Sayamoza Move Forex Market

Price Behavior and analyzing Price Structure are some of the most important aspects of Technical Analysis and of trading, and yet they are the most overlooked. Understanding Price Behavior and Structure will put the ODDS on the trader’s side so that he can make better decisions, trade more successfully and with better results.

Today, more and more traders and sophisticated investors use some type of technical application that he or she use in their investment or trading decisions.  Trading has become a function of taking “buy” and “sell” signals off technical indicators rather than applying the basic principles of Technical Analysis and the study of price behavior and chart structure.

Take a look at figure 1 and figure 2 and try to decide which would be the high probability trade? Should we Buy? Or Sell?


How to study Price Behavior and Structure?

There several rules and as simple as they may seem, they are the tenants of technical analysis

1. The Market is a discounting mechanism, events are usually discounted in advance with movements likely the result of the so called “Smart Money” or the “informed” buyers and sellers.
    
2. Price moves in trends, trends move in waves – we have “impulse” waves in the direction of the trend, followed by “countertrend moves” better named “corrective waves”.
   
   (Just by accepting this simple truth that prices NEVER move in a straight line, you will stop trying to pick tops or bottom and view the corrections instead as an opportunity to take a trade in the direction on the trend)
    
3. Trends are created by an imbalance in supply/ demand and that moves price.
    
4. Usually, movements in the market tend to have a relationship to each other.  Price will alternate between areas where prices have been marked up to a new higher level or marked down to a lower level, and after a big move in either direction price will consolidates at that new price level  (see Fig 3)

5. Trends usually begin from low volatility sideways or contracting price zones. Trends start from an area of price equilibrium. Once there is an increase in demand, prices breakout of this equilibrium area and are bid higher or “marked up” to the next level where the market consolidates at the new equilibrium zone. ( the opposite is in a down market)
    
6. Trends do have greater odds of continuation rather than reversal. A trend in motion will tend to continue in motion until a major event takes place that would cause it to change its direction.
    
7. Trends in most cases do not change direction without giving signals or warning signs that it is about to change. These signals are usually a price patterns and sometimes accompanied by a buy or sell Climax. It takes time for a trend to change.
    
8. Momentum precedes price, this is a very important concept. I can not emphasize this enough. Momentum is what confirms the trend and it usually precedes the price. Momentum tends to accelerate as the trend develops. So if you are just looking at the chart and see momentum increasing and making new highs or new lows, the odds are that higher prices or lows will probably follow.
    
9. This breakout out of an equilibrium zone would be evidenced by increase in volatility and momentum until prices reaches the next level of equilibrium where volatility will decline and momentum will decrease.
    
10. A loss in momentum is NOT a sign of trend reversal, it is merely a pause. The loss in momentum and volatility is because buyers and sellers now agree to the new established price level or the new level of equilibrium. They will continue to buy and sell within a narrow range which is known as backing and filling, thus forming some of the known patterns like triangles, ledges, flags etc. 
     
11. The breakout in between equilibrium zones offers the trader the biggest profit potential.

Let’s go back and review the charts (fig 1 & fig 2) and let us apply what I have just mentioned above, and together let us decide which trade we should have taken?
Here are some questions we should be asking ourselves:

1. What is the market condition? Trending or consolidating?
2. Is momentum increasing or decreasing?
3. What is the major trend?
4. Do we have a Trend changing pattern and /or a buy /sell Climax?
5. Where is Support & Resistance?

We can answer the above questions?

1. Yes the market is trending up, series of higher highs and higher lows.
    
2. Yes, momentum was increasing all the way to the top. You can see that the blue price bars have bigger ranges and are more explosive in the direction of the trend, the magnitude of the price swings are bigger in the direction of the trend than the corrective swings; thus indicating that higher prices will follow.
    
3. The major trend is up.
    
4. Yes, at the top, we do have a buy climax followed by a failure of prices to make higher highs, prices then gapped down taking out support. That would be our  First signal that trend has changed and for us to go Short.

Now let us examine the next swing down Box 2 answering the same questions

1. Taking it from the Top – we had a buying Climax followed by a Failure to make higher highs and then prices broke down through support.  The market is now trending down.
    
2. Momentum is increasing to the downside evidenced by bigger down swings and red price bars. The final push down, as you see, is indicating a loss in momentum – but that does not indicate a trend change – it could be a profit taking area for us –  and we would be still expecting  a new lower low to follow.
    
3. The trend is Down – Lower highs and lower lows.
    
4. The next swing down made a higher low and consolidated at an area marked with low volatility  - Coiling  and followed by a breakout to the upside and an increase in momentum indicating a new trend to the upside.

Now let us examine the next swing up Box 3 – apply the same rules and answering the same questions, let us see if we can choose the high probability trade

1. The market broke out of a consolidation and is trending up – Trend change is evidenced by prices failing to make a lower low. Actually making a higher low.
    
2. Momentum is now increasing to the upside, large upswings – small corrective down swings, an increase in momentum is evident on the charts.
    
3. The trend is now up. Indicating that new price highs are yet to come.
    
4. The last corrective swing down at the top of the chart is shallow, moving sideways for about 7 days; holding support.

To say the least, we have no reason whatsoever to go short, even though all the indicators (fig 2) are giving sell signals, and by the information we get from the price action I think we can all conclude that the high probability trade is to be go LONG.

See fig #7 and fig #8


It Gapped up - If you were a student of Price behavior and structure, at least you would not have shorted and if you were long would stayed in your position

As you see by studying the price behavioral and applying the principals of technical analysis you would have been on the right side of the market and would have also taken several profitable trades.  And if you choose to use some technical indicators, they should be used as tools to confirm your trading decision rather depending solely on them to initiate a trade.

I am attaching more charts in different markets to show you that the same type of analysis and rules do apply in all markets and on any time frame


Simply taking trading signals off an indicator, or analyzing several indicators at the same time usually would have a negative effect on trader’s bottom line.

It is very important that you to be able to make a trading decision based on your observations of the price action and by what you see on the chart. There is a great deal of information you can derive from the charts that will put the odds on your side and add to your confidence level and you will have a reason to get into a trade and stay in it  longer – give it more room - if you so choose.

And if prices do not act in the way you expect them to act, then get out of the trade and re-study the chart. Take in the Big Picture; Make sure that you have enough price data on your charts.

Let me emphasize NO one knows where the next tick in price is going to be. Our job as traders is to put the odds on our side and to Identify and Quantify our risk; i.e. where is my exit on that trade if I am wrong? And then decide if that level of risk is acceptable to me.

On many occasions I always say, "We need to emphasize that the key to making money is to minimize risk and take a small loss, try to never take large losses and laid the chance on your side."

Profits will then take care of themselves.