SMART MONEY CONCEPT
INSTITUTIONAL TRADING GUIDE
TRADING LIKE THE BANKS
SMC Entry Types, Liquidity Setups,
Market Structure, MS Mapping, BOS,
Mitigation, Order Blocks, Supply and
Demand Zones
David Woods
Copyright ©2022 David Woods
All rights Reserved
No part of this publication may be reproduced, distributed or transmitted in
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electronic or mechanical methods, without the prior written permission of
the publisher.
DISCLAIMER
This book is meant for educational purposes only, and not a financial
advice. This book does not give a %100 guarantee so trades are taking at
traders risk, but when studied and implemented will help you a lot in
understanding and improving in your trading journey because it has always
worked for me. Traders are advised to get information from multiple
sources to help improve your trading skills. Always conduct a registered
financial or investment advisor before making any financial decisions. The
author makes no guarantees related to the claim herein. So please always
trade responsible.
Section 1
Smart Money Entry Types
It may be the daily, 4 hours, or 1 hour when we are looking at the HTF, but I
use the 1 hour period as my highest because it provides me a lot of
opportunity and is just a wonderful timeframe to sort of base our trades
around. Now, it depends on your personal preferences whether you choose
the daily or the 4h as your highest periods. However, if we look at this
figure, we will see that it is an HTF, thus we will refer to it as the 1h.
We can see a clear shift in momentum once we get a bullish OB (POI), and
from there, as we can see, bullish order flow. The price initially declined
before being pushed up and BOS.
Now that we have a BOS, we have a demand level or an OB inside of this.
Therefore, I believe that there is not enough of a confluence when price
initially begins to trade into this zone for us to place a pending limit order.
Therefore, once the price is in, there won’t be enough confluence for me to
consider going long. I would prefer to wait for the price to be supplied and
observe how it is delivered before checking an LTF for our entry
confirmations. Many SMC traders would categorize that kind of entry as a
risk entry, but I personally don’t like to put my money at danger, especially
when we are trading with significant quantities of money. Waiting to see
how the price enters that zone is something I would prefer to do, and it is
something I have had a lot more success with. I would then look for our
entries
on
LTF. This is the reason I won’t be looking at any risk entries.
So, once we arrive here, we have this as our initial demand level, as we can
see if we look at the various types of submissions. Therefore, inside this kind
of demand level, we are looking for longs. Now, this would seem like this on
an LTF. So this will be our LTF, and as for me, I execute trades on a 1m,
occasionally dipping into the 30s. But we’re going to stick with 1 m.
Therefore, once the price declines and trades into this area, we typically see
LLs and LHs on an LTF.
Therefore, we will be watching for price to push in before looking for signs
of bullish action. We want to see a good BOS, then. Now that it would build
an OB down here, this would then grant us access.
The first BOS on an HTF, as we can see on 1h, is the entry type 1 for this
trade, which is a single BOS, which basically means a single BOS and a
single confluence. Since there is only one confluence and only one BOS on
the LTF, this might have previously been a downtrend with the preceding
BOS demonstrating intent and tapping into a demand level.
Entry type 2 would then be waiting for the double BOS, which basically
means we want to see a BOS that could pullback and then BOS again. It
doesn’t have to mitigate this level here.
Since we are still trading at this 1h demand level and there is double
confirmation on an LTF, I still consider that to be a double BOS. It is also a
single confluence.
Therefore, if you have trouble entering trades or you take too many losses, I
would strongly advise you to steer clear of this entry (type 1) because when
the price breaks now, depending on how it breaks obviously, it might just be
a fake out before heading lower.
It’s not too much confirmation, but it also depends on how it breaks. If
you’re having trouble with entries, I’d advise you to wait for a double BOS
because we’ll enter some better trades while we wait for more confluence. In
addition, we’re starting to see bullish order flow on our LTF, and we can tell
that we’re being respected from the 1h demand level.
We will therefore be looking at this second demand level on HTF when entry
type 3 is. So that we could see the BOS, we retreated and then we BOS.
Therefore, we are displaying clear bullish intent and order flow on the HTF.
Now that we put the caption intent for HTF prices here, we can see what we
did. Basically, this means that prices have been trading above these lows,
and that once this structure was broken, prices began to move upward. We
then pulled back, we moved upward again, and now it is clear that we are
indicating a desire for higher prices because prices have been unable to
move below this level. Returning to the third entry, we can see that there is a
second BOS on 1h, making this a double confluence since it corresponds to
our second demand level. In order for prices to continue, we are
just witnessing more confluence.
Now this pullback to second demand level, this is what it will look like or
this is what we are expecting to see for the trade to meet our entry rules.
As a result, they are currently trading inside the second demand level and
second BOS.
As we can see, the price is once again trading back down into it, and we will
also see LLs and LHs. We want to wait for a nice BOS, which would be our
single BOS but with double confluences as we trade in the second demand.
Now that we can see one BOS, a pullback, and a second BOS, entry type 4
requires that we wait for a double BOS. As we trade at this second demand,
there are double BOS and double confluence. However, if we wait for this,
we will engage in some fantastic trades, but we won’t always engage in the
trade. Type 4 is going to the extreme and waiting for a lot of confirmation.
