A trader sent a very good question last night on a recent post. Since he sent it via email and since it is such a good question, I decided to make it into a separate blog post. You can see the original post that he is referring to by clicking here. In that post I noted a location for an aggressive long trade. I’ve posted the chart he sent with his question along with my response.
His Excellent Question
He asks what the rationale is to go long at point b1. He goes on to say that in real-time, he would consider this as a down wave with aggressive supply and not ‘bag holding.’ He wonders how we would see this as bag holding and not supply?
The Answer
It is an excellent question. Let’s take this section of the chart (highlighted by the blue box) apart and see why.
Overnight, the market fell in a strong move down (A). We see momentum in the price action and also in the 3-10. Given that momentum, we would expect follow-through to the downside. So we have a small rally to X and after this rally we would expect the market to drop further (red arrow) if supply were in control. But, it doesn’t do that. Instead, we get a strong rally at B (green arrow). We see strength in the price bars, wave structure, the 3-10, and the wave volume. If this is the case, then we have to think that the move down at A could be a shake out. As always, we need confirmation.
Confirmation comes on the reaction (b1). Yes, there is more wave volume, but this is due to it being in the first half hour of the US open. Despite overnight market activity, we still have the most volume traded during the US session, and a lot of that comes in the early and late periods of the US session. So, we need to take that into consideration when comparing early US session wave volume with the overnight wave volumes.
The reaction down to b1 was corrective in nature (the a-b-c). Drawing proper trend channel, it also became oversold. at the low. In contrast to the up wave B, spreads and price action were also confirming a lack of supply. The wave didn’t come all the way back to support (top of X), which would have made it an easy long; hence the ‘aggressive’ label.
How To Approach A Trade Setup
When looking at the market and especially at a trade, we want to mentally go through all the things we know about this method and be very mindful about what we are seeing. It is so very easy for us to see only the last few price bars, the last wave, or the last trend channel and make a decision. We do not want to do that, as that is one of the things that gets us into trouble. As readers know, I emphasize a different approach, and this question (thanks, Dmitry!) give me a chance to highlight that for us all (myself included, as I still can make this mistake!).
Can This Be Learned?
What we talk about here are the kinds of things we learn in Chart Reading Mastery. I’ve had a few emails asking what’s included in the course and why is it so different than other trading courses (is it really worth it?). Well, the above is the kind of things you learn: how to really read the market by its own actions and where the very best opportunities are to take trades – not based on some 3/4-criteria trade setup, but a deep understanding of market structure, how to read it, and where choice trades lie. Of course these things can be learned. It does take dedicated effort, but it certainly is doable. We are starting this course again shortly, if you are interested:
Very well written information. It will be helpful to anyone who usess it, as well as myself. Keep up the good work – for sure i will check out more posts.