Using Balance and Unbalance to your advantage

Quick update on USD/JPY:

The order flow on the intraday perspective is now balancing. I have moved my stop down to the edge of the balance zone...just out of range to lock 357 pips. Considering the volatility of late, we may get a spike higher as the larger order flow attempts to test the last balance zone on the weekly chart....therefore, I want to lock as many pips as possible, (as opposed to riding it out), and be ready for another short up around the 123-124 area.

Update on gold:
Daily chart has closed below the low of the last two days. I read this as a change in the order flow even though I didn't see a very clearly defined balance area. I have therefore moved the stop on this position down to a small 35 pip risk. I have kept the position up at a higher level on if I get stopped out. For now I am pleased with a small lead on the market.

Good morning friends, US is starting to wake up. Here is an update on the positions:

GBP/USD: Stopped out for a small loss of approximately 23 pips. This market never really did anything and the buyers could never really get enough together to move prices as I anticipated.


USD/JPY: This market is balancing on the intraday time frames. Stop remains as I updated it yesterday locking 357 pips.


Gold: This market is moving nicely in the anticipated direction and is currently 288 pips positive. I have left the stop where it is for the time being and will most likely NOT move it again for at least another week. This is because I am wanting to manage this trade on the weekly or even monthly chart eventually. We have a good start to the trade and have limited the down side to only 35 pips. So I don't want to "choke" the trade any further.

Let me see if I got this right...
I'm sort of using "consolidation boxes" instead of "balanced areas" but I guess it's more or less different words for similar or close concepts

Silver:
Strong BO of a consolidation box with a H4 candle (NY time feed) closing below this box. I put a sell order by the low of the previous candles (see crappy oanda chart).
2 entries, 1 TP at 1R, 2nd will be trailed (if triggered, as it looks like it missed my entry by a few points). SL above the candle that broke.


EURUSD:
Same story, price breaks out of a small H4 consolidation box, an H4 candle closes below, entry by the previous lows, and targeting the next S/R area.
SL above the candle that broke / above the box.


Let see how it plays.

Great Questions Patapouer...let me see if I can answer them one at a time...first Silver:
I like to look at any commodity on larger time frames...the reason is simple. intraday commodity trading (for me) is too volatile and it is easy to loose sight of the actual market flow. I like to keep in mind that commodities are traded as long term investments and are used largely as a store of value (unless you are a jeweler). So I look at longer term charts.

On the chart below, I have a monthly, weekly and daily chart side-by-side (which is how I prefer to view the market). I call your attention to the monthly chart. You can see a balance area that I have circled in red...and a break from that balance area represented by the blue box. This box represents the area where the sellers overwhelmed the buyers with not doubt as to what happened.

On the weekly chart, I have redrawn those same areas to show what that area looks like on a weekly chart. You can see the volatility on a weekly chart...imagine what that was like on an intraday time frame...like your 4 hr chart...

On this weekly chart you can see where price came down...balanced again...then moved up back into the blue box and is now falling away. BTW...this is mirroring what gold is doing.

Finally, on the daily chart...you can see that same theme play out but in the area where price retraced back into the blue box on the monthly area...daily prices moved up...balanced...pulled away...retested (giving you the opportunity to enter) and are now going down.

This is how one properly uses multiple time frames, to understand the concepts of "Market flow", "balance/unbalance", and "fractal entry". I hope this is clear...

I will address EUR/USD next...give me a few minutes to prepare the charts.

To be a little more precise, IMHO, there is more buy or sell order volume. One huge seller can keep hold off hundreds of small buyers and vice-versa.

On the EUR/USD I have located the weekly, daily, and 8 hr charts side-by-side. This weekly balance area (circled in red) is more clearly seen on a monthly chart, but this is how that same area looks on the weekly chart...again note the volatility. (typical price action when a reversal is coming)

The break of the weekly balance area has not been sustained on the weekly chart, however, there were two daily closes above this area and I anticipate more upside to come. I have placed orders as seen here, one of which has triggered. However, the more proper way to enter would be to wait and watch for an intraday balance area to form instead of a "blind" entry.

The short you are anticipating from an intraday perspective will most likely work IF - and this is a big IF - you are able to exit before the reversal that buyers will try to form sometime before the end of next week.

I say this because I feel the larger market flow on this market has turned from selling (offer) to buying (bid), and I think that this big "pin bar" forming on the weekly chart is simply the long standing sellers that have been stopped out, but the actual "new" buying has yet to appear.

I have placed my orders in areas where I anticipate that to happen, but so far am simply waiting.

