Module 2

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E M P O W E R I N G T R A D E R S
O B J E C T I V E T R A D I N G
 Module 2: Technical Analysis and Price Action

1. Introduction to price action

a. Price Action Explained
b. What Really Drives Price Action?

2. Support and Resistance

a. Support and Resistance Explained
b. Support-Resistance Myths and Truths
c. How to draw proper Support and Resistance
d. How to tell when Support or Resistance will break?

3. Round Numbers
Psychology Behind Round Numbers

4. The Information Behind Candlesticks

a. Candlesticks History and Definition
b. Candlesticks Patterns
c. Candlestick Patterns Tricks
d. Understanding Buying and Selling Pressure
 Module 2: Technical Analysis and Price Action

5. Understanding Market Structure

a. Who is Richard Wyckoff? What are his Rules
and Laws?
b. Wyckoff Market Cycle Theory

6. Understanding Trends
a. How to Tell when the Market is Trending
b. How to Tell when the Market is Ranging
c. How to Determine a Trend Strength/Weakness

7. Understanding Indicators
a. What are Forex Indicators?
b. Indicators Types
c. When to Use Indicators?

8. Stop Loss
a. Stop Loss Explained
b. Stop Loss Truths and Placement Tips
c. Stop Loss Myths and Mistakes
 Module 2: Technical Analysis and Price Action

9. Supply And Demand

a. Supply and Demand Explained
b. How to Identify Supply and Demand Zones
c. Characteristics Of a Strong Zone

10. Divergence and How to Trade Them

a. What is a divergence?
b. How to Trade Divergences?

11. Trend lines and Channels

a. What are Trend lines?
b. How to Draw Trend lines Correctly
c. Information Behind Trend lines
d. How to Trade Trend lines?
e. What are Channels and How to Trade Them?

12. Chart Patterns

a. What are Chart Patterns?
b. Popular Chart Patterns and How to Trade them
 1. Introduction to Price Action

To really understand price action, you need to study what happened in the past, then observe what
is happening in the present and then predict where the market will go next.

“Regardless of what you may think, all traders are forecasters, just like the weatherman.”

Then what does he do?

He will say something like “tomorrow, the weather in Paris will be mostly cloudy, slight chance of
rain and possibly sunny in the afternoon.”

How does he know that?

Well, from studying the “past data” and seeing what the current weather situation is at the
moment.

So traders are like that…

If we get the direction wrong, we lose money, we get it right, we make money. As Simple as
that. So everything you will learn in this course is about trying to get that direction right before you
place a trade.
 a. Price Action Explained

Price Action Trading (P.A.T.) is the discipline of making all of your trading decisions from a
stripped-down or naked price chart.

Price charts reflect the beliefs and actions of all participants trading a market during a specified
period of time and these beliefs are shown on a market’s price chart in the form of “price action”.

Economic data are the catalysts for price movement in a market, however these economic data
are ultimately reflected via P.A on a market's price chart.
Since a market’s P.A. reflects economic data, using lagging indicators like stochastics, and others is
a waste of time.

Price action and trading strategies provide a way to make sense of a market’s price movement and
help speculate its future movement with a high degree of accuracy.

Price action traders often use the phrase “Keep It Simple Stupid“ K.I.S.S to remind traders not to
cloud their charts with indicators and to stop them from overanalyzing the market.
 Dow Theory

Technical analysis was formed out of basic concepts gleaned from Dow Theory about trading
market movements that came from the early writings of Charles Dow. (1900-1902)

Two basic assumptions of Dow Theory that underlie all of technical analysis are:
• Market price discounts every factor that may influence a security's price and
• Market price movements are not purely random but move in identifiable patterns and trends
that repeat over time.

Price action traders use tools like charts patterns, candlestick patterns, Trend lines, market swing
structure, support and resistance levels, consolidations etc…

The assumption that price discounts everything essentially means the market price of a security
at any given point in time accurately reflects all available information, and therefore represents
the true fair value of the security.
 What Price Action trading is not

- Price action trading will not make you rich

but with proper risk management can make you a profitable trader.

- Price action trading is not the holy grail

but it definitely beats other indicators (most of which often lag and are derived from
price action anyway).

- Price action trading will not make you an overnight success

You need to put in the hard work, observe and see how price reacts around repetitive
patterns to have the confidence to trade them and then you will be rewarded.
 b. What really drives price action?

Understanding Mass Psychology in trading

All human beings have evolved to respond to certain situations in certain ways.

And you can see this happening in the trading world as well from the way multitude of
traders think and react from patterns:

Repetitive price patterns that one can see and then speculate with a certain degree of
accuracy where the market will most likely go once that particular pattern is formed.

Price action trading is about understanding the psychology of the market using those
patterns and making profit as a result.

Price action is a representation of mass psychology. The markets are moved by the activities
of traders.
 Behind Price Action is “Liquidity”

Picture the market as if it were a tall building with no stairs.

As prices rise, they break through the ceiling above to the next level.

As prices fall they push down through the floor.

Wherever we are in a market there is a ceiling above and a floor below.

These floors and ceilings are formed by limit orders. (also what people
refer to as liquidity.)

The job of pushing through these floors and ceilings is performed by

market orders.

They consume the liquidity, effectively leaving the barriers thinner.

 2. Support and Resistance

a. Support and Resistance Explained

Nothing is more noticeable on any chart than support and resistance levels.

These levels stand out and are so easy for everyone to see! Why?

Because they are so obvious. They look like peaks and valleys.