Therefore, as long as we are trading with the trend, I do accept trades with a
single BOS and a single confluence. However, I also take a double BOS, so
we will need to conduct testing on that. It all depends on how it breaks,
though. However, as I mentioned, if we are having trouble getting entries,
the bare minimum that we should be taking is a double BS followed by
entries types 3 and 4. It is crucial to understand that these are merely
sketches and textbook setups after going through these continuation trades.
They won’t always be as tidy as this. Therefore, we should exercise selfinitiative and consider what price is genuinely doing.
How’s the price trend?
What is the likely source of price reaction?
This is a continuation trade, so check for our entries from there instead.
Therefore, we want to check for the BOS as we start observing HTF bullish
or bearish order movement, similar to this.
Where are the levels of supply or demand?
Before the BOS, where does the momentum enter?
So, from whence did the price rise that led to the BOS begin?
Understanding where price broke from and where the move started from is
crucial since this is where price is likely to return to reduce the damage
before continuing.
Section 2
Understanding the Liquidity Setup
Liquidity, put simply, is the ease with which one can enter and remain in a market at the
appropriate price, based on the quantity of buyers and sellers in the market.
In terms of liquidity, the market maker’s main goals are:
1) To generate revenue when there are no public orders to purchase or sell the asset by
buying and selling from their own inventory.
2) To maintain the market book of orders, which consists of restricted buy and sell
orders as well as stops issued by general market participants.
In general, if you can comprehend these two key principles, you will grasp how the MM
deceives and seduces retail traders.
Buy Stops Liquidity, part a (BSL)
A collection of buy stop orders with associated stop losses makes up the BSL.
When the BSL is removed (and the buy stops are activated), the market turns downward,
clearing the stop orders.
How to identify BSL
1) PMH (previous month high)
2) Week-ago High [PWH]
Three) Previous Day High
4) High of the day
Number 5) Old High/Swing High
b) Sell stops Liquidity[SSL]
The SSL is a pool of sell stop orders, with there respective stop losses.
When SSL is taken out (sell stop activated) the market reverses to the upside cleaning
the stop loss orders.
Where to spot SSL
Previous Month Low [PML]
Previous Week Low [PWL]
Previous Day Low [PDL]
High of Day [HOD]
Old Low/Swing Low
Equal Low [EQL] Support
Trading Liquidity Sharp Entry Setup
When do we trade liquidity?
As a general rule, consist of the following.
a) Stop Hunting [SH]
SH is merely a fictitious breakout above or below the area where liquidity is located.
b) Market Structure Break [BMS/BOS]
BMS refers to a market that has lost its structural integrity (HH or LL for an ongoing
trend; HL or LL for a direct change/CHoCH).
Considerations for Trading Liquidity
a) Always trade in accordance with the HTF trend direction since the trend is your
friend.
b) Supply and Demand: Take market success and imbalance into account.
b) Support and Resistance [EQL EQH]: Always watch the SnR zones for fake outs.
d) Understanding: This is the best approach to recognize a price retracement; otherwise,
you risk entering the market after it has altered course and incurring losses.
LIQUIDITY SETUP EXAMPLES
1.
SH
– CHoCH with quick RTO (Quick Entry)
2
SH – CHoCH with late RTO
3. SH +
Confirmation Entry (Re-entry) with quick RTO
4. SH +
Confirmation Entry (Re-entry) with late RTO
5. SH + Fake BMS
6. SH + Compression
Section 3
MARKET STRUCTURE
Basics of Market Structure
Knowing the market structure on a price chart is essential for understanding
how a pair is performing, what stage we are in, and when a pair structure is
changing direction.
Therefore, is a currency pair trending higher or lower? Therefore, we are
adding LLs, LHs, HHs, and HLs.
Can we range? Therefore, we are remaining inside two price points by
market and aren’t really moving up or down.
Is the price corrective or impulsive? By recognizing the structure, we may
therefore determine what a couple is doing.
So, as we just stated, this market is in an upward trend. We will therefore see
HHs and HLs in an up trending market. So, as you can see, there has been a
price drop and an increase. As soon as the price breaks above this high, it
will be certain that this is the HL. So long as the price remains within this
high, we won’t have a definite high-low until we break above. As soon as we
decide that HH is the most recent HL, we retreat HL. Then, we watch for a
new higher that validates the HL, followed by the HH, HL, and HH the
structure.
In a down trending market, the same situation exists now, but plainly it has
been flipped, making it the opposite. Therefore, unless the price breaks
through this level, we will have a low and a pullback. We consequently
experience a break below, which confirms the LH, LL, pullback, LL, LH,
LL, and LH. Before we receive a BOS of the most recent high, we may
affirm an HH, and vice versa for a downtrend.
Let’s have a look at the charts for the EU now. Price is pulled back from this
point onward and we have broken, so we have created this low, which, as we
might say, kept getting lower until this point. At this point, there was a real
downturn. As a result, below here, the entire leg down snapped. So it is
obvious that it has broken this low. So, first, we have an LL, and then an LH.