The idea I am trying to put across is that "Market Context" is very important when looking for opportunities. It is important that you evaluate the CONTEXT of your entry and then understand if your entry in with or against that context (market flow, trend, what ever you want to call it).

Nothing in the market takes place inside a "vacuum". That is why candle stick patterns or trend following or indicators all have limited use at best. One needs to learn to see the order flow present in each and every candle, understand the context of that candle and then take appropriate action - or stay inactive as the case may be.

Here is the monthly EUR/USD chart...again, the balance area is very clear as is the break...as we are coming into the end AUG, I anticipate prices will rise...

Yes you are quite correct...I was purposefully over simplifying the concept for the sake of explanation.

OK makes perfect sense.

I will take the time to digest the different elements of your responses.

Thanks a lot for your time and... well... patience

take care

Your welcome...no patience was required...I honestly wish to help out and if you ever feel you would like more information just pm me.

Great thread gspajon. Thanks for all your hard work

I have a couple of questions, if you don't mind.

1) You mentioned that about 80% of the time price retreats back to the breakout zone before continuing, which allows you to enter more times than not. This is an interesting statistic! So my question is: have you done any studies to determine the percentage of false breakouts versus real ones?

2) Have you ever tried trading this method more aggressively by placing stop orders just beyond the consolidation zone in order to enter at the start of the breakout? I suppose this could give you a good entry price (not much worse than waiting for a retrace), and a fast profit too if you placed a modest target order. It might even work on the false breakouts! You could then re-enter on the retrace - as you're doing now - in order to profit again.

Cheers,
NT

I'm sorry for the delay in responding North Trader...I lost my internet connection for the entire day and am just now getting back...I will give an update tomorrow morning on the outstanding trades...but to your questions.

I would guess the answer to that question really comes down to definition. What would constitute a "false" break. I really hesitate to use the typical technical analysis terms because I don't consider this "technical analysis". I like to call it "reading order flow"...but to answer your question. Is a "false break" when price moves beyond an established range but then retreats to the other side? Or is it a close beyond the range that then goes against that direction and actually breaks the other way? To suggest that a "break" at all has occurred simply because price is trading in an area that you expect it not to, or to place some significance on that fact seems wrong to me. If I see buyers push price up and CLOSE in an area or even past an area where before there was only selling, THAT is when I use the term "break", this does not necessarily mean a "break" in the range but most often that is the way it occurs. I do NOT have statistics on how many times a "buyers close" in a seller's area fails (or vise versa), but I have anecdotally observed that it usually occurs as a "counter trend break". Or as I like to call it, "the FU stop". Its that time where price finds your stop almost to the pip, just as if to say "no money for you" and then moves your direction after your out. I HATE THAT!

I have actually...there was a time when I would "stop and reverse" in these areas...but when I started seeing the price almost always came back to give me a better price or stop me out on the "break out" trade, I found that it was worth waiting for that 80% and leaving the other 20% alone. It was hard to watch price go my direction with out me, but I discovered that was just my own greed or fear of missing out. Often time (no statistic on this) even though it looks like price has gone and isn't coming back...if I wait long enough...price fills my order and then ZOOMS out of the area as if to say..."hey get on board this is your last chance, this train is leaving." I no longer worry about that other break and run trading...it just isn't worth the aggravation. BTW, break trading requires a much larger stop, and is often hit more often, reducing the win/loss ratio. Waiting for the retest is far more successful, and allows you to quickly reduce your stop or move to BE thus keeping your losers smaller...

Isn't that what we want? Have as many wins as possible, but cut the losers short and let the winners ride?

Thanks, gspajon. And no rush to reply of course.

Regarding the false breakouts, I agree that they should be properly defined before any analysis is possible. Much the same as your "returning to the area" statistic - you must have defined it in order to analyse it. I'm asumming that you defined "the area" as the edge of the range, so price had to retrace to that point or beyond, following a close a certain distance above it, in order to be included in the 80%. I suppose the "false breakout" is defined by what happens next. Plausible definitions might be:

a) price then moves beyond the opposite edge of the range
b) price remains in the range for a certain number of bars after the breakout
c) price moves back towards the breakout tip, in your favour, but doesn't reach it

We could then analyse each definition in turn and produce a set of statistics. But would there be any benefit to this? I'm not sure.

Regarding your answer about "break trading", I would have thought that you could use a smaller stop rather than a larger one. If price manages to break out of a long-established range then it seems to carry on for a good distance before a significant retrace, more often than not. So the small SL would be placed just inside the range (top quarter) , and a larger initial TP would be based on a proportion of the width of the range, maybe a fib extension, or whatever else might work. You may get a low winning rate - which is why the false breakout statistics might be interesting - but the R:R would be good. I guess this is the type of trade that would be nice to manage as it happens, so you could reduce your stop to BE as soon as possible.

