Market Phases
How does the market really move? It sounds like a silly question but this is truly valuable knowledge. We start this episode zoomed out focusing purely on price action, slowly zooming down time frames for more clarity and clearer area of interests. This is an effective routine to break down any potential setup and a great place to kick off the Pro academy content.
You may have heard traders use the term ‘Impulse and correction’?
We use it quite a lot when looking at a more raw piece of price action.
In the financial markets, this is how price action typically moves within cycles.
You will see price action consolidate in a correction - where there are no clear winners between the bulls and the bears, causing the market ranges in a sideways.
After a while, the buying or selling pressure becomes too much resulting in an impulsive break of structure and momentum in a particular direction - this is known as a price impulse. Generally speaking, the higher the timeframe of the consolidation the larger and more extensive the breakout impulse.
When I first started out trading, understanding whether I was in the impulsive or corrective phase of price action was very tricky. So It might be hard to distinguish at first, but in the long run it will become very easy and second nature.
Why is it important to understand which phase of price action you are in?
It’s vital to understand what period of price action you are in before taking a trade. Certain analytical tools and patterns are far less effective within different phases. When entering a trade you need to be completely aware of your surroundings to avoid taking unnecessary losses.
Ideally we want to be entering the market at the start of the impulsive phase
Entering at the start of the impulsive phase is where you would see the area with the highest probability, the safest area to be entering a trade. Trading is all about probabilities, you DO NOT want to be entering low probability trades when price action has been exhausted at the end of a run.
https://www.tradingview.com/x/gyJ2KtWQ/
This is an example of a basic market movement
Impulse, correction, impulse is the natural progression of the market.
As you can see we have a strong price impulse driven by cumulative selling. Having had the impulse, price action is then followed by the corrective phase. This is where price is undergoing a pullback or retracement before the bears or bulls enter the market again (dependant on what trend you are in)
Price action started off with a heavy impulse up, the natural progression of the market normally results in price action pulling back as the bears enter the market during the corrective stage.
Followed by another impulse up and then another correction.
Within this strategy we will refer to these swing points as ‘higher highs’ and ‘higher lows’ when in an uptrend.
And ‘Lower highs’ and ‘Lower lows’ when in a downtrend.
Whilst price action is choppy and undecided between highs and lows this is known as the corrective phase. The majority of the time Price action will be in the corrective phase so it is very important that we capitalise on the impulsive phase. By buying or selling at the swing points.
https://www.tradingview.com/x/XB05sfs7/
We highly recommend jumping onto the charts and trying to identify and draw whether price action is in the impulsive or corrective phase.