Therefore, we can observe price reversal that taps into an OB, which would
be more obvious on an LTF. The low that needs to be broken is therefore
evidently here, where price has been pulled down to. This is one more leg to
the downside, and then price has pulled back, though this is not yet
confirmed as an LH. However, we can see that price has attempted to come
down, but we were unable to do so and have instead risen to test the LH. We
then retreat, but ultimately we break it with this impetuous move that leads
to this LH. As a result of the LH being broken and the fact that we did not
receive an LL, our bias has changed from being bearish to being bullish
because it is clear that the LH has been broken. Price then reversed direction,
giving us HH, which we can categorize as the highest point. Because it
broke over this highest point, we can conclude that this is a new HH. Then
we reverse and produce an HH. As of right now, this is the most latest HL.
Now that the price has reached an HH and HL, it pulls back. After
consolidating for a few days at this point, the price rises to test the high but
doesn’t break it until this point.
So, where would we place the HL? Technically speaking, this is the lowest
point, so we can designate it as an HL. However, since there are areas here
where we can see growth continuing for a while, this is just the HL. Next,
we get an HH, in which the highest point is located nearby; as a result, this is
the most recent HL, HH, HL, HH. Once we made the sudden move higher
that broke this high, this was confirmed. Now we may claim that the HH was
made as a result of an impetuous move up that was later pulled down.
We came down to test it, pulled it off, and then broke it, so we essentially
had a little gain. However, this could be people who are long on this HL with
stop losses grabbing liquidity, as we didn’t really tap into any sort of POI.
The lowest point is right here, but we just sort of pushed up from there
before inserting a HH and a HL. Following a BOS, we have HH and may
then validate our HL, which is always the lowest value. So, once more, we
have an HL and HH. There are a number of BOS in LTF, however this is the
general process for marking BOS.
Market Structure Mapping
I want to talk about a few different types of market structure breaks.
Now it’s crucial that we pick and stick with one of the following market
structure breaks as we move forward.
Since the wicks are not taken into account, the first kind will occur when the
price breaks the structure with a candle body that closes below the candle
body low.
2. The second kind, which is the most common and what I personally use, is
a candle body that is close to the wicks of the candle.
3. A candle wick located just below the candle wicks is the third and final
type. This type, in my opinion, is the least likely to occur of the three
because it doesn’t actually demonstrate a break.
Taking a look at some examples of BOS, we can see that on EU 1h, we had a
BOS here, we had this higher, we had a small range, and then this candle
broke structure, and we got a wick, but we did close above, and then we can
see price pulled back into a bullish OB, which is here, before we see some
significant momentum to the upside. This would be for me a valid sort of
trade to be looking at as we come back into this 1h OB, which we can refine
on an LTF, because we broke above and closed above the structure.
However, if we take a look at some of these examples, we can see that there
was a little consolidation range, that range was pushed lower, that bottom
was reached, that low was beaten and closed above, and that the price then
reversed to the upside.
Before they reverse price up to these highs, as we can see, we also get a wick
above these highs, which is taking some more buy side liquidity. Price then
reverses, we put in a new low, and then we pullback and then we have a
huge wick.
As a result, the price was here at one time when we closed bullish, pushing
below this level before closing above it.
So, if we turn to the left, we can also notice that this wick perfectly mitigated
before continuing by tapping into a bullish OB. This is the reason why I do
not consider this to be a genuine BOS because it is simply creating liquidity,
rebalancing this impulsive move, and utilizing a bullish OB that has not yet
been neutralized before the price reverses to the upside.
Another illustration is EU 1h, where we can plainly be seen inserting LLs
and LHs all the way down.
Since this is the LL that broke this low here, we can see that price was in this
LL and LH at this point. Thus, it is clear that the price impulsively breached
the structure upward. Since we can see that the candle body closed above the
wicks of this LH, I would consider this to be a genuine BOS. Once we had
this, we could see that we had left an imbalance as well. This was a
significant move that revealed a change in the market’s structure.
Since momentum entered on the subsequent candle, which broke structure,
we can then refine our OB down to this candle here using the most recent
downward candle as our starting point.
As you can see, after that, we did benefit from a day or so of range-buying,
we did BOS once more, and now that we have done so, the price has
dropped quite impulsively into that level. This is creating some liquidity,
which is more apparent on LTF. This is what we can be looking at since we
have EQL, price entered into our OB, which we can obviously tweak on an
LTF, and then we can see how price reacted from this OB, how price
rebalanced a little bit, and then how price made the impulsive move to the
upside from here.
How does price break structure?
I want to start looking at how the price is calculated now. Therefore, it is
crucial to observe how a particular piece of structure is broken when looking
at structure breaks. So what I mean by this is that I’ll be breaking structural
lows and highs, grabbing liquidity, and tapping into an unmitigated AOI to
then see price continue with the overall trend, whether that be bullish or
bearish. Alternatively, I’ll be breaking structural highs and lows. Because it
will offer us a really clear indication of what price is actually doing and
where it is going to behead, it is crucial that we pay attention to how price
breaks.
So in this first instance Here are some diagrams I’ve created. Since this will
be our first hour, we can see that we have placed it entirely in HHs and HLs.
