They say price action never lies! And this it’s 100% true! So get ready to take some notes, because today you’ll discover several strategies that reveal exactly when big money enters the market.
Nothing complicated, just simple price action combined with some basic volume analysis! Engulfing gap Let’s start with the engulfing gap concept! Engulfing gaps are a big sign in the market.
They show up when prices jump a lot from one day to the next. And they can tell us a lot about what might happen next. A bullish engulfing gap is when the price opens lower than the last close, but then shoots up and closes higher than the last open.
This means buyers came in strong. They pushed the price up a lot. A bearish engulfing gap is the opposite.
The price opens higher than the last close, but then falls and closes lower than the last open. This shows sellers took control. They pushed the price down hard.
These gaps can show the start of a new momentum move. And of course, not all gaps are the same. Some gaps are more important than others.
If a market has been going up for a while and then has a big bullish gap, that might be a sign of strength. It could mean the uptrend is still strong. But if a market has been going up for a long time and then has a bearish gap, that could be a warning sign.
It might mean the uptrend is ending. The same for downtrends. A bearish gap in a downtrend might mean the trend is still strong.
But a bullish gap could be a sign the downtrend is ending. Now, you don't just jump in as soon as you see a gap. First big thing to look at is volume.
High volume with a gap is a strong signal. It means lots of people are trading. They all agree on which way the price should go.
Low volume might mean the gap isn't as important. Another thing to look at is the overall trend. Is the market in an uptrend or a downtrend?
Engulfing gaps that go with the trend are often stronger than gaps against the trend . There are 3 different types of engulfing gaps: Breakaway gaps, Runaway gaps and Exhaustion gaps. Breakaway gaps happen at the start of a new trend.
They're like the market breaking out of an old pattern. Runaway gaps happen during a strong trend. They mean the trend picking up speed.
And exhaustion gaps happen at the end of a trend. They're the last push before the trend ends . Engulfing gaps can be any of these types.
The type matters because it can tell you what might happen next. For instance, if you see a bullish engulfing gap that looks like a breakaway gap, it might be the start of a new uptrend. That could be a good time to buy.
But if you see a bullish engulfing gap that looks like an exhaustion gap, it might be the end of an uptrend. That could be a good time to sell. Gaps can be tricky.
Sometimes they fill quickly. This means the price moves back to where it was before the gap. Other times, this gap fill might take a longer time.
That why if you buy after a bullish engulfing gap, you need put your stop below the low of the gap. If the price falls below that, it might mean the gap wasn't as strong as you thought. Also, engulfing gaps can create support and resistance levels.
This means prices might have trouble moving through the gap area in the future. For example, if a market gaps up, that gap area might become support. If the price falls back to that area later, it might stop falling and start going up again.
This can be useful for finding other entry and exit points. You might buy when the price bounces off a gap support. Or you might sell when the price hits a gap resistance.
Momentum recharge The next concept is called the momentum recharge. After a big momentum day, the market often takes a breather. And during this contraction phase, you’ll see liquidity sweeps, trapping the traders expecting a reversal.
So when the market moves a lot in one day, most of the times, it pauses to rest the next day, or even days, and figure out what to do next. First, some traders want to cash in on their wins. They sell some of their positions to lock in their profits.
This selling can slow down the market's movement. Also, traders need time to think. Big market moves often happen because of news or volatility increase.
After the first rush of excitement, people want to sit back and really think about what the news means. Also, after a big move, there might not be many traders left who want to keep pushing the market in the same direction. That’s why, you might see the price moving sideways in a range.
The volume often drops during this time too. The market is getting ready for its next big move. Here's how to pinpoint the contraction: You simply look at the "isolated pivot highs and lows".
These are like the edges of the box the price is moving in. When the market breaks out of contraction, it often starts a new trend. And this breakout can happen in either direction - up or down.
But I only trade in the direction of the previous move. If the previous move was a strong upward one, I mainly look to buy, after the contraction phase. You want to see the price clearly break out of its contraction range .
