Lecture Notes on Context in Trading

Introduction

• Importance of context in trading to improve trade success.
• Example: An MMT student secured 5 million in funding based on these concepts.

Overview of Context

• Context Definition: The area where one looks for entry points in trading.
• Two types of context:
  • Usual Context: The standard trading context.
  • Unusual Context: Occurs when usual context is filled.

Usual Context Explained

• Usual context is where trades are initiated; it serves as a boundary for entering lower time frames.
• Narrative starts with fair value gaps and swing points.
• Boundary: The area that indicates where to look for entry confirmations once price trades back into a fair value gap.
• Target: The first opposing PD (Potential Demand) area that prices aim for after initiating a trade from the usual context.
  • A bullish fair value gap may signal to expect higher prices from a discount area.
  • The opposing PD area can be a swing high forming the target.

Context Areas and Lines of Defense

1. First Line of Defense:
   • Ideally, a fair value gap that serves as the starting point to the swing high.
   • If there's no swing point, use the previous candle high as the boundary.
2. Overlapping Defense:
   • Expect retracement back into a fair value area to continue higher.
   • Context area from the fair value area to the swing point or previous candle high.
3. Last Line of Defense:
   • Context area formed from swing points or previous candle lows to swing highs.
   • Represents a point where price may sweep and create a new context for trading.

Examples of Usual Context

• Example 1: Canadian Dollar JPY trading scenario with context areas and targets identified.
  • Fair value gap serves as the boundary.
  • Swing low acts as the first opposing target.
• Example 2: Gold trading with context areas identified using fair value areas and targets.
• Example 3: US Dollar CHF and JPY examples focusing on context boundaries and targets for entries.

Unusual Context Explained

• Unusual context arises when the market is not offering fair value anymore and begins seeking liquidity.
• Fair Value Area: The area from the high to low defines the context for entries.
• If a rejection fails to continue higher, it signals a shift to seeking liquidity above the swing high.
• Context Areas Transition: From usual context to unusual context as market dynamics change.

Case Studies and Backtesting

• To master these concepts, engage in case studies to see how potential entries form in different contexts.
• Utilize the study notion linked for a better understanding of practical applications.

Conclusion

• Understanding context, usual, and unusual areas is crucial for trading success.
• Continuous practice through analysis and backtesting is essential for skill development in trading.