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Summary - Trading with PAV ​

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Summary – Trading with PAV ​

Let's summarize the key points that we learn in this course from YSTC’s “Trading with Price Action Volume”. Lets start the Trading with PAV – Summary with Principles.

Principles of Markets ​

Markets are traders making trading decisions.

Price movement is a result of supply/demand imbalance. And the supply/demand imbalance is created by the traders’ sense of urgency to transact.

Price moves due to following 4 points of supply/demand imbalance

  • Price rises while demand is greater than supply, and while those buyers are willing to pay higher prices.
  • Price rises until we run out of buyers, or until supply increases sufficiently to absorb all the demand.
  • Price falls while supply is greater than demand, and while those sellers are willing to sell at lower prices.
  • Price falls until we run out of sellers, or until demand increases to the point it absorbs all the supply.

Price moves with changes in the forces of supply and demand. Supply and demand change as the sentiment of the crowd changes. And the sentiment of the crowd changes with changes in the bullish or bearish sentiment of the market participants.

Trading is not about the Fundamentals or Technicals. It’s about people… and the decisions they make about market direction.

Price moves as a collective result of all traders’ bullish or bearish sentiment and their decisions to act in the market (buy or sell).

Learn to view all price movement from the perspective of other traders, and how the price movement influences their decision making.

The aim of your analysis then MUST be the following:

Aim of your analysis

  • To buy at areas where you KNOW others will buy after you, because their buying will create the net order-flow or bullish pressure to drive prices higher, allowing you opportunity to profit, or
  • To sell at areas where you KNOW others will sell after you, because their selling will create the net order-flow or bearish pressure to drive prices lower, allowing you opportunity to profit.

Or more simply; buy at areas where others will buy after you, and sell at areas where others will sell after you.

Buy\Sell Areas analysis

  • To do that, your analysis must focus on areas of trader decisions.
  • What are other traders thinking? Where will they be making their trading decisions?
  • Identify areas at which others will be making buying decisions, and you can profit.
  • Identify areas at which others will be making selling decisions, and you can profit.

Individual trader decisions are unknown. However we can, through our analysis, identify areas where significant groups of traders will be under extreme stress, and therefore feel forced to act in a reasonably predictable manner.

We aim to enter before or at the point of maximum stress, where traders are coming to accept they’re wrong.

Their decision to exit is a means of relieving themselves of stress. This creates order-flow that takes our position to profit (provided of course you manage the trade well).

Market Analysis ​

Initial Market Analysis Process: ​

Initial-Market-Analysis-Process

Initial Market Analysis Process

Initial Market Analysis involves a six step process, as per figure above. The following checklist will walk you through the actions required for each step.

Initial Market Analysis Checklist ​

Step 1 – Define Structure ​

Define a structural framework within which our trading timeframe price action will move.

  • Actions:

Step 2 -Define Trend ​

Assess the movement of past price action within our market structure framework.

  • Actions:
    • Identify significant swing highs and lows on the trading timeframe (3 min) chart.
    • Identify the trend direction

Step 3 – Identify Strength & Weakness ​

Analyze price movement within the trend to identify signs of strength or weakness.

  • Actions:
    • Analyze momentum of recent price swings
      • Compare the momentum of the current price swing with the momentum of the previous price swing in the same direction? Is price faster or slower than before?
        What does that mean?
      • Compare the momentum of the current price swing with the momentum of the previous price swing in the opposite direction? Is price faster or slower than before? What does that mean?
      • Is the current price accelerating or decelerating? What does that mean?
    • Compare projection and depth of recent price swings (not taught instead use Fibonacci)
      • Increased projection is a sign of potential trend strength. Decreased projection is a sign of potential trend weakness.
      • Increased depth is a sign of potential trend weakness. Decreased depth is a sign of potential trend strength.
    • Identify signs of failure to continue (i.e.. failure to meet expectations).
    • Identify signs of strength or weakness via any miscellaneous methods

Step 4 – Identify Future Trend Direction ​

What is the likely path of future price action?

  • Actions:
    • Determine the likely path of future price action, in accordance with the following six principles:

Step 5 – Visualize Future Price Action ​

How do you expect price to behave? Visualize the future price action, based upon your expectations for future trend direction and its interaction with the market structure S/R levels.

  • Actions:
    • What price action would validate your assessment of future trend direction?
    • What price action would invalidate your assessment of future trend direction?

Step 6 – Identify Areas of Trade Opportunity ​

Next Process Step?
That concludes our initial analysis.

From here we conduct our ongoing analysis process – an ongoing process of updating our assessment of likely future trend and areas of trade opportunity, based upon new information provided by each and every candle.

That’s the subject of sections 3.5 (Ongoing Market Analysis – Theory) and 3.6 (Ongoing Market
Analysis Process).

