This section is designed to show you how you can determine market direction at any given time.
For this we only need to use our most powerful force, price.
This concept is known as market flow and many traders that are new to it sometimes find it hard to grasp at first but once you understand it, it is an extremely fast and simple way of determining market direction on any price chart at any time. Aside from this it is also an incredibly accurate and powerful method when combined with other concepts such as support and resistance.
First of all we have an example price chart:
First of all, notice the small blue triangles above and below the price.
These are called Fractals and they simply highlight price candles that form swing highs and swing lows on the price chart.
The Fractals are an indicator found on the MT4 trading platform which is one of the most commonly used platforms.
A swing high is a candle with two lower highs on either side of it.
A swing low is a candle with two higher lows on either side of it.
Here is an example of a swing high and a swing low:
You can see above that a swing point on the chart is basically a 5 candle formation which has been highlighted in yellow on the price chart.
On the chart above there are many swing highs and lows but for purposes of illustration I have just picked out 2 examples for you.
The next important thing to point out in relation to market flow is that we are only concerned with the most recent swing highs or lows on the price chart and every time a new swing point forms we disregard the last one .
The concept is simple, every time the most recent swing high or low is broken by the price, market flow is biased in that direction, . For example if the most recent swing high is broken market flow would be considered up but if the most recent swing low was broken market flow would now be considered down.
So how do we know exactly WHEN market flow changes?
Let’s look at another chart to show us:
The opposite is true to have market flow as up, as in, it’s the swing highs that need to be broken to turn market flow up.
The next question is, if you are looking at a price chart how can you tell which way market flow is right NOW?
Again, let’s look at a chart:
If you open a chart the best way to quickly determine which way market flow is going on that chart is to find the most recent Swing point that was broken by price.
If the last one to be broken was a swing high as in the above chart example, then you know that market flow is currently up regardless of how long ago the break occurred.
The other thing to remember is that the market flow would remain up until the most recent swing low is broken. You don’t need to see swing highs being constantly broken for it to remain up.
One useful trick is to mark on your chart where the market flow will change, so that you have a “zone” in which you know you can safely trade in a certain direction.
This works best if you are using a higher timeframe market flow such as 4 hour and then getting your entries on a lower timeframe such as the 15 minute.
The chart below demonstrates how this marking of market flow change looks:
Notice that in the chart example above (which is the 15 minute timeframe); I have marked out exactly where our 4 hour market flow will change to up.
This means that the space between the current price and the black line, which is the 4 hour market flow change level, could be considered a selling zone and so now you know exactly where on the chart it is best to look for confluences of resistance.
Next: Summary