Now the HL was broken by this maneuver. As a result, the structure is
breaking. We’re going to assume for the purposes of this example that this
down move is a calm, corrective BOS.
Calm and corrective BOS
It’s merely a BOS with corrective and low momentum candles, so there isn’t
much momentum behind it.
Since we are breaking structures to the upside when we make these HHs and
HLs, we are creating demand levels and OBs, so when we get this, we are
going to view it as a common corrective BOS, meaning it is very likely that
the price is coming down to sweep liquidity and tap into an unmitigated
demand zone that was previously created. We might observe anything that
has been abandoned along with an untested, unadjusted imbalance.
Therefore, anyone who is trading stop losses at the lows and is in the bias
could be losing liquidity to this breaking pattern. We know that there is
liquidity at every market low and high.
In order to maintain the overall bullish bias, this could be a BOS taking
liquidity by leveraging an unmitigated OB.
In this case, the price would equal our 1 hour demand.
Now that we have an LTF, we can tell that this is a 1m viewpoint. So, this
blue box over here is a one-hour OB. As a result, the move that descends
that BOS on 1h will seem like this on a LTF, thus we would observe LLs and
LHs. We can look for where the LL and the LH are when the price responds
to the 1 hour demand. Given that we have an LL and that this is the most
recent LH, we can watch for price to move in a way that will produce a
bullish OB, from which we might consider going long. Now that we have
targets, we may look for past 1 hour highs because we expect to continue
seeing bullish order flow. We want to see price put in new HHs because we
have swept liquidity.
Aggressive BOS
So, HHs and HLs, which are the same as the corrected ones, are now going
to be impulsive boys. Therefore, an aggressive BOS would indicate some
significant momentum candles and eventually result in price imbalance. As a
result of the strong momentum we have observed during this downward
movement, after the price reaches its bottom, we can define this as the
market turning bearish. Therefore, the BOS, if we get it, forms a supply zone
and OB from which we can consider going short since we expect a retreat
into that zone as well as further LLs and LHs to occur. A downward order
flow.
We may have places underneath it that we can refine on an LTF, but for the
purposes of this example, we’re going to state that this is where we want to
get short from once we get an impulsive BOS.
Therefore, if we look at it from the 1m perspective once more, this is what
we might observe as we tap into the 1h supply. Consequently, as prices form
HHs and HLs, we want to see a nice BOS below the most recent HL because
this will give us an OB from which we can look to short the market. The
same is true for targets. As our bias has shifted from bullish to bearish, we
should at the very least be watching for price to enter 1 hour LLs and LHs,
making this 1 hour low the most recent low that we want to see broken. So,
at the very least, this is a solid spot to aim towards as your initial target.
Buy to Sell Approach
So, let’s say price moves to the downside as we can see here. Whether that
was a calm or aggressive move, it moved the structure, and we shouldn’t be
afraid to buy before the longer term sell.
If there is a place to long from, we can still look to take longs from that
location. Therefore, if we have a demand level that hasn’t been challenged,
depending on what the LTF confirmation is telling us as we approach it, we
can take a long way from here and aim for a supply zone that just recently
formed from this BOS to the downside.
So, before initiating a longer-term sell, we buy from here and aim upward.
From there, we can anticipate that the price will make new lows and then
move on to lower and upper highs.
Now, this move from here as we can use the LTF to our benefit, we can
clearly get in with a very tight stop loss and this shift from supply to demand
zone could be 30pips, 20pips, 60pips, whatever.
Before we look to sell, we can still make a nice percentage in this move. In
order to buy and sell. The fact that we are essentially neutralizing this move
once the price reaches this level and withdrawing liquidity from buyers or
even traders who are trading some type of breakout in this structural break is
why this has a higher chance. People are being dispersed before they can see
the price enter a supply zone. In essence, it makes room for liquidity so that
the price can access a supply zone, and from there, we can shorten. We can
now describe this move as complete because it has been neutralized and the
demand zone has seen a push off.
When the price drops, we have postponed. Since the effects of this move
here have already been minimized, there isn’t much actual reason to believe
that this demand zone will hold again. Thus, we can observe price declines
and lows being reached.
When we buy, we can sell, and then we can look for a longer-term buyer
from an untested area. This is an example of a buy to sell, or in this case, a
sell to buy. Therefore, I also made this trade. As a result, there is a little bit
of a range when compared to the price we had set as this high. We did
establish EQH, and this level required some buy side liquidity. Thus, we had
an HL here when we had this high. Range hence, and this move broke to a
new HH, this is the HL. The price may then be seen after extensive buy side
liquidity, and since the candle ended below the BOS, it is a genuine BOS.
This can also be seen on an LTF, such as the 15m and 5m, where we actually
closed below. However, for me, this would be best seen on the 1h because it
is a calm BOS and because we have closed below, we can still try to sell
from this supply zone before a longer-term buyer arrives from this area
below.
We can then refine that from this last up move to this candle here once we
have the last up move before the down move that BOS, as we can see that
candle has not yet swallowed the OB. As a result, this is our supply zone and
OB from which we can try to go short.
