The following article aims to provide:
- Information on Enhancer #2: The placement within the big picture
- A new way of filtering your levels and selecting the best trade setups
So at this point you have probably read about the first trading Enhancer (if not, please make sure to read the articles in the order provided as they will make more sense that way). You have probably even looked for strong moves on your charts and followed them to their origin while looking for suitable levels to trade (patterns that look similar to those in our basic visual examples). But even if you found something that looks like it could be a valid level, it doesn't mean that you can jump right into a trade yet, the levels have to meet all requirements in order to help you stack the probabilities on your side of the trade. The next step in your evaluation, before even thinking about placing an order, is to determine the placement of your candidate level within the big picture, i.e. the higher timeframes (also called reference timeframes or parent timeframes in the context of a specific trade setup).
You will find that this placement is a crucial factor in the success of your level, and that by evaluating it you will be able to select the highest probability levels
You will find that this placement is a crucial factor in the success of your level and that by evaluating it you will be able to select the highest probability levels while discarding the ones which are not properly placed and thus do not carry the same probabilities. Expect most of your candidate levels to be discarded after evaluating their placement, this is normal and it is how it should be.
But what exactly is this placement within the higher timeframes and why is it so important? There are two simple things to have in mind when thinking about evaluating the placement within the higher timeframes: a) By looking at the higher timeframes you might discover that your level is too close to a higher-timeframe opposing level (e.g. a demand level right below a higher timeframe supply level), and b) Higher prices help create more natural Supply while lower prices help create more natural Demand, so you don't want your levels to be placed far away towards the wrong side. Both of these can affect your trade, but let's examine the opposing levels first as they are much more important.
If for example you are looking at a candidate Demand level on the 15 Min timeframe, you might see that this Demand level is right below a large Supply level on the 1H timeframe. This can easily override your demand level and make it fail because the smaller Demand level is too close to a larger Supply level. This means that you have to discard the Demand level no matter how good it might look on the 15 Min timeframe because as a trader you should always be looking to take only the highest probability trades. You most likely would not be aware of this opposing level if you didn't check the higher timeframes because frequently they are either not visible or don't look like opposing levels if seen on the same timeframe as your candidate level. This could cause you to enter a low probability trade and end up making the trader on the other side of the trade very happy.
In the above example (top image) we can see what might initially have looked like a nice Demand level on the 5 Min chart: the initial strong move is there, and even after the eventual retracement price continued further up. So according to the first enhancer alone, this level would appear appropriate for a trade. But as soon as we evaluate it with the second enhancer we see that this minor 5 Min chart Demand level is placed right below a much larger 1H chart Supply level which is very likely going to override this candidate Demand level. This 1H Supply level does not even appear to be a valid Supply level if only seen on the 5 Min timeframe, but as soon as we evaluate it on the higher timeframes like the 1H it immediately becomes apparent that we are dealing with a Supply level capable of turning price around and making our much smaller 5 Min Demand level fail. Indeed the larger 1H Supply level worked very nicely later on and produced a great low-risk and high-reward short entry, while making the smaller 5 min level fail as expected. But if we didn't check the higher timeframe in order to evaluate the placement of the 5 Min Demand level, a) we would have traded a low quality and low probability level (which although it created a small bounce on the 5 Min chart (R1), it was not the low-risk high-probability level we are looking for), and b) we would have missed the much larger Supply level on the 1H timeframe which produced a fantastic trade.
Just to avoid any confusion though, we should clarify that the big picture is complete only when price has almost returned back to the initial level. This means that we have to monitor this ongoing process, or at least review it again when price gets close to our level. This not only allows us to see how far price traveled before returning, but also to avoid any newly created opposing levels that price might have created on its way back to our level. These opposing levels can not only affect our trade but could also force us to skip the trade or even to take the opposite side if a valid opposing level is left behind. Whether the opposing level will override our own level or not, is mostly a matter of placement in the big picture as well as the timeframe of each respective level (because higher timeframe levels are stronger).
Evaluating the placement of a candidate level in the big picture means being aware of any opposing levels that can harm your trade, and at the same time it can point out that you might be looking at the wrong side of the trade
So, evaluating the placement of a candidate level in the big picture means being aware of any opposing levels that can harm your trade, and at the same time it can point out that you might be looking at the wrong side of the trade. But as mentioned previously, there is also the added bonus of increased Supply or Demand which comes with high or low prices respectively. This means that by looking at the higher timeframes it would immediately become apparent to you that the above candidate Demand level is placed too high in the big picture, close to a possible top, and very far from lowest-lows of the trend, thus it is not suitable for trading due to the low probability setup. The uptrend which ended there had started much lower, and this means the Demand level which formed there (near a possible top) was placed in the wrong area, where we should have been looking for a Supply level to evaluate and trade instead of a Demand level. Despite the fact that we couldn't know for sure in advance that the trend was going to end there, this small Demand level was already too far away from the lowest lows of the existing trend while the Supply level was very nicely placed very close to a recent significant top making it a much better candidate due to its correct placement in the big picture.
