There are 5 basic ways to trade a Gap or any line. In this video, I discuss two ways to enter the market using a Gap. The Gap entry techniques by themselves are of little use, but if we make a few distinctions in market structure and the process of a swing cycle, they can become functional.
Swing cycles have a process that they go through. As long as we understand that process we can view Gaps in the light of where they happen in that process. I’m going to focus on these two Gap entry techniques in the lower portion of the reaction leg at the bottom pivot of a swing. The Gaps are what make up the pivot portion of the swing.
If you observe markets and swings you will often see this distinct pivot portion of a swing, it looks like a U at the bottom of a reaction leg.
There are several ways to trade gaps but first, there should be a solid understanding of what Gaps are and how they show up. Markets aren’t that hard to read if we have some simple ways to see them that adhere to the principles of movement.
All markets move in contraction and expansion. A Gap is the sudden supply/demand imbalance that comes out of the contraction and shows up as the expansion. These expansions can even be used to measure how far the next expansion will go.
Start with a simple bar chart and erase everything else off the chart. Look and simply see the dense areas of contraction (Range). Then see the expansion (Gap), followed by another contraction.
Look for same-size contractions and expansion and you will start to see how organized price flow can be. It’s no different than swings in that minor contractions and expansions make up the major contractions and expansions.
This is the first in a series of posts on Gaps. Gaps are the expansion that comes after a contraction. It’s a sudden supply/demand imbalance that shows up in the price bars of a chart. Gaps show us a significant area of buyers/sellers that take control and when they lose that control.
In the video, I discuss and define a Wide Range Bar (WRB) Gap and show how to mark it out on a chart. A WRB Gap is a bar larger than the last 3 bars with a space between the previous bar and the subsequent bar. We will be marking the base of the gap. If it’s an up Gap, mark out the bottom 1/3 of the bar, if it’s a down gap, mark out the upper 1/3 of the bar.
We can then make observations about how price interacts with the base of this gap when or if it gets there. Then we can notice where in the swing process the Gap is happening. Don’t make conclusions, just observe and learn.
There are many ways to trade Gaps but first, we must first lay out some foundations and then come up with objective ways to see them. For now, simply look for the biggest ugliest bars on your chart and mark them out, and observe. These are footprints we can follow and track
When it comes to learning about markets and trading, finding the right path and committing to it is the hardest part. The right path has little to do with any technical analysis method. It has to do with structuring our mental framework so that we fundamentally change how we experience markets, trading, and loss.
In the video, I show some Median Line and Action/Reaction work but this work is useless by itself. No tool is good or bad, they are just tools we use to comprehend markets. The problem arises when the tools start using us and we think there is some kind of magic to them.
The essence of our strategy should be to structure our methods and mindset toward functionality. The journey we should commit to is one marked by fostering accountability and responsibility in all our actions. The swing trade Idea I show takes a method and structures it into function.
The trade plan is broken up into parts. We have an objective and consistent entry, stop, and exit plan. Here I will be talking about the exit plan and setting targets that will give you a particular risk/reward ratio. There are no absolutes when it comes to what risk/reward you should be aiming for, a lot has to do with how you handle risk and loss and your overall understanding of markets.
Defining the stop (risk) is relatively easy compared to defining the target (reward). Mostly you need a clean set of statistics on an objective method. This will give you an average distance that the swing will run in relation to your method. The reward part of the equation is a function of how far your stop is to your entry.
There is no one-size-fits-all when it comes to trading. For many, it may be best not to set a target, but instead use something simple and objective like a moving average to exit the trade. This way, you get what the market gives you while incorporating consistency and objectivity into your exit plan. Keep it simple, objective, and consistent, and learn as you go. In the video, I make something up on the spot that may give you some ideas. I use a 20ema as a profit stop only after the price has made a new high. It’s simple, principle-based, and it’s objective.
No matter what your method, knowing where you are in the swing cycle will help in defining entry, stop, and target, and this will directly influence the risk/reward ratio.
Markets move in contraction/expansion. Small swings can be thought of as a form of contraction and the bigger swing is a form of expansion. An Expanded Swing is simply a reaction leg that is bigger than the previous reaction leg or legs. Its minor swings growing up to be major swings.
This represents a change in behavior that often causes confusion among the shorts and the longs. The shorts are fearful cause the market is now backing up on them and the longs are fearful cause they see a market now turning up and getting away from them. This confusion creates an opportunity for those that are sitting back with a plan.