• If price has been going down for some time and hits a price zone and bounces up from there,
that’s called a support level.
• If price goes up, hits a price zone where it cannot continue upward any further and then
reverses, that’s a resistance level.

So when price heads back to that support or resistance level, you should expect that it will get
rejected from that level again.
 Support & Resistance Types

Market
Key Level
Structure
Long-term zones. Short-term Swing
High/Low.
From Daily and
Weekly Can also act as a
Timeframes. trigger.
 b. Support-Resistance Mistakes and Truths

1- The more times a Support or Resistance (SR) is tested, the weaker it becomes. (not stronger)

2- Support and Resistance are areas on your chart. (not lines)

3- Support and Resistance are the worst places to put your stop loss.

4- Support and Resistance can be dynamic.

5- Trading at Support or Resistance gives you favorable risk to reward.

6- You should look back for levels on your chart depending on the timeframe you choose.
 Truth 1

The more times a Support or Resistance is tested, the weaker it becomes.

Here’s why…

The market reverses at Support because there is buying pressure to push price higher.
If the market keeps re-testing Support, these orders will eventually be filled. And when all the
orders are filled, who’s left to buy?
 Truth 2

Support and Resistance are areas on your chart and not lines
Because you’ll face these two problems:

1- Price “undershoot” and you miss the trade.

This occurs when the market comes close to your Support or Resistance level, but not close enough.
2- Price “overshoot” and you assume the Support or Resistance is broken.

So you enter a trade with the direction of the break… but only to realize it was a false
breakout.
 Why Support and resistance are areas?

Support and resistance are very easy to spot and draw. However, everyone seems to have a
different way to draw or even trade support and resistance.
 Truth 3

Support and Resistance are the worst places to put your stop loss because it gets hunted.

How do you avoid it? Well, you can’t avoid it entirely.

But you can avoid many fakeouts by treating support and resistance as areas not lines.
 Truth 4

Support and Resistance can be dynamic.

What you’ve learned earlier is horizontal Support and Resistance.

But support and resistance can also be Dynamic known as non-horizontal support and
resistance.

There are two ways to identify Dynamic Support and resistance.

• Moving average
• Trendline
Here’s an example of 20 & 50 MA acting as resistance
Here’s an example of a trendline acting as resistance
 Truth 5

Trading at Support or Resistance gives you favorable risk to reward.

A big mistake traders make is entering trades when the price is far away from support and resistance.
Mark out your support and resistance areas in advance. Then look for trading opportunities around it.
If the price is elsewhere, stay out.
 Truth 6

How far back should I look for levels?

It depends on the timeframe

Weekly chart: 4 to 5 years

Daily chart: 2 to 3 years
H4 or H1: around 6 months

The further back in time you go the less relevant the levels become.

And most importantly, don’t cloud up your charts with levels.

You don’t need to draw all levels on your chart, you only need to focus on the key levels.

If you draw in too many support and resistance levels, you will begin over-analyzing the market.
 c. How to draw proper Support and Resistance

To draw support and resistance levels, first you identify proper rejection in your chart.

Not all rejections can be qualified to mark as valid support and resistance levels.

There are certain rejections more powerful than others.

There are 2 characteristics of a Proper/Valid Rejection:

1. It will spend more time in that direction.
2. It will cover more distance in that direction.

Stronger Rejection => Stronger Level

Only mark longer rejections in your chart and ignore the small ones!
The one common thing in all of these rejections is the distance they cover in that
particular direction.
These are perfect examples of Proper Rejections. You can see in the above chart I have drawn
three proper rejections marked by falling red arrows.

The three small swings marked in orange are not used to draw the resistance zone.
Once you identify two Proper Rejections in your level you can start to look for sell or buy
opportunities on the third touch!

No matter how many rejections you have in your level, you should have at least 2 Proper
Rejections to consider it valid.
 d. How to tell when Support or Resistance will break?

Support and Resistance tend to break when there’s buildup.

 e. Why Support does become resistance? And vice versa

A simple story of emotions, fear & greed:

After a resistance level is broken, there are very few Sellers left, and they have lost money (in pain),
and now there are more Buyers present to push prices higher.
 3. The psychology behind round numbers

As humans, we tend to think in terms of whole round numbers rather than in terms of uneven
random numbers.

For example, if someone asked “what time is it?” and it was 12:29pm, what would you say?

Example:
Based on the psychology of rounding, many people are likely to just say 12:30pm rather than
12:29pm since 12:30 is a rounded number and 12:29 is not.

By default, most traders have a tendency to prefer rounded currency values to odd random values.

Because of this psychology, areas of support and resistance tend to form around certain price levels
since traders subconsciously tend to place stops and take profits at areas where price is rounded.

Example:
A trader is more likely to place a stop at the 1.2500 level than at the 1.2502 level.
- Double Zeros, Increments of 500 and 100
In forex trading, rounded levels are regarded as those prices in which there are double zeroes
(or more) at the end of the price eg. 1.3400 or 1.5000.
 4. The Information Behind Candlesticks

a. Candlesticks history and definition

The Japanese began using technical analysis to trade rice in the 17th century.

The guiding principles of candlesticks:

• The “what” (price action) is more important than the “why” (news, earnings, and so on).
• All known information is reflected in the price.
• Buyers and sellers move markets based on expectations and emotions (fear and greed).

According to Steve Nison, candlestick charting first appeared sometime after 1850. Much of
the credit for candlestick development and charting goes to a legendary rice trader named
Munehisa Homma
On the chart, each candlestick includes an open, high, low and close price.

