How to define the trend?

UPTREND versus DOWNTREND

27th September 2013, 06:06 PM

In previous lessons we have talked about what Supply and Demand trading is and how
it can help us to achieve success in the markets. We talked about imbalances, which
manifest themselves as either peaks and valleys (swings) or in continuation patterns.
These structures will help us pin point “potential” areas of interest and turning points
in the markets. You've also learnt how to draw bases on the most important Japanese
candle stick patterns so you are able to define – providing other criteria is met that you
will learn in later lessons- potential entry zones.

In this lesson we're going to start dealing with a key concept in any methodology
– the Trend. You might have heard the saying “the trend is your friend - until it ends”.
But how can we define the trend and when will we consider its end? This is what I am
going to show you in this lesson.

As you will learn in future lessons the methodology rests on a concept called the
sequence and realignment by using multiple time frame analysis to make trade
decisions. The concept of identifying trend is the backbone of it. I therefore urge you
to go through this lesson several times so you understand it inside out. A wrong
application will lead you to many losses. So lets start...

WHAT DEFINES AN UPTREND AND A DOWNTREND?

When you open Metatrader platform or any other charting software and switch
through the time frames of any instrument you will realise that sometime price goes
up, sometimes it is in a clear down trend and sometimes price is just flat. Each
timeframe can have a different trend because Price is fractal. The term fractal means,
that there are price structures within price structures and these structures/patterns
repeat themselves over and over on all timeframes.

Sometimes you stare at a price chart and you first believe it is up, then after looking
again you think it is flat. Why is this you might ask? Because depending on where on
the chart you reference the last candle with the beginning you might get a different
outcome. In this lesson you will learn the rules on how to exactly define the trend so
that there is no subjectivity left. You will never have any doubt what the trend is,
which is what we seek, clarity and objectivity.

Therefore I urge you again to read the lesson several times, watch the videos and
practice, practice, practice!
WATCH THIS VIDEO:

You might ask how can I make a trading decision trade if each timeframe has a
different trend? Isn't that a mess? It may look like a mess but this is why we need to
make a top-down multiple timeframe analysis so we align as many timeframes as
possible in the direction of the bigger picture's trend. This concept will be taught in
later lessons.

To define a trend or for that matter a consolidation in a mechanical and methodical

way, we use supply and demand imbalances as well as trend lines.

Just one word of caution upfront which is very, very important! Since we are
primarily working with supply and demand imbalances, price making a higher high or
a lower low does not necessarily mean that we have a trend. Also remember that so
far we have not qualified proper supply and demand imbalances. We have identified
“potential imbalances” in lesson 2. So when you look at the explanations or when
watching the videos remember that these imbalances I am referring to are in fact
proper supply and demand zones. Again, you will learn how to qualify those in later
lessons.

So lets get started. We basically have 4 stages:

1. An uptrend
2. A broken uptrend to the downside a.k.a Bullish consolidation
3. A downtrend
4. A broken downtrend to the upside a.k.a Bearish consolidation
▲ UPTREND ▲

What we look for in an uptrend is that identified demand areas underneath

current price are respected (are held) and in the process of the price moving
up has taken out supply zones (broken through even if it was just by one PIP
pinch). Demand areas are respected, supply areas are taken out

We define an uptrend as follows:

Possibility 1
• We were able to draw an uptrend line, which is respected AND
• at least one opposing zone of supply was/is taken out
SP500 WEEKLY UPTREND
• Weekly uptrend [1] is eliminated by W DZ [2] and a bullish trendline
connecting last two peaks is possible, therefore there is an official uptrend.
• All time highs scenario after that with new W demand zones being created at
[3] [4] and [5] with nothing to the left to be removed at all time highs. We must
always connect the latest two valleys.

Possibility 2
• At least two opposing supply areas taken out, no possibility to draw a bullish
TL
The reason for the second possibility is that it sometimes is not possible to draw a
trend line based on the rules. Again you will learn this in another lesson just accept
this definition as it is for now. Later on it will become clearer.

As described a bit further above we can only consider valid demand and supply zones
when applying these rules therefore you should always ask yourself: what has this
imbalance and potential demand zone accomplished? Has it taken out an opposing
supply zone?

Level on top of level: Sooner or later you will come across situations where you
identify supply or demand zones that sit right on top of each other or are very very
close. This is called a “level on top of level” situation.

Let’s assume for a moment that price was moving down, price reversed up and it
broke two supply zones that were sitting right on top of each other. Does this mean
we are now in an uptrend? No, it does not! In these situations we are in a bullish
consolidation stage.
WATCH UPTREND VIDEO:

▼ DOWNTREND ▼

What we look for in a downtrend is that identified supply zones above current price
are respected (are held) and in the process of the price moving down has taken out
demand zones (broken through even if it is was just by one PIP pinch). Supply areas
respected, demand areas taken out.

We define a down trend as follows:

Possibility 1
• We were able to draw a descending down trend line, which is respected AND
• at least one opposing zone of demand is/was taken out
TRIP ADVISOR WEEKLY DOWNTREND
• Clear example of weekly downtrend on TripAdvisor, new bearish impulses and
demand being removed. Some demand zones can't be seen on the chart, they
are further to the left.
• Every time there is a demand zone removed and two new peaks the weekly
downtrend is renewed.
• For instance, W DZ [1] is removed by W SZ [2] and a new bearish trendline
can be connected once price removes W DZ [1] at [3]. Then two new bearish
impulses happen allowing us to connect newer bearish trendlines connecting
last two peaks.
Possibility 2
• At least two opposing demand zones were/are taken out
As before please do not forget the level on top of level situation

AUDCAD TWO OPPOSING DEMAND ZONES TAKEN OUT

Two opposing weekly demand zones taken out but there is no possibility of drawing a
bearish trendline to connect two peaks. Two opposing demand levels taken out =
downtrend. Downtrend is official once price makes a lower low than DZ #2 at #3
WATCH DOWNTREND VIDEO

◄► CONSOLIDATION ◄►

Bullish and bearish consolidation: There are times where price is not clearly moving
in any particular direction, steam has been lost and price starts bouncing off opposing
imbalances like a ball on a tennis court. This is where most traders get confused and
lose the money they potentially made in trending markets. This is the time when the
trader asks himself why his mechanical trend following system does not work
anymore, where every trade he or she makes turns into a “brown, smelly mass”. I am
sure you know what I am talking about : - ) This is also the time where the trader is at
greatest risk to loses confidence in himself and the methodology he is trading”

A bullish consolidation happens when either

• An ascending uptrend line is broken by one full candle (the
open/high/low/close) is fully under the trend line OR
• The last valid demand zone – irrespective if it was a CP or Valley - underneath
price is broken. (Even if it is just by a one pip pinch) OR
• All of the above
When any of these three scenarios happen, you are not allowed to take any longs
(buys) in the direction of the previous uptrend line until
• Price makes a high that is higher than the previous high (price resumes
uptrend) OR
• Price hits a demand zone of 1 higher time frame below it, also known as
realignment (further lesson)
IMPORTANT: Please do not stress out over the last point yet. You will learn this in
a later lesson. For now just learn and accept this rules until it becomes second nature
to you. The last point is the concept of the realignment and sequence mentioned
earlier.
AUDCAD BULLISH CONSOLIDATION
Clear weekly uptrend with new demand zones being created and bullish impulses. But
suddenly price drops and takes DZ #2 out. Once that demand is taken out at #3 rules
state there is bullish consolidation

A bearish consolidation happens when either

• A descending down trend line is broken by one full candle (the
open/high/low/close) is fully above the trend line OR
• The last valid supply zone – irrespective if it was a CP or Valley – above price
is broken. (Even if it is just by a one pip pinch) OR
• All of the above
When any of these three scenarios happen, you are not allowed to take any short
positions (sells) in the direction of the previous downtrend line until
 • Price makes a low that is lower than the previous low (price resumes
downtrend) OR
• Price hits a supply zone of 1 higher time frame above it
As mentioned before you will learn this concept, so do not go over it just yet, as it will
only confuse you at this point.

A bullish or a bearish consolidation is what the name says. It is a consolidation of

the last trend, a pause so to speak. You are not in a new trend!

AUDNZD WEEKLY BEARISH CONSOLIDATION

Weekly downtrend connecting latest two impulses down at #3 and #4 was broken by a
bullish impulse causing the break of the trendline. Once the trendline breaks with
more than one full OCHL candle creating demand is created at #1 and the weekly
trend becomes bearish consolidation. Price retraces to previous SZ at #2 and reacts
from it. This is the picture of bearish consolidation.
USDZAR DAILY CONSOLIDATION STAGE.
Daily chart is consolidating because we are seeing new supply and demand
imbalances, neither of them is being removed. Price is bouncing back and forth from
opposing imbalances at [1] and [2].

What to do in consolidation? Both longs and shorts are allowed as confirmation at one
timeframe lower, that is, at newly created imbalances, in this case H4.

In this scenario, we have demand [1] used up with three retests, whereas supply [2]
has been tested only once. It's advisable that we trade in the direction of the weakest
imbalances, in this case shorts against demand at [1].

WATCH VIDEO ON CONSOLIDATION:

NEW TREND:

Having just explained what a trend and consolidation is and what criteria need to be
fulfilled let’s now look what needs to happen so we can clearly say that a new trend
has started.

Newton's First Law of Motion states: Every object in a state of uniform motion
tends to remain in that state of motion unless an external force is applied to it.
It's pretty simple, a trend in any given timeframe will continue in the same direction
unless an external force, in our case, a bigger timeframe, is applied to it. A trend
change in any given timeframe usually happens (not always) when a bigger timeframe
gains control.

In order to have a new downtrend after an uptrend either one of the following
scenarios has to happen:
• A new bearish trendline can be drawn AND at least one demand zone is
taken out.
For instance: current timeframe was in an uptrend, bullish trendline is broken.
Furthermore at least one demand zone has been taken out... if we can connect
two new peaks with a bearish downtrend line. timeframe will now be
downtrending. The difference between a bullish consolidation and a downtrend
is the possibility to connect two peaks where the second leg of the second peak
makes a lower low than the first peak's second leg
• Two demand zones were taken out. For instance: there are times when price
sells off so fast that drawing a bearish trendline connecting the latest two peaks
is just not possible. However due to the strength, price managed to take out two
demand zones. When that happens, two opposing demand zones taken out, that
chart will be in an official downtrend.
In order to have a new uptrend after a downtrend either one of the following
scenarios has to happen:
• A new bullish trendline can be drawn AND at least one supply zone is
taken out.
For instance: current timeframe was in an downtrend, bearish trendline is
broken. Furthermore at least one supply zone has been taken out... if we can
connect two new valleys with a bullish line. timeframe will now be uptrending.
The difference between a bearish consolidation and an uptrend is the possibility
to connect two valleys where the second leg of the second valley makes a lower
low than the first valley's second leg
• Two supply zones were taken out. For instance: there are times when price
rallies so fast that drawing a bullish trendline connecting the latest two valleys
is just not possible. However due to the strength of the move price managed to
take out two supply zones. When that happens, two opposing supply zones
taken out, that chart will be in new and official uptrend
Please keep in mind the level on top of level scenario mentioned earlier
EURUSD WEEKLY CHART NEW TREND EXAMPLE

Example of a new weekly uptrend. Weekly supply at #1 is valid because it took out W
DZ on the left (not seen on the chart). We must score the level and ask questions like:
did it consolidate away? (yes) Did it make 2:1 RR? (no). Confirmation is required
since it's not a 2:1 imbalance, W SZ #1 is valid but not tradable, confirmation needed.
Once W DZ #2 takes W SZ #1 an uptrend is created connecting last two valleys + one
opposing W SZ #1. Official W uptrend when highs at #3 are traded through.

OVER-EXTENSION

Now that we know how to define a trend or a consolidation we have to look at the
concept of over-extension. As you might have already picked up in this lesson we can
draw two types of trendlines.
• Downtrend line by connecting two peaks or
• An Uptrend line by connecting two valleys
There is a more detailed lesson dealing with over-extension which contains further
explanations and a few chart examples. Read the over-extension lesson here
Why do we have over-extension?

Market participants can get ahead of themselves a lot of times and fall into the trap of
greed and mania as well as fear. These irrationality is what makes prices to look
overextended on the charts. However there comes a time where simply market
participants get exhausted and the buying and selling pressure eventually subsides.
This is shown as a pause or a pullback on the chart. Price will eventually revert back
to the mean – a state of normality. I am sure you have been part of such an irrational
move before yourself. How often in your trading career have you found yourself
desperately wanting to get out of a trade when you saw price falling like a rock?

I am sure you have realized by now due to you practising on correct level drawing that
peaks and valleys are frequently not there. All we have are little pauses, which reveal
themselves as continuation patterns (CPs). The issue now becomes as follows, if you
do not have peaks or valleys and thus are not able to draw a trend line how can we
make sure we can still accommodate for this?

The answer to this is to draw an “aggressive trend line”. The break of such a line has
the same consequences than that of regular trend line. You do not have to use them as
the rules above stating the break of 2 demand / supply levels already accommodate for
this. However drawing a trend line makes things visually easier, especially if you
decide to analyze and trade on 20+ currency pairs.

So when are we overextended and thus are able (and only then) to draw an aggressive
trend line? We consider over-extension when we clearly see that price has been
moving in one direction non-stop by:
• Creating 3 or more clear CP patterns
• Visually strong up or down moves with huge candles covering a huge price
distance in a very short time compared to other candles
• Price rallying indefinitely creating a series of CPs and valleys/peaks. (Note: We
need to analyze each case in particular. When this happens it's recommended to
keep on trading in the bigger picture's direction while applying the realignment
and sequence rules, once you get a loss on a clear level, you should stop trading
in that direction until price realigns itself with a higher time frame demand
level (uptrend), higher time frame supply level (downtrend) or you trade on
confirmation. Confirmation trades is discussed in more details in later lessons
so do not concern yourself with this aspect
• NOTE: When 3-4 CPs happen in a row, over-extension may start happening
and it's very likely that price will return to the origin of the whole move to 1
HTF valley/peak or HTF bullish/bearish engulfing pattern; moreover is a HTF
opposing zone has taken control
Please keep in mind that there is no rule that will turn a CP into a valley/peak or
vice-versa to make things easier. The structure of an imbalance can't be changed once
the structure has been created.
EURJPY D1 OVER-EXTENSION

In EURJPY D1 chart example below we can draw a more aggressive bearish trendline
connecting the last three CPs. Over-extension is great for counter-trend trades. The
break of an aggressive TL also creates an imbalance at #4.
Exceptions and resets

As you have read above when we identify over-extension we can draw an aggressive
trend line and once this trend line is broken we need to realign (3 rd point above).

Through extensive testing I have come to realize that an over-extension and thus an
aggressive trend line can be ignored when
• A level (CP) that is part of that over-extension has caused an important
accomplishment such as breaking a supply or demand level of a higher time
frame OR
• When we have formed a new valley or peak as a valley or peak is considered a
pullback and thus a reversion to the mean.
What we do when any of these two exceptions occur is to simply resume trading in
the original direction until we have a loss. Once we the loss we will wait for a
realignment in a higher time frame zone as described above

The significance of trend lines and its correct application

So far we have discovered the rules to objectively determine when price is trending,
when price is consolidating and when a new trend has begun. Trend lines are a visual
aid that guide and help us to stay objective. They help to determine if we are working
within the rules that we have given ourselves to survive in a market that hardly has
rules. If we do not lay objective rules upon ourselves than our trading endeavour will
be short lived.

The break of a trend line signifies a change of dynamics, nothing more nothing less.
This change of dynamics is usually the result of a reaction to a higher time frames
supply or demand area.

Correct application of trend lines

• Regular trend lines: A regular trendline is applied when price is in state of
normalcy, printing clear and obvious valleys and peaks
• Aggressive trend lines: An aggressive trend line is applied when price is over
extended. The criteria for these situations was discussed in the last section of
this lesson
• A regular up trend line should be drawn between the penultimate valley (its
lowest point) to the last valleys lowest point.
 • A regular down trend line should be drawn between the penultimate peak (its
highest point) to the last peaks highest point.
• An aggressive up trend line, we need 3 CP's or more so trendline should be
drawn covering at least the latest 3 CP's or more
• An aggressive down trend line we need 3 CP's or more so trendline should be
drawn covering at least the latest 3 CP's or more
IMPORTANT: Please note that it is not allowed to connect Valleys/Peaks to a CP or
a CP to Valleys/Peaks. There is a simple reason. Price is either in a state of normalcy
or overextended. It cannot be both!

Any break of a trend line signifies a change of dynamics, nothing more nothing less.
This change of dynamics is usually the result of a reaction to a higher time frames
supply or demand area. For now keep the following things in mind:

OVER-EXTENSION VIDEO:
16th April 2014, 08:29 AM
The screenshots below show examples of what an uptrend, a downtrend and a
consolidation stage look like in any given instrument.
• Remember that having a break of a trendline does not necessarily mean that we
have an opposing trend, the dynamics of the market might be changing, price is
losing steam, potential consolidation stage happening
Screenshots below are from USDJPY D1 chart December 2013
#3
4th July 2014, 06:25 PM
IMPULSES versus CORRECTIONS

Before going deeper into understanding how impulses and corrections help us define a
trend, let me remind you of this. Supply and demand imbalances are made of
impulses but not all impulses are imbalances.

Each timeframe has its own trend, this is why it's mandatory that we make a
multiple timeframe top down analysis in order to decide in which trend direction we
want to trade. The bigger the timeframe, the higher its reliability.
A trend is composed of impulses and corrections:
o Impulses
• The impulses are the moves in the direction of the current trend, the
direction in which we should be trading.
o Corrections
• Corrections can be seen as the pauses in the trend, or small retracements
reverting to the mean before the current trend is resumed. Corrections
 together with supply and demand imbalances give us the opportunity to
trade in the direction of the main trend before the new impulse happens
Anatomy of an Impulse:
• Fast moving prices. Violent moves that cover large price moves in a short
period of time
• ERC candles. They tend to have larger candles, even gaps in the direction of
the trend
• If seen in the opposite direction of the main trend, it may be giving us
information of a potential change in the dynamics of the current trend
• Impulses in the opposite direction to the main trend usually happen when a
bigger timeframe opposing imbalance gains control
Anatomy of a correction:
• Price moves slower and covers less price action. Price takes much more time
to cover the same price action covered by an impulse
• Riskier to trade, you will probably be on the wrong side of the new potential
impulse
• Corrections can be easily measured by supply and demand imbalances on the
timeframe where they have been located. 20 EMA and trendline rules can be
applied in order to learn where the next impulse is most likely to happen

Charts below belong to EURUSD D1 timeframe, first months of 2014

21st March 2017, 08:59 AM
A TRENDLINE CONNECTING TWO VALLEYS OR PEAKS DOES NOT
NECESSARILY MEAN THERE IS A TREND

We use trendlines in Set and Forget to connect the last two obvious impulses (valleys
and peaks) and detect potential imbalances if these trendlines are solidly broken with
full OHCL candles. Many traders struggle with this way of drawing trendlines and
how trendlines can tell us about the trend in a specific timeframe. The fact that a
bullish or bearish trendline is connecting the last two impulses does not necessarily
mean there is a trend.

As supply and demand traders, we must take into consideration opposing imbalances
and ask ourselves (or the charts) what is happening with those imbalances. Are the
opposing imbalances being eliminated or being respected? If the answer is respected
then drawing a bullish trendline will not result in an uptrend, the TL will be used to
detect potential supply zones if it's solidly broken.

Remember, a trendline connecting the last two valleys or peaks does not
necessarily mean there is a trend, we also need opposing zones to be eliminated
AUDUSD WEEKLY BULLISH TRENDLINE IS NOT A WEEKLY UPTREND

A bullish weekly trendline connecting last two valleys does not necessarily mean
there is an uptrend. An uptrend requires at least one opposing supply to be eliminated,
in this case Weekly supply at #1. If this supply is taken out, AUDUSD will have an
official uptrend and create a new W demand zone at #2.
AUDNZD MONTHLY BEARISH CONSOLIDATION, NO UPTREND

Being able to draw a bullish trendline connecting 2 valleys does not necessarily mean
there is an uptrend. Trendlines like [1] can be used as confluences to locate new
imbalances when broken but not to assess current trend. An uptrend also needs an
opposing supply imbalance eliminated and there is none overhead and left at [2].
Currently there is bearish consolidation since M DZ [4] removed M SZ [3] but on the
new two valleys at [1] no opposing supply has been taken out.
NZDUSD MONTHLY BEARISH CONSOLIDATION, NO UPTREND
We can draw a bullish trendline at [1] on NZDUSD monthly chart but no opposing M
SZ has been taken out, currently M SZ [3] has been tested and not eliminated
therefore there is no uptrend. Current valid trend is bearish consolidation by using
bearish trendline [2], monthly is ranging. Bullish trendline [1] can be used to locate
potential supply zones if broken with at least a full OHCL candle.
#1
Multiple Timeframe Analysis
27th September 2013, 05:58 PM

Multiple Timeframe Analysis will help us to be on the right track and multiple returns
if done correctly. In order to consistently make money in the markets, as traders we
need to learn how to identify the underlying trend and trade around it accordingly.
Common clichés include: "trade with the trend" "the trend is your friend" can be read
everywhere.

Let us imagine a juggler, using two identical balls.At some point, the two balls will be
at exactly the same height - with one going up, and the other coming down, gravity
forces are playing out here. Both are moving under the momentum of exterior forces.
The same could even be true of four, six or any number of balls. At any one time
several variations of momentum could be in play.

In terms of an absolute price, what is the difference between a stock or Forex pair that
is rising and a stock that is falling? If you believe that the true value of that asset is
much higher than the current price, then how does the recent history and current
momentum of price action affect your decision to buy or sell? The answer depends
upon your personality, the type of trader you are and your psychology towards that
market. Is the current 'glass' half empty, or half full?

Like 2 balls in the air simultaneously, currently at the same height, the true picture
only becomes clear with more information... generally only available in hindsight
unless you are looking at it in a different way by using more data to assess if the ball
is in the process of ascending or descending.

It would be a very simple decision to invest in buying an asset that is falling if one
were sure that it was about to bounce and head back up again to levels higher than our
purchase price. It is tempting to visualize that scenario to justify purchasing an asset
that has fallen considerably already. As supply and demand traders we know that
looking at one single scenario (timeframe) is not enough. Looking at these two balls
rising and falling can't tell us where they are coming from or where they are heading
to, we need more information. What is information that we need? We need more
timeframes.

Basing our decisions on the analysis on a single timeframe is not enough to make a
trading decision, we need more timeframes, we need multiple timeframe analysis. The
more timeframe aligned in the same direction, the better. We will have more
information to base our trade direction than a couple of balls rising and falling.

Your style of investing - would you buy stock A, or stock B both trading at $60?
There are some rules:
1. Nope - you don't get to see the rest of the chart. It is irrelevant
2. There is no right answer - your choice simply reflects your trading style
3. Everything is considered to be equal, except for the recent momentum
4. Both stocks are considered to be fundamentally undervalued at $60
5. Neither stock has any tangible reason for the recent price action
Both stocks are considered to be fundamentally undervalued at $60. Would you buy
on A and sell on B, or vice versa?
• Stock B is more expensive than you could have bought it for, it could be seen
as a rolling wagon to jump aboard.
• Stock A is cheaper now - a bargain! This often looks good, but momentum
traders see is a falling knife.
The answer is: we need MORE INFORMATION, we need multiple timeframe
analysis
What is Multiple Timeframe Analysis (MTF)?

