Overview
This lecture explains the concept of rejection blocks in trading, their formation, and how to identify and use them for potential trade entries and exits.
False Breakouts & Turtle Soup Patterns
- False breakouts occur when price briefly moves above a previous high or below a previous low before reversing.
- These are referred to as "turtle soup" patterns: "turtle soup long" after a false break below a low; "turtle soup sell" after a false break above a high.
- Anticipating rejections at new highs or lows is a key skill for traders.
Rejection Blocks: Bearish and Bullish
- A bearish rejection block forms in downtrends after price makes a high with long wicks and then reverses lower.
- The key reference for a bearish rejection block is the highest wick and the highest open or close in the swing high.
- When price returns to this block, it can be a selling opportunity with stops above the block.
- A bullish rejection block forms in uptrends after price makes a low with long wicks and reverses higher.
- The key reference for a bullish rejection block is the lowest wick and the lowest open or close in the swing low.
- When price revisits this block, it can become a buying opportunity with stops below the block.
- Entries can be aggressive (at the block) or wait for a minor price trade through the level.
Chart Interpretation & Practical Application
- Focus on bodies (opens/closes) rather than just wicks for defining rejection blocks.
- Institutional activity often respects candle body levels more than wicks.
- Don't always require price to make new highs/lows for reversals; bodies are often more significant.
- Rejection blocks can be used to set profit targets for existing trades.
Key Terms & Definitions
- Turtle Soup Pattern — A false breakout above/below a prior swing high/low resulting in a sharp reversal.
- Rejection Block — A price area defined by the highest (bearish) or lowest (bullish) body and wick in a swing high/low, signaling potential reversal.
- Bearish Rejection Block — Formed after wicks at a high in a downtrend, used as a potential sell zone.
- Bullish Rejection Block — Formed after wicks at a low in an uptrend, used as a potential buy zone.
- Liquidity Run — When price moves through stops above highs or below lows before reversing.
Action Items / Next Steps
- Review charts and identify examples of rejection blocks and subsequent price moves.
- Practice marking the highest/lowest wick and body in swing highs/lows to define rejection blocks.
- Prepare for upcoming lessons on entry techniques and deeper pattern analysis.