The trader sets the timeframe of each candle.

• Open Price
The open represents the first price traded during the candlestick, indicated by either the top or bottom of the
body. If price trends up, its bottom would be the open, and if price trends down, its top would be the open.
• High Price
The high is the highest price traded during the candlestick, indicated by the top of the tail that occurs above
the body, called the upper tail.
• Low Price
The low shows the lowest price traded during the candlestick, indicated by the bottom of the tail that occurs
below the body, called the lower tail.
• Close Price
The close is the last price traded during the candlestick, indicated by either the top or bottom of the body.
• Direction
You can see the direction the price moved during the time frame of the candle, by the color of the candlestick.
• Range
The price difference between the upper and lower tails shows the range the price moved during the timeframe
of the candlestick. The range is calculated by subtracting the high from the low (Range = High - Low).
Example of bullish candlesticks:

Example of bearish candlesticks:

 b. Candlesticks Patterns

Bullish reversal candlestick patterns signify that buyers are taking control.

However, it doesn’t mean you should go long immediately when you spot such a
pattern because it doesn’t offer you an “edge” in the markets.

Instead, you want to combine candlestick patterns with other tools so you can find a
high probability trading setup.

For now, these are 4 Bullish Reversal candlestick patterns you should know:
• Hammer
• Bullish Engulfing Pattern
• Piercing Pattern
• Morning Star
A Hammer / Inverted Hammer is a (1- candle) bullish reversal pattern that
forms after a decline in price.

Here’s how to recognize it:

• Little to no upper shadow
• The price closes at the top ¼ of the range
• The lower shadow is about 2 or 3 times the length of the body

A Bullish Engulfing Pattern is a (2-candle) bullish reversal candlestick pattern

that forms after a decline in price.

Here’s how to recognize it:

• The first candle has a bearish close
• The second candle closes bullish
• The body of the second candle completely “covers” the body of the first candle
A Piercing Pattern is a (2-candle) reversal candlestick pattern that forms after a
decline in price.

Here’s how to recognize it:

• The first candle has a bearish close
• The second candle closes bullish
• The body of the second candle closes beyond the halfway mark of the first
candle

A Morning Star is a (3-candle) bullish reversal candlestick pattern that forms after
a decline in price.

Here’s how to recognize it:

• The first candle has a bearish close
• The second candle has a small range
• The third candle closes aggressively higher (more than 50% of the first candle)
How to identify high probability bullish reversal setups with candlestick patterns:

1. If the market is trending higher, then wait for a pullback towards Support

2. Wait for a bullish reversal candlestick pattern

3. Make sure the size of it is larger than the earlier candles (signaling strong rejection)
Bearish reversal candlestick patterns:
Bearish reversal candlestick patterns signify that sellers are taking control.

Likewise, you want to combine candlestick patterns with other tools so you can find a
high probability trading setup.

These are 4 Bearish Reversal candlestick patterns you should know:

• Shooting Star
• Bearish Engulfing Pattern
• Dark Cloud Cover
• Evening Star
A Shooting Star / Hanging Man is a (1- candle) bearish reversal pattern that
forms after an increase in price.

Here’s how to recognize it:

• Little to no lower shadow
• The price closes at the bottom ¼ of the range
• The upper shadow is about 2 or 3 times the length of the body

A Bearish Engulfing Pattern is a (2-candle) bearish reversal candlestick pattern

that forms after an increase in price.

Here’s how to recognize it:

• The first candle has a bullish close
• The second candle closes bearish
• The body of the second candle completely “covers” the body of the first candle
A Dark Cloud Cover is a (2-candle) reversal candlestick pattern that forms after an
increase in price.

Here’s how to recognize it:

• The first candle has a bullish close
• The second candle closes bearish
• The body of the second candle closes beyond the halfway mark of the first candle

An Evening Star is a (3-candle) bearish reversal candlestick pattern that forms

after an increase in price.

Here’s how to recognize it:

• The first candle has a bullish close
• The second candle has a small range
• The third candle closes aggressively lower (more than 50% of the first candle)
How to find high probability bearish reversal setups:

1. If the market is trending lower, wait for a pullback towards Resistance

2. Wait for a bearish reversal candlestick pattern

3. Make sure the size of it is larger than the earlier candles (signaling strong rejection)
Indecision candlestick patterns:

Indecision candlestick patterns signify that both buying and selling

pressure is in equilibrium.

And these are 2 indecision candlestick patterns you should know:

• Spinning top
• Doji
A spinning top is an indecision candlestick pattern where both buying and selling
pressure is fighting for control. The color of the body is not very important.

Here’s how to recognize it:

• The candle has long upper and lower shadows
• The candle has a small body

A Doji represents indecision in the markets as both buying and selling pressure are in
equilibrium.

Here’s how to recognize it:

• The candle’s open and close are around the middle of the range
• The upper and lower shadows are short and about the same length
Even though Doji is an indecision candlestick pattern, there are variations
with different significance.

the Dragonfly Doji open and close are near the highs of the range
with a long lower shadow.

Which means there is a rejection of lower prices as buying pressure

stepped in and pushed the market higher towards the opening
price.

the Gravestone Doji open and close are near the lows of the range
with a long upper shadow.

Which means there is a rejection of higher prices as selling

pressure stepped in and pushed the market lower towards the
opening price.
Continuation candlestick patterns:

Continuation candlestick patterns signify the market is likely to continue trading in the
same direction.