Most technical analysts, whether they are novices or seasoned pros have come across
the concept of multiple timeframe analysis in their educations. However, multiple
timeframe analysis is often the first level of analysis to be forgotten when a trader
pursues an edge over the market.

Trends can be classified as long term, intermediate and short-term. However, markets
exist in several time frames simultaneously. As such, there can be conflicting trends
within and sequences a particular asset depending on the time frames being
considered. It is very common for an asset to be in a long term uptrend while being in
a downtrend in swing and short-term trends.

Typically, novice traders lock in on a lower timeframe sequences, ignoring the more
powerful primary trend. Alternately, traders may be trading the long term trend but
underestimating the importance of refining their entries in an ideal short-term time
frame. Which time frame you should track for the best trading outcomes?

Multiple timeframe analysis involves monitoring the same instrument across

different timeframes. While there is no real limit as to how many timeframes can be
monitored or which ones to choose, there are general guidelines that we should follow
as a trader.

Using three different timeframes gives a broader view of any market. Using fewer
than this can result in a considerable loss of data, while using more typically provides
redundant analysis and indecision. When choosing the three timeframes a simple
method can be to follow the rule of four. This means that a medium-term timeframe
should first be determined and it should represent a standard as to how long the
average trade is held. From there a shorter term time frame should be chosen and it
should be at least one-fourth the intermediate timeframe, for example a H4 timeframe
for the short-term time frame and D1 timeframe for the medium or intermediate time
frame. Through the same calculation, the long-term timeframe should be at least four
times greater than the intermediate one so keeping with the previous example, the
Weekly chart would be the third timeframe.

Check out the Sequence and Realignment Lesson to learn more about which
timeframes to choose and in which order they should be analyzed. Below is just an
example for a longer term position top down analysis.
It is imperative to select the correct timeframes when choosing the three
periods. Clearly, a long-term trader who holds positions for months will find little use
for M15, H1 and H4 charts. At the same time an intraday trader who holds positions
for hours and rarely longer than a day would find little advantage in daily, weekly and
monthly combinations. This is not to say that the long-term trader would not benefit
from keeping an eye on the H4 chart or the short-term trader from keeping a daily
chart in the selection but you can see how it’s all relative to what you want to achieve.

Putting it all together

When all three timeframes are combined, you will easily improve the odds of success
for your trades, regardless of the other rules applied. Performing the top down
analysis helps you to trade with the larger trend, what we refer to as the bigger picture.
This alone lowers the risk as there is a higher probability that price action will
eventually continue with the longer term trend. The confidence level in a trade should
be measured by how the timeframes line up (more about this in the Realignment
lesson) in the top down analysis. For example, if the larger trend is in up and the
medium and short-term trends are heading lower, taking shorts is not a good idea, you
should be cautious with your profit targets and stops if you decide to take a trade.
Alternatively, you may decide to wait until a higher timeframe demand area has been
reached before you decide to join the longer term uptrend.

Everything will become clearer as you progress further through the topics.

USDMXN MULTIPLE TIMEFRAME ANALYSIS

Find below an example of a multiple timeframe analysis for USDMXN forex cross
pair. You will be learning more about MTF analysis in the sequence and the
realignment lessons.
• Monthly demand at #1, price is trying to retrace to it after a strong rally and a
monthly shooting star at #4.
• Bullish big picture bias. Set and forget longs at D1 DZ #3 nested at W DZ #2,
both at M DZ #1
Choose your timeframe combination
27th September 2013, 06:13 PM

Multiple timeframe analysis is paramount when trading any strategy, supply and
demand is not an exception. In order to make a top down analysis we need to choose a
sequence of timeframes which we will always use in the same order. The smaller the
number of timeframes used in your sequence, the lower the number of trade setups
you will find which means you will have a distorted view of what the bigger picture
trend is doing.

We can use two or three timeframes in our combination for our sequence. A minimum
of three timeframes is required if trading lower timeframes. By choosing at least three
timeframes you will be able to apply the realignment and sequence rules with more
accuracy, you can add one or two timeframes more if you wish as long as these
timeframes don't change very often. There are multiple sequences and trends playing
out at any moment in time, the more timeframes you add to your sequence, the bigger
the confusion and trading paralysis you might suffer.

There is one fact you just can't change no matter how hard you try --> The lower
the timeframe the more noise you will find, the more difficult to trade it will become
and the more experienced trader you will need to be. Most traders think that the lower
the timeframe the better they will do and the more money they will earn. I believe you
already know what is generally (not always) the result of that thinking process. It's
like saying, hey I am learning how to drive, can I borrow your Ferrari? Instead of
using a slow, small car with less horse power.

Setting and forgetting your trades is a way of life, it's not just trading that should have
driven you here, it's not about being in front of the computer 6-8 hours a day. One
hour a day or every two days should be enough. Deciding how many hours you want
to spend in front of your trading platform is one of the most important decisions that
you will have to take in your trading career. You decide the purpose for your trading
and your goals. Trade for a living, or living to trade? Which one applies to you?

The type of trader you are is directly related to the timeframe sequence which
you will choose. It will determine the type of trades that you take, how long you will
hold them and how you manage them. Once you have decided which type of trader
you are, which style fits your personality, you should accept and be happy to
ignore/miss trades that do not match your sequence and take only those that your
chosen sequence allows you to take.
Watch the short video below on how to take a trading decision on Daily
timeframes. This short video shows you how quick it can be done and why I trade
these imbalances. It's a personal decision that fits my goals and life style. A more
detail post explaining this can be read here

WATCH VIDEO:

HOW TO CHOOSE YOUR TIME FRAME COMBINATION AND YOUR

SEQUENCE

THE RULE OF 5

A simple way of choosing your personal three time frames can be to follow the rule of
5. The rule of 5 simply means that your three time frames should be separated
“roughly” by the time factor of 5.

As you remember my stating in a previous lesson, “Price is fractal” and Fractal means
that there are structures within structures, the same patterns repeat over and over on
all timeframes when we drill down a candle on any timeframe.

The best combinations for trading multiple timeframe analysis are those that use
a common multiplier, in our case the factor 5. Any multiplier or scale can be used
but we need to keep it consistent over the timeframes we select for our sequence.
As price is Fractal a candle can be multiplied or divided to obtain either a Lower
Time Frame or Higher Time Frame Candle. [From a mathematical point of view]
• 6 x H4 Candles = 1 Daily Candle
• 5 x Daily Candles = 1 Weekly Candle
• 4 x Weekly Candles = 1 Monthly Candle
When it comes to trading where the big boys conduct their business you will realise
that the H4, Daily, Weekly and Monthly time frames are the “Ace of Spades”. Why
will be explained further below.

In the above list, we can see a common multiplier factor; the average multiplier is
five. A Monthly candle has four weekly candles and a weekly candle is made of five
daily candles and so on. If we sum up 6 + 5 + 4 and divided by 3 (number of
timeframes used in the sequence) we will get 5 as the multiplier.

If we used a timeframe with a multiplier much bigger or smaller than 5, we would not
be able to take advantage of the "fractality" of price. “The sequence” – a concept we
will discuss in one of the next lessons would be broken and the realignment rules
(another concept for later) could not be applied.

By using similar multipliers we make sure that the differences between the chosen
timeframes are minimal and the "fractality" of candles stays intact. This is why using
timeframe combinations such as WK, D1 and M30 make no sense.

Which time frames to use?

This is one of the biggest decisions in your trading career. You need to make this
decisions by yourself and should be driven by your personal circumstances.

A long-term trader who would like to be in the same trade for months will find little
use to select a 15 Min, 1 hourly and 4 hourly time frame sequence. At the same time
an intraday trader who holds positions rarely longer than a day would find little
advantage using daily, weekly and monthly combinations. This is not to say that the
long-term trader would not benefit from keeping an eye on the H4 chart or the
short-term trader from keeping a daily chart in the selection.

To determine what kind of trader you want to be in the near to mid-term future you
need to assess your time limitations, your personality and your mental and
psychological stamina.
Ask yourself the following questions:
• Can I trade smaller time frames due to work or family commitments? Is it
possible and realistic to spend at least several hours per day focused and
uninterrupted during the London open until lunch break of the New York
sessions 3-4 days per week? Do not even think about intraday trading outside
these time windows. Although the Forex market is a 24 hour market the real
and significant movement is during these sessions. If you cannot fulfil the
above criteria then an “intra-swing combination” is not the right option for you
• What is my personality? Do I need action day in and day out or do I want to
enjoy life away from the charts and only look at them once per day or once
every several hours? If you are like me and want to enjoy life then a Position or
Swing Trading combo is better for you.
• Am I mentally and psychological stable enough to trade on smaller time
frames making decisions and a correct analysis in a very short period of
time? If not then again “intra-swing combinations will not be the correct option
for you.
There are more questions that you need to ask yourself, which I cannot answer for you
as I do not know you.

The fallacy of shorter time frames

My experience tells me that after you have read the above bullet points you most
probably think, “He is making valid points” but I still want to be trading intraday. I
am sure I will find a way to trade while my boss is not checking up on me. I have the
right personality and of course I am not like all the others. I am mentally and
psychological stable : - )"

Keep the following aspects in mind.

Problem 1 – the more I trade the more money I make (misconception)

The more I trade the more money I make. While it is true that trading on shorter time
frames creates a lot more opportunities for trade execution you need to keep in mind
that your profit potential per trade is also smaller. How come?
• Do not forget that a smaller time frame move means also less pips/points. You
can simply identify this by measuring the pips from one extreme of a swing to
another (which could be a DBR or RBD) and compare it with higher time
frame swings
 • With every trade you make your broker is charging you a commission, because
they want your money. A broker is not a “retail trader’s charity”
• The lower the time frame the more important the spread becomes. You do not
believe me? Do the following. In point 1 I have asked you to measure the pips
from one extreme to the other extreme. On a 5 minute time frame on a major
pair a swing is usually between 20 and 30 pips. Will you be able to hit the
extreme every time? No! If you are really good you can get maybe 60% of the
entire move. Let’s say your swing is 30 Pips x 0.6 = 18 pips. Now take the
spread away your broker charges you and your profits melt like butter in the
sun. Now imagine you have to achieve such swings every day several hours per
day. Add now the inevitable loosing trades and your dreams of driving a Ferrari
in 2 months is history
Learning: Especially as a beginner you should stay away from smaller time frames.
Ideally you should never go below a 4 hour entry chart. In the beginning you should
stick to the daily time frame or higher as this gives you enough time to analyse, to
reflect and to focus on your trades.

Problem 2 – Market Noise

The lower one goes into a time frame unfortunately the less reliable supply and
demand zone becomes. Why is this? Because banks and institutions do not trade on
lower time frames. It is the banks and institutions that are the dinosaurs and these
dinosaurs leave footprints. These foot prints are visible on all timeframes but specially
on the daily, weekly and monthly charts as our supply and demand zones. Imbalances
exist on all timeframes, however the lower the time frame you go the more you will
lose focus on what the bigger picture is telling you.

Imagine you identify a 5 minutes supply/demand zone (20 pips/ticks wide) and an
institution fires off an order of 20000 currency contracts in a range between 1.5020
and 1.5060. You did not really think a Goldman Sachs accumulates a position in a
price range of 20 pips did you? It can’t because their positions are so big that they
cannot execute their orders in such a small range in the first place. For every buyer
there needs to be a seller. Imagine what would happen if a bank wanted to buy the
equivalent of 2 billion Euros in the market all in one go? Price would not execute
there as it cannot find so many sellers at such a small price range. Price movement on
lower time frames are generated mostly by retail traders and smaller hedge funds. As
we all know – the majority of retail traders and small hedge funds are the uninformed
market participants, otherwise they would not be retail traders or small hedge funds.