In order to find whether your candidate level is correctly placed you must look at the higher timeframes and locate the most important top and the most important bottom you can see in the wider area. Note that these important tops and bottoms are usually quite easy to find, they enclose the area above and below your level as seen on the higher timeframes. Make sure to use a higher timeframe as you want to include a much wider area (the big picture) in your search for these important tops and bottoms, not the minor ones that might be seen on the same timeframe as the one you used for finding your level. This big picture will make it much easier for you to decide whether your candidate level is low enough for a Demand level (or high enough for a Supply level) as seen in the big picture, and thus suitable for trading due to the increased probabilities for success. Consider another example:
In the above example we can see two Supply levels, as seen on a higher timeframe than the one used to find them initially. The two levels can still be seen on this higher timeframe, although not as clearly as on the original smaller timeframe. The reason why we are looking at this higher timeframe seen above is to determine their placement in the big picture. Initially, when the two levels were formed we could only see the top and bottom marked by circles #1 and #2. These points were the important top and bottom of the higher timeframe and so initially it might have not been easy to determine the suitability of their placement (due to the small area between the two points, and for the lower level also the nearly equal distance from the top and bottom of this big picture). But as the downtrend progressed to reach the new important lows marked by circle #3, it became more apparent that the Supply levels were well placed. So when price turned up after circle #3 and started approaching the two Supply levels, the new important top and bottom defining our big picture became #2 and #3 (i.e. #1 was no longer applicable as there was a fresh lower-low, effectively hiding the previously exposed area on the left).
Keep in mind that these marked areas are not clearly visible on the original lower timeframe that was used to find the levels, so looking at the higher timeframe is absolutely required if you want to properly evaluate the big picture.
The reactions (R1 / R2) to both levels was large enough that it can even be seen clearly on this higher timeframe. The accuracy with which they worked was also very good, and although this is not always the case, it is not rare either as you will frequently see price just touching the level and then bouncing away from it. But who would be willing to buy right below these Supply levels, exactly where Supply is much more likely to exceed Demand and much lower prices are to be expected soon?
But who would be willing to buy right below these Supply levels, where Supply is much more likely to exceed Demand and much lower prices are to be expected soon?
Only a novice trader would make such a mistake, and a very frequent excuse is that some fancy indicator or oscillator suggested a buy (based on arbitrary configurations and wild assumptions about how the market works). To make this easier to see on the chart, check the long distance covered by price between the lows near circle #3 and the lower supply level: a novice trader who did not buy at the lows or even at any later point during the upward move, decided to eventually buy right below a Supply level where Supply exceeds Demand and lower prices are most likely to be seen soon. Such a decision is either purely based on emotion (like missing the move, or revenge for a previous lost trade etc), or based on misinformation like considering the suggestion of some indicator or oscillator valid for some reason. In either case, some novice trader was willing to buy right below a Supply level, and someone else on the other side of the trade was very happy to sell to this novice buyer and get a low-risk high-reward entry as a result.
Remember that if you cannot spot the novice trader on your charts, then probably you are the novice trader.
One last thing to clarify is that you don't need to go to much higher timeframes in order to determine the big picture that is relevant to your trade. If you spotted a level on the 15 min chart, then your reference timeframe will usually be the 1H timeframe, and under some circumstances maybe the 4H timeframe. It will never be the weekly or monthly timeframe for a level found on a 5 Min or 15 Min timeframe, it is just not relevant to such a trade setup. You need to see just the part of the bigger picture that is still relevant to your trade (usually either 1 or 2 timeframes up on most Forex platforms), and not a timeframe so much bigger that it dwarfs anything related to your trade setup.
Ensure that the information you use makes sense and it is based on valid logic all the way to its core. Any amount of misinformation added to the mix will only make it harder for you to identify the proper trade setups with the lower risk entries and the higher rewards. Think more like an Institutional trader who navigates the charts and shows the way by anticipating and trading the price direction of the near future, and less like a casual follow-the-herd trader who tries to catch moves after the fact and usually ends up paying those who showed the way.