Step 5:- Visualizing the Future price action and Ongoing Market Analysis….
Before going into the fifth step, let me cover how we are going to update our bias when the new information is added to the chart. This is what we call ongoing market analysis. Remember, Ongoing market analysis is conducted throughout the session. If you have no positions in the market but have a bias, we perform an ongoing market analysis to update the bias with new information. If you have a position, we perform an ongoing market analysis to manage the trade in such a way that we decrease the risk and increase the opportunity to profit. We call this as Trade Management. No matter how experienced you are in trading, you can never perfect trade management. There is always room for improvement in this area. So, the only thing that we can do is to make our performance better than the previous trade. That’s the reason why I always say trading is a process of personal development and there is no shortcut to it. Instead of regretting about the mistakes we have done, we must learn something out of it to make the next trade better. Maintain a trade Journal and review them often. You will be on the way to succeed in this business.
Ongoing Market Analysis :-
We have formed our bias ( high probability future direction) from the 6 rules in step 4. But, that bias is formed using the data available till then.
Then what about the new data that is going to be added? Will the new market data has the potential to affect our bias we have formed using the past data??
Absolutely. So, we must update our bias with the addition of new information. As I have already written in one of my previous articles that we are not concerned with the continuous stream of data, we just need to look at the packet of data represented in the form of a candle in our chart. You can read it here if you want.
So, when a candle is formed in our trading time frame chart, we will question it. We will check whether the new candle is in conformance with our bias or it is objecting our bias. If it is in conformance with our bias, we will continue with the same opinion on future direction and wait for the next candle. If the new candle is not in conformance with the bias, we will then start from step 1, to form a new bias.
How will we know that the new candle is supporting or objecting our bias?
Make a note that in the 5 parameters of a candle, namely, Open, High, Low, Close, Volume, close is the one that decides the nature of the candle. I don’t know the exact reason behind it, but most technical traders believe that and that might automatically turn out to be a self-fulfilling prophesy. We don’t need the exact reasons, if something works for us, use it. If something doesn’t, discard it. There is no right and wrong in trading. The one that is giving you good profits is the right one for you.
Let me repeat what we are looking for. We have formed our bias, either upside or downside using the six rules in step 4. Now when a new candle forms, we need to know the strength of bulls and bears after the formation of the candle. If the bias before is upside, the new candle must show bull strength. If it is a downside, the candle must show bearish strength. If that doesn’t happen, we will start from step 1 to reassess the bias.
This comes to the main point of our ongoing market analysis.
We need to know that the new candle formed is owned by bulls or bears to make a decision.
We will do that in two steps.
By comparing the close of the candle with the range of the same candle and
By comparing the close of the candle with the previous candle’s range.
- Close comparison with the range of the same candle:-
We will check whether the close of the new candle is that top 1/3, bottom 1/3 or centre 1/3 of the total range of the candle.
If the close is at top 1/3, it is a high close candle. Relatively bulls are strong in this.
If the close is at the centre 1/3, it is a mid close candle. Neither bulls nor bears are strong in this.
If the close is at the bottom 1/3, it is a low close candle. Bears are relatively strong in this.
Once we classify the candle with the help of the close and range comparison, we move on to the next step.
2.By comparing the close of the candle with the previous candle’s range:-
If the close is above the high of the previous candle, we name it as Bull candle.
If the close is in between the high and low of the previous candle, we name it as Range candle.
If the close is below the low of the previous candle, we name it as Bear candle.
Using the above two comparisons, we will have 9 combinations which point to different degrees of bullishness and bearishness.
High close Bull – Strongly Bullish.
Mid close Bull – Moderate Bullish.
Low close Bull – Less bullish. Can be considered as Bearish in some context.
High close Bear – Less Bearish. Can be considered as Bullish in some context.
Mid close Bear – Moderate Bearish.
Low close Bear – Strongly Bearish
High close range – Neutral sentiment, but slightly leaned towards bulls.
Mid close range – Neutral sentiment.
Low close range – Neutral sentiment but slightly leaned towards bears.
Don’t be scared as it seems like greek and Latin if you are a beginner. They are not that tough and it hardly takes around 5 seconds to define this 2-candlestick pattern sentiment when you start trading.
Now, we know who owns the candle, Bulls or Bears. Then the next step is to look at this 2- candlestick pattern sentiment in the context of our bias and make a decision.
If the bias is bullish, we expect the new candle to show some sort of bullishness. If the bias is bearish, we expect the new candle to show some sort of bearishness. If that doesn’t happen, we will start our analysis from step 1.
These are the three steps involved in ongoing analysis-
Determine candlestick sentiment by comparing the close with the range of the same candle.
Determine candlestick sentiment by comparing the close with the range of the previous candle and then determine the 2-candlestick pattern sentiment.
Now, consider the context (i.e. bias) with the newly added candlestick sentiment and make a decision.
The process is quite simple and there is no reason to complicate it. Now that you know how to question a newly formed candle to seek an answer about the sentiment, let’s move on the fifth step of our analysis.
Step 5 :-Visualizing the Future price action:-
Have you remembered the article I have written about Situational Awareness? Our productivity depends on maintaining situational awareness throughout the session. We should never be surprised by the new information to let our decision making more fluid. We must be prepared to take action by keeping our emotions at the check when new information is added.
In an environment of uncertainty, i.e. in the financial markets, you will always be surprised no matter how prepared you are. So, you must know what kind of future price action supports your present decision. You must also know what kind of future price action proves you wrong. If you are prepared for these two scenarios, you won’t be affected by the emotions caused by surprises of the market and that directly controls the damage of your bank account.
This is what we do in this fifth step. Two questions we must ask.
What kind of future price action validates my present bias?
What kind of future price action invalidates my present bias?
When I say price action in the above, I am referring to the 2-candlestick pattern sentiment. So, we visualize the future candle’s sentiment before it appears on our chart.
Once you visualize these two scenarios, you can react with ease with the addition of new market data.
Remember, we perform our ongoing analysis throughout the session. Even after entering the trade.
The sixth step has been discussed in the previous article and this concludes our analysis before entry. After completing these six steps, we will prepare our entry procedure and that I am going to write in the next article. We are approaching the end of the theory part and I will show how to implement all these steps with the help of realtime charts once we are done with the theory. Until then, don’t lose focus and familiarize yourself with the procedure.
Good bye till then.. 🙂
P.S- Some of the images in this article are copied from the book, YTC price action trader, by Lance Beggs.