And if you’re a trend trader, these candlestick patterns present some of the best trading
opportunities.

So here are 4 continuation patterns you should know:

• Rising Three Method
• Falling Three Method
• Bullish Harami
• Bearish Harami
The Rising Three Method is a (5-candle) bullish trend continuation pattern
that signals the market is likely to continue trending higher.

Here’s how to recognize it:

• The first candle is a large bullish candle
• The second, third and fourth candle have a smaller range and body
• The fifth candle is a large bullish candle that closes above the highs of the
first candle

The Falling Three Method is a (5-candle) bearish trend continuation pattern

that signals the market is likely to continue trending lower.

Here’s how to recognize it:

• The first candle is a large bearish candle
• The second, third and fourth candle have a smaller range and body
• The fifth candle is a large bearish candle that closes below the lows of the
first candle
The Bullish Harami works best as a continuation pattern in an uptrend.
It signals the buyers are “taking a break” and the price is likely to trade higher.

Here’s how to recognize it:

• The first candle is bullish and larger than the second candle
• The second candle has a small body and range

A bearish Harami works best as a continuation pattern in a downtrend.

It signals the sellers are “taking a break” and the price is likely to trade lower.

Here’s how to recognize it:

• The first candle is bearish and larger than the second candle
• The second candle has a small body and range
How to find high probability trend continuation setups:

1. If the market is in a range, then wait for it to break the Resistance upward

2. Wait for it to form a continuation candlestick pattern (like Rising Three Method or
Bullish Harami)

3. Look for buy opportunities as price breaks the high of the pattern.

4. And vice versa for sell setups

 Bonus visuals to clarify the confusion:

Hammer vs. Hanging Man Shooting Star vs. Inverted Hammer

The hammer and hanging man look The inverted hammer and shooting star
exactly alike but have totally different also look identical. The only difference
meanings depending on past price between them is whether you’re in a
action. downtrend or uptrend.
 c. Candlestick Patterns Tricks

“There are so many candlestick patterns. How do I remember all of them?”

Well, you don’t have to.

How to understand any candlestick pattern without memorizing a single one?

Here’s what you must know…

1. The color of the body tells you who’s in control

2. The length of the wick represents price rejection
3. The ratio of the body to the wick tells you the “whole story”
 Understanding Buying and Selling Pressure

Every candlestick tells you a story about the battle between the bulls and the bears.

If it closes near the highs, the bulls are in control.

If it closes near the middle, the market is undecided.

If it closes near the lows, the bears are in control.

1. The color of the body tells you who’s in control

The longer the white/green candlestick, the further the close is above the open.

The longer the black/red Japanese candlestick, the further the close is below the open.
2. The length of the wick represents price rejection

If the upper wick is very long, it shows that there’s a lot of selling pressure.

If the lower wick is very long, it shows that there’s a lot of buying pressure.
 Combining Multiple Candlesticks

3 bearish candlesticks in a downtrend, 3 bullish candlesticks in an uptrend,

each with decreasing body lengths. each with decreasing body lengths.
Notice how the bullish candlesticks had increasing lengths and then gradually decreased as
the price went up then followed by a big downward fall.

That’s price momentum.

 5. Understanding Market Structure

a. Who is Richard Wyckoff?

• Richard Wyckoff was a famous stock trader and investor.
• he opened up his first brokerage firm in his 20’s.
• he wrote several famous stock trading books.

The Wyckoff theory is based primarily on price action and the different cycles the market falls into.

Two Rules of Richard Wyckoff

1- The first rule is that the market never behaves the same way, the market is truly unique.

2- The second is that since every price move is unique, its analytical importance comes when
compared to previous price behavior.
 b. Wyckoff Market Cycle Theory

The Wyckoff method states that the price cycle of a traded instrument consists of 4 stages.
 b. Wyckoff Market Cycle Theory
- Accumulation Phase
The Accumulation stage is caused by increased institutional demand.
Bulls are slowly gaining power and as a result, they are poised to push prices higher.

- Markup Phase
Bulls gain enough power to push the price through the upper level of the range.
This is usually a signal that the price is entering the second stage and that a bullish trend is emerging
on the chart.

- Distribution Phase
This phase is where the bears are attempting to regain authority over the market.
The price action on the chart at this stage is flat, just like the Accumulation phase.

- Markdown Phase
The Markdown process comes as a downtrend and begins after the Distribution phase.
It indicates that the bears have gained enough power to push the market downward.
 Wyckoff Market Cycle Theory
Did you notice that the price went below the Accumulation range and above the Distribution range
prior the creation of the real breakout?
 6. Understanding Trends

It is important for you to understand the structure of trends and what signals to look for that
indicates the beginning of a trend or the ending of one.

There are 3 types of trends.

• When price is moving up, it’s called uptrend / bullish.
• When price is moving down, it’s called downtrend / bearish.
• When price is moving sideways, it’s called ranging / sideways.

Each of these 3 types has a certain price structure that tells you whether a market is in a
downtrend, uptrend or moving sideways.
a. How to Tell when the Market is Trending

Question: What is the trend of the market?

Answer: What is your timeframe?
 Structure of the Market / Dow Theory

Structure of An Uptrend (Bullish) Market

Prices will be making Higher Highs (HH) and Higher Lows (HL).
Structure of A Downtrend (Bearish) Market
Prices will be making Lower Highs (LH) and Lower Lows (LL).
 Impulsive & corrective move

-Impulse move – “Longer leg” on the chart, which points the direction of the trend.
-Corrective move – “Shorter” leg on the chart, which is against the current trend.
b. How to Determine a Trend Weakness

- Slope of impulse moves getting flatter

- Candlestick bodies getting smaller on impulse move
b. How to Determine a Trend Weakness

- Slope of corrective move getting steeper

- Candlestick bodies getting larger on corrective move
c. How to Tell when the Market is Ranging

Short-term Ranges
Long-term Ranges
 7. Understanding Indicators

a. What are forex indicators?

