Introduction
I want to discuss support / resistance and price machination; there are endless threads about SR but here's my take...
Price can only do three things - go up, down and sideways. Consolidation is where contracts are built up and is an institutional pit-stop used to hide their footprints in the snow. When there's enough price inequality, the coiled-up spring releases its energy and a candle will paint outside of this region of stagnation showing both intent and direction.
AUDUSD 1hr - consolidation & break-out
Notice the large red candles preceding the box and then price paused to build contracts in the orange box. A red candle then closed below the box to show a possible sell continuation.
AUDUSD 1hr - test
For price to drop further, there needs to be more buyers than sellers. This may sound incorrect as you'd think 'surely there needs to be more sellers to drop price', but it's the other way around. You need to have more buyers at a price point to whom you can sell your contracts, otherwise you'd be selling to other sellers.
An example, let's go virtual shopping at the high street for some shoes. Let's say you are the only one buying shoes and every shop is a shoe shop, this means there are many more sellers than buyers (only you), so the shops will all be dropping their prices to get you to come into their shop to buy some shoes so as a buyer, you see prices keep dropping. This is great, as each time price drops you keep buying more and more shoes.
However, if there's only one shoe shop and there are now many more people on the high-street looking to buy shoes, then prices will sky-rocket as the shop knows there's strong demand for their shoes and they have cornered the market and can charge what they want. So as a buyer, you see prices shoot up and you'd be reluctant to buy a pair of shoes at extortionate prices. You'd prefer to look elsewhere for cheaper shoes, so as a buyer you are looking for more sellers so you can buy shoes at a lower price.
This is supply and demand and when the two curves cross, that becomes an acceptable price point and market value is achieved.
In forex, if price drops then there's a big red candle. You know that people will sell after seeing this candle and if prices drop further, they'll move their stop to break-even. If you're an institutional seller, you want to hit these stops to purge the market of all these sell stops, so you're the only one selling to buyers.
Basically, you're looking to identify where sellers jump in and place their stops. Once price retraces into these price levels, then it's a low risk sell opportunity as you know they've taken out all the previous sellers to create a bullish retrace.
So in the above picture, notice how the more aggressive sellers entered when the trend line was broken within the consolidation zone. Price then came back and spiked up to hit all those stop losses at the white line, so if all these sellers were stopped out, that means there are now more buyers at this level. Sellers then start loading up their sells again as they have buyers to sell to and price drops again.
Now look at the secondary consolidation that formed at this white line, why would price do that? The sellers didn't have much joy dropping price after the first spike to purge sellers. If price comes back to this white line so soon, you know there's underlying buy intent as this level keeps getting hit and now the opposite is happening. So buyers are now building contracts and consuming all these sellers as they expect price to drop but as an institution you know there are shit loads of sellers here trying to trade a second elliot wave, so you start buying. In fact, you relish bearish three-candle patterns as you keep adding buy orders as you know sellers will trade those signals and it's a great way to hide your intent.
EURUAD - 1hr
A great example is currently happening on EURUAD as a previous supply zone is tested. Notice the 1hr pinbar that immediately was breached upwards, so there are trapped sellers at the bottom of this pinbar candle and buyers aren't letting them off the hook by allowing price to drop below so they can take some profit, instead, price has held above and made higher highs on lower timeframes.
I want to discuss support / resistance and price machination; there are endless threads about SR but here's my take...
Price can only do three things - go up, down and sideways. Consolidation is where contracts are built up and is an institutional pit-stop used to hide their footprints in the snow. When there's enough price inequality, the coiled-up spring releases its energy and a candle will paint outside of this region of stagnation showing both intent and direction.
AUDUSD 1hr - consolidation & break-out
Notice the large red candles preceding the box and then price paused to build contracts in the orange box. A red candle then closed below the box to show a possible sell continuation.
AUDUSD 1hr - test
For price to drop further, there needs to be more buyers than sellers. This may sound incorrect as you'd think 'surely there needs to be more sellers to drop price', but it's the other way around. You need to have more buyers at a price point to whom you can sell your contracts, otherwise you'd be selling to other sellers.
An example, let's go virtual shopping at the high street for some shoes. Let's say you are the only one buying shoes and every shop is a shoe shop, this means there are many more sellers than buyers (only you), so the shops will all be dropping their prices to get you to come into their shop to buy some shoes so as a buyer, you see prices keep dropping. This is great, as each time price drops you keep buying more and more shoes.
However, if there's only one shoe shop and there are now many more people on the high-street looking to buy shoes, then prices will sky-rocket as the shop knows there's strong demand for their shoes and they have cornered the market and can charge what they want. So as a buyer, you see prices shoot up and you'd be reluctant to buy a pair of shoes at extortionate prices. You'd prefer to look elsewhere for cheaper shoes, so as a buyer you are looking for more sellers so you can buy shoes at a lower price.
This is supply and demand and when the two curves cross, that becomes an acceptable price point and market value is achieved.
In forex, if price drops then there's a big red candle. You know that people will sell after seeing this candle and if prices drop further, they'll move their stop to break-even. If you're an institutional seller, you want to hit these stops to purge the market of all these sell stops, so you're the only one selling to buyers.
Basically, you're looking to identify where sellers jump in and place their stops. Once price retraces into these price levels, then it's a low risk sell opportunity as you know they've taken out all the previous sellers to create a bullish retrace.
So in the above picture, notice how the more aggressive sellers entered when the trend line was broken within the consolidation zone. Price then came back and spiked up to hit all those stop losses at the white line, so if all these sellers were stopped out, that means there are now more buyers at this level. Sellers then start loading up their sells again as they have buyers to sell to and price drops again.
Now look at the secondary consolidation that formed at this white line, why would price do that? The sellers didn't have much joy dropping price after the first spike to purge sellers. If price comes back to this white line so soon, you know there's underlying buy intent as this level keeps getting hit and now the opposite is happening. So buyers are now building contracts and consuming all these sellers as they expect price to drop but as an institution you know there are shit loads of sellers here trying to trade a second elliot wave, so you start buying. In fact, you relish bearish three-candle patterns as you keep adding buy orders as you know sellers will trade those signals and it's a great way to hide your intent.
EURUAD - 1hr
A great example is currently happening on EURUAD as a previous supply zone is tested. Notice the 1hr pinbar that immediately was breached upwards, so there are trapped sellers at the bottom of this pinbar candle and buyers aren't letting them off the hook by allowing price to drop below so they can take some profit, instead, price has held above and made higher highs on lower timeframes.
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