Anyway, just thinking out loud. Please carry on!

Hello Again North Trader,

I know this is going to sound a bit...obtuse. Please forgive me because I don't want to present that way. Much of what you mention is valid from the "technical analysis" point of view. I will not tell you that is wrong. However, I firmly believe that one needs to leave that behind to start understanding the idea of order flow and its affect on price.

While I am certain it appears that way, I am NOT trading range break outs or looking for them. I don't even call them ranges anymore. And, while this may seem like semantics I assure it is not. It is a fundamental shift in the way I think. And this, necessarily, causes me to "see" differently.

Where one sees a range and a break out, I see an area of balance where there is a clear and distinct zone, where once side (buyers or sellers) overwhelm the other. To most technicians I speak with this is simply a range break...and they say, "what's the difference?" The difference is in how I THINK about it and that is what determines where (at what price) I place my order(s), and how I define stop placement...etc.

Thus when a technician sees a "range", I see an area of balance where I can usually define where buyers and sellers are clearly transacting. It is more than just a simple range with a top and a bottom. There are areas INSIDE the "range" where buyers and sellers are transacting and which side seems to overcome the other.

So because of this - it is (for me) "complicated" to define a "false break out"...because there is nothing "false" about how I see the order flow. I see an area of balance, I see that one side (let's say the buyers) overwhelm sellers and push prices higher outside the area where the sellers were transacting. Then I see a new wave of selling take hold, and that is so powerful that it pushes price through the previous balance zone and out the other side. Is that a "false" break? Not to me. It is simply an area that I didn't anticipate selling, (because I am not privy to the order book).

As I've stated before, I have noted the above scenario often occurs in counter trend movements, and are what results in "lower highs" in a bearish trend...or vise versa in a bullish trend.

There is one other thing that often occurs around the "edges" of a range that I have noted. Often times, price will "test" the edges of a range. Extending it beyond how one originally defines the top and bottom. For the "break out" trader, this is "death by a thousand cuts". You get a break, then you don't and either stop or liquidate...then it looks like its going again...wait no...then WHOOSH...back to the other side...then the same thing...testing the other side...on and on.

This ends up redefining the edges and the range now begins to look like a trumpet, and technicians label it an "expanding" range. Again, I just can continue that farse. It is NOT an expanding anything...it is simply where buyer and and sellers are transacting and which side is coming in with the most volume. These are NOT "false break outs" they are ORDER FLOW...that is the nature of the beast in which we have decided to work.

How often does this occur? Honestly, I didn't think to gather statistics on that because I feel I can just follow the order flow and control my risk. My win rate usually ranges between 58%-72%, depending on the market conditions.

So I therefore define my area of entry as, that zone where I can clearly see that one side overwhelmed the other. It is a zone not a specific price, however my order must be a specific price, so I place that order right smack in the middle of the zone. If I feel it is a particularly large zone, I will place more than one (smaller) order and wait to see which ones get filled.

I hope that makes more sense...I'm sorry if this sounded a bit "snobbish" I don't want to sound that way, but feel I must clearly demonstrate that the real difference in all of this is how one THINKS. Other than thinking it is all the same price...we all see it...the difference between the winner and the loser is thinking.

No, not snobby or obtuse at all. Thank you for your thoughts

Hi Gspajon,

first of all thanks a lot for your thread and for the clarity of your explanations. It's very interesting!

Looking at the so called "false breakout" with your eyes, I would ask you then how we "can clearly see that one side overwhelmed the other" as opposite to a simple stop loss haunt or a false break out.
I hope the question is clear.

Bye Puma

edit: I didn't mean to turn around your answer into the same question again.
I believe you can understand when it could develop into a "false breakout"? maybe from the price action which is different?
Or I am wrong and, in the moment that the breakout takes place, you cannot predict it and only after we can say whether it did continue in the direction of the breakout or turned in the opposite direction?

A valid question and difficult for me to answer as I have students who pay me to teach them this concept. To honor their sacrifice and to also answer your question I will try to explain in best way possible.