Problem 3 – Our upbringing

From early on we were told that the more we work the more money we can make.
This is true in most endeavours but not in trading.

A smart trader once said. “We are not traders – we are waiters”. We have to wait
patiently and only take action on high probability areas. Trading is not gambling,
trading is a business and just as in other areas of business, profitable opportunities do
not come along every 5 minutes.

Again, I can only warn you for going down the intraday route too early in your career.
Ultimately it is your choice but don’t complain afterwards that you have not been
warned.

Find below some configurations I feel are best depending on your choice you
hopefully have made by now.

POSITION TRADING CONFIGURATIONS

We will be using daily imbalances as your entry timeframe, Refer to the Sequence
lesson for more information about it, it uses a very mechanical top down analysis
approach to locate our entries. There are times when a swing entry on H4 can become
a long term trade, if that is the case we should manage the trade by using Daily and
Weekly imbalances, this will be explained in a future lesson.

If you can’t trade successfully on the daily chart timeframe, you won’t be able to trade
successfully on any lower timeframe combination either. The daily chart is simply the
best timeframe to trade, and I don’t believe that to be a subjective view point either.
Generally speaking, the lower the timeframe you choose, the lesser chance any given
price action pattern has of working out. This is due to market noise that simply mean
nothing. Within all this noise there inevitably arises potential setups that may look
good to the untrained eye.

The daily chart time frame has a much better chance of being meaningful, simply
because there’s less random market fluctuations. The daily chart shows the most
relevant view of a market, what is happening and what might happen next. As you go
down to lower timeframes, this view becomes hazier and noisy.

HOW MANY TRADES CAN I EXPECT?

This is the million dollar question. How many trades can the strategy produce every
day/week/month/year? Well think of the strategy as a set of rules that will mostly
prevent you from trading low odds trade setups. The strategy will also provide with
great setups but think of it as a set of tools/rules, a way of reading market price action,
that will prevent you from taking unnecessary losses.

You won't just be learning a trading strategy in this classroom, you will also learn a
way to read price action and what you expect price to do under X and Y scenarios.
This will also help you develop your own nuances that might help you create personal
setups based on the core rules and your own nuances. You will be building a
wire-frame on which you will start adding new pieces.

The number of trades depends on a bunch of factors, mostly on the sequence of

timeframes used in your trading and the number of assets that you trade. The more
assets the more opportunities. It also depends on what type of trader you are
(conservative, aggressive), trading only trending setups or also trading consolidation
and counter-trend.

Factors affecting the number of trades:

• Timeframe sequence chosen. The bigger the timeframe sequence, the lesser
the number of trades per day/month/week. The smaller the timeframe sequence,
the larger the number of trades.
• Number of assets in your watchlist. Having a small selection of assets (cross
pairs in Forex, or Stocks) will yield a smaller number of trades. This number
will be proportional to the how large your watchlist is. The larger the watchlist
the larger the number of trades
• Type of trader and scenarios. Deciding what type of trader and scenarios you
want to trade will have a big impact on the number of trade setups. The more
scenarios you trade, the larger the number of setups
o Trend trading
o Counter-trend trading
o Consolidation/ranging scenarios
You must put names and numbers to these variables in order to build your own
trading plan because the number of trades will mostly depend on them. If the number
of assets that you trade is reduced and you only trade a few Forex cross pairs then you
will limiting your entries to just a few or very few, forcing you to look at the lower
timeframes or very low timeframes. You should put your money at risk at those assets
that are doing what they are expected as per the rules, it could be a stock, it could be
Gold or the futures market, you should not care. Trade the valid setups.
POSITION TRADING CONFIGURATION:
• BIG PICTURE timeframe: Monthly chart is our supply/demand SD range
and bigger picture direction
• INTERMEDIATE DIRECTION: Weekly chart is our intermediate direction
and part of the top down sequence analysis
• EXECUTION and trade management timeframe: D1 chart
o This is the chart where we should draw and pick our levels up and where
we will set our limit orders
o This is also the chart where we will manage our trades, we'll use
technical SL to move our SL above/below new D1 SD areas. This is
explained on another lesson
• FINE TUNING timeframe (optional): H4 chart
LONG TERM CONFIGURATION

We will be using monthly and weekly imbalances as our entry timeframes. Refer to
the Sequence lesson for more information about the timeframes to use and why, the
sequence uses a very mechanical top down analysis approach to locate our
imbalances.

LONG TERM TRADING CONFIGURATION:

• BIG PICTURE timeframe: 3M will be our supply/demand SD ranges and
bigger picture direction
• INTERMEDIATE DIRECTION: Monthly is our intermediate direction and
part of the top down sequence analysis. Monthly can also be used as our entry
timeframe
• EXECUTION and trade management timeframe: W chart
SWING TRADING CONFIGURATIONS, THE SEQUENCE:
Timeframe combination for medium-term setups. This setup uses the Sequence, a
concept added in a later lesson. Refer to the Sequence lesson for more information
about that, it uses a very mechanical top down analysis approach to locate high
probability trade setups.

SWING TRADING COMBO:

Timeframe combination for medium-term setups
 • BIG PICTURE timeframe: Weekly chart is our supply/demand SD range
and bigger picture direction
• INTERMEDIATE DIRECTION: Daily chart is our main direction. We need
at least D1 direction for our H4 swing entry
• EXECUTION and trade management timeframe: H4 chart
o This is the chart where we should draw and pick our levels up, where we
will set our limit orders. If the H4 level is too wide we can drill it down
by using either a fixed number of pips (for instance 40 pips on EURUSD
for H4 charts) or a third timeframe to fine tune our entry. We will not
zoom in and look for levels on lower timeframes above or below that
area because it's the H4 area we should be interested in. If the level itself
is on H4 then we have to base our decisions on this timeframe, the one
we have defined originally as our execution timeframe. Otherwise we'll
end up chasing the trade and finding what we want to see on the charts
not what the market has to offer us at that particular moment
o The execution chart will also be the chart where we will manage our
trades. We'll technically adjust the stop loss by moving it above/below
new H4 SD areas accordingly. This is explained in a further lesson.
INTRA-SWING TRADING CONFIGURATION:
If we choose to use H1 levels as our entry timeframe then we will switch to this
timeframe combination:
• BIG PICTURE timeframe: Daily chart is our supply/demand SD range and
bigger picture direction
• INTERMEDIATE DIRECTION: H4 is our intermediate direction and part of
the top down sequence analysis
• EXECUTION timeframe: H1 chart
o This is the chart where we should draw and pick our levels up and where
we will set our limit orders
o This is also the chart where we will manage our trades, we'll use
technical SL to move our SL above/below new H1 SD
• FINE TUNING timeframe (optional): M15

NOTE: H1 timeframe can also be used for swing trading as long as you use this
chart to drill down your entry at a higher timeframe supply demand area. It all
depends on your style of trading. H4 levels will give you more time
VERY IMPORTANT: CONCENTRATE ON ONE SINGLE TIMEFRAME
COMBINATION
• Choose only one combination. Stick to your decision and don't change your
mind.
• Hide the timeframe buttons you are not going to use. Enable only those you
have chosen for your sequence. You will see that in short you will start
improving because your mind will not have to take into account so many
timeframes and information.
JUST DO IT! Don't find excuses not to do it, hide those timeframes you are not
going to use and concentrate only on those that you will use, that simple. The
Sequence is a VERY powerful combination, start with that one, HIDE all the other
timeframes and that should help you tremendously.

You must follow very strict rules or you will enter an unbreakable loop. A huge
percentage of your success lies in controlling your emotions and managing your exits
correctly. Pulling the trigger is not an issue.

The key to becoming consistent is by being consistent. It's a loop that only YOU can
break
The SD Range: buy low, sell high. Supply and Demand in Control
5th October 2013, 09:43 PM

THE SD RANGE
By this time you will have probably read a few times about the SD range. The SD Range is used
to define how low or high price is to buy or sell, which is all supply and demand is about. It
is a concept that many have problems with, maybe because multiple SD ranges and timeframe
sequences can coexist.

First of all, let's use some analogies before we proceed to some graphical explanations:

The SD Range, highway and traffic jams

See the bigger timeframes supply and demand zones (the ones we use for the SD range) as traffic
lights. Imagine you are driving on a three lane highway at 120 km/h and suddenly
the three lanes become one because there is a nearby exit or crossroad then there is a traffic light
which turns red.

You should ask yourself these questions when you see the traffic light:
• Will you drive through the cross road at full speed all the while ignoring the red traffic
light?
• Does having the traffic light in red means that you have to skid row and turn 180º to
drive back home or find an alternative itinerary? No, It just means that you'd better slow
down and drive much more carefully, stop your car, look left and right, wait for the
traffic light to turn green, look left and right again and resume driving in the same
direction of your initial itinerary
You should see bigger timeframes of supply and demand SD range timeframes as traffic lights
which will tell you when you are no longer allowed to trade in that direction.

Larger timeframe imbalances are like traffic jams. See yourself driving in the same relaxed
situation while listening to your favourite music. You look ahead and you see cars are slowing
down, the rear red lights are on and a big concentration of cars are about 500 meters ahead, it's a
traffic jam, maybe it is because there was an accident, it's rush hour, the fact is that there is a
traffic jam. What do you do? Do you accelerate so you can reach home faster to have your lunch
or do you slow down and wait for the traffic jam to dissolve? You will obviously slow down else
you will crash your car and you are going to spend quite some time eating tasteless meals at the
hospital

See the bigger timeframe imbalances like traffic jams. Don't buy into higher timeframe weekly
and monthly supply zones. They are lots of sellers on a monthly supply zone (traffic jam), wait
for the traffic jam to dissolve or signs of rejection for confirmation (police diverting traffic in the
opposite direction).
The SD Range and the ocean

Markets are like ocean waves, constantly in motion, you can stick your toe in at any time - it's
always moving! If you are a surfer, you don't have to chase waves or worry about missing the big
wave, the waves will always be there. You have to be careful with your surfboard as it doesn't
always take you where you want to go, sometimes there are waves against you and sometimes
there are waves moving away from you and sometimes the water just ebbs and flows forward
and back meandering going nowhere.

What can happen to us is that we jump in with our board too near the top of the wave and try to
ride it but go over the top and get wiped out with a big drop to the bottom. (3 CPs in a row and
too high in the SD range or a bigger TF is in control), this is where we will be having most of our
losses if we don't watch how the waves move.

We need to ride the wave down low from the trough to the top crest and get off before the wave
starts to break down (engulf).
We must not forget that sometimes we will be surfing in a small bay (entry timeframe) and the
larger waves from the open ocean can flatten us if we come up against them. (fractality and
bigger picture trend).

We must be careful with those waves too, there are some crafty big fishes making their own
(fake) waves under the surface of the water ready to expose any weakness in our surfing
technique.

Thanks to Steve for this great SD range/Ocean analogy

DEFINITION OF THE SD RANGE

The SD range is a percentage we use to define how expensive or cheap any given instrument is
(currency pair, stock, index, etc). The timeframe used to measure the SD Range must be at
least one timeframe higher than out entry timeframe.
Some facts about the SD range:
• The SD range is bound by the first imbalance above and below price, except when
the first imbalance was created by a CP and the market is not trending
• The imbalance in control may or may not be part of the boundary of the SD range for a
time frame.
• The SD range timeframe must be a bigger timeframe than the one we are analysing
• We must compare our entry TF against bigger timeframes SD ranges in order to know
how high or low supply and demand imbalances are in the SD range. For instance, use
MN as the SD range for weekly imbalances; Weekly SD range for Daily imbalances,
Daily SD range for H4 imbalances and so on
• Multiple SD ranges coexist at the same time
• Our entry TF should never be used as our SD Range TF, each TF in the sequence
should be used for a different purpose
• Each sequence will have its one SD range or SD ranges. You can have one or more SD
Ranges.
 • In a MN/WK/D1 sequence
o MN will be the bigger picture trend and the main SD range
o WK will be the intermediate direction TF and SD range
o D1 should be our entry TF. D1 SD range will be used when using H4 and lower
timeframes imbalances
• Use the Daily TF as SD Range and main direction for intraday, don't try to go against
it unless price is over-extended and a bigger timeframe than the Daily opposing zone is in
control
• A lower TF cannot be used as the SD Range for a bigger TF. H4 can't be the SD range
for a Daily entry
• SD Range timeframes can be fresh, tested or used-up. If the imbalance used for your
SD range is tested or used-up, the imbalance has bigger odds of being further penetrated
and eventually taken out
• Fresh SD range imbalances being retested for the first time in trending market are higher
odds
Think of the SD range as a brick-wall that has been built right between your entry price and your
profit target. You don't want to be the one to break that brick wall, in fact, none of us possibly
have the money and emotional control to break those brick walls or imbalances in control.

HOW HIGH IS HIGH IN THE SD RANGE? HOW LOW IS LOW?

This is a question you will be asking very often. The answer is: it all depends on which
timeframe sequence or combo you are using. Let's use Monthly, weekly and Daily combo to
establish some percentages that will determine how high or low we are price is in the SD range,
its altitude.
• Daily/Weekly: 0-25 % is low, 75-100% is high
• Monthly: 0-15% is low, 85-100% is high

What is the wisest and higher probability thing to do in a scenario where price is 80% or
higher high in the Monthly SD Range? Just wait... Wait for the Monthly supply in control to
be taken out and then trade accordingly else go in the opposite direction with the new trend or
reversal if they ever happen by following counter-trend rules, that’s if you allow counter-trend
trading in your trading plan.

Why a lower % for the Monthly timeframe?

The only reason is because many monthly zones can be so wide that a simple 10% can be 200
pips or ticks

What do these percentages mean? It means that if you are long and you are 90% high in the
monthly SD range into a fresh area of supply, adding up to your existing long position is not a
good idea, even if you are a position type of trader.

What should I do then in such a scenario?

• Manage your SL tighter and lock in profits
 • Prepare to exit your long near the SD range timeframe or when you see reversal signals
reacting to the HTF SD range timeframe. These signals can be fresh and original daily
imbalances, engulfing patterns and pin candles within the Weekly imbalance

The percentages mentioned above are just guidelines.

If we're approaching a higher timeframe imbalance, we should not be thinking of adding more
positions to our initial trade, it can get much riskier playing that game. For instance, low in the
SD range means that price is too close to an area of demand at a bigger timeframe, going against
such a zone or adding more lots to your existing positions is not a good idea if you want to
become consistently profitable. Wait for a bigger pullback to a higher timeframe and trade with
the trend for higher probability trading.

EURUSD MONTHLY AND WEEKLY CHARTS TOO HIGH IN THE MONTHLY AND
WEEKLY RANGE
EURUSD monthly supply [1] in control and in a clear downtrend. We can't go long against a
downtrend and a higher timeframe supply in control. It's in control because price is testing and
within the monthly supply boundaries.
What to do? Wait for new areas of supply on our entry timeframe (Daily) to go short.

All actions that we take should be based on a multiple timeframe analysis.

Why should we take a short at a random daily supply, just because it's supply? No, there must be
other reasons to pull the trigger. We would take that short for instance if that Daily supply was
nested within a Weekly or Monthly supply with MN and WK down trends. Do you want to keep
on buying that high against larger timeframe supply? You shouldn't. This is why multiple
timeframe analysis and having a bird’s eye view of the bigger picture will help you to take high
odds trades.

More facts about the SD Range:

1. We consider bigger timeframes supply and demand SD Ranges as: the Daily, Weekly
and Monthly charts. If trading longer term, 3 and 6 months imbalances and SD ranges are
very important
2. Continuation Patterns won't be used to measure the SD range unless price is trending in
the direction of the CP
3. CP patterns will no longer be used as part of the SD range once the TL is broken, an
extreme valley/peak that was the origin of the imbalance on that TF will now be the zone
in control
4. Don't diddle in the middle. If the zones you've have detected are in the middle of the
SD range (about 50% retracement), price could probably go either way, skip those levels
to avoid unnecessary losses, or wait for a momentum to either side to trade with a brand
new Daily trend and momentum. Apply Multiple Timeframe analysis in order to assess
the odds of that level you found in the middle of the SD range . Diddle in the middle
normally matches a 50% Fibonacci retracement, also used by many traders to set their
targets
5. The higher the timeframe, the bigger its reliability. If we have a Weekly or Monthly
supply zone, even if that zone is not fresh and it has been tested multiple times, the zone
 is still in control and a higher timeframe zone, they hold much better than M15 or hourly
zones. Why? Because the smart money, the institutions, the big fishes, will be looking to
position themselves on higher timeframes. They will probably not be looking at M5 and
M15 to fill orders worth millions. Maybe some might but most likely they just don't care
much about lower timeframes, moving averages, CCI, RSI or MACD, most of them are
not scalpers but swing and position traders, so why should they care about filing orders in
the middle of nowhere? They are market makers and they know what you are doing
remember. They buy low and sell high in the supply and demand SD range.
6. Trade with the trend for higher probability. Price does not move in straight lines, SD
levels will work in both directions at any given timeframe, with or without the trend, but
in order to trade with the odds on your side you'd better trade with the trend until it ends.
But where will it end? Normally near or at a higher timeframe supply/demand area, when
price is too high or low in the SD range.
7. Avoid unnecessary losses trading against the trend in the middle of the SD range,
your profit/loss ratio will be much better. You will miss many trades for sure, but you
will filter out many losses as well
8. Decide if you want to be a hero by trading counter trend high/middle/low in the SD
range, or you just want to go the safe way by buying the dips and selling the
pullbacks in the direction of the bigger picture's trend

MULTIPLE SD RANGES CAN COEXIST

What is high in one SD Range timeframe may be low in another one. There are different SD
Ranges, you must check one range against SD ranges on bigger timeframes in order to assess
how high or low an imbalance is in relationship to the bigger picture SD Range and other
nested SD ranges.
• Monthly SD range will be used for weekly and lower imbalances
• Weekly SD range will be used for Daily levels and lower imbalances
• Daily SD range will be used for H4 levels and lower imbalances
• Each timeframe can have one or multiple SD Ranges. The Daily timeframe can have
Weekly and Monthly. H4 can have Daily, and Weekly timeframes as SD ranges
• Don't go against HTF SD Ranges with lower timeframe entries, use at least a
timeframe as big as the biggest SD Range timeframe that is in control. Why? Price
tends to move from zone in control to its opposing zone. If a Weekly SZ has gained
control, price will normally move to an opposing Weekly DZ. This does not always
happen however, the freshness of the zone can affect these scenarios, for instance a
weekly supply that has been tested multiple times while the monthly trend is up, will
probably not have enough sellers left to move price to its opposing Weekly demand zone

ALTRIA MONTHLY DEMAND IN CONTROL, TOO LOW IN THE MONTHLY

RANGE
• Monthly demand level in control at #1, monthly uptrend
• At #2 price is just too low in the monthly range to go short, bias would be to go long at
nested levels of demand on W and D1 timeframes like #4
• We need a bigger timeframe supply in control like W SZ at #3
• We can look for nested D1 demand levels at the new W DZ to go long
Weekly and Daily SD Ranges
• Weekly SD Range is located between last two valleys and peaks between W SZ #2 and
W DZ #1.
• This Weekly SD range is coexisting with Monthly range, W DZ #1 is located low in the
monthly range at the Monthly demand zone. Multiple SD ranges can coexist, Monthly,
weekly and daily ranges.
Monthly + W DZ zones in control at #1 and #4 in a monthly uptrend. At #2 price is just too low
in the monthly and weekly ranges to go short, the area of attraction of demand zones is too
strong to short that low and with demand in control.

THE SD RANGE AT ALL TIME HIGHS AND LOWS SCENARIOS

It is impossible to calculate the top of the SD range when price is making all time highs, or the
bottom of the SD range when price is making all time lows. In order to calculate the top of the
SD range in an all time highs scenario, we need a supply zone, there will be none in this
scenario, so we buy until we get a loss or over-extension happens.
• In an all time high scenario, there is no opposing supply to measure demand against so no
percentage or range can be calculated. We only have one variable of the equation, the
lowest demand, but no supply
• High in the SD range will not exist, we'll just keep on buying until we get over-extension
or a loss
• There is no supply at all time highs to lean on for the SD % calculation. There is only a
void to be filled
• W DZ #2 and M DZ #1 have no opposing supply to calculate the SD range percentage
CONTINUATION PATTERNS ARE ONLY USED TO CALCULATE THE RANGE IN A
TREND

Continuation patterns are only used to calculate the SD range when there is a trend imbalances
are being respected.
• Once an W DZ #1 CP has been taken out, we are not allowed to use W DZ #2 as part of
the weekly SD range because it's a CP, we must lean on the extreme valley at #3.
• Once DZ #1 is taken out, the top of the W range would be #4, and the bottom of the range
would be #3.
• When price starts consolidating by taking out an imbalance, we must use valleys and
peaks (the extremes) in order to calculate the SD range for that timeframe in particular.
• Once W DZ #1 valley at the extreme gains control, we must use previous supply as the
extreme of the SD range if the trend is still down. Weekly was in a downtrend because
there was a valid W bearish trendline connecting last two peaks at #3 and #2 and an
opposing W DZ at #4 that made all time highs
• Since price was still down trending, W SZ #2 could still be used as the top of the W SD
range. Once W SZ #2 is eliminated, we need to use the extreme peak at #3 as the top of
the SD range
• Once W SZ #3 at all time highs is taken out, W DZ at #5 is validated
WHAT DO DO WHEN PRICE IS TOO HIGH OR TOO LOW IN THE TOP TIMEFRAME
OF YOUR SEQUENCE
For the sake of simplicity I will be using a M W D sequence to explain what to do when price is too high or
too low in the top timeframe of your sequence. I am using this sequence because it is the one that myself
and many are using.

In the following example EURJPY has a clear monthly downtrend.

• Monthly SZ at #3 in control, too high in the SD range to buy

• Monthly SZ at #3 took out Monthly DZ at #2 which took out M SZ at #1 (this one took out M DZ
further down and to the left, it didn't fit on this screenshot)

• Monthly is in a clear downtrend

• Monthly bearish TL confluence

In such a scenario we consider that price is too high in the monthly SD Range. Selling at new lower
timeframe areas of supply is the way to go.

Why is price too high in the M range? Because M SZ is in control

Why is M SZ in control? Because price has rallied all the way into it and testing it, it's a fresh supply in
control.
Why is this M SZ fresh? Because it has never been tested before. As long as price does not consolidate
away a full OHCL M candle, we consider the zone as 'being tested'.
Can a CP SZ be a valid zone for the top of the range? Yes, as long as price is trending down on that
timeframe, a CP SZ can be used as the top of the range. If the downtrend was broken, we should lean on
peaks for the top of the range.

WHAT TO DO WHEN MONTHLY SUPPLY IS IN CONTROL?

