Step 2 :- Identifying the trend and Trend violating pivot:
We have now defined our structure using our higher timeframe candlestick chart. Now, its time to look a bit deeper into the market using our trading timeframe. From here on, until you find the low-risk high probability trade areas ( setup areas), everything should be conducted in the trading timeframe ( the timeframe you have chosen to analyse and execute trades). I hope you are clear with the construction of a structural framework of support and resistances using higher timeframe. Let’s move onto the next step, i.e. identifying the trend and trend violation point.
Let’s recall the jargon of trend quickly before proceeding. There are three directions to the market. Up, Down and Sideways.
The uptrend is a series of higher pivot highs and higher pivot lows. The uptrend is said to be violated when the pivot low responsible for the highest high in the trend is broken.
The downtrend is a series of lower pivot highs and lower pivot lows. The downtrend is said to be violated when the pivot high responsible for the lowest low in the trend is broken.
If you want the details of the above two sentences, please find it here.
I also said that the market is said to be sideways when there is no particular sequence of pivot highs and lows and the sideways trend (also called as a range) moves in between a support and a resistance. All well and all good till now. Here is my question.
When will you say that the market entered into sideways trend from an up/downtrend? If the sideways trend is identified, where shall we draw support and resistance?
In the above picture, B is the highest high in the trend and A is the pivot low that is responsible for the highest high. 1 and 2 are intermediate pivots in between A and B. The uptrend is still intact as A hasn’t broken yet.
This is what that should happen if the uptrend is still intact, ie. it has to break the highest high in the trend, ie. B without breaking the trend violating pivot, A, after forming another intermediate pivot 3.
But instead, if this happens,
We say that the trend has changed from an uptrend to sideways. Look clearly the difference between this image and the above one.
In the previous image, after forming the third intermediate pivot, the price has formed a new high breaking out the previous high in the trend.
In the above image, after forming the third intermediate pivot, the price couldn’t break the high. Also, the trend violation pivot is not broken. Instead, it has formed another intermediate pivot, ie. pivot 4, in between A and B. We will say that the trend has changed to sideways when pivot 4 is confirmed.
When there is a minimum of four intermediate pivots between the highest high ( in an uptrend) or lowest low ( in a downtrend) and the trend violation pivot, we say that the trend has changed to sideways.
Look at the above image from the realtime market. Go through the image according to the serial numbers in the description.
First, it is in a downtrend due to lower pivot highs and lower pivot low sequence. The downtrend has changed to an uptrend when the pivot high responsible for the lowest low in the downtrend is broken at 3. The pivots numbered from 1 through 4 in red are in between the highest high and the trend violation pivot of the uptrend. When the pivot 4 is confirmed, ie. on close of the red candle pointed in the image, we confirm that the trend has changed to sideways.
Now, where do we draw the range support and range resistance?
Look at the above image. The support is drawn at the uptrend violation pivot and the resistance is drawn at the highest high in the trend when the trend has changed from an uptrend to sideways.
When the trend changes from downtrend to sideways, Support is drawn at the lowest low in the trend and Resistance is drawn at the downtrend violation pivot.
Now, the above realtime chart, after drawing range support and range resistance looks like this,
So here is the point.
If there are more than 3 intermediate pivots in between two pivots in a trend, we say that the trend has changed to sideways / range.
When the sideways trend is confirmed, ie. after the conformation of 4th intermediate pivot, we draw the range boundaries (range support and range resistance) at the highest high (in an uptrend) or lowest low (in a downtrend) and the trend violation pivot.
It might be confusing if you are a novice. Understand the concepts and train your eyes. It is simple if you practice.
So, this is what you need to do in the second step of your analysis.
Identify the trend in the trading timeframe, ie. Up/Down/Sideways.
If the trend is Up/ Down, mark the trend violation pivot.
If the trend is sideways, draw range support and range resistance.
In the next article, we will move onto the third step, ie. identifying the strength of bulls and bears in the trend and that is the last step we need to do for making a prediction of future direction. You must completely understand all the things explained by now before moving to the next step. So please practice. Without hard work, it is impossible to make money in trading.
Good bye till then.
Thank you for such an informative site. Have started learning the basics.
In the image on this page, I am confused by one thing. I have marked it on the following image.
After the trend change point pivot, you have denoted, as per me there is pivot low A, high B, low C and high D.
So as per me, D should be the trend change point. Am I wrong or you have just ignored those pivots?
Nothing wrong in considering D as a TVP there. The things are, it’s not a total rule-based approach and I personally consider the pivots that are obvious to the eye.