We did receive some wicks as we descended, which, in my opinion, simply
drew liquidity from the HL that came before this one. As a result, anyone
who is holding from this uptrend and is in a buy would probably have stop
losses at this low. As you can see, the wick has come down. Price reductions
to absorb that reversed liquidity are visible, followed by more price
reductions. Therefore, this occurs every day. So once we tap in, we move to
an LTF and look for reactions and BOS that leave imbalance. Here, we can
take a sell on an LTF. In order to determine whether we have any unchecked
demand levels that have been left for a later time, we must look left after
tapping in OB.
Let’s take a look. This HH price and this HL price rose to create this EQ.
Then, we observe some tremendous velocity that effectively broke this high
point. In order to extend, we can mark it as BOS, wicked it, but we can see
that this is a range.
It abruptly exited, leaving an imbalance. I’m going to use this demand level
for this example. We do have an OB, so this is an OB, but let’s just mark on
the actual range, from the high end to the low, so that as prices come in, we
can note that there has been significant momentum leading up to this level.
Pricing has so broken out of this bottom and is now rebalancing the previous
move, but price is impulsive. Consequently, what we might do on an LTF is
wait for the price to settle down, demonstrate to us that they genuinely want
us to respect this area, and then actually go long from here to perhaps return
up to this highs.
It hasn’t held, so we can either classify it or deny it and move on. Instead,
look for bearish sort of structure and look to get short. However, the next
candle, I’m not going to go LTF and look at the entries but we see we
wicked below it, but we closed back up.
Now, in my opinion, this does not invalidate the demand zone because it
depends on how it breaks—does it break abruptly or does it break in a
corrective manner with wicks? And it is clearly cracking with wicks, as seen.
As a result, if we get a wick on a 1h, it will be an OB on an LTF when we
obtain wicks on an LTF. Wicks basically simply shows us OB on LTF. So I
won’t get into the entrances on an LTF like the 5m or the 1m, but we can
watch what happens after that. We respect the demand zone and we correct,
but you can see that after we break above it, we come up to test this wick
here, which is what we know to be an OB on an LTF. After that, we come up
to previous highs and back up to test it.
The price then reverses once again at that point. Therefore, we can look at
how the price respects this wick up here, which we are aware is an OB on
LTF. The reason why we are now wicking above it is probably because we
want the price to develop liquidity before reverting. But in the end, it
respects it, and then we descend to the lowest level again. This is the pricing
at the moment, however it only represents the ideas of buying to sell and
selling to purchase. We are likely to see lower prices now that we have
already reached this demand zone, and we can start looking for sells.
Section 4
BULLISH AND BEARISH ORDERBLOCK
How do order blocks work?
Is the last candle before the rash action that causes the structure to break. In
essence, this indicates that either the most recent HH or LL is removed. The
last candle is not regarded as a valid OB if an HH or LL is not produced and
the price moves upwards or downwards; price must break structure for an
OB to be valid.
An untested supply and demand zone or an untested OB is more likely to
give us the unexpected price reaction we are looking for than one that price
has already entered before to mitigate. This is what I mean when I say that
the newer is usually better when looking at supply and demand, or Bullish
and Bearish OB.
A general rule of thumb is that price tends to moderate to the 50%
equilibrium point of a given OB before continuing in that general direction.
In my own tests, I have discovered that if a price is offered to fill 50% of the
OB, we can now declare that the OB is mitigated, finished, and there is no
need to continue looking for the area of potential interest.
It’s crucial to consider the timeframe on which you’re trading as well as the
market structure you’re currently observing.
If so, looking for long trades at demand zones and bullish OBs will make
more sense than looking for supply zones and shorting bearish OBs.
Obviously, if you are experiencing bearish market structure, the same idea
applies.
In general, the HTF, the more significance the zone, the more significance
the OBs will have, making them more reliable. For example, taking a long
from a 4h OB or 15m OB that only resulted in a $500 move in price.
Bullish Order Blocks
The final down candle that precedes a bullish impulsive move to the upside
that breaks structure is known as a bullish order block. This move will have
strong upward momentum and typically leave some price imbalance behind.
Order blocks are simply fancy names for the supply and demand levels,
where major institutions have made significant market purchases. According
to theory, price will eventually return to this order block in order to
rebalance price, fill any liquidity, and allow for the placement of additional
orders.
Once we receive this OBs shape, they frequently leave behind imbalance; as
a result, price needs to recover and become efficient before moving upward.
With OBs, we can locate a clear entry point and stop loss. With a stop loss
at, or slightly below, the OB, enter at the top of the OB.
If we look at this diagram, we can see that this OB is bullish because the
momentum can enter on this following candle and there is also a BOS.
In order to correct any remaining liquidity or imbalance, the price moves
toward the OBs, where more orders can be placed to maintain the bullish
trend.
The thing we can do with these OBs is to set an entry, so once we
impulsively move away, we can set an entry at the top of the OB, our stop
loss can be at the low, and we can put the OB just below. If we have some
wicks or if we account for a little bit of a spike, we can put it in a few pip
below.
Bearish Order Blocks
The final candle that is up before a bearish, impulsive move to the
downward that disrupts structure is known as a bearish order block. There
will be strong downward momentum, which typically leaves some price
imbalance.
