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Volatility Contraction
Volatility Contraction
And again, I'm just going to share with you generally what's going on in this chart.
The trend is towards the downside.
And you can see that this market traded lower.
Came into the swing low or area of support at 17.97
And then volatility contracted!
How do I know that?
Well just look at the range of the candle.
It got smaller and smaller until it finally broke down.
All you need to do is compare the size of the range of the candle.
If it's getting smaller it's telling you that volatility has contracted.
And chances are when it breaks out, it will tend to expand again.
With that said, I just want to share with you a few pointers when you are looking to trade this type of breakouts.
Number one, have the trending move, trade in the favor of the direction of the trending move.
What is a trending move?
A trending move is basically the stronger leg of a trend line.
And the second thing, the volatility contraction, the VC.
You want to see those small candles.
Because you know, when it does break up you can expect the volatility to expand and pick up.
These are a couple of things to take note off.
Another example:
You can see a strong trending move.
Then when you find a volatility contraction, you get somewhat like a descending triangle.
Volatility expands when it broke down and then volatility contracted again!
You can see that this phenomenon pretty much happens all the time in different markets.
So how you want to go about trading it?
For me, personally, I like to look at the breakout from its low volatility range.
And stop loss is just usually referencing from the swing high or swing low.
For example, if price breaks down on the low, I'll set it on 1x the Average True Range above the high of
the pullback.
So this I know generally how I go about trading volatility contraction.
As I’ve said, I think this is a clear example that this isn't a trading strategy by itself.
Candlestick patterns are useful to serve as an entry trigger.
But when it comes to stop loss or to trade management and risk management.
You can see that candlestick patterns are not able to go help you answer or manage all these scenarios.
I hope I’ve shed some light on how to go about trading candlestick patterns using volatility contraction.
With that, let's do a quick recap…
Recap
• The market moves from a period of low volatility to high volatility. You can see that the word
volatility.
• You want to enter your trades during a low-volatility period. Because you know it gives you a
favorable risk-to-reward on your trades, and your stop-loss tend to be tighter.
With that said, I have basically come to the end this video.
And I hope this candlestick trading course really gave you a good foundation on how to go about trading
candlestick patterns.