To see this price action on a chart, it helps to have some simple and objective definitions for mapping the market and I show this in the video. First, we use market structure to read the market, and then we use a trading structure (trade plan) to structure the actual trade where we manage risk.
We can break up the review section of the trading into several distinct sections.
1. Review for discipline and personal insight 2. Review for performance (statistics) 3. Review for market insight 4. Review for method development
I’m going to do the first section “Review For Discipline”. We can keep this simple and ask 2 questions. 1. Did you make a clear and objective plan? 2. Did you then do what you said you were going to do in the plan?
These questions demand honest, yes-or-no answers. They force you to confront your trading discipline head-on, without room for excuses or escape. If the answer is no that’s ok, just start over with the commitment to keep at it and don’t spend too much time on regrets. You might need to make your plan clearer or simply learn the discipline to stay with it. Keep in mind that this isn’t about whether you won or lost, it is about learning consistency and discipline.
Position sizing is one of the components of a trading plan, and it’s important to be just as disciplined and consistent with this as with all other parts of the plan. Position sizing is defining how much we will risk for each and our objective is to consistently get the most profit with the least amount of risk.
So, how much should you risk per trade? There is no one-size-fits-all answer, but to manage our risk consistently, we must establish simple, objective, and common-sense rules grounded in the realities of trading.
Let’s take a look at some of those realities
• As traders, we should expect to lose more often than win and must learn how to manage losses effectively. • At some point, we will face drawdowns with many consecutive losses. • Successful trading results from a series of many trades and the compounding of gains, not just from being right on one or a few trades.
In the video, I will show a simple guideline for calculating how much to risk per trade based on your risk tolerance over a series of trades and a drawdown number. I’m going to give you a default drawdown of 30 consecutive losses.
For example, if you have a $10,000 account and don’t want to lose more than 15% ($1,500) of your account in drawdowns, you would divide $1,500 by the default drawdown of 30 stops, which would give you $50 per trade (1/2% of the account per trade). This plan allows you to lose 30 times in a row while staying within your risk tolerance. This doesn’t mean you have to risk the entire $50 per trade; consider it a maximum amount.
If you are relatively new to trading or still fine-tuning your approach, I suggest trading very small amounts. Less than 1/4% of your account balance. Choose what feels comfortable and stick to it consistently. This allows you to make many trades while learning and not damage yourself. Be deliberate and create a plan to earn the right to size. For instance, require at least a small profit after two months and comfort with your method before incrementally increasing your risk per trade. Repeat this process every two months before increasing your size again.
It’s this kind of work that helps to balance your psychological mindset. You don’t get that from books about trading psychology, you get it from grounded and deliberate practice.
Use my position sizing calculations as guidelines and adjust accordingly. Once it is set, be consistent in what you do.
Market Structure is simply making distinctions in price flow. its putting structure around what looks like chaos so that we have a way to measure and orient ourselves to any market in any timeframe. When I look at a market, I want to see objectively in swings.
Swings are the common thread that weaves through all markets and timeframes, clearly indicating who is in control at any given moment. They consist of distinct components and follow a process, forming the foundation of my trading strategies and setups.
Market Structure Definitions:
Confirmed Swing High/Low: A new high confirms a swing low and a new low confirms a swing high.
Relative: Major Swing: The largest reaction leg in your frame. Minor Swing: the next largest reaction leg.
Balanced/Relative Swing: Same size reaction legs.
Expanded Swing: Reaction leg larger than previous reaction leg.
Components of a Swing:
Impulse Leg: The leg that takes out a previous high or low.
Reaction Leg: The retracement or pullback after the impulse leg.
Impulse Leg Shelf: a small range at the end of an impulse leg
Reaction Leg Shelf: A small range at the bottom of a reaction leg
Patience in trading is the discipline of being with your restless energy when things aren’t happening the way you want them to. If we are to be patient, we must know what it is we are being patient for. That is part of what making a trade plan is all about.
I know I’m being patient for the conditions of my setup to line up. After that, I know I’m being patient for my planned entry to hit. Then I know being patient and waiting to either get stopped out or start to manage profits. There is no escape other than to make up some justification to break my discipline and try to make something happen or force the trade.
The analysis for this trade is simple and straightforward. FNV is going down according to the fixed cycle (amount of bars on the chart) I’m looking at, therefore I want to sell a pullback. The rest is just structuring an exact entry and stop along with management after I’m in the trade.
Understanding and practicing patience in trading is not just about waiting; it’s about disciplined waiting with a clear purpose and strategy. It’s a practice.