If the top timeframe of your sequence, in this scenario the Monthly chart is in control, shorts is the only
way to go. If you are trading weekly imbalances, #2 was the the entry, once price tested W SZ for the first
time. Monthly supply in control. Weekly supply #1 nested at M SZ with a clear Monthly downtrend.
If trading the D1 imbalances, there are two things you can do in this scenario:
• Set and forget a short trade at D1 supply zones nested at M SZ at #1

• Wait for confirmation, that is. a new D1 supply zones created by breaking a D1 bullish TL or
taking an opposing D1 DZ out. Potential zones being created at #3 and #4
SILVER TOO HIGH IN MONTHLY AND WEEKLY RANGES
Daily demand #3 is low odds because price is too high in the monthly and weekly ranges, supply levels in
control on M and W charts at #1 and #2. New daily supply zones created at #4 that has eliminated D1 DZ
#3 and broken bullish daily trendline.

What to do? Wait for new daily supply zones to be created, like the one at #4
WHAT IS SUPPLY AND DEMAND IN CONTROL?

Now that we know a bit more about the SD range, there is another concept we should pay attention
to: supply and demand in control.

A zone in control is a valid imbalance that has been hit or retested (any number of times) and remains
unbroken. It must be hit and unbroken to remain in control without its opposing zone in control.
Freshness is irrelevant to zones in control.

• As soon as a zone has been is retested it will ‘gain control’ and will continue to keep control
no matter how many further retests happen at the zone. One single pip or tick will suffice to
remove the zone

• A zone will lose control when it's broken or an opposing zone gains control. For instance, if a
Weekly DZ has been tested and is in control, it will stop being in control when Weekly DZ is
taken out or opposing Weekly SZ gains control

• The SD Range is a separate matter and has nothing to do with a zone in control.The bottom
and top of the SD range can be fresh, non-fresh or used up. Most SD range boundaries are
simple, clear fresh valleys and peaks. Sometimes they are CPs in the direction of the trend. A
zone may be in control and be part of the SD range at the same time. In other cases a SD range
boundary will not be the zone in control. The main thing to remember here is that control has
nothing to do with determining the SD range.

• Any type of imbalance can be a zone in control, valleys and peaks and CPs, fresh or tested
levels.

EURUSD MONTHLY SUPPLY IN CONTROL. DON'T GO LONG.

EURUSD monthly supply [1] in control and in a clear downtrend. We can't go long against a downtrend
and a higher timeframe supply in control. It's in control because price is testing and within the monthly
supply boundaries.

What to do? Wait for new areas of supply on our entry timeframe (Daily) to go short.
Think of a zone in control as a traffic light redirecting price in one direction or another. If you see a
traffic light about to turn red, don't speed up, slow down and stop your car. This same analogy can be
applied to lower timeframes against bigger timeframes in control by not taking Daily shorts against a
fresh Weekly demand and Weekly / Monthly timeframes in a clear uptrend.

Freshness is irrelevant to the definition of a zone in control. A Daily demand in control can be fresh, not
fresh or used-up. Obviously, the more times the D1 DZ in control is tested the weaker it gets.

You should not sell low in the D1 SD range based upon the assumption that the opposing zone will be
broken. Don't assume! Wait for the market (price action) to show you when that zone has been broken.
The only way to know what the market is going to do is by letting the market show you.

Don't trade against a zone in control until it has been clearly solidly broken, we want as many odds as
possible in our favor. A zone can hold 1, 2, 3, or 10 retracements. The wisest thing to do is to trade when
it is solidly broken.

Price normally moves from one zone to its opposing zone on the timeframe where the imbalances
have been detected. The bigger the TF that is in control, the bigger the movement that will happen in
the lower timeframes. New lower timeframe trend will be formed on the way to the retest of the
opposing zone. For instance, if Weekly SZ is in control, price will usually travel from Weekly SZ to the
opposing WK DZ. In order for price to reach the WK SZ imbalance, Daily and H4 will be in an uptrend on
its way up.
A zone is in control as soon as price retests/hits the zone, as simple as that. Don't try to go against that
zone on lower timeframes unless that zone is taken out

When trading swing and position combos we will probably be using multiple SD ranges at the same time,
it's advisable that you read and understand the realignment rules in order to know what to do with each
zone that comes in your way. It's very important to spot and draw imbalances correctly, but even more
important to assess how high or low each new level is in the SD Range.

The previous statement is key, a Daily supply zone high in the Weekly SD range and bouncing off a WK
supply should not be a "big problem" because we'd be selling high in the SD range, however going long
at a Daily DZ that high in the Weekly SD range would be lower odds, we would be buying into a bigger
timeframe's supply zone.

Two very important statements about Supply and Demand in control:

1. A higher high does not necessarily mean a new demand area has been created
A higher high is just a higher high, that rally could be the final thrust to hit a strong supply area
on higher timeframes and be a bull trap

2. A lower low does not necessarily mean a new supply area has been created
A lower low is just a lower low, the drop in price could be the final thrust to hit a strong demand
area on higher timeframes and be a bear trap

CPS can temporarily be used to determine the SD Range

CPs can be used to calculate the SD range long as that timeframe is trending. That is, if we are in a MN
downtrend, CPs of supply will be part of the SD range but CPs of demand will not be used as part of the
SD range. When this scenario happens we will lean on the extremes to calculate the SD range on the
side of the CP that was broken.

The SD Range and zone in control are two different things

• A level can be in control but it may or may not be part of the SD range. A CP with a TL break will
not determine the SD range but it can gain control of price and reverse from it, it won't be part
of the SD range unless we create a new trend in the direction of the CP

How do we know if demand is in control and not supply?

• If valid demand has been hit on any specific TF and price is holding it, then demand is in control

• If valid supply has been hit on any specific TF and price is holding it, then supply is in control

• The imbalance in control will stop being in control once an opposing imbalance has been
retested

Many times we won't have such a confirmation in the shape of a WoW long trade or brand new
imbalance on Daily or H4 charts, price will just rally without giving us any opportunity to trade. That's
trading, we will miss many potential opportunities because the markets won't behave as expected in our
trading plan.
Supply and demand imbalances act like magnets for price. Patiently wait for the best opportunities, it
will pay off in the long term.
Momentum versus Location trades
7th October 2013, 05:40 PM

Not all trading scenarios are the same. Market conditions are changing every day and price reacts to certain
price areas for many different reasons. News creates volatility and attracts speculators, allowing price to move
from one imbalance to its opposing one.

Sometimes price reacts to a bigger timeframe imbalance, other times it reacts to an imbalance in between two
imbalances and others it will react to a lower timeframe imbalance nested within a bigger timeframe imbalance.
Occasionally price may react at a price area where there is no imbalance at all, areas we can call "man's land".

It seems difficult to try and come up with certain patterns that repeat themselves when there are so many
different scenarios that could be playing out and so many market participants, each of them with a different
bias.

Price usually moves from one area of imbalance to an opposing one by means of volatility caused by multiple
market participants and news events. These participants, mostly professionals, will create new imbalances that
will act like magnets to price where new orders are most likely to be filled with new retracements.

Bearing in mind how price moves between opposing imbalances, we can classify supply and demand trades in
three different types:
1. Momentum. A new imbalance has gained control and price has reacted to it. There is a lot of room to
the opposing area and the bigger picture is clearly trending in one direction. Since a bigger imbalance
has gained control any intermediate imbalances will go with the momentum of the bigger picture. This
type of trade is called "Momentum" because it goes with the bigger picture momentum and the path of
least resistance, towards the opposing bigger timeframe imbalance in control.
2. Location. These imbalances are usually nested zones located within a bigger timeframe than our entry
timeframe that we expect price to react to or located at price areas with HTF confluences like
trendlines, flip zone retests and HTF 20 EMA with trending markets. These nested zones are very high
probability if the market is clearly trending. Location setups are also used for counter-trend trades
3. Momentum + Location. This is the most powerful of the three setups, it has the highest odds. It's
usually an imbalance nested within a bigger timeframe imbalance with a clear trending market that is
creating new impulses in the direction of the bigger picture trend. For instance, a D1 DZ nested within
a WK DZ with the Monthly and Weekly in an uptrend.
WATCH VIDEO: https://vimeo.com/295576170/e2370b95cd

MOMENTUM SET-UPS
Momentum setups are new imbalances created with each new impulse in the direction of the bigger picture
trend. For a momentum set up there will be a lot of room to the opposing area and the bigger picture will be
clearly trending. Since a bigger imbalance has gained control, any intermediate imbalances will go with the
momentum of the bigger picture. This type of trade is called "Momentum" because it goes with the bigger
picture momentum and the path of least resistance, towards the opposing bigger timeframe imbalance in
control.

When do Momentum setups happen?

• When price is realigning with the bigger picture direction. Read the realignment lesson for more
information
• When a WoW trade is playing out. After hitting a bigger TF imbalance, price will tend to react to it
and break one lower TF Trendline. Momentum trades will happen under this scenario. First we'll
probably have 1-3 CPs in the direction of the bigger timeframe in control (over extension) and then
we'll start seeing a new trend connecting new valleys/peaks. See WoW lesson for more information
• When the bigger picture is in consolidation. If the MN is consolidating, price will tend to move from
MN DZ to MN SZ until one of them succumbs. While we're waiting for confirmation at the extremes of
 this consolidation, some momentum trades might happen in the opposite direction to the zone it's
reacting to, that is, if it's ranging and price retests MN DZ, a D1 WoW long (descending TL break) may
happen and we'll probably see momentum trades heading towards opposing MN SZ if there are no
clear fresh and/or original D1/WK SZs on the way up
• After a bigger TF is broken. When the market is clearly trending and price takes out a WK or MN
imbalance, price will tend to offer momentum trades in the direction of the breakout.
Here are some of the scenarios in more detail:

SCENARIO 1:
• Weekly trend is clearly DOWN
• D1 trend is clearly DOWN
• D1 demand areas are being taken out
• New D1 supply areas are being created and respected
• Two peaks can be used to connect a D1 bearish TL, which is telling us to short this market
• H4 entry timeframe is DOWN
• H4 demand areas are being taken out
• H4 supply areas are being respected
• H4 bearish trendline can be used to connect latest 2 peaks
• Still lots of room to reach opposing WK demand areas
SCENARIO 1: What action to take?
• Sell all valid H4 supply areas until we're close to a fresh WK demand area
• These are momentum type of trades, they go with the momentum of the bigger picture trend
SCENARIO 2:
• Weekly trend is clearly DOWN
• WK demand areas are being taken out
• New WK supply areas are being respected and respected
• Two peaks can be used to connect WK bearish TL or downtrend, which is telling us to short
the market
• Price just removed a WK DZ
• D1 entry down is DOWN
• New D1 impulses are created to the downside, they caused the break of last WK DZ
• New D1 SZ created after the break of WK DZ
SCENARIO 2: What action to take?
• After the break of an opposing zone and with a clear trend direction. CPs are high odds
• Take all valid D1 and H4 SZ as well as new D1 SZ created after the break of the WK DZ
LOCATION SETUPS
These are trade setups that happen at or within a bigger timeframe imbalance, they are very common setups
when price is realigning with the bigger picture trend. See the realignment lesson. Location setups can also be
used for counter-trend trades.

Why is this setup called a Location setup?

Because the imbalance will normally be "located" within one TF bigger than the TF you are looking at or at a
confluence like a HTF TL or HTF 20 EMA.

When do Location setups happen?

• When price is realigning with a a bigger timeframe direction. For instance: MN is up, WK is up, D1
is down and out of alignment. When price hits a WK DZ, it will probably rally from it and start the
realignment with the MN/WK uptrend. See the realignment lesson for more information
• Before a WoW trade happens. When a bigger TF imbalance is being tested, price will tend to react to
it and break one TF lower's Trendline. Waiting for a WoW trade is a momentum type of trade (used as
confirmation). However if bigger picture is up and there is a nested zone within the HTF that is being
retested. we can set and forget our trade before the confirmation type of trade (WoW) happens. See
the WoW lesson for more information
• When the bigger picture is in consolidation. If the MN is consolidating, price will tend to move from
MN DZ to MN SZ until it breaks, we must wait for confirmation when price is at the bottom/top of the
trading range. Most trades taken in confirmation will be "located" within these MN imbalances in the
trading range so these setups will be considered location setups
 • Counter-trend. Location setups are normally the ones that create V shape reversals, that is, a 180º
turn in price
Location setups DO NOT take into account the direction of the bigger picture timeframe, only how high or
how low we are on that TF, its all about altitude.

