Overview
This lecture explains the concept of invalidation levels in trading, focusing on how and where to place them for effective trade management and analysis.
Invalidation Levels in Uptrends
- Invalidation levels are placed below significant lows that have taken liquidity.
- Do not place invalidation below every low, only those that are meaningful for the trend.
- Breaking below a key low that took liquidity suggests a failed uptrend.
Invalidation Levels in Downtrends
- Invalidation levels are placed above significant highs that have taken liquidity.
- A break above such a high signals a potential end to the bearish trend.
- Focus on levels that, if broken, make the chart’s direction unclear.
Using Supply and Demand Zones
- Invalidation can be set above a supply zone in a bearish scenario; breaking it indicates not bearish enough.
- In bullish scenarios, invalidation is set below the lowest point of a demand zone that initiated a move to new highs.
- Breaching this demand zone suggests a shift to bearish conditions.
Logical Placement of Invalidation
- Place invalidation where, if price breaks, you no longer understand the chart.
- Avoid seeking trades when the market behavior breaks your analysis logic.
- Invalidation for analysis may differ from a trade’s stop-loss; analysis invalidation is broader.
Key Terms & Definitions
- Invalidation Level — A price point where your analysis or trade thesis is considered incorrect if breached.
- Liquidity — Market orders clustered around highs/lows that can trigger significant price movement.
- Supply Zone — A price area where selling interest is strong enough to resist further price increases.
- Demand Zone — A price area with strong buying interest that supports price increases.
- Stop-Loss — A predetermined price at which a trade is closed to limit losses.
Action Items / Next Steps
- Practice identifying significant invalidation levels in various market trends.
- Compare invalidation levels with stop-loss placements in your trade planning.
- Review and discuss these concepts with peers for deeper understanding.