Step 4 :- Identifying the High Probable Future Direction.
We now have the structure, trend and trend violation point and the strength/weakness in the trend.
Based on this information, we now need to predict the high probable future direction of the market. It is quite simple and we just need to remember only 6 points for that.
Before moving into that, let me give basic tenets on which those 6 rules are postulated.
The trend (inertia) in the price movement plays a very crucial role. We will only consider the trend reversal at the boundaries of the structural framework when weakness is shown in the trend. No matter how weak the trend is, we never expect a reversal of the trend between the structural boundaries until that time when price breaks the trend violation pivot.
Look at the above images. In the first image, weakness is shown at the structural boundary and hence we anticipated a trend reversal ( i.e price will break the trend changing pivot). In the second image, weakness is shown by the trend between the structural boundaries. We anticipated a complex pullback (3 swing retracement), rather than a normal pullback (single swing) and expected that the price will continue to move in the previous trend after the complex pullback (CPB). Look that the trend violation point is not broken and price continued its uptrend after the CPB.
Price always moves in the direction of strength and against the direction of weakness.
Using the above two points, we postulate the rules for the high probable future prediction. First, we will look at the rules that have to be applied when the price is in between the structural framework support and resistance. After that, we will look at the rules that have to be applied when the price is interacting with the range boundaries.
WHEN PRICE IS IN BETWEEN THE STRUCTURAL SUPPORT AND RESISTANCE :-
RULE 1 :-
When there is no weakness evident in the trend (uptrend/downtrend), we expect that the trend will continue with a normal pullback (single swing).
RULE 2 :-
If weakness is shown in the trend, we expect a complex pullback instead of normal pullback. We don’t expect the trend to change.
RULE 3 :-
When the price is in a sideways trend/range, if there is no strength displayed at the range boundaries, we expect that the price will continue to move in that range.
RULE 4 :-
When the price is in a sideways trend and strength is shown on approaching the range boundaries, we expect a range breakout. Then we watch the price closely for evidence of weakness after the breakout.
If weakness is shown in the direction of the breakout, we expect that the breakout will fail.
If weakness is shown in the pullback to retest the range boundaries, we expect that price will continue in the direction of the breakout.
These are the four rules that must rotate in our mind when the price is moving in between the structural support/resistance. Now, let’s look at the rules when the price is interacting with structural support/resistance.
WHEN PRICE IS INTERACTING WITH THE STRUCTURAL BOUNDARIES
RULE 5 :-
When there is no evidence of strength shown on approaching the structural support/resistance, we expect the TEST of the framework holds, i.e, we expect that the trend will reverse.
When the price is showing strength on approaching the structural framework boundary, we expect a structural framework breakout. Then we watch the price action for clues of weakness after the breakout.
If weakness is there in the direction of the breakout, we expect that the breakout will fail and price returns to the previous framework.
If weakness is shown in the pullback to retest the structural framework boundary, we expect that price will continue to move in the direction of the breakout.
These are the 6 rules that we use for predicting the high probable future direction. Don’t think about entries yet. We now have high probable future direction. Now we need to find a low-risk area to enter into the high probable direction and that will be covered in the next two steps.
Make sure you understand all these before moving into the next step. Everything we have done until here is very very crucial for your profitability.