no matter what trading strategy you use going with the trend gives you a better chance of winning but you have to watch out for reversals because they can take away your profits additionally deep retracements can stop you out even if you were right about the overall direction there's a common saying the trend is your friend unless it ends so is there a simple and mechanical way to find the real market direction and read the reversal signals the market is giving the answer is yes and in today's video I'll show you how to do that step by step so guys if that's something you're interested in please smash the like button to help us create more videos and subscribe if you're new [Music] the market always moves in the form of impulsive and corrective moves due to the behavior of market participants impulsive moves are characterized by the same colored candles large bodies and a great pushed distance corrections or pullbacks on the other hand are characterized by mixed color candles sideways wicks and a smaller push distance in an ideal trending scenario the market forms higher highs and higher lows respecting the swing lows each time the price breaks above a structure level it signals trend continuation and a demand level automatically forms conversely when it breaks below a structure it signals a possible trend reversal but here comes the confusion most traders face does this move qualify as a pullback or should we take the whole movement as a single leg in other words is this a swing low or is it just valueless internal volatility that we should neglect because if this is a swing low then breaking below it signals a reversal but most of the time price just continues moving upward after breakouts so let me explain the most mechanical method to identify valid pullbacks and filter out internal moves and noise this technique uses Fibonacci retracement levels to pinpoint the depth of correction here's how it works when the market makes an impulsive move we draw the Fibonacci retracement from the start of the recent impulse to the end for a pullback to be considered valid it must retrace at least to the 38.2% level if the price doesn't reach this level and continues higher it's often just internal volatility a weak reaction with no real correction behind it these shallow moves are unreliable and can lead to false signals by waiting for a pullback to hit the 38.2% level or deeper we ensure that we're only reacting to meaningful corrections not just market noise so in this case it is considered a single leg and a reversal only occurs if the market breaks below this swing low let's recap this in a bearish scenario to identify a valid pullback the retracement must reach at least the 38.2% Fibonacci level of the previous bearish leg if the correction doesn't meet this minimum level we consider it insignificant noise not a true pullback these shallow moves often lack real selling interest and can mislead traders into expecting a reversal too early for example let's find out if this move is a valid pullback or just noise in the price movement if we apply the Fibonacci retracement tool from the start of the impulsive move to its end we'll see that it has reached the 38.2% level this confirms that the move qualifies as a valid pullback it shows that the market has paused long enough for some profit- takingaking or counter trend interest which adds structure to the chart from this point if the price resumes in the direction of the original trend we have a break of the market structure and can look for continuation setups with more confidence on the other hand if the retracement had only reached say the 23.6% 6% level or even less we'd consider it internal noise and this would be treated as a single price moving leg in this case there would be no break of structure and no valid swing high now that we know how to identify impulse and pullback let's talk about market direction when we see 1 two three moves breaking above the previous structure that tells us we're in a trend if the price then forms another pullback and impulse we have trend continuation now here comes a very important point we mark the lowest point of the pullback as our swing low but only after a break of structure has happened this means that during a correction the price might create many lows but those are not swing lows breaking below these minor lows does not mean the trend is reversing the real swing low is confirmed only after the market structure is broken then the lowest point of correction becomes our swing low and breaking below it signals a possible reversal let's look at a bearish price action example to apply this method and clear up any doubts so here we have a bearish market structure at first look it might seem choppy with no clear direction but we're going to apply our method and find out what the market is really doing as price action forms also keep this in mind if you're trading a trend continuation setup it's best to focus on charts where the direction is clear avoid choppy unclear markets now let's start from the beginning here we have one two three moves breaking below the recent structure so we're in a downtrend here is our low high and lower low if price breaks below the recent structure again the trend continues and the correction should happen within this range let's see what happens next the market makes a small pullback and continues downward so after this breakout we can mark the recent swing high and swing low breaking below the swing low means trend continuation and breaking above the swing high means a potential reversal so again the correction happens inside this range but wait is this a valid correction or just noise in the price chart to answer that we use the retracement tool to measure the depth of the pullback if we apply the retracement tool from the start to the end of the impulse we'll see that this pullback does not reach the 38.2% level so this is not a valid correction we should treat the whole movement as one single leg let's keep going we now get another break of the market structure to the downside so we mark a new swing high and low we're still in a downtrend as long as the price stays below this swing high next price taps into this structure level but fails to break it these long wicks show that sellers push the price through the swing low but it quickly returned back inside the range this shows some bullish strength but still we are in a downtrend as long as the price stays below that swing high price tests the level again and finally we have a breakout above the swing high this signals a potential reversal to the upside and possibly forms an uptrend in the following moves but to confirm the uptrend we need to see 1 two three moves to the upside now let's see what happens next price suddenly drops breaking below the structure again now we have a confusion the market is breaking both up and down structures this means there's no clear direction when this happens we need to wait and see which side takes control supply or demand then we can look for clear impulses and corrections again here's another key point always trade when you know what the market is doing you don't have to trade every day waiting for high quality trades is a skill you must develop if you want to be consistent now let's continue price forms one two three moves breaking above the market structure so now we are in an uptrend then we get one more impulse and correction so yes this is a trend continuation as long as we stay above the swing low we're still in an uptrend and if price breaks above the previous level it means the trend continues so if we wanted to mark the market direction in this example it would look like this the red areas show when we had a bearish trend the green area shows when we had an uptrend and the gray areas are neutral with no clear direction now that we've talked about the breakout it's time to see what qualifies as a valid break but before we continue 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often resembles a liquidity grab where stop- losses are triggered for traders who went short due to the previous rejection if we get another break with a full-bodied candle it signals a valid breakout at this point we can identify the origin of this move that caused this breakout as our swing low as long as the price stays above this level we remain bullish and focus on buying positions but what happens if the price breaks and closes below this highquality demand zone this would indicate that buyers have failed to hold the level and sellers have taken control it signals that the uptrend is over and a potential reversal is underway so when price breaks through a high quality level like this we can confidently say that the market structure has shifted and the momentum is now favoring the sellers this condition is known as a change of character signaling a shift in market sentiment the change of character is valid except in two common scenarios sometimes the market structure conditions make these changes invalid let's break this down step by step right here we have a major swing low that triggered this breakout a break below this level might seem like a valid change in character however if you look at the left hand side you'll notice something important this level aligns with a significant area of liquidity here's the deal many traders previously opened long positions at this level placing their stop losses just below it what does this mean a massive pool of liquidity is sitting beneath that level waiting to be tapped now smart money knows this to hunt these stop- losses they often push the price lower sweeping the liquidity before driving it back up in the same bullish direction here's the key takeaway when a major swing low sits in a liquidity hot spot breaking through it is often just a liquidity grab not necessarily a signal of a market reversal in this context we can't classify this break as a valid change in character if the price re-enters the range after the liquidity sweep it creates an excellent opportunity for a long position why because the overall trend remains bullish the sellside liquidity has been engaged and the next target is the buy side liquidity as smart money traders our goal is to enter after the stop losses are taken out when the real move begins now that's just one piece of the puzzle let's talk about another concept that can also invalidate a change of character the mitigation of fair value gaps as a smart money trader identifying FVGs should be one of the first steps you take when analyzing a chart because these zones often act as magnets for price in most cases before continuing its trend the market pulls back to fill these gaps this is why FVGs are critical zones to watch they're most effective on intraday time frames such as the 4hour 1 hour or even smaller time frames now here's where it gets interesting let's go back to the earlier example look closely at the left hand side and you'll spot an unmitigated fair value gap sitting just below the major swing low in scenarios like this price often retraces to the FVG zone to fill the gap this pullback doesn't indicate a true reversal it's simply the market rebalancing itself the bottom line always check the left hand side of the chart for unfilled FVGs this helps you distinguish between a move that's just filling a gap and one that reflects a real shift in market sentiment by doing this you can avoid false signals and stay aligned with the bigger picture now that we understand how to identify market direction using breakouts and changes let's take it a step further and see how the system of market sentiment actually works the system operates based on mitigations when price mitigates a demand level demand takes control over supply conversely when price mitigates a supply zone supply takes control over demand i know it sounds so strange but it all will make sense in a minute imagine the market is in an uptrend forming a series of higher highs and higher lows each time price breaks structure to the upside with fair value gaps a strong demand zone is created these demand zones remain unmititigated until price revisits them offering ideal opportunities to trade with the dominant trend however if the price breaks below a strong demand area it forms a change of character this signals two key things first supply has taken control over demand and second a new valid supply area has been established from there the price continues moving downward forming new supply zones until it reaches the next unmititigated demand area at this point a battle between supply and demand occurs sometimes this results in consolidation and a ranging market between these two zones a break above or below the range will determine which side gains control now a quick tip for the end of the video don't chase the market let the market come to you having patience trusting your analysis and waiting for mitigations can be the difference between a winning trade and a losing one so guys I hope this video provided value to you if it did please go ahead and smash the like button to show your support and if you're new here consider subscribing to our channel see you in the next episode