Price Action Behind the Candles | Trading in the Zone | Episode: 6

TLDR;

Alright, so this video is all about understanding price action by looking at candle formations in detail. It covers key concepts like closing concepts, origin of buying and selling, distribution, and how to spot areas you should probably avoid. The aim is to build a strong foundation for trading and investment decisions.

• Understanding candle formations
• Key concepts: closing, origin, distribution
• Identifying areas to avoid

Introduction [0:00]

The video is the sixth episode of a series on trading. It emphasizes the importance of the previous five episodes for building a strong foundation in trading and investment. This episode is part of that foundation, focusing on price action and how to understand it by looking at candle formations. The next episodes will move into complete trade setups.

Logic behind price action [2:40]

The class is about understanding the logic and price action behind a candle. It aims to teach what a candle is exactly telling us, where the buying and selling are happening. The goal is to understand each candle in depth.

Closing concept [3:40]

The first concept discussed is the "closing concept," which involves analyzing whether the "leg out" candle closes above the "leg in" candle in a demand zone. If the green candle closes above the upper range of the red candle, it indicates a powerful zone. If it doesn't, there might be problems with the zone. This isn't a definite rule, but it helps improve the accuracy and confidence in the trade setup. The closing above the leg-in suggests that buyers are strong and can sustain the price above that level. If the price goes above the leg-in but closes below it, it indicates that buyers couldn't sustain the upward movement, and there's selling pressure.

The presence of a prior green candle before the red candle in the demand zone suggests potential selling pressure, meaning pending sellers at the top could drive the price down. If the price falls from there, it confirms the supply zone is active. Comparing this to a scenario where the leg-out candle closes above the supply zone, it shows the demand zone has overpowered the supply zone, indicating strength.

Significant gap + base candle [26:03]

The concept of significant gap plus base candle is discussed, where a gap-up opening followed by a base candle is considered a leg-out candle. This is because a gap-up opening indicates strong buying pressure in the pre-market. The base candle represents a fight between buyers and sellers. This base candle is seen as an invisible exciting candle.

The strength of this setup depends on the subsequent candles. A red base candle after the gap-up is weak because it shows the price couldn't sustain the upward movement. A green base candle is better but still not ideal unless it closes above the leg-in candle. If the price doesn't sustain and falls, the level may easily be breached. If the candle closes above, it shows strength. If another green candle forms after the base candle, it creates two demand zones. Demand Zone 1 is the original zone, and Demand Zone 2 is the new one. Demand Zone 1 is always more powerful as it's the origin of the price movement.

Origin of buying and selling [54:11]

The video moves on to the origin of buying and selling, emphasizing that even with odd-looking structures, the focus should be on identifying pending orders. If there's a strong rally after a base candle, it indicates pending buyers, and the area should be marked. Conversely, avoid forcing demand and supply zones on stocks without proper leg-outs or imbalances.

Distribution of buying and selling [1:05:30]

The distribution of buying and selling is discussed, highlighting that a proper buying strength is needed rather than distributed buying. If buying is distributed, it means buyers are struggling, and there's no unity. This is illustrated with an example of multiple gap-up openings followed by base candles, indicating struggle and lack of unity among buyers. Such areas should be avoided for marking demand zones.

Garbage Area [1:16:45]

The concept of a "garbage area" is introduced, which refers to situations where patterns like Drop Base Drop (DBD) or Rally Base Rally (RBR) are invalid due to a lack of imbalance. For example, if the drop or rally doesn't move significantly from the base candle's range, it's considered garbage. More base candles mean the area is more garbage. The video also explains that if a new demand zone forms completely outside a garbage area, it's a separate picture, and the leg-in's role comes into play.

The presenter also shares a scenario where the base candle is almost like an exciting candle, followed by a strong rally. In such cases, the zone can be marked easily. The key takeaway is to understand what the price is trying to convey and not get confused by odd structures.

Summary [2:29:52]

The presenter revisits the concepts discussed, emphasizing the importance of understanding the underlying logic and practical application. The key points include:

• Closing Concept: Ensuring the leg-out candle closes above the leg-in candle to confirm the strength of the zone.
• Significant Gap Plus Base Candle: Recognizing a gap-up or gap-down followed by a base candle as an exciting candle.
• Origin of Buying and Selling: Identifying the origin of imbalances and focusing on those areas.
• Distribution of Buying and Selling: Avoiding areas where buying or selling is distributed and lacks unity.
• Garbage Area: Recognizing and avoiding areas with too many base candles or a lack of significant movement.

Q&A Session [2:42:20]

The presenter encourages viewers to practice identifying these patterns on charts and to send any questions to their mentors. He also clarifies that while these concepts are important, they are not rigid rules and should be applied with practical understanding. The goal is to develop a strong base and avoid common pitfalls in trading.