions. We also know that
you can only profit when someone else loses. This has been discussed in
detail here.
We now have the high probable future direction from our analysis and we
know when someone else loses, there is a chance for you to make money if a
trade is taken against them when they accept that they are wrong and are
ready to exit their positions.
This is the basic idea behind our strategy. Read the above paragraph again if
the concept is not clear as it is very very important. So here it is,
1.

First, we find out the areas on chart where other traders make
trading decisions.
2.
Then, we enter at or before the change of net order flow to
that in the direction of our bias.
Now, the next question is, how we will find the traders who are
ready to lose on the chart?
You are thinking fantastic if you got the above question in your mind before
reading it..
The simplest way to find the losing traders is to look for those who
are fighting the bias, or look for those who are trading against our
bias and in the direction of weakness.
We already know that the bias that we have formed is a high probable future
direction for the market and generally, moves against this bias are weak and
they should be. So, traders who have initiated their trades against this bias
are taking a very low probability trade. Once they entered into the trade, if
the market is showing weakness in the direction of those traders ( against
our bias), they will be stressed out as price is showing weakness towards
their targets. When the market finally shows signs that it is not willing to
move in the direction of their trades, they will place orders to exit their
position. Then we will place our entry orders at or before their exit orders
trigger. When their exit orders trigger, it creates a net orderflow in the
direction of our bias,( ie. in the direction of our trade) that makes our bank
account fat.
We always trade against weakness and in the direction of our bias.
We reassess our analysis from the first step when price is showing
strength against the bias.
Lance Beggs, in his YTC price action trader book says,

Trading is not about objective analysis.

Its about identifying weakness in the market and then having

the confidence to get in at a wholesale level fading that
weakness.

Its about actively managing that trade, in order to maximize

opportunity if youre proven right and minimize risk if youre
proven wrong.
Now you know what a setup area is, lets look at different types of setups we
are going to use in our strategy. There are five setups
1.
2.

PB Pullback. A simple single leg pullback within a trend.

CPB Complex Pullback. A complex pullback is a 3 swing
retracement within a trend.
3.
BPB Breakout Pullback. When price breaks a
support/resistance and it holds.
4.
BOF Breakout Failure. When price breaks a support/
resistance and then reverses.
5.
TST Test of support or resistance which is expected to hold.
Setup Definitions :1. Pullback (PB) :When our rules for future market direction tells us that the current trend will
continue ( i.e Rule 1) , we will look for a weak pullback against the trend
direction. Weakness on the pullback will alert us for a possible PB
opportunity.

2. Complex Pullback (CPB) :-

When our rules for future market direction tells us that the current trend will
continue after a complex pullback ( i.e Rule 2 ) , we will look for a weaker
complex pullback against the trend direction. Weakness after breaking the
intermediate pivot in the complex pullback will alert us for a possible CPB
opportunity.

3. Breakout Pullback (BPB) :When our rules for the future direction tells us that the support or resistance
will be broken (Rule 4 and Rule 6), we watch the price action very closely
after the breakout. If price is accepted in the breakout region and there is
weakness in the pullback to the breakout region, we expect a possible BPB
opportunity.

4. Breakout Failure :When our rules for the future direction tells us that the support or resistance
will be broken (Rule 4 and Rule 6), we watch the price action very closely
after the breakout. If price shows weakness in the direction of the breakout ,
we expect a possible BOF opportunity.

5. TEST (TST) :When our rules for the future direction tells us that the support or resistance
holds the price (Rule 3 and Rule 5), we expect a possible TST opportunity.

These are the 5 setups we are going to use in our trading.

Here are the list of setups that we are going to look for different biases.
Rule 1:- PB
Rule 2:- CPB
Rule 3:- TST
Rule 4:- BPB / BOF
Rule 5:- TST
Rule 6:- BPB / BOF
You must calm down your mind and wait patiently until market comes into
the setup region with weakness. We never chase for entry outside this region
as it increases the initial risk. Missed money is always better than lost
money.

Once we identify the setup region properly and price enters into it, its time
for us to prepare our entries. Before that, we need learn how to update our
bias with addition of new market information. That will be covered in the next
article, Ongoing Market analysis. Step 5 is a simple one. So I will combine
it with the ongoing analysis in the next article.