KEEP IT SIMPLE

The initial analysis process has taken many articles to describe, as I’ve attempted to do so
in as simple as possible. As you’ll later experience yourself later when practicing, the process itself is quite simple and should take no more than a minute or so on initial opening of your charts.

Be careful not to get caught up in complexity. The process should be SIMPLE. If it’s not, then you’re probably trying too hard to predict exactly where price is going. This is not about prediction. We’re simply assessing the likely future path. We’ll then be monitoring ongoing price action to confirm that path, or amend it.

Don’t be afraid to get it wrong. Ongoing analysis will be self-correcting.

If you’re finding it too hard, just refer back to our simple checklist steps above.
That’s all there is to it.

We now move on to ongoing analysis.

Remember – the analysis we have conducted so far is just my initial assessment of likely future trend direction. I’ll be updating that assessment bar by bar as new data unfolds. So, if I’m wrong I’ll see it in a very timely manner, allowing me to reassess and adjust my expectations. And if I’m right, I’ll be prepared for any trade opportunity that will present, as price follows my expected path.

Ongoing Market Analysis – Theory ​

Our initial analysis resulted in an initial assessment of the future trend direction. Ongoing analysis requires a bar by bar reassessment of our previous analysis, as more price action unfolds on the right hand side of our chart.

New data will arrive, one candle at a time. Each new candle being a source of information; most of which will offer nothing new or relevant; but some of which will alter our analysis, either strengthening or weakening our assessment of market sentiment and future price direction.

Every new candle is potentially significant.

Failing to monitor price with each new candle means we will be forced to be reactionary – surprised by price action developments and chasing setups and entries after they’ve become obvious to the crowd.

Ongoing monitoring ensures we maintain focus and maintain situational awareness – staying ahead of the current price action – assessing where it’s likely to travel, how that will impact the decision making of other traders, and where that will create trade opportunity.

Ongoing-Market-Analysis-Benefits

The Benefits of Ongoing Price Action Analysis

Ongoing price action analysis can be conducted on all timeframes, however our main interest is with the trading timeframe. We question EVERY candle, to determine what it means with regards to the shift in sentiment between the bulls and the bears; and whether or not it changes our expectations for the future.

This is a step by step process, the first part of which is assessing the sentiment of the current candle with volume.

Use Volume and rejection candles articles 39, 40, 42, 43 for bar by bar volume analysis. Analysis tips as below

Where is price in relation to S/R? Where is it in the trend? Where is it in relation to key swing highs and lows? And what does this mean?

Support and Resistance:

  • Where is the PAV occurring with respect to higher timeframe support and resistance?
  • Has the market shown strength or weakness on approach to the S/R area? Is the current VPA sentiment continuing this strength or weakness, or has something changed?
  • Is the Rejection candles showing signs of order-flow opposing the move into S/R, such as tails rejecting price at or near the S/R level?
  • Has the VPA breached the area of S/R? If so, is it now showing signs of acceptance or rejection of this new area?

Trend:

  • Where is the Rejection candles occurring within the current trend?
  • Is it on an extension? Is it early in the move, or late and overextended? Has it projected past the previous swing high/low?
  • Is it on a pullback? Is it early in the move, or has it continued deeper than anticipated? Is it a single swing pullback, or is this pattern a part of a multiple swing retracement.
  • Or is the pattern within a sideways trading range or other form of consolidation pattern?

Swing Highs and Lows:

  • Is price testing any areas of swing highs or lows? Of particular importance are those which lead to a change of trend definition; how is price reacting at those swing highs or lows?

For an uptrend:

  • Pullbacks to previous areas of swing low support should be watched closely. We expect them to hold. Is the price action showing signs of the level holding, or is it threatening to break? If it breaks, is price showing signs of rejection (opposing order-flow / difficulty continuing) or is price accepting this new area?
  • Pullbacks to previous swing highs (within an uptrend) are not as critical, but should still be watched for their reaction.
  • Extensions are expected to break the previous swing high. Is price action supporting that premise, or is the VPA showing weakness. If it can’t exceed the previous swing high, we need to be alert for further signs of weakness which may forecast a complex correction or reversal.

For a downtrend:

  • Pullbacks to previous areas of swing high resistance should be watched closely. We expect them to hold. Is the price action showing signs of the level holding, or is it threatening to break? If it breaks, is price showing signs of rejection (opposing order-flow / difficulty continuing) or is price accepting this new area?
  • Pullbacks to previous swing lows (within a downtrend) are not as critical, but should still be watched for their reaction.
  • Extensions are expected to break the previous swing low. Is price action supporting that premise, or is the VPA showing weakness. If it can’t break the previous swing low, we need to be alert for further signs of weakness which may forecast a complex correction or reversal.