Indicators are statistical tools that digest price data, OHLC of each candle, add a formula to it
and then convert it into visual information such as graphs or oscillators.

Many currency traders use indicators to make judgments about the direction of a currency pair.

Price Action traders rarely use indicators.

When it comes to indicators, we can divide them into four classes:

• Trend indicators
• Momentum indicators
• Volatility indicators
• Volume Indicators
 b. Indicators Types

1- Trend indicators
Trend indicators demonstrate the direction of the currency you’re trading in.
Examples: Moving Averages, MACD, ADX, Parabolic SAR, etc…

Moving Average
The Moving Average shows the mean instrument price value for a certain period of time.
As the price changes, its moving average either increases, or decreases.

There are four different types of moving averages: Simple, Exponential, Smoothed and
Weighted.

The only thing where moving averages of different types diverge considerably from each
other, is when weight coefficients, which are assigned to the latest data, are different.
 Moving Average

You can use one moving average or a combination of moving averages to define the trend.
MACD (Moving Average Convergence/Divergence)
It consists of 2 moving averages (1 fast, 1 slow) and vertical lines called a histogram, which
measures the distance between the 2 moving averages.
Average Directional Index (ADX)
The ADX calculates the potential strength of a trend.
It fluctuates from 0 to 100, with readings below 20 indicating a weak trend and readings
above 50 signaling a strong trend.
2- Volume indicators
Examples: Force Index, Ease of Movement, Money Flow Index, etc.
Volume indicators demonstrate the number of trades that are occurring for a currency pair,
and these indicate whether interest in a certain direction is strong or weak.
3- Volatility indicators
Examples: Bollinger Bands, Envelopes, Average true range, etc.
Volatility indicators demonstrate how fast a currency value moves in relation to its mean value.

The Bollinger Bands is comprised of three data points that together create an upper and lower
trading channel (band) that are two standard deviations from the middle line.
Average true range (ATR)
ATR is an indicator that shows volatility of the market.
4- Momentum indicators (oscillators)
Examples: Stochastic, RSI, CCI, etc.

Momentum indicators are used to identify overbought or oversold situations.

 c. When to use indicators?

Every trading indicator on your charts must have a purpose.

You only need one indicator for each purpose.

The correct way to use indicators. Indicators don’t provide signals.

Indicators don’t tell you when to buy or when to sell.

Indicators provide information about price, how price has moved, how candles have shaped
and how recent price action compares to historical price action.

How to choose the right indicator? That suits your trading style and personality.

Meaningful: Represents important information.

Objective: Has a clear operational definition of what is being measured.

Understandable: Easy to comprehend and interpret.

 8. Stop Loss

a. Stop Loss Explained

Trading is a game of probability. This means every trader will be wrong sometimes. When a
trade goes wrong, there are only two options: to accept the loss and close your position, or go
down with the ship.

Understanding what a stop loss is and using it correctly,

is critical for trading success.

Price should have to breach a level to ‘prove’ your

trade wrong.

You need to take into account the context of the

market

Your assignment is to define your stop-loss

placement first to be able to identify your position
size.
 b. Stop Loss Placement

- Basic Stop Loss Placement Strategy

Stop loss should be above the previous swing high in case of a sell and below the previous swing
low in case of a buy.
 b. Stop Loss Placement Examples

In a trending market, one of the simplest methods for where to place a stop loss order when selling
is above the last "swing high".
For a counter-trend trade setup, your task is to place the stop-loss just beyond the last high or low,
made by the setup that indicates a potential trend change.
For range breakouts, the stop loss goes one the other side of the range.
 c. Stop Loss Myths and Mistakes

- Move Stop Loss to Breakeven ASAP

Moving a stop loss to the point of your entry is a great amateur mistake when done with the
wrong intentions.

- Not using a stop loss gives you flexibility

It means that you risk being wiped out in one single trade, or at least lose so much money
that it cancels out months of good and consistent trading.

- Use a Fixed and Constant Stop Loss

You should never place a stop loss based on some random amount of pips. This is not a
proper stop loss placement.
- Setting the Stop Loss Later
You should know where your stop is going to be before you open a trade. The same goes for
your entry and target.

- Widening the Stop Loss as Price Approaches it

Once the Stop Loss is set, don’t widen it. You have already made your decision. If the market
goes against you and your stop loss is hit, analyze your trade and see what you’ve done wrong.

- Setting your Stop Loss at Zones of Liquidity

Don’t place your stop in really obvious places. Avoid placing your stop loss directly
above/below key swing highs/lows because there is a good chance the market will trade
through them before reversing.
 Conclusion

Here are 4 of the many reasons why a stop loss should be highly respected by any trader and a
trade should not be entered without one:

- Helps you determine the position size

- Defines the worst-case scenario
- Defines the Risk : Reward Ratio
- Protects your profits

A properly placed stop loss is truly the starting point of a successful trade.

Traders who do not focus on stop loss placement first or put a lot of importance on doing it right,
are doomed to fail and blow out their accounts.
9. Supply And Demand
9. Supply And Demand
a. Supply and Demand Explained

Supply and demand is a trading and price action concept that studies how financial markets
move and how buyers and sellers drive the price.