One way to confirm a breakout is to look at the volume. If the volume increases as the price breaks out, that's a good sign. You look for those isolated pivot points to spot the range.
And you wait patiently for a clear breakout with increasing volume, before making your next move. One interesting thing about contraction is that it often happens at certain times of the day in the Forex market. So let’s say the market went up quite a lot during a whole trading day.
The next day, there's often a consolidation period during the Asian trading session. This contraction can also last during the London session. Other times, when London opens, there's often a breakout.
New York's opening can cause another shake-up. These patterns can help you time your trades better. During this contraction phase, expect some liquidity sweeps, to bait and trap reversal traders.
If the price drops below the bottom of the contraction, it might be a sign that big players are actually buying. They push the price down to trigger stop losses and scare some traders out of their positions. Then, they buy at the lower prices.
If the price then moves back above the contraction and stays there, it could be the start of an upward move. The opposite is true for downward moves. If the price spikes above the range and then falls back below it and stays there, it could be the start of a downward move.
During this contraction, something interesting happens. The price will often make quick moves in the opposite direction of the big move. If the big move was up, you might see the price dip down briefly.
If the big move was down, you might see small jumps up. These quick moves are the liquidity sweeps we talked about. It's all about tricking traders and finding money to fuel the next big move.
You see, after a big move up, some traders think the price will come back down. They place orders to sell when the price drops a bit. And the market knows this.
So it drops the price just enough to trigger these sell orders. But then, instead of keeping going down, it often bounces right back up . This is called inducement.
It's meant to catch traders who are trying to guess when the price will turn around. These reversal traders are looking for the point where an up-move turns into a down-move, or the other way around. If you understand these sweeps, you can avoid falling into the trap.
Instead of selling when you see that small drop, you might wait to see if it's just a sweep. And you might even use it as a chance to buy, with the big players. So, next time you see a big momentum day in the market, don't get too excited.
Instead, start looking for signs of contraction. Watch for those isolated pivot points. Keep an eye on the volume.
Be patient, and wait for a clear breakout or a liquidity sweep. Pattern Pitfall Syndrome I like to call the next concept the Pattern Pitfall Syndrome. When we start trading, we are immediately bombarded with chart patterns.
Triangles, wedges, pennants. But trading these patterns can be tricky. Many traders get caught in traps when they try to trade these patterns, because these are actually tough to trade.
Basically, triangles and wedges are patterns where the price moves in a smaller and smaller range. It's like the market is taking a deep breath before making a big move. The problem is, it's hard to know which way that move will go.
Now, many trading books tell you to wait for the price to break out of the triangle or wedge. Then you're supposed to jump in and ride the new trend. Sounds easy… but it's not that simple!
One big problem is what traders call "liquidity clear-outs". This is when the price looks like it's breaking out, but then it quickly turns around and goes back into the pattern. This happens because the market is always looking for liquidity.
That's just a fancy way of saying it's looking for people to trade with. When price is in a tight range, like in a triangle or wedge, there's not much trading going on. So, the market might push the price out of the pattern just to get some action.
And big players use these patterns to trap other traders. They push the price out of the pattern on purpose. This makes some traders react.
And then the price is pushed back into the pattern. Now those traders are stuck in a bad trade. This is why blindly following breakouts from these patterns can lead to a lot of losing trades.
I admit I’ve lost a lot of trades chasing breakouts from triangles. So, what can you do? Well, if you're in your first year, it might be best to avoid these patterns for now.
They look simple, but they're actually pretty complex. In hindsight, on the left side of the chart, they look obvious. But it takes a lot of experience to tell the difference between a real breakout and a fake-out .
If you do want to trade these patterns, here are some things to think about: First, don't rush in. Just because the price moves out of the pattern doesn't mean it's a real breakout. Look at the bigger picture.
What's happening in the larger trend? Is this breakout going with or against that trend? Breakouts that go with the larger trend are more likely to be real.