The premise is that prices will eventually return to these OBs because large
institutions have placed significant orders in this sector of the market. To fill
any liquidity, adjust the price, and place additional orders.
Once these OBs have formed, they typically leave imbalances behind, thus
before prices can start to decline, they must return and become efficient.
In OBs, we can spot a distinct entry and halt loss. With a stop loss at, or just
below, the OB, one should enter at the top of an OB.
If we had this as our OB but had a candle that followed it but didn’t engulf
the real OB, one thing we could do with all the OB would be to filter it down
and see where momentum had entered the market. Instead of focusing on the
most recent upward or downward movement, we can narrow it down to that
bullish or bearish candle.
Order Block Refinement
We can actually refine the OBs down if it is possible, therefore it’s crucial
for us to pay attention to where the market’s most recent momentum has
entered. For instance, where the institutions have entered. Because of the
fact that price must return to the location where the momentum began before
continuing, we may see price movement.
Because tightening our AOI allows us to enter more precisely with a greater
stop loss and typically reduces our draw down to our trade, refining our OBs
is advantageous. Additionally, it will provide us the opportunity to raise the
return rate on our trade, which will improve our return. The examples that
follow demonstrate OB improvement. Therefore, as can be seen, the bullish
OB gave us a final downward move, which was followed by a short bullish
candle that didn’t engulf the OB or give us any indication of upward
momentum. The candle that followed actually revealed the motion. So that
we may focus on this bullish candle as our OB.
With the bearish OB to the right, we have the exact same situation.
This will be our opening bid (OB), but as you can see, the candle that came
after it was a bullish candle. However, take note of how it doesn’t appear to
be indicating any momentum or indication of market movement.
It hasn’t closed above the OB, so it hasn’t demonstrated that momentum. In
fact, the subsequent candle demonstrated that momentum engulfed this
candle. As a result, what we can do is take our OB, which is located here and
represents the most recent downward move, as our OB.
We can reduce our AOI by -10 pips, which will essentially get us in at a
better price, a tighter stop loss, less drawdown, and more RR on our trades.
For example, the RR on this candle is 15 pips, whereas if we could have kept
to this OB, this is what we are looking at 25 pips.
So this is our bearish OB, which is precisely the same thing, except the
candle that followed didn’t demonstrate any velocity or attempt to engulf the
OB. We narrow it down to this, and as you can see, this is a significant
amount of momentum. As a result, this is now our OB. Refines stop loss is
15 pips, which includes the wicks, whereas the original OB is 25 pips, thus
it’s advisable to give some room for price movement by placing the stop loss
above or within the wick.
Therefore, we will now go over various OB and refinement instances. We
are at the 1h on EU, and if we look at price activity, we can see that we were
previously in a decline, which is why we are obviously adding LLs and LHs.
Now that the market structure has changed, we BOS to the upside before
retracing and shattering this peak. It is obvious that we are now in a bullish
trend, so we are looking to add HHs and HLs.
So, as soon as BOS is moving upward, we start looking for potential longs.
This last down move before the impulsive move up the BOS can be seen if
we look to see where the OB will be. We pushed up, and the BOS pushed
back. The candle after this OB is here and it hasn’t engulfed this candle,
indicating that momentum hasn’t been demonstrated. This is the OB, but we
can further clarify this.
So we can actually refine it down, and when we refine down OB, it won’t
always mean that the AOI is tighter; instead, it means we can be more
precise. In this example, however, we have a large wick, so this is our OB;
typically, it will be tighter.
Price imbalances still exist, thus in essence, an imbalance occurs when either
buyers or sellers assume power without giving the other party an opportunity
to respond.
You can see that the imbalance will exist from this wick to this wick since
they are not meeting, which means that there will be no sellers and only
buyers within.
Therefore, it follows that price will return in the future to make up for the
imbalance that it left behind before possibly continuing to rise.
As you can see, the price started to correct as soon as we impulsively moved
away. In fact, we had EQL on an LTF when we swept the liquidity from
EQL, so the price didn’t return to our OB. But what did it actually
accomplish? Will it eventually lead to the majority of this imbalance—not
all of it—being mitigated before moving forward?
Since it often only rebalances any liquidity or imbalance from just above the
OB, this will occasionally happen even if we won’t obtain a tap into the OB.
Therefore, even though we weren’t tapped in, we are aware that an order
might have been placed here. An order would have been placed at the top of
a refined OB or below the wick.
Therefore, once the structure has been broken, we may set this entry and
have a 12 pip stop loss in place.
As soon as the price BOS this structure, we may exit the trade because it is
unlikely that the price will go back up now that the imbalance has been
corrected.
Now that we have pushed upward from here, we are aware that no structural
integrity has been compromised. Instead, we have simply wicked up this
high and created this EQH, allowing for liquidity above this EQH.
Price this EQH and leave an OB, so now that this is our OB, we can place an
entry. However, since this was the last down move and the candle that
followed it marked the onset of momentum, we are unable to refine that
entry down as we did here.
We therefore have a big stop loss, but in this example, we may really drop to
an LTF and try to refine it.
