Decoding Crypto Market Structure, A Trader's Blueprint

 Market Structure Basics

Vocabulary

HH = higher high

HL = higher low

LL = lower low

LH = lower high

BOS = Break of Structure

MS = Market Structure

CHoCH = Change of Character (in the market)

Market structure (MS)

Market structure defines the structure in which the current market is

trading. It is what tells you whether the market is trending or not.

So how do we view it?

I don't advise just being a trend trader or a PA trader. Crypto is full of

widely available information and retail move info that anyone can

use to her an in-depth motion of the market. Hence in the long term,

I don't believe just studying PA, or Trading the trend or breakout is a

successful strategy. Confluence and data are where the sweet spot

lies. However, it is paramount that all your basics are clear and an

in-depth understanding of PA is a primary requirement.

Bullish MS

Bullish MS 

A bullish MS is identified when the

price makes a series of higher highs

HH and higher lows HL.

Every time the price takes out a high                

to form a higher high, we get what is

called a break of structure BOS or

MSB (Market Structure Break).

                                         

Bullish MS in reality (4H BTC chart)

Bearish MS

                                Bearish MS

A bearish MS is identified when the price makes a series of lower lows

LL and lower highs LH.

Every time the price takes out a low to form a lower low, we get a

break of structure BOS.

Bearish MS in reality (4H BTC chart)

Why is MS so relevant in trading?

Remember the famous saying “The trend is your friend?”, well it is

only popular for a reason!

If you can use the market structure to identify the trend, more often

than not, the price will continue in the same direction. This might

seem contradictory at first to my usual “trade the range” motto but

it is essential to use Higher Time Frame MS to guide how you form a

bias while trading a Lower Time Frame range.

How to use MS

Market structure can help you define if-then scenarios. In this

section of the tutorial, we will describe how to put it to good use. I

like to use the ITTT model (If This, Then That).

Deep swings

Example of a deep swing High

One of the questions about market structure is: which swing points should I use?

I suggest you look for deep swing highs and lows on higher

timeframes (never lower) to

answer that question.

We define a deep swing high as

the highest point that causes                         

the swing low and a deep swing

low as the lowest point that

causes a swing high.

Above is an example of the last deep swing high on a

1D BTC chart. The price was previously in a continuous uptrend,

making higher highs and higher lows, until it reached the high

marked with a green tick. The price failed to break

that high and ended up moving below the low that formed that

high. Thus, you have a BOS.

Example of a deep swing low

                         Pullbacks

Pullbacks

Note that after every BOS we expect a pullback on that same

timeframe. And this is where market structure comes in handy.

If a BOS occurs then look for an opportunity to long/short on a

pullback. In other words, never think of buying right after a BOS; wait

for the pullback. Studying my SFP (Swing Failure Pattern) tutorial is

also advisable to better grasp why it is not wise not to trade

breakouts without context.

The formation of a lower low confirms a bearish trend change, our

entry would be on a pullback. We put our stop loss above the last

lower high and target previous swing lows.

Change of character CHoCH

The next concept is a tool that you can use alongside the break of

market structure (BOS) in order to anticipate when a run may be

finished and a pullback may be starting (Bearish CHoCH), and when a

pullback has finished and a run may be beginning (Bullish CHoCH).

The figure below will give you an idea of the whole setup, using BOS

and CHoCH combined with the market structure.

BOS+CHoCH in theory

I recommend you look at CHoCH as the first sign of trend change; it

doesn’t have to be a deep swing structure; it can be in the minor

movements in between; while the BOS is a trend continuation where

we look for deep swing highs and lows to be taking out.

Note: CHoCