Will expand more on them in the Price Action thread

Reversals to Downside


Reversals to Upside

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Candles are more visually appealing.........

Originally Posted by longhorn2006

Candles are more visually appealing.........

Cant be done in black and white though

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BUt colors are more appealing too . Any reason for b&w.

Everything in nature is made up of building blocks. Just as the universe is made up of atoms, so the market is made up of basic units called Market Structures. And just as there are two basic part to an atoms – protons and electrons – so in the market there are two types of structures, Market Structure High and Market Structure Low. Most price movement in the market can be defined in terms of MSL’s and MSH’s, and the ranges that are found in-between them. Likewise, everything you find at enthios.com is, for the most part, defined in terms of MSL’s, MSH’s, and the building block that they form together, 1-2-3 Reversals.


Market Structure Low (MSL)

A Market Structure Low (MSL) is the first sign of a potential reversal in prices from a downtrend to an up trend. It is usually made up of three price bars (or candles): A low, a lower low, and then a higher low. The “Low” is measured from the actual low of the candle, not the closing price. Ideally, as shown in Figure1, the Low and Lower Low will both be “down” bars (where the closing price is lower than the open price), whereas the third bar, the Higher Low, will be an up bar.




The MSL is actually triggered when prices subsequently move above the high of the third candle, as shown by the dotted line. Of course, it is dangerous to enter a long trade simply on the trigger of a MSL. But this book is filled with ample opportunities to use the MSL and MSH as triggers for different trades.

A MSL can also be made up of two bars or candles when they both have the same low. This is known as a double bottom, as shown in Figure 2. Again, ideally the first bar of the double bottom will be a down bar, and the second will be an up bar. In this example, the second is a doji (open and close were the same), which is neutral.

Figure 2: Double Bottom MSL





Market Structure High (MSH)

The opposite of a MSL is a Market Structure High (MSH). It is the first sign of a potential reversal in prices. A MSH is usually made up of three price bars (or candles): A high, a higher high, and then a lower high. The “High” is measured from the actual high of the bar, not the closing price.

Again, the MSH is triggered short when prices move below the low of the third bar in the MSH pattern.

Figure 3: MSH




1-2-3 Reversal Patterns

The next important building block is made up of MSL’s and MSH’s. Just as a MSL is the first sign of a potential reversal in prices, the combination of a MSL, a MSH, then a MSL that is higher than the first one, is a confirmation pattern that a down trend has reversed into an up trend. This is illustrated in Figure 4.



Note that the MSL trigger on the higher MSL is the first point of entry for a reversal trade, however the reversal is not confirmed until prices move above the high of the previous MSH.


The difference between a MSH and a Swing High

Some of my trading friend have pointed out that a MSH is exactly the same as a Swing High. That probably is the case. Certainly every swing high is made up of a MSH at its apex. However there are some instances where a MSH is not a swing high.

@ Capricorn, that's a good one. I really liked your presentation.

these are the simplest theories...just need concentration on every bar ,, but only one stock

KF

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Originally Posted by kingfisher

these are the simplest theories...just need concentration on every bar ,, but only one stock KF

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Very good informative post...saved the post to my library.

"What is Price Action?" is a frequently asked question by aspiring traders. Traders who ask, feel it is a well kept secret when all they receive for an answer is: 'Swing highs, swing lows, test of top/bottom, etc., are all price action.' The answer still leaves them in the dark. Understanding price action enables a trader to minimize questionable entries and improve exits. Price action is the footprint of the money.

Let's start with the very basics. The bars on the following chart are labeled as traders commonly referred to them.





Up Bar: is a bar with a higher high and higher low than the previous bar. The bars marked off are in an up trend. Notice how the close is higher than the open until what turns out to be the last bar of the trend where the close is lower than the open. There were more sellers then buyers on the last bar.

Down Bar: is a bar with a lower high and lower low than the previous bar. The bars marked off are in a down trend. Notice how the close is lower than the open until what turns out to be the last bar of the trend where the close is higher than the open. There were more buyers then sellers on the last bar.

Inside Bar: also called a narrow range bar, is a bar with the high that is lower than the previous bar and low that is higher than the previous bar. Some traders do not consider an inside bar that has either an equal high or an equal low as an inside bar, others do. Inside bars usually represent market indecision. As on any bar, the closer the open and close are to each other shows just how undecided the market is as neither the buyers or sellers are in control. Buyers are in control on the inside bar marked on the chart because the close is at the top of the bar.

