Making Order Out of Short-Term Chaos
Price Action Lesson #3
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“Making Order Out of Short-Term Chaos“
This is the title of Chapter 1 of one of the best trading books ever written – Long-Term Secrets to Short-Term Trading by Larry Williams
It was back in 2004 when I first read that title and immediately knew that something’s gonna change in my trading. In that chapter, Larry explains how the markets move. A concept called market structure which was first developed by a guy named Henry Wheeler Chase in 1930s.
Back then, I didn’t fully grasp the potential behind this idea, but after so many years, now I am aware, how powerful this really is. I can’t say, that I understand it completely because in trading it is dangerous to think in such a way, but I can show you a thing or two :).
Especially when it comes to the best buys and sells, which can’t scare us out of the trade.
Check the following examples.
The first one is the daily chart of the 30 YR. US Treasury Bonds futures. What a move, huh? Starting with 0T Long Nose candlestick, it doesn’t do anything that will make us even consider, that there will be a reversal. Until it ended with the same candlestick shape as it began with, the 0TLN.
Maybe it is a coincidence, or only bullish trends are experiencing such a phenomenon?
Here is Sugar. Take a look.
Most of the traders are very persistent. When some thought gets in our heads, it can’t get out easily. And if we decide that “Sugar’s gonna fall”, then everything starts to look like the beginning of that decline. But where will the down move begin? Where is the beginning of the move which we can ride longer?
It is not when the price goes up. It is on the right side of the chart when it goes down!
And as you can see, the Sugar is just falling and falling.
But again a commodity. Maybe it works only there, in commodity markets?
Let’s check the stock market. Here is the daily chart of Amazon.
Again on the right side. Again after the market has made the ultimate low. And when it starts to rise, on the higher bottom, after a small EQ type of candlestick, begins the move we expected.
You can go back to the Gold chart in the previous lesson or check currencies, preferred stocks, cryptocurrencies or other instruments. What you’ll find is that there is something in common between them and it is that:
The big up move (best buy) can be expected after a Higher Short-Term Low
The big down move (best sell) can be expected after a Lower Short-Term High.
That’s how simple it is.
We don’t need to try to catch the ultimate top or bottom because
– we can’t catch it – such tops and bottoms just happen without anyone expecting them
– this is not where the best trade will be! Yes, this is how all markets move.
We need to be patient and wait for the higher low or lower high to come. Because now we know that if there will be a monstrous trade, it will be after them.
Don’t take my word for it, open your charts and see for yourself. This will be a good exercise. It doesn’t work all the time, nothing in trading does. But most of the time you’ll find the best Risk-Reward trades exactly there.
Now, most of you are probably thinking right now “how to find that higher/lower short-term top or bottom?”
We’ll continue to drill down further into the price action and the next lesson is exactly about that. The Price Action Entry!
The Talking Chart book and the checklist might give you an idea of how to find a good entry.
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