The formation of each candle is the expression of the order flow that developed during its time span. (5 min, 1 hr, daily, etc). If we were to look at a bullish candle for example, we see price open. Sellers come in and push price down...then that selling attracts buyers who balance the sellers and bring price up to where it opened...at this point (even though the candle has not yet closed), the market is balanced for that point in time. This leaves what looks like a doji or a lower wick. Now more buyers come in...whether those are "new" entries or shorts stopping out, one cannot say, but price begins to rise. People see price rising and start entering more buy order that exacerbate the now bid (unbalancing to the buy side) market. Price accelerates, and continues to rise until...sellers come into and balance the buying market. Price stops rising and the candle now looks like what many here refer to as a "strong" candle, because the price action was mostly only one way...but now buyers, are turning to sellers as they liquidate and either take profit, or the late buyer stops out. Price now begins to fall slightly pushing the candle back a bit and the candle closes...leaving a wick at the top.

This scenario plays out in EVERY candle...it leave a trail behind that clearly indicates where buyers and sellers are transacting AND how their volumes either balance each other or one side overwhelms the other. Group the candle together and you begin to see areas where the entire market seems to all act in unison as these level become more and more clear to the "technicians", who start adding ridiculous math formulas to explain why this happened and "predict" what "must follow".

It is simple human behavior as each trader attempts to act in his/her own best interest.

When you start to see areas where only wicks are forming you will start to see where balance occurs on a very small time frame. When you see long extended bodies, you will recognize UNbalance and one sided order flow.

I actually have an entire 10 week course that I teach people this in much greater detail. Yes I charge for it...no I don't charge much. You can read more about it here. If you (any of you) are interested please pm me.

I don't want to distract from this discussion, but hope you will see the value I am presenting here.

Puma, I can see you are struggling to understand this concept and you are asking all the right questions. Again, not to sound pedantic, but it truly does come down to the way I think and therefore what I "see" in the order flow. The price action one will often see is the "whoosh" I spoke of earlier as liquidation (stop run) of all the trades in the opposing position hit. If the does NOT occur, generally speaking, any "break out" is still highly contested by the opposing side and a return to balance will most likely occur.

What causes that "whoosh" and why does it return? Lets back up a bit...lets say you have a long position on, which meant at some point you were a buyer. After that buy is completed, you are automatically a seller in the current market whether or not you realize it. Why are you a seller if you bought? Because your orders to liquidate, stop or limit, or any exit from your position at all, in profit or in loss, is a sell order. Thus you will be looking for the best place to sell right?

So if you entered the market and it is now ranging and threatening your stop, what do you do? If you are like most people you will move your stop closer to the market, just outside the range, to either reduce any potential loss, or preserve some portion of your profit...this is what EVERYONE does. Orders tend to "congregate" around the edges of a range. They are defended by new traders coming into the market and especially those trading inside the range, they buy the bottom and sell the top...with me so far?

So what happens when price wanders outside that range (for whatever reason)...your stop order just turned into a sell, along with everyone else's in the same area...all those sell orders hit the market at once and WHOOSH, price moves sharply downward. But then what happens?

Once those orders are filled there is commonly no one else selling. Those who wanted to sell wanted to do so at a higher price (like me). But now since there is no one left to push price lower, price will tick higher and some buyers may even come in. Price will rise to where it started that "whoosh" and all those like me will have more sell order waiting and another round of sell orders will hit the market and quickly unbalance it again, but this time it is new sellers who are jumping on board and with more momentum prices continue until all those sell orders are satisfied.

This is yet another reason I try NOT to trade the "break and run". It is usually very fast and spreads tend to open, thus giving a very bad entry. I prefer to wait and set a pending order that will be filled at MY price.

Please don't be confused, I cannot "predict" the next tick much less whether a break is "false"...but as I said before, from an order flow perspective there is nothing false in how price moves...BUT it may not move the way I WANT it to move....

Because I cannot predict or even try to predict, I rely on probabilities to assist me in what is most likely to happen. As I said earlier, 80% of the time price will return to the area where one side overwhelmed the other and then continue giving me the opportunity to profit. What I do with that opportunity is up to me and my trade management skills.

There are only three things that one can say absolutely WILL happen every day the market is open. (1) price will move up, (2) price will move down - not necessarily in that order, and (3) Order flow is what determines 1 & 2, as well as how far and how long 1 & 2 will move. It is just not possible to know in advance what the next round of orders will be (unless you are privy to the entire world's order book).

**Edit: Now I ask you in all sincerity, understanding the "truth" about how markets work, do you really think some obscure derivation of price divided by itself, or some average of what happened 14 candles ago, will give you an edge?

I started to read this when page #2 was just started and already smelled fishy.
Why? Because you talked about order flow, balance and unbalance, that this is not technical analysis, but basically your charts were Support-Resistance and/or Supply-Demand trading.
Now on page 4 you tell us that you have a 10 weeks course....

Rule #1: when you see people give new names to old stuff, you can tell they are going to sell it.