The efficiency of this move up is now being balanced by the price pulling
back, which we can see more clearly on an LTF. However, we have
mitigated, which means that more buy positions have stacked close to the
sell positions, so the expectation is that the price will continue to make
higher highs.
This is our trade; we were tapped in and triggered into it. Our stop loss is
below this wick.
Now that the price has formed a new BOS, we may set our stop loss at BE.
Now that we have BOS, will I be examining the downward movement that
initiated the trade? It is now an OB, but it is very large, so we can refine to
this candle, and for me, like in this example, I will use this candles, as they
show a bit of momentum, not really so we have a bit of wicks, but we did
push off BOS.
I would not be seeking to enter a trade at this time or consider this to be an
OB because the price action is efficient and does not require further decline
to ameliorate the situation.
Because we have broken higher, if we were in the first trade, we could
attempt to lock in more profit at this low. If we managed to do so, we would
then push up, which is what we anticipated, and we would now be inserting
these HHs and HLs.
Price is therefore efficient and correcting, so I wouldn’t be looking to engage
in any scaling trades.
Therefore, we placed a limit order at the base and a stop loss below it as the
price made BOS to the upside once more and left an OB, which is the candle
in this example. Price had created an imbalance at this point, so we could
expect a price drop to correct it before continuing to rise.
Therefore, we must first reduce this imbalance before initiating our
transaction
Section 5
SUPPLY AND DEMAND
Consolidation and Expansion
The market either do one or two things:
Price either expands or consolidates. As it is both impulsive and corrective, the
consolidation phase would be the corrective phase and the expansion phase the
impulsive phase.
Consolidation
A period of quiet price movement during which the market trades inside the
“dealing range” is referred to as consolidation.
When a price is said to be “range bound,” “ranging,” or “consolidating,” it usually
suggests that it is simply moving horizontally rather than upward or downward.
The range can be small (with a spread of just a few dollars) or enormous (with a
spread of tens of thousands of dollars from range high to range low).
This will depend in part on the timeline used. Now, typically, the spread is
narrower the smaller the timeframe, which means it may be a few dollars, and the
spread is looser the higher the timeframe, which generally means more money.
Finally, the consolidation is a period of calm and range-bound price movement, or
simply sideways price action. If we look at the diagram below, we can see that this
is the consolidation phase, during which the price is moving sideways and not in a
single direction but rather up, down, up, and down.
Market expansion:
A time frame during which prices are moving quickly in either direction. Price
will offer us enormous candle bodies or wicks when it makes an impetuous move
to the upside or the negative. We made a significant impulsive move higher, as
seen in the image above. We will observe enormous candles or large wicks in one
direction over the other since this is expansion.
Theory of Supply and Demand
Demand zone: Is the area of consolidation that precedes an abrupt upward
movement (bullish price action). Consequently, a bullish consolidation block is
another name for a demand zone. Typically, a range-bound market will be
followed by bullish expansion. When price movement descends into demand
zones from the top side, they can provide as support. Demand zones are used
while opening or closing long or short positions.
How do we mark off our demand zones?
We choose the highest candle body and the range’s low point. Or we may consider
that price range as a whole.
Supply Zone: This is the consolidation phase that precedes an abrupt downward
movement (bearish price action). An area of supply is also known as a bearish
consolidation block.
Typically, a range-bound market will be followed by bearish growth.
When market movement pushes up into supply zones from the downside, they
may operate as resistance. To enter short positions and/or close long positions,
supply zones are used.
How can we mark off our supply zones?
We
take the highest point in the range—the wick—and the lowest candle body—the
actual body, the lowest point in that range, which would be the lowest bodies
rather than the wicks. However, I prefer to look at the high and low of the trading
range as a whole. However, in some cases where there is a large wick, we can take
the candle body and use that as a guide to determine the range’s location without
taking into account the size of the wick.
Now that we have a demand zone example, let’s move on. After a consolidation,
we saw an expansion that cut through a range-bound market and brought the price
back into it. So let’s just look at this example. We had this range here, which is our
consolidation range. Since we have 4 candles here, it will be easier to see on an
LTF, so we’ll just zoom in. We have candles number 1, 2, 3, and 4, which are
consolidating and moving sideways. The next candle is where the expansion took
place, which also broke the structure. Then, as you can see, we started to construct
these HHs and HLs after pushing up and creating an HH and HL.
Demand
However, if we look at the demand rules:
1) The period of consolidation that precedes an abrupt upward movement that also
disrupted structural (bullish price action).
2) The highest candle body and the range’s low can be used. Or we could even
consider that pricing range as a whole.
3) Once the expansion occurs, a demand zone is generated, breaking the
framework. Price movement will move into the top side of the demand.
4) Long positions can be entered using demand zones. They can also be used to
close any open short positions we might have.
Notes about rules:
2) The low would be indicated by this blue candle. Why else wouldn’t this wick be
the culprit? This candle, however, was the one that genuinely displayed the
expansion. Since this is the impulsive candle and not the range, the range was
broken by this candle. The lowest point would be the wick, making this the low
point. The highest point would be the highest candle body, making this the high
point. However, rule 2 was also included, or we might consider the trading range
as a whole, which is what I personally do. Therefore, for me, the highest point
would be followed by the lowest point, the wick.