On every price chart, there are certain price points where you can observe a sudden shift
between the buyers and the sellers.

Those areas are usually characterized by strong and immediate turning points, or an explosive
breakout. We as traders call those areas supply and demand zones.

Supply and Demand areas can add another layer of confluence to our trading and help you find
better trades.
 b. How to Identify Supply and Demand

The general idea of supply and demand is to locate points on the chart where price has made
a strong advance or decline.
The point in which the price has made a strong advance is marked as a demand zone and
a point where the market has made a sharp decline is marked as a supply zone.

There are four types:

- The Drop Base Rally, or ‘DBR’

- The Rally Base Drop, or ‘RBD’

- The Rally Base Rally, or ‘RBR’

- The Drop Base Drop, or ‘DBD’

A ‘DBR’ demand is a zone which normally A ‘RBD’ supply is a zone which normally
denotes a market bottom. denotes a market top.
A ‘RBR’ demand zone primarily forms A ‘DBD’ supply zone primarily forms
within an uptrend. within a downtrend.
Here’s how the above noted zones look like on a live chart.
 c. Characteristics Of a Strong Zone

- Momentum from the zone

The stronger the move away from a zone the higher the chance the market has of having
a strong move away when it eventually returns.
- Time Spent Away From Zone
The quicker the market returns to a supply or demand zone the better the chance it has
of giving you a successful trade.
 Supply & Demand VS Support & Resistance

Support and resistance is where one is able to see a number of failed attempts.
However, supply and demand is a strong move that is formed from one
single fresh untouched base.
 Supply & Demand VS Support & Resistance

Sometimes, a Support/Resistance could be at the same time a Supply/Demand zone.

 in Closing

Word of caution:

Traders, especially amateurs, are usually fascinated by supply and demand because they
want to catch the exact price tops or bottoms.

- Supply and Demand are not fool proof, and definitely not the Holy Grail.

- Supply and Demand zones are not a stand-alone strategy, but acts as extra confluence
for an existing potential setup.

- Higher-timeframe Supply and Demand zones are more reliable.

- Trading the first time back to a zone is the highest probability trading setup.
 10. Divergence and How to Use Them

a. What is a Divergence?

A divergence exists when your indicator does not “agree” with price action.

For example, a divergence is formed on your chart when price makes a higher high,
but the indicator you are using makes a lower high.

When your indicator and price action are out of sync it means “something” is happening
on your charts that requires your attention.

Using divergence can be useful in spotting a trend weakness or reversal in momentum.

There are two types of divergence:

- Regular
- Hidden
Regular Bullish Divergence
If price is making lower lows (LL), but the oscillator is making higher lows (HL),
this is considered to be a regular bullish divergence.
Regular Bearish Divergence
If price is making higher highs (HH), but the oscillator is making lower highs (LH),
this is considered to be a regular bearish divergence.
 Examples

The indicator signals to us that momentum is starting to shift even though

price has made a higher high, chances are that it won’t be sustained.
Keep in mind that divergence can be tricky sometimes where the price or the
indicator will make a double top/bottom instead of a lower low and higher high.
 b. How to Trade Divergence

Divergence is not a stand-alone strategy, but can definitely add more confluence to an
existing potential setup.

Regarding triggers, one way is to follow the basic rule of the Dow Theory.
 11. Trendlines

a. What are Trendlines?

Trendlines are non-horizontal support and resistance.

The Trendline Flip
Just like support and resistance, when a trendline is broken upward,
it becomes support. And vice versa.
 b. How to Draw Trendlines Correctly

Rule 1: Number of Touches

All these trendlines are not valid as they connect only two swings.
Rule 1: Number of Touches
All these trendlines are valid as they connect three swings.
Three swings; not candles / points.
Just like support and resistance levels:
Trendlines are zones, not laser lines.
Rule 2: Draw Unbroken Trendlines
Trendlines shouldn’t be broken by a candle close.
Rule 2: Draw Unbroken Trendlines
However, Wicks are tolerated.
Rule 3: The Distance between the swings has to be equidistant or symmetrical.
Rule 3: The Distance between the swings has to be equidistant or symmetrical.
Rule 3: The Distance between the swings has to be equidistant or symmetrical.
Rule 4: The Angle of the trendline has to be below 40 degrees.
If the trendline is too steep, it means that the buyers are still in control.
Rule 4: The Angle of the trendline has to be below 40 degrees.
A trendline with an angle below 40 degrees means that the buyers are losing momentum.
Decreasing Momentum in an uptrend.
Rule 5: Trendline = Rejection, not continuation.
If price and trendline are going down, we will be looking for buy opportunities.
Rule 5: Trendline = Rejection, not continuation.
If price and trendline are going up, we will be looking for sell opportunities.
 d. How to trade trendlines?

Trendlines Types

Long-term Short-term

* From Daily and * From H4, H1 and

Weekly Timeframes M30 Timeframes

* Act as key rejection * Act as trigger

levels
* By connecting three
* By connecting two swings
swings
Short-term:
Trendlines on M30, H1, H4 = Break, Trigger
Long-term:
Trendlines on Daily, Weekly, Monthly = Rejection, Reversal
Long-term:
Trendlines on Daily, Weekly, Monthly = Rejection, Reversal
 How to trade trendlines?