SCENARIO 1:
• Weekly trend is UP
• D1 trend is bullish consolidation
• A D1 DZ has been taken out
• Brand new D1 SZ has been created
• H4 entry timeframe is UP
• H4 is rallying towards brand new D1 SZ that removed opposing D1 DZ
• H4 SZ nested within D1 SZ, the new H4 imbalance is located within a brand new D1 SZ that is
no longer up trending but located within a HTF opposing SZ that caused the break of a D1 DZ
SCENARIO 1: What action to take?
• Can we go long? No, since D1 is out of alignment for longs, CT shorts can happen
• It's too high in the D1 SD range approaching a brand new level of supply
• Look for good H4 supply levels located within the brand new D1 SZ
LOCATION + MOMENTUM SET-UPS
Location and Momentum setups are the most powerful of the 3 setups, it has the highest odds. It's usually an
imbalance nested within a bigger timeframe imbalance with a clear trending market that is creating new
impulses in the direction of the bigger picture trend. These setups are set and forget trades, that is, we don't
need to wait for any kind of confirmation to take a trade, we will locate the imbalance we want to trade nested
within the HTF imbalance and set a trade at it no matter what happens in the markets on the way to it.

These are trade setups that go with the bigger picture direction AND are located within a bigger timeframe
imbalance (MN, WK, 3 months, 6 months)

The Location + Momentum setup is the most powerful of all the setups because these scenarios have all
the pros from the Location and Momentum setups together in a single trade. New imbalances will be
nested within a HTF zone and the setup will go with the bigger picture trend
When do Location + Momentum setups happen?
We need to have a lot of patience for this kind of setup. They require a few of confluences to happen at the same
time such as a clear trending market that is losing steam and retracing to a bigger TF imbalance where there
must be a clear lower timeframe imbalance nested within it.
• When price is realigning with the bigger timeframe direction. If MN and WK are up and price hits
a D1 DZ nested within previous valid WK DZ, a location + momentum setup will most likely start
playing out, for instance a D1 DZ nested within the WK DZ. See the realignment lesson for more
information
• When a WoW trade is playing out within the a HTF imbalance. Once a bigger TF imbalance is in
control, price will tend to react to it and break one TF lower Trendline. The momentum trades will
happen under this scenario, but it will also be a location trade if it happens within the HTF zone. First
we'll probably have 1-3 CPs in the direction of the bigger timeframe, then we'll start seeing
valleys/peaks. See the WoW lesson for more information
SCENARIO 1:
• Monthly trend is UP
• Weekly trend is UP
• WK supply areas are being taken out
• WK demand areas are being respected
• WK ascending trendline can be used to connect a WK uptrend
• Price is approaching a fresh WK DZ
• D1 is DOWN
• D1 demand areas are being taken out
• D1 supply areas are being respected
• D1 descending trendline can be used to connect a D1 downtrend
SCENARIO 1: What action to take?
• Can we go short? NO
• We're too low in the SD range and approaching a fresh WK DZ
• Plan a set and forget long on our entry TF (D1). Locate a valid D1 DZ located within the WK DZ and
plan a buy limit set and forget order
• D1 and H4 can be used as confirmation if you still are not confident about setting and forgetting your
trades
Find below a screenshot that shows on a single chart all three types of trades described in this lesson.

There is also a PDF file attached with some sticky notes (yellow), when you press on them you will get extra
descriptions. Both files have been kindly provided by one of the members, Sharon.

This is what Set and Forget community is all about, sharing our knowledge, helping each other and improving
the methodology with everybody's help. We worked together on this graphic but she should be created for the
whole job. I am sure she's learnt a lot throughout the process.

The screenshot below defines several stages of the markets, where these imbalances are happening and why, there
are not a type of setup a way to structure them.
*BIG PICTURE TIMEFRAME (WEEKLY) CHART IN UPTREND 4 Hour Demand Levels
*EXECUTION TIMEFRAME (4 HOUR) CHART SHOWING WEEKLY SUPPLY + DEMAND LEVELS 4 Hour Supply Levels

There are 3 different Trade Types: MOMENTUM LOCATION MOMENTUM + LOCATION

Momentum Trade Setup

Location Trade Setup
We have now hit Weekly Supply. We can no longer Buy. We must
Momentum + Location Trade Setup only look for short trade Setups OR wait for Weekly Supply in
Control to be taken out to resume buying on new H4 Demand.

WEEKLY SUPPLY IN CONTROL

Price at new 4hr Demand, but no

trade because we are too high in the
Weekly Curve.
No short trade here as
price has already hit
Weekly Demand

50% of Curve Price did not make it back

curve to this level so no trade.

Demand forms here on Weekly Timeframe

(VALLEY – DBD) WEEKLY DEMAND IN CONTROL

WEEKLY S

Price has reached new Weekly Demand in

Control. We should only be looking for Long
Trade Setups OR wait for Weekly Demand to
WEEKLY DEMAND IN CONTROL be taken out to resume selling on new H4 WEEKLY D
Supply levels.

Price has touched Weekly Demand in Control. VALLEY or DBR

(We should only be looking for Long Trades) WK UPTREND on Weekly Chart
Over-extension and unsustainable moves
19th April 2017, 03:51 PM

Over-extension is one of these topics that most traders struggle with. It's sometimes difficult to explain to traders
what an over-extended market is since there are many different ways to define over-extension out there.

An over-extended move is a strong move in the market that exceeds the normal behaviour of the market. What is
the normal behavior of a market? A market usually moves in one direction and then after some time it will correct
and pullback creating a new impulse. That's what a normal market will do. At times, the buy or sell pressure will be
so strong that no such corrections will exist and price will continue to move without looking back and correcting. It's
then when we can start looking for signs of over-extension using CPs (continuation patterns).

A continuation pattern or CP is a pattern that tells us the ongoing trend is continuing in its current direction without
any correction or retracement. An excess in the number of consecutive continuation patterns will give us the first
signs that price cannot sustain the move. This doesn't mean that a retracement will happen after we see three or
more consecutive CPs, because each asset is different. Over-extension is used to help us make a trading decision
based on the realignment rules, a mechanical way of telling us where we can buy or sell once the over-extension is
spotted.
Just by looking at a chart, and just by eyeballing the previous string of CPs inside the price action structure, you can
know that if a given timeframe might be overextended or not. And if we are in an overextended move, it might be
very possible that smart money is in it. And, you want to know when they are going to be taking profit. This is another
reason why it is important to understand what an overextended move is and what it is made of.

Over-extension can be defined an unsustainable move as three or more consecutive CPs (continuation patterns) in
the same direction are created. These movements in price create unsustainable market conditions and scenarios
that usually force price to correct and create bigger retracements into a higher timeframe imbalance and/or
confluence.

Over-extension is usually made of pauses in the market, we can spot these pauses by looking for Continuation
Patterns (CPs) made of 50% basing candles (failed ERC candles are not considered pauses) and tight engulfing
patterns made of 50% engulfed candlesticks. Over-extension has no structure since it's made of continuation
patterns. By definition, a CP continues a trend, it does NOT create a trend. Therefore when we see three or more
continuation patterns in one direction, price will have been moving in the same direction for a pretty decent amount
of time without any kind of retracement or take profits executed by investors. This scenario sort of makes the
underlying asset either too expensive or too cheap and will most likely correct to the origin of the move or a higher
timeframe imbalance or confluence.

These CPs in over-extension usually happen at the interchange zones of one timeframe higher. D1 CPs at Weekly
interchange areas. Weekly CPs at Monthly interchange aras. Read more about the interchange concept at the
Interchange lesson.

Big investors will probably have initiated the whole move at the origin of the impulse (valley or peak) and added
extra positions at an early stage before the move is unsustainable in the 1st or 2nd CP, after that the market moves
alone boosted by the emotional trading of the typical investor trading intraday and breakout strategies probably
unaware of where the opposing higher timeframe imbalances are.

Over-extension is great for:

• Counter-trend trades if a HTF imbalance or confluence is in control

• Set and Forget trades. When there is a great imbalance and the arrival into the level is made of lower
timeframe over-extended markets, it's very likely that price will react strongly off the HTF imbalance.
Remember that CPs are very low probability high/low in the range when a HTF is in control and can easily
be eliminated by a HTF imbalance in control, moreover if that CP is the last CP of a series of CPs in an over-
extended market
• Trailing and exiting a longer term trade. Since we can easily spot pauses in the markets (CPs) we could use
them to trail stop our entries, once we see price is getting closer or too close to a HTF imbalance we can
use the over-extension to close our trade
• Determining exhaustion and take profit levels. We are expecting a bigger retracement, if we are holding a
short with W bearish over-extension confirmed, it's a sign to manage our trade closer or close it completely
Expecting bigger retracements or correction in an over-extended market are just probabilities, it does NOT necessarily
mean that price will retrace every time there are three or four consecutive CPs in one direction, trading is a numbers
game. We must have rules for every market stage, over-extension is not an exception. Once the market is over-
extended we should not be trading in the same direction until there is a bigger retracement to a TF higher than the
one that is over-extended.

OVER-EXTENSION IS USUALLY SEEN AFTER A VERY STRONG IMPULSE

There are signs that will tell us when a given timeframe might be over-extended or when to expect to see over-
extension. Supply and demand core rules tell us that we should not buy after a very strong rally in price made of two
or more ERC candles, ideally three or more, why? Because the asset will be too expensive and as supply and demand
traders we want to buy cheap and sell dear. The opposite is true when an asset has had a beating and been dropping
for a prolongedWe should period of time creating two or more ERC candles.

Why should we expect over-extension in a lower timeframe when we see three or more ERC candles in a higher
timeframe?

Simple, it's all related to the interchange zones, impulses and ERCs are made of interchange zones and it's at these
spots where we are going to locate timeframe CPs and over-extension. Why three or more? Because having three
ERC candles or more will increase the probabilities of having three or more interchange zones in the lower
timeframes.

For instance, If price has been dropping strongly on timeframe X (let's say weekly) creating three or more bearish
ERC candles (including failed ERC candles), this is telling us that we will probably bee seeing over-extension on one
timeframe lower (daily), made of three of of more bearish CPs..

The follow GBPCAD example explains in detail this scenario:

• We should not sell after a very strong decline in price as seen on weekly chart on the left. [a] and [b] are
interchange zones where we can see Daily CPs [1], [2] and [3]
• There is daily bearish over-extension with the creation of several D1 CPs after a prolonged decline in price
on the weekly chart creating three or more consecutive bearish ERC candles.
• New Daily demand level has been created at [4]. We are not allowed to sell unless price retraces to weekly
supply above or over-extension is reset with a new Daily peak

OVER-EXTENSION RESET
Over-extension will not last forever, it will be reseted sooner or later, that's the way the markets work.
Unsustainble moves will not last forever, therefore over-extension will cease to exist or it will be reseted.
 • If price has been printing 3 or more consecutive CPs, we’ll consider that timeframe as over-
extended

• If after a series of consecutive CPs price creates a new valley, over-extension will be resetted and
we’ll be allowed to draw a new trendline connecting latest two original valley V2 and the new
valley resetting over-extension (V3)

AUDUSD D1 chart below shows an live example of over-extension reset

• Aggressive trendline in red could be drawn after three consecutive CPs.

• Over-extension is reset when there is a new valley, the reset happened at the new D1 valley at
#4. The valid trendline is now the blue one.
LOWER TIMEFRAME OVER-EXTENSION AGAINST HTF IMBALANCE AND TREND.