Pay attention to volume. A real breakout often comes with an increase in volume. If the price is breaking out but volume is low, be careful.
It might be a fake-out. Consider the time of day. In the Forex market, for example, breakouts often happen when a new trading session opens.
The Asian session is often quiet, but when London opens, there's often more action. The Exhaustion Wick Illusion The next concept is the Exhaustion Wick Illusion, and involves candles with long wicks, pin bars basically. Pin bars are a popular trading pattern, but they can be tricky.
When they show up after big price moves, they might not be as reliable as you think. The long wick shows that the price tried to go one way but then changed its mind. Traders often see this as a sign that the price might turn around .
But here's the thing. When a pin bar shows up after a big momentum move, it might not mean what you think it means. That’s because big price moves can mess with how the market usually works.
Let's say the price has been falling a lot. Then you see a pin bar with a long lower wick. You might think the price is going to go up now.
But that's not always the case. The market might still be feeling the effects of whatever made the price fall in the first place. Or think about it this way.
After a big move, some traders might be taking their profits. If the price went up a lot, some traders who bought low might be selling to lock in their gains. This selling can create a pin bar, but it doesn't mean the price is going to start falling.
Here's another reason to be careful. Big players in the market might use these situations to trick other traders. They might push the price just enough to create a pin bar, making some traders think a reversal is coming.
But then the price keeps going in the same direction as before. So, what can you do? Well, one thing is to look at the bigger picture.
Pay attention to where the pin bar forms. Is it at an important level? Maybe a support or resistance level.
Or at a fresh, unmitigated supply or demand area that's been important in the past? If so, the pin bar might be more meaningful. Another thing to watch is what happens after the pin bar.
Does the price quickly move in the direction the pin bar suggests? Or does it just sit there, not doing much? A real reversal signal should lead to some follow-through.
Volume can be a helpful clue too. If you see a pin bar with a lot more trading volume than usual, it might be more significant. High volume means more traders are involved, which could mean a real change in the market .
Here's something else to think about. Sometimes, what looks like a reversal is just the market taking a breather. Remember the previous concept we talked before.
After a big move, the price often pauses or pulls back a bit before continuing in the same direction. This is normal and doesn't always mean a full reversal is coming . Again, think about the time of day.
For example, pin bars that form at the start of a new trading session might be more meaningful. There's often more activity when a new session opens, which can lead to real reversals. Think about it.
When a new trading session starts, a lot of things happen. Traders are coming back to their desks. They're looking at what happened while they were away.
They're making new plans for the day. All this can lead to more buying and selling. Now, let's say you see a pin bar right when the London session opens.
This could be a big deal, because London is a major Forex hub. When it opens, there's often a burst of activity. Prices might move a lot.
And if a pin bar forms during this time, it might show a valid shift in the market, at least for a short period. The same thing can happen when New York opens. These are times when big players enter the market.
Their trades can really move the market . Sometimes, different sessions overlap. There's a time when both London and New York are open.
This is often a very active time. If you see a pin bar during this overlap, at a key level, it might be worth paying extra attention to. And it's not just about the start of sessions.
The end of sessions can be important too. As a session closes, some traders might be closing out their positions. This can lead to price moves and maybe even pin bars.
You need to do some backtesting here. Look at the start and end times of major sessions on your charts. And try to see if you spot pin bar patterns.
Maybe you notice that pin bars at certain times tend to be more reliable. Or maybe you see that certain times of day often lead to fake-outs. This kind of backtest can be really valuable and save you many losing trades.
Buying/selling climaxes One of the most important concepts is buying or selling climax. Trading is a battle between participants. On one side, you have buyers, and on the other, sellers.
Most of the time, they're pretty evenly matched. But sometimes, one side gets really strong. That's when we see climaxes.
Let's start with the buying climax. These happen when buyers get excited. Maybe there's good news.
Maybe the price has been going up for a while. Whatever the reason, suddenly everyone wants to buy. So picture this: The price is going up.
It's been going up for a while. Then, out of nowhere, it starts going up even faster. The volume gets really high.
This is key. High volume means lots of people are buying. And here's the tricky part.
While all these people are buying, the smart traders are selling. They know something the buyers don't. They know that when everyone's buying, it's often a good time to sell.
That’s because after a buying climax, there's often a drop in price. The market has run out of buyers. Everyone who wanted to buy has already bought.
Now, let's flip it for a selling climax. The price has been going down. Then it starts going down even faster.
The volume gets really high. Everyone's selling. But just like with buying climaxes, the big traders are doing the opposite.
They're buying when everyone else is selling. They know that after a big sell-off, prices often go back up. So how can you spot these climaxes?
You look for several signs! For a buying climax: The price is going up fast. The volume is super high.
The price bars are getting narrow, they are decreasing in size. And for a selling climax: The price is dropping fast. Again, the volume is super high.
And the price bars are narrow . Now, why are these climaxes important? Because they often mark the end of a trend.
After a buying climax, the price might start going down. After a selling climax, it might start going up. But be careful.
Just because you see a climax doesn't mean the trend will change right away, on the next candle! Sometimes the market can stay irrational for a while. That's why you wait for confirmation .
You want to see the price actually start to move in the new direction. Don't just assume the trend will change because you saw a climax. Let's analyze a bit deeper a buying climax.
Remember, these happen at the end of an uptrend. The price has been going up for a while. Then it makes one last big push higher.
During this last push, you'll see some telltale signs. The volume will be really high. In this case, lots of people are buying.
You will also start to see "narrow spreads". This means the difference between the high and low price for each bar (or candle) is small. This can happen when there's a lot of excitement in the market.
Another thing to watch for: the market might close in the middle or low of the bar. This means that even though there was a lot of buying, the price couldn't hold onto all its gains. This can be a sign that the buying pressure is starting to weaken .
The same for selling climaxes. These happen at the end of a downtrend. The price has been falling for a while.
Then it makes one last big drop. Just like with buying climaxes, you'll see high volume. But this time, it's because lots of people are selling.
You might also see narrow spreads here too. So there’s a lot of effort, the volume, but the result, the candle, is narrow. When you have a high volume, you want to see a large candle.
But that’s not the case here. In a selling climax, the market might close in the middle or high of the bar. This shows that even though there was a lot of selling, the price couldn't keep falling.
A sign that selling pressure might be easing up. Climaxes can happen in any market and any timeframe. You might see one on a 5-minute chart or you might spot one on a daily chart.
The principles are the same, but the effects might last for different lengths of time. Now, what happens after a climax? After a buying climax, big traders start looking for signs of weakness.
They know that the market has probably run out of buyers. What might this weakness look like? Maybe the price tries to go higher but fails.
Or maybe it starts making lower highs. These are signs that the uptrend might be over. After a selling climax, it's the opposite.
The big boys look for signs of strength. Maybe the price bounces off a low. Or maybe it starts making higher lows.
These could be signs that the downtrend is ending. Just because you see a possible climax doesn't mean you should immediately open a trade in the opposite direction. Try to find some sort of confirmation.
It could be something simple, like a break of a trendline. Or a move above or below a key level. Maybe you find a change of character on a lower time frame.
The specific confirmation you look for might depend on your trading style. But the important thing is to have some kind of proof that the trend is actually changing. Here's another point: climaxes often happen when there's big news.
For a buying climax, the news might be really good. For a selling climax, it might be really bad. But smart money know that news alone doesn't determine where the market goes.
They look at how the market reacts to the news. Again, the timeframe of the climax matters. A climax on a 5-minute chart might lead to a reversal that may last for several hours.
A climax on a daily chart could signal a reversal that lasts for weeks. The bigger the timeframe, the more significant the potential reversal. Now, if you’re ready for more smart money and price action methods, go ahead and watch one of these videos!