If a valid trendline is broken, it can mean 2 things:

Trend Reversal False Breakout

1- Treat trendlines as zones.
1- Treat trendlines as zones.
1- Treat trendlines as zones.
1- Treat trendlines as zones.
2- Last Swing Standing break: Wait for the break of the last swing
that forms around the trendline.
How and Why does the Last Swing Standing work?
Trendline Last Swing Standing Examples.
 In closing

- Trendlines are non-horizontal support and resistance.

- Only draw trendlines that connect at least three swings.
- It does not matter if you use candle bodies or wicks to draw trendlines as long as it is valid.
- Trendlines shouldn’t be broken by a candle close.
- The angle of a trendline shows how fast a trend is moving.
- The distance between the swings has to be equidistant or symmetrical.
- The longer a trendline is respected, the stronger the movement when it gets broken.
- Trendlines tend to break after five touches.
- Treat trendlines as zones, not laser lines.
- Always wait for the last swing standing break to enter.
- Trendline = Rejection, not continuation.
- Short-term trendlines = trigger. While long-term trendlines = rejection.
- Never try to force a trend line to fit, the best trendlines are the most obvious ones.
- You should not enter solely on a trendline break, as it is not a stand-alone strategy.
In closing
 12. Chart Patterns

a. What are Chart Patterns?

Chart patterns are simply price formations represented in a graphical way.

Chart patterns are very popular as they look good on the chart and are easy to spot.

Chart patterns can be based on any price chart of any time-frame, and usually provide clear
entry and exit signals, as well as stop loss levels and profit targets.

Most patterns fall into two categories:

- Continuation patterns
- Reversal patterns
 b. Popular Chart Patterns

Here’s a list of the chart patterns that we’re going to cover:

• Double Top/ Bottom

• Triple Top/Bottom
• Head and Shoulders and Inverse Head and Shoulders
• Rectangles / Channels
• Triangles (Symmetrical, Ascending, and Descending)
• Wedges
• Pennants and Flags
 b. Popular Chart Patterns

Double Top
When price forms equal highs, we have a double top pattern.
How to trade the Double Top

Entry: After a candle close below

the neckline.

Stop Loss: Just above the pattern.

Take Profit: Same height as the

double top formation.
Double Bottom
When price forms equal lows, we have a double bottom pattern.
How to trade the Double Bottom

Entry: After a candle close above

the neckline.

Stop Loss: Just below the pattern.

Take Profit: Same height as the

double bottom formation.
Triple Top/Bottom

Triple tops and bottoms are similar to double tops and bottoms, except in the case of a
triple top/bottom there are three swing highs and three swing lows.
Head and Shoulders
It is formed by a peak (shoulder), followed by a higher peak (head),
and then another lower peak (shoulder).
How to trade the Head and Shoulders

Entry: After a candle close below

the neckline.

Stop Loss: Just above the right

shoulder.

Take Profit: the same distance

between the highest point of the
head and the neckline.
Inverse Head and Shoulders
It is formed by a valley (shoulder), followed by a lower valley
(head), and then another higher valley (shoulder).
How to trade the Inverse Head and Shoulders

Entry: After a candle close above

the neckline.

Stop Loss: Just below the right

shoulder.

Take Profit: the same distance

between the lowest point of the
head and the neckline.
Channels

- Ascending channel
- Descending channel
- Horizontal channel
It’s easy to identify a channel. The best way is to simply find a valid trendline and then look to
see if a parallel trendline is also being respected by the market.
We are only interested in selling on the rising trendline break downward, and in buying on the
falling trendline break upward.
Wedges vs Channels
Wedges are just like channels. The only difference is that the other trendline is flatter,
and not parallel to the original trendline.
Rising Wedge
It is formed when price consolidates between upward sloping
support and resistance lines.
Falling Wedge
It is formed when price consolidates between downward sloping
support and resistance lines.
Triangles
Triangles are among the most famous chart patterns.
Symmetrical Triangle
The slope of the price’s highs and the slope of the price’s lows
converge together to a point where it looks like a triangle.
Ascending Triangle
This chart pattern occurs when there is a horizontal resistance
level and a slope of higher lows.
Descending Triangle
This chart pattern occurs when there is a horizontal support
level and a slope of lower highs.
 Pennants and Flags

Pennants look very much like symmetrical Flags are in fact the smaller version of channels.
triangles. But pennants are typically smaller
in size and duration.
Bullish Flag
A Flag is simply a trend-following Channel on a lower timeframe.

Channel on H4 Flag on Daily

Bullish Pennant
A Pennant is simply a trend-following Symmetrical Triangle on a lower timeframe.

Symmetrical Triangle on H4 Pennant on Daily

 In closing

Entry: After a candle close above/below the neckline.

Stop Loss: Just beyond the last swing from the other side.

Take Profit: Same height as the pattern.

Entry: After a candle close above/below the last swing standing.

Stop Loss: Just beyond the last swing from the other side.

Take Profit: Double the stop loss size.

- The other trendline acts as an add-on.

- The other trendline is not used for entry.

- Unless it is from Daily, weekly and monthly timeframes, then it will act as a key rejection zone.
 13. The Power of Confluence

a. What is Confluence?

The dictionary has the following definition:

Confluence is a situation in which two or more things come together or happen at the same time.

In terms of Forex trading, we can say that confluence is when two or more chart tools come
together at the same place on a chart. (like Support/Resistance level, divergence, trendline…)

b. How and Why does confluence work in trading? And what to look for?

If there are more people buying a certain pair, the market will most likely go bullish.
And exactly the opposite if it goes bearish.