Having a lower timeframe over-extension against a bigger timeframe imbalance in control is very
common. Most investors will have a bearish bias and won't be aware there is a bigger timeframe
imbalance in control. By putting things into context using supply an demand imbalances we can anticipate
what is most likely to happen and take a trade before price starts reacting strongly to that HTF imbalance.

For instance on Ethereum crypto currency #ETHUS, there is a daily over-extension with three consecutive
CPs at [1], [2] and [3] against monthly demand in control [5] and monthly uptrend. New daily demand
zones have been created at [4].

This is one of the scenarios to go long, daily bearish over-extension with monthly uptrend and monthly
demand zone in control. A higher odds long bias, however Daily demand level at [4] does not score high
in the strength of the impulse. No longs allowed yet.
HOW DO WE DRAW TRENDLINES IN OVER-EXTENSION?
Trendlines are slightly more aggressive when the market is over-extended. As per the trendline rules, we
can't use CPs to draw a trendline because a CP continues a trend, it does not create it. When drawing
trendlines in over-extension CPs or pauses do not need to take any opposing zone, they just need to have
a drop - pause - drop formed by ERC leg in- basing candles + ERC in the second leg out, or a rally - base -
rally.

See some over-extension examples and how trendlines are drawn more aggressively when over-extended
moves exist.

EURJPY D1 OVER-EXTENSION
In EURJPY D1 chart example below we can draw a more aggressive bearish trendline connecting the last
three CPs. Over-extension is great for counter-trend trades. The break of an aggressive TL also creates an
imbalance at #4.
NIFTY 50 INDEX WEEKLY OVER-EXTENSION AFTER MAKING ALL TIME HIGHS
NIFTY 50 index all time highs made, over-extension on the weekly chart with four consecutive weekly CPs,
no longs allowed on the weekly chart, we must lean on a demand zone at a bigger timeframe, in this case
Monthly DZ at #5 with nested W DZ at #6.

Counter trend shorts can happen with the help of Weekly over-extension, it might or might not happen.
Over-extension does not mean price will retrace. Longs at Monthly demand zone if W DZ at #4 is
eliminated.
DOW JONES INDEX MONTHLY AND WEEKLY OVER-EXTENSION

• Over-extension on Dow Jones index weekly chart, four consecutive CPs at 1, 2, 3 and 4, bullish
trendline is broken, therefore W is out of alignment. Over-extension + middle timeframe out of
alignment is a good scenario for counter trend shorts

• Room to drop to Monthly DZ at #5 but that M DZ is a doji and M trend is also over-extended with
three CPs at 5, 6 and 7

• Basing structure at W DZ #4-5 nested at M DZ single doji at #5 is not good, price could continue
dropping, we can't set and forget at the upper W and M demand zones at 3, 4 and 6
CADJPY WEEKLY AND DAILY OVER-EXTENSION

• Strong rally on weekly chart with five weekly bullish ERC candles, that usually means over-
extension one timeframe lower (daily) with CPs at 2, 3, 4 (no clear valley, no close below previous
mother candle), 5 and 6

• A similar scenario is happening on the way down now on the weekly chart with several CPs
(pauses) on the way down at 7 and 8. This will mean the Monthly has several bearish ERC candles
and price could rally easily from Weekly DZ at #9 in a few weeks

• We must try and anticipate to the markets, a new W basing candle and potential CP could happen
at #11 creating W over-extension if second leg down is created, great for longs at W DZ #9

EURJPY DAILY OVER-EXTENSION

• Daily over-extension with three consecutive CPs (pauses) at 1, 2 and 3. No need to remove
opposing D1 demand zones to be considered a CP part of over-extension

• Price is now too low at Weekly DZ at #4 after a super strong drop in price on the weekly chart with
5 bearish ERC candles. This usually means over-extension on the Daily with several CPs at the
Weekly interchange areas with small W shadows at #5 and #6
ADOBE WEEKLY OVER-EXTENSION

• Adobe weekly chart is over-extended, three consecutive pauses (CPs) at 1, 2 and 3. Over-
extension requires at least 3 CPs, these CPs do not need to take out any opposing zone, moreover
if there is an all time high scenario where there is nothing to be eliminated

• Price usually reverses to the mean or to a HTF imbalance in a timeframe that is not over-extended.
In this example Monthly DZ at #4
GOLD WEEKLY BEARISH OVER-EXTENSION

Weekly downtrend with bearish over-extension after printing three consecutive CPs (continuation
pattern) at [1], [2] and [3]. After three or more CPs that timeframe will be considered over-extended and
no set and forget shorts will be possible on the weekly chart, only at one timeframe higher (monthly) if
it's in a downtrend and not over-extended.

Daily creating new demand zones at [4]. No shorts allowed.

 Momentum Trade Setup
TRENDLINES AND (CP’s) CONTINUATION PATTERNS Location Trade Setup
Weekly Supply is in Control and our entry timeframe is the 4 hour Chart Momentum + Location Trade Setup

4 Hour DEMAND Levels

WEEKLY SUPPLY IN CONTROL
4 Hour SUPPLY Levels

Trendline is drawn using last 2

obvious peaks/valleys. Never use CP
This CP SUPPLY level is no longer valid as
patterns for connecting trendline.
there has been a break of the trendline.

We need to wait for brand new areas of

SUPPLY to form on our entry timeframe.

We cannot use this level for SET & FORGET, we need confirmation

Valid CP patterns as trendline is

intact.

Confirmation Entry - opposing

DEMAND was consumed, creating a
brand new level of SUPPLY to trade.
Trendline has been broken with a full candle
(OHLC) outside the trendline.

Too low in the Curve. We should

not SELL here. NO TRADE

IMPORTANT POINTS TO REMEMBER ABOUT TRENDLINES

 A Trendline becomes invalid when we reach a HTF supply or demand WEEKLY DEMAND IN CONTROL
 When a new trend begins, we need to wait for newly formed valleys/peaks to draw a new
trendline
Using trendlines as direction and/or to filter out supply and demand levels

27th September 2013, 06:20 PM

We will use Trendlines as a mechanical tool that will allow us to interpret market dynamics of the
timeframe being analyzed in the same way over and over, we need a consistent and mechanical way to
assess the trend in multiple timeframes and locate the Sequence. Once we locate and evaluate the
Sequence and which TF price is bouncing off, we'll be able to also locate the high odds WoW trade
setups (Trendline break).

You can decide not to use the Trendlines to trade, if you do so you will have to lean purely on the
imbalances that you see on the charts. There are many SD traders that do that. Doing it that way you
won't have the aid and guidance of a mechanical methodology that will dictate where you can set and
forget or just wait for a WoW trade, or do nothing. You are the one to choose which way to go. Rules are
there to create your trading plan depending on what kind of trader you are, but it's up to you to decide
what you want to do with them.

All these rules and lessons, APPLY TO ALL TIMEFRAMES. Price is FRACTAL.

Trendlines are like traffic lights, giving us the green or red light to continue in the same trading direction
or just waiting for one bigger timeframe zone as dictated by the Sequence and Realignment rules

1. Trendlines will be drawn on multiple timeframes to assess direction and evaluate the Sequence
and Realignment, that is, the timeframe where your orders will be placed

2. We need 2 OBVIOUS valleys (uptrend) or peaks (downtrend) are needed in order to draw a
trendline or 3 consecutive CPs to draw a steeper and more aggressive TL

3. Drawing a Trendline does not necessarily mean we have a trend, we need at least one opposing
zone to have a trend as defined in the Trend lesson

4. Update, Update, Update. Use always the last 2 obvious valleys and peaks in order to draw a
trendline. If there is a third obvious peak/valley that matches the previous 2 ones, we would
extend the TL to it, that would mean the trend direction is even stronger.

5. A CP level will NOT be taken into account to draw a trendline unless there are 3 or more
consecutive CP patterns a

6. A Buy setup with an ascending trendline will be invalidated when we have at least 1 full candle
(Open, Close, High and Low) is closed below the trendline

7. A Sell setup with a descending trendline will be invalidated when we have at least 1 full candle
(Open, Close, High and Low) is closed above the trendline

8. Trendlines on entry timeframes (H4 and H1) will no longer be valid once a higher timeframe (D1
and above) or a HTF TL have been reached. Higher timeframes supply and demand areas are
potential turning points in the market, so the Trendline is no longer useful or valid at these areas
 9. If price hits a higher timeframe SD area and starts reacting to it, the new trendline can’t be painted
until we have at least 2 peaks or valleys, thus, we’ll be trading like a robot on brand new areas
formed on our entry TF (specially CP)

10. If our entry within is a higher timeframe zone and we have a loss, if we still want to trade within
that area again, we will need price to penetrate it deeper so it can reach the unfilled orders, if any
is left. Unless price goes in the direction we wanted and new areas are formed

11. Do not sell when price is very near or at a higher timeframe ascending trendline (D1 or
higher), opposite for buying. The same logic that applies to your entry timeframe, applies to
higher timeframe trendlines

12. The break of a trendline does not necessarily mean that the retest of a SD zone near or at the
retest of the broken trendline will be valid. A TL breaks needs the confluence of a reaction to a 1
higher timeframe or a strong flip zone. A TL break out of nowhere is not not used

13. Do not trade the break of a trendline just because it's just been broken, we need to assess
location in the SD range

14. If we have a valid trade setup on our LTF entry but price is near or at a HTF trendline that has
not been broken yet, stay out of that trade. Wait for the HTF TL to be broken before you trade.
Another thing would be that you are already in a trade, you would lock in some profits, and be
protected in case you want to try and hold your trade and see if the TL is broken to get a bigger
reward. Do not add any trades once you are close to a respected HTF TL

The Trendline formation and drawing is independent from what price action has accomplished. That is,
there is no rule that states that in order to draw a TL we need to take out an opposing zone.

A trendline break is not a MANDATORY rule. A TL break is just a way of filtering out certain zones in a
mechanical way, a simple way to mechanically and consistently filtering out levels.

You can decide not to use TLs to filter out levels, it's up to each of you. I do use them because I've tested
them and even though I will miss some nice opportunities, I know that it will keep me out of lots of losses.

I placed all that on a balance and I decided that I prefer to use the TLs for these 2 reasons:

1. TLs allow to filter out levels in a very mechanical way

2. The use of TLs practically remove all of the emotion when picking up a level

If these reasons are not enough for you, then you can skip the use of Trendlines. Each trader has to find
what it fits him the best to his style. You can use whatever variable or methodology to filter out SD levels.
I am using TLs and the SD range. But be careful with what you use or stop using. Before adding a new rule
to your set of rules, you first need to test it over and over and over for a decent period of time, with a
minimum of 500 samples per new variables... then make a decision!

How to draw a trendline

There are many ways to draw trendlines, many. Set and Forget uses a very specific way to draw them,
they behave as traffic lights that will tell us if a certain TF is losing steam and we now need to lean on a
higher TF trend and trendline.

These rules are very strict and specific rules, they can as follows:

• Ascending TL = last two valleys or 3 consecutive CP's (Continuation Pattern)

• Descending TL = last two peaks or 3 consecutive CP's

IMPORTANT:

• You ALWAYS have to take into account the latest valid/current trendline in order to establish
current/previous trend

• Older trendlines won't tell you about current trend. If we use a valley as our first TL point, the
second valley needs to make a higher high than the highest high printed by the first valley, else it
won't be an ascending trendline

Sharon has created a new PDF where she explains how to use Trendlines and CP patterns. She originally
sent me a PDF, we revised it together several times and the one attached is the final version, I have also
uploaded it to the Trendlines lesson.

The PDF shows:

• How CPs are great patterns to trade when we are trending

• When a TL is considered broken, levels outside its range will be negated

• How levels too close to HTF SD in control are not high probability

• How Momentum type of trades are associated with the entry and SD range timeframe direction