3)Break structure, this is the range, this is our demand. So this is the top side, we
fall back into the demand
4) Because it’s feasible to observe a response to a demand. As a result, if we are
considering selling from this point on, we should consider establishing goals or
manually closing down after we have observed how price responds to the degree
of demand since we are confident that we will see that response and then wait for
the upward surge.
How might we go about entering this trade?
When we have a BOS, we can put our entry at a limit order, which is valid
immediately. Therefore, we can create a limit order at the top of the OB range after
this BO. We are able to set up entry at the top. Now that price has been pushed
higher and made a new HH, we can see that we had wick back down but would
not have been plugged into the market.
The purpose of this wick down was to try to correct any imbalance that had been
left here, however we had also left imbalance in this area. We would have been
triggered into the trade had we not pushed up HH and then fallen back down,
breaching these lows.
Regarding our stop loss, we have two options: we may set it at the low of the trade
and range, or we can take into account any wicks that may exist. Since price
dropped down to balance out the entire sort of trading range and any imbalance or
inefficiency that remained from this impulsive move (large candle that formed
BOS), we may place our stop loss at that wick or below it before moving forward.
Therefore, it is possible that we will be tapped out with a wick before price moves
further if we place our stop loss just at this type of block or trading area. Giving
ourselves a 1 to 2 pip buffer to account for the wick is therefore far safer to do. But
that is an illustration of a demand for which we are considering consolidation and
growth, as well as how we might approach it.
Supply
But
let’s now look at a supply example. We now have a supply sample, and it is the
first hour on GU. As a result, we can observe that the price was effectively
corrected by placing it in the HHs and HLs. Therefore, all of these movements
involve making highs, retracing, and mitigating, followed by continuing after
mitigating.
So
now that we’re looking at this, we can see that we made an impetuous move to the
expansion’s downside. We can see that it is aggressive, and if we compare it to the
full move, we can see that the length of the move is the same while the size of the
candles differs.
We
have several candles within this, like these 2, but this move is impulsive and
corrective to an extent of 80%.
Since we are in the expansion phase, BOS is also present here and here on the
downside.
However, if we examine the laws of supply:
The period of consolidation preceding an abrupt swing to the downside (bearish
price action). We take the lowest candle body and the range’s high. Or we may
consider that price range as a whole.
The expansion forms after the creation of the supply zone. The downside of the
price action will push up into the supply.
Shorts can be entered via supply zones. They can also be used to close out any
long positions we have.
Notes about rules:
1) This price movement is bearish. Where is the preceding range located? This
is it; the price made this high here, above which we had a low; the price
then climbed above the low but was unable to break above it and set a new
high.
Instead, we saw two wicks, which indicated that we were sort of losing the upward
trending momentum. We get a little range, find the market, and then we start
trading.
2) Where does the range begin when we zoom in? This move is pushing up and
this is the move that broke the high, therefore it is not a range even though it
is corrective.
This is more of a range, so I would be examining where this candle or this bearish
candle may linger from here till we start the expansion. As a result, we start with
the highest point in the range, which is represented by this wick and the lowest
wick, as we can see. Because we then start the expansion that follows the rangebound market consolidation.
3)
This sudden downward movement so validates a range expansion and
consolidation. So, as I’m noting now, any liquidity or imbalance that was
left on this large move is being rebalanced before large banks continue to
drive the price down. If we push back up, this move is also rebalancing
inefficiency.
4) This point demonstrates something crucial. What do we tap into here? We
push down, which is expansion, which came after consolidation. So what do
we see if we turn to the left? Do demand zones make sense? As a result of
our expansion upward from a range.
Since we have tapped into a demand that has also created an imbalance, we can
seek for longs as the price starts to decline. And take note of how price has
honored this area.
Even if we drag this out, we already have this line because it indicates that the
demand, or this OB, has reached halfway. The OB’s equilibrium point is along this
line. It is therefore halfway there.
Price taps in, as we can see. Now that there are levels of SnD, the equilibrium is
much more respected. We tap in and push off, so if we were looking for a long
here, obviously, I’m not knocking LTF; rather, I’m just illustrating the ideas
behind SnD. As a result, we would enter the top and place our stop loss right
below. We have this supply up here now that we are aware. We can target it from
the start or supply base and observe how well it worked out. The current price is
4.3RR with a 26 pip stop loss. Now, in LTF, we can enter with a stop loss that is
much tighter than this.
We
can observe how the price has maintained this demand as a result of this tap into
the supply, push off, and return to this demand. We have acknowledged it, and in
this case we actually mitigated over 50%. As a result, we actually reduce to about
90% before moving forward.
Refocusing on the supply, we can see that it has expanded following consolidation.
As we rebalance, we tap in to set our entry at the low of the range and our stop
loss just above the high of the range by one or two pip(s), with the expectation that
we will tap in to mitigate.
As a result, the price respects the supply zone and has been rebalanced; as a result,
we continue to hunt for LLs while also being aware of the situation in the demand
zone/OB.
Given that this is the final up move before the down move, which broke structure,
this might push up to another type of supply or a bearish OB up here.
1hr chart when deciding what supply and demand areas we should be considering