Therefore, forex trading is about understanding the market sentiments. “Where are the big boys
moving the instrument to?”

And this leads to CONFLUENCE.

For example:
• Trader A trades only on Symmetrical Triangle patterns
• Trader B trades only on Moving Average signals
• Trader C trades only on Support & Resistance
• Trader D trades only on Divergence
• Trader E trades only on Supply & Demand

Let’s say Trader D sees a strong Bullish Divergence signal so he enters buy. But Forex Trader A, C
& E see bearish signals and enter sell.

The market will most likely head down as there are more traders who took it short (sell) than long
(buy). The sellers won the battle in this particular case.

From this example, you can see why Confluence is so important in forex trading and why
professional forex traders enter only on confluence.
 Confluence puts the odds in your favor

Traders should keep in mind that there is no form of analysis that will predict future price
movements. Instead, trading is about probabilities.

The ability to put the odds in your favor is what trading is all about. This is where the combination
of various Confluence Factors comes into play.

The more Confluence Factors present on any given setup, the greater the odds are that the setup
will move in the intended direction.

When we were kids, most of us had this dream job, to be a “Detective”. Well! You are essentially
like a detective when you are trading.
Detectives tend to gather as many evidences as possible to identify potential suspects and start
interrogating them.

Same rule applies to trading, one or two signals are not enough to take a trade. We recommend at
least three clues before calling it a potential trade.
As traders, our tools / clues / confluences are:

- Horizontal Support/Resistance Levels

- Dynamic Support/Resistance Levels => Trendlines
- Supply/Demand Zones
- Divergences
- Chart Patterns
- Overall Trend (Trend-following setup)
- Multiple Timeframe Analysis (more about this in the next section)
- Or even customized strategies like RichBomb (more about this in Module 3)
Each one of the above clues is considered as ONE confluence.
Each one of the below clues is considered as an add-on or ½ confluence.
- Psychological Levels / Round Numbers
- Daily/Weekly Previous Highs/Lows
- Candlesticks patterns
- Fibonacci Retracements
- Event Areas

Find at least 3 reasons to take the trade and make sure that there is maximum one (but preferably
zero reasons) reason not to take a trade.
 Example

Confluences:
1- Wedge Pattern (in purple)
2- Divergence on MACD (in red)
3- Resistance and Round Number 111.9 – 112.0 from Daily (in orange)
 14. Multiple Timeframe Analysis

a. What is Multiple TimeFrame Analysis

The biggest mistake traders make is that they typically start their analysis on the lowest
timeframes and then work their way up to the higher timeframes.
Starting your analysis on your execution timeframe where you place your trades creates a very
narrow and one-dimensional view.

The top-down approach is a much more objective way of doing your analysis because you
start with a broader view and then work your way down.

Caution: Doing a multiple time frame analysis while you are in a trade can be a real challenge
because of the trade-attachment.
That’s why I always recommend to separate your charting software from your live account.
Like using TradingView or another mt4.
 b. Step By Step Example

Weekly / Monthly – The Big Picture

On this timeframe, we will draw our support and resistance zones and price action patterns to
know where we currently stand in the market.
Weekly / Monthly – The Big Picture
On this timeframe, we will draw our support and resistance zones and price action patterns to
know where we currently stand in the market.
Weekly / Monthly – The Big Picture
Here is the “zoomed in” view showing the market structure. We are currently in a downtrend
(long-term) as price is still making lower lows and lower highs.
Daily – Where are we?
When we are done with Weekly, we “zoom in” to Daily timeframe and check if we can draw any
more support/resistance areas or trendlines that weren’t clear on Weekly.
H4 / H1 / M30 – Execution
This is where you map out your trades and specific trade scenarios. Take the key levels and ideas
you came up with on the daily / weekly and translate them into actionable trade scenarios.
 c. Filter Losses and Maximize Profit

The trend may appear differently on the time-frame you are looking at than where the long-term
trend is moving.

CHFJPY trend is bearish on H1, Trend traders will look for opportunities around the trendline or
moving average to sell and join the trend.
However, the overall trend on Daily timeframe is bullish.

Thus, knowing that piece of information we got from Daily timeframe, traders should rather look
for buy opportunities to join the overall trend, instead of getting stuck by riding the short term one.
Price may appear to have room to move on one-time frame where it is actually quite over-
extended on a higher/lower timeframe.

Remember: Don’t Buy at Resistance, Don’t Sell at Support.

- Stay open minded

Always create long (buy) and short (sell) trade scenarios when doing your multiple time
frame analysis. This will keep you open-minded and avoids one-dimensional thinking.
A trader who is only looking for short trades, will blank out all signals that point to a long
trade.
Or, a trader on a long trade will miss the signals that could signal a reversal.

Moreover, separate your charting platform from your actual trading platform.

If you can see your open orders on your charts, you are much more likely to be biased
during the analysis.

Always have three platforms:

1- one to make the weekly analysis
2- one to enter trades
3- and one for testing/practicing your strategies.
 Our Approach

This is our step by step Top-Down analysis approach:

• Draw Support and Resistance, Trendlines/Patterns on WEEKLY and DAILY timeframes.

• Do market structure and price action analysis on WEEKLY and DAILY timeframes.
Is the market trending or ranging?
Sitting on a strong rejection area or in the middle of nowhere?
Is it losing strength or gaining momentum?

• Identify key rejection levels (from the above 1 and 2).

• Zoom in to lower timeframes and look for setups around these key levels.

• Enter on at least “three confluences”. No exceptions.