For a sideways trend:

  • Is price testing a range boundary?
  • Has the market shown strength or weakness on approach to the boundary? Is the current VA sentiment continuing this strength or weakness, or has something changed?
  • Is the pattern showing signs of order-flow opposing the move into the range boundary, such as tails rejecting price at or near the level?
  • Has the pattern breached the area of range S/R? If so, is it now showing signs of acceptance or rejection of this new area?

Ongoing Market Analysis Process ​

Ongoing Market Analysis Process:

Ongoing-Market-Analysis-Process

Ongoing Market Analysis Process

Ongoing (Bar by Bar) Market Analysis involves a four step process, as shown in figure above.

The following checklist will walk you through the actions required for each step.

Ongoing Market Analysis Checklist ​

Step 1 – Determine Pattern Sentiment ​

Classify the candle pattern and determine the short-term sentiment of price.

  • Actions:
    • Classify the Rejection candle with volume.
      • Candles which are Long Upper Wick/Shadow are
        1. Shooting Star (Bearish)
        2. Inverted Hammer (Bullish)
        3. Gravestone Doji (Bearish)
      • Candles which are Doji (Indecision) are 4. Doji (Indecision)
      • Candles which are Long Lower Wick/Shadow are 5. Hammer (Bullish) 6. Hanging Man (Bearish) 7. Dragonfly Doji (Bullish)
    • Determine the sentiment of the pattern.

Step 2 – Consider the Context ​

Every pattern is unique and MUST be considered in the context of the background market environment in which it occurs.

  • Actions:
    • Where is the current price action in relation to key market structure features:
      • Support or Resistance
      • Trend
      • Swing Highs and Lows
    • What does this mean with respect to the sentiment of the pattern and the potential future price action?

Step 3 – Does it Support my Premise? ​

Is the market action continuing as expected, or is something indicating we’re out of sync with market flow?

  • Actions:
    • Does the current price action and sentiment support our previous expectations for future price action?
      • Yes
        • Await further price information.
      • No
        • Decide whether to hold for the next candle, or to reconsider the Initial Market Analysis.
      • Unsure
        • Wait for further price information.

Step 4 – Repeat ​

  • Actions:
    • Repeat the process as new information appears on the chart.

KEEP IT SIMPLE

As with the initial analysis process, this ongoing analysis has taken many articles to describe. However, what may appear to be quite a complex process is in actual fact quite simple to perform.

My analysis has developed over the years as a subjective and intuitive process.

The complexity appears as a result of trying to get the essence of that process into writing and teaching, in as reproducible form as possible.

Once again, the ongoing analysis should take no more than maybe 10-15 seconds. Any more than that and you’re trying too hard to find certainty, where there is none.

Experience will rapidly improve your ability to read the market flow. And in time you’ll do so without checklists. In the meantime, use them as a prompt.

  • You already have an expectation for where price is going.
  • Is the latest price action supporting that premise, or does it need to be reconsidered?

That’s the two sentence summary version of “Ongoing Bar-by-Bar Market Analysis”.
Keep it simple. And as before, don’t be afraid to get it wrong. Ongoing analysis will be self-correcting.

Principles of Future Trend Direction ​

Within the S/R framework: ​

  • First Principle – We expect an up or down trend to continue in its current state until the next S/R barrier, unless displaying evidence of weakness within the trend.
  • Second Principle – When an up or down trend shows evidence of weakness, we expect a higher likelihood of a complex correction* rather than a reversal, until such time as the market shows both price acceptance and strength in the new trend direction.
    (* a complex correction being one of extended duration, or multiple swings)
  • Third Principle – A sideways trend within the framework is expected to continue in its current state, unless displaying evidence of strength towards the range boundary.
  • Fourth Principle – When a sideways trend shows evidence of strength towards the range boundary, we expect a break of the boundary. We observe the behavior of price post-breakout for clues as to future direction:
    • Weakness following the breakout – the expectation is for a breakout failure and reversal back within the trading range
    • Weakness on the pullback – the expectation is for a breakout pullback and continuation.

At the edges of the S/R framework: ​

  • Fifth Principle – We expect a test of our framework S/R to hold, unless strength is displayed on approach to the S/R boundary.
  • Sixth Principle – If strength is shown on an approach to an S/R barrier, we expect a breakout and watch the behavior of price post-breakout for clues as to future direction:
    • Weakness following the breakout – the expectation is for a breakout failure and reversal back through the area of S/R.
    • Weakness on the pullback – the expectation is for a breakout pullback and continuation

Trading Strategy ​

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Setups Appropriate for each Particular Market Environment: ​

  • Steady trend environment:
    • Higher Probability
      • PB and CPB
  • Weakening trend environment
    • Higher Probability
      • CPB
      • PB if they break a previous swing low (uptrend) or swing high (downtrend)
    • Lower Probability
      • Standard PB (single leg; not breaking any prior swing low (uptrend) or swing high (downtrend))
      • Counter-trend TST or BOF of swing high (uptrend) or swing low (downtrend)
  • Within a Sideways Trading Range with a clear intra-range trend
    • Lower Probability
      • PB and CPB
  • Approaching higher timeframe S/R or range S/R, with no sign of potential breakout
    • Higher Probability
      • TST
  • Approaching higher timeframe S/R or range S/R, with strength showing signs of potential breakout
    • Higher Probability
      • BOF or BPB

Trading Process ​

Trading Process Diagram ​

Trading-Process

Trading Process

The trading process involves four steps, as per above figure.
The following checklist will guide you through the actions required for each step.

Trading Process Checklist ​

Step 1 – Trade Preparation ​

Prepare for possible trade opportunity as price enters the vicinity of a setup area.

  • Actions:
    • Monitor price movement confirming it matches the behavior previously anticipated. If price action differs from expectations, return to the initial analysis and recheck premise and assumptions.
    • Identify trade parameters
      • Stop loss location
      • Targets T1 & T2
      • Confirm entry zone
        • Consider both LWP (if identified) and LRP
    • Identify preferred entry plan
      • Stop and/or limit order
    • Final confirmation
      • The setup and trade is valid for this market environment
      • Price action is supporting the trade premise.

Step 2 – Trade Entry ​

Manage the entry into the trade, achieving the best possible price within the entry zone.

  • Actions:
    • Monitor price movement bar by bar, until the entry locations are identified. Ensure price continues to support the trade premise.
      • Determine candle pattern sentiment
      • Consider the context
      • Does it support my premise
    • If working an entry, place an appropriate order in the market as soon as the entry decision is made.
    • Confirm pending order details are correct.
      • Entry price, direction, size,
      • Contingent stop and target orders
    • On fill:
      • Cancel other no longer required pending orders.
      • Confirm full or partial position filled.
    • Post-fill confirmation (gross error check)
      • How do I feel about the entry?
      • Confirm the setup and trade are valid for this market environment
      • Confirm the price action is supporting the trade premise.

Step 3 – Trade Management & Exit ​

Manage an open trade in order to minimize risk and maximize opportunity. The trade should
remain live while the premise remains valid.

  • Actions:
    • Continue monitoring price movement bar by bar. Ensure price continues to support the trade premise.
      • Determine candle pattern sentiment
      • Consider the context
      • Does it support my premise
    • Part One
      • While premise remains valid:
        • Move the stop to breakeven when we would no longer wish to be in the trade if price retraced to the entry point.
        • Move the stop to new levels where we would no longer wish to be in the trade if price retraced to that point.
      • When premise is threatened
        • Cancel position if immediate exit is required.
        • Else work an exit through tightening both the stop and target orders, based upon lower timeframe price action.
    • Part Two
      • While premise remains valid:
        • Move the stop to breakeven when we would no longer wish to be in part two if price retraced to the entry point.
        • Move the stop to new levels where we would no longer wish to be in part two if price retraced to that point.
      • When premise is threatened
        • Cancel position if immediate exit is required.
        • Else work an exit through tightening both the stop and target orders, based upon lower timeframe price action.
      • When market shows increased strength
        • Consider extension of T2 or replacement with a trailing stop.
    • On partial exit
      • Confirm order correctly filled.
    • On total exit
      • Confirm flat

Step 4 – Post-Trade ​

Conduct post-trade administration and recovery.

  • Actions:
    • Reconfigure order entry screens or DOM.
    • In the event of a loss:
      • Consider the need for a recovery process.
    • Is price setting up for a possible re-entry or subsequent setup?
      • Delay any trade log entries and prepare for the new trading process.
    • When time permits:
      • Update trade log.
      • Monitor and record significant observations:
        • Market structure or price action.
        • My trading process.
        • My physical and psychological state.

Setups Poster ​

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The Learning Process ​

Deliberate Practice: maximize exposure and learn through a process of trial and error.

Trade-Record-Review-Improve cycle:

  • Trade – self-explanatory… trade the markets in accordance with your trading plan and procedures manual.
  • Record – record results in your trading logs and journals.
  • Review – review your results, considering the four key questions:
    1. What did you expect to happen?
    2. What did happen?
    3. Why was there a difference?
    4. What can you learn from this?
  • Improve – implement improvements, either through setting process goals for the next trading session, or through amendment to the trading plan and/or procedures manual.

Development Stages ​

Development-Stages

Development Stages

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