Outside Bar: also called a Wide Range or Engulfing Bar, is a bar with a high that is higher than the previous bar and with a low that is lower than the previous bar thereby engulfing the previous bar. Since the open and close are close together on the marked bar, neither the buyers or the sellers are in control and the market is undecided which way to go.

When the open is in the bottom quarter/third of the bar and the close is in the top quarter/third of the bar, it is said to be bullish engulfing with the buyers in control. When the open is in the top quarter/third of the bar and the close is in the bottom quarter/third, it is said to be bearish engulfing with the sellers in control.

Another definition used for this bar – especially if candlestick charts are used - is that the open and close have to engulf the previous bars open and close and not just the high and low of the bar. With this definition, the wide range bar or engulfing bar does not need to have a higher high or lower low to qualify. The first definition most probably came about with bar charts where it is harder to notice the open and close.

The following chart has the swing highs and lows marked in both an up trend and a down trend. Price on a given time frame is in an up trend if it is making a higher highs (HH) and a high lows (HL) and in a down trend if it is making lower highs (LH) and lower lows (LL). If price is doing anything else, it is in a consolidation pattern - range, triangle, pennant, rectangle etc.




The trend is considered in place until price is no longer making higher highs and higher lows in an up trend or lower highs and lower lows in a down trend. After a trend is broken, there is usually a period of consolidation that is easier to see on a lower time frame. With practice, you will be able to visualize this going on without looking at the lower time frame.

When price is in a consolidation pattern that is often referred to as chop, it is usually in a range with no trend pattern to the swing highs and lows.




The above chart shows how an exact test of high or low may mean a change in trend as it failed to make a higher high on test of last swing high or a lower low on test of last swing low.

1. Price was making HHs and HLs until price tested the prior swing high at A
2. Price made a LL and LH until price tested the prior swing low at B.
3. Price made a LH (The bar that does not touch line at C) until price tested the prior swing low at C.
4. Price was making HHs and HLs until price tested the prior swing high at D.

It is possible for one time frame to be in one trend and another time frame to be in a different trend or show consolidation. This is where the phrase 'trend within a trend' regarding price action and the different time frames comes from. An example would be that while price may be rising on a daily chart, the intra-day chart will show retracements, corrections of various types and consolidation periods

The true meaning of this and how it can influence your trading, eludes many. The following exercise is an excellent way to learn what the phrase 'trend within trend' means visually.



Pull up a 15 minutes chart and mark the highs as higher high (HH) or lower high (LH) and the lows as lower low (LL) or higher low (HL). (The note tool was used in Ensign to mark these charts.) You can also print out the chart and mark it by hand. Use red lines if price in a down trend and green lines if price in an up trend. Remember price is in an up trend if it is making HH - and HL and in a down trend if it is making LH and LL. If price is doing anything else, it can be a consolidation pattern - range, triangle, pennant, rectangle etc.

Points labeled 1-4 on the example chart are in a down trend. Points labeled 5-8 are in an up trend.

Now take the same chart and change the time frame to a 5 minutes chart, keeping the colored notes and numbers from the 15 minute by using the padlock with the L to lock lines in Ensign. Mark the new highs and lows with green numbers for an up trend and red numbers for a down trend.




Now we can see by the yellow HH and LL what trend is on the 15 minute at the same time we are able to see the trend on the 5 minute.

Both charts are in a down trend until the 5 minute makes a HH at the first green #1. The down trend is broken when the LH at black #3 is exceeded. Price then goes on to make a HL starting an up trend that continues until price makes a lower high at the red #1. The 15 minute just made a HH at the black #5 and will not make a HL until black #6. At this point, we are expecting a HL on the 15 minute, and are waiting for a long signal on the 5 minute. Some traders would take the entry on the pair of reversal bars at red #2, others would wait until the last swing high at red #1 is exceeded.

The time frames are now in agreement (shown by green #1-#4) up to the black #7 HH. After the HH at #7, the 5 minute goes into a down trend (shown by red #1-#6) to what is still a HL on the 15 minute at #8. So, while the 15 minute price action shows only two trends, the 5 minute shows five different trends!

While you may trade the trends on the smaller time frame, waiting for price action to show it is going to move in the same direction as the larger time frame is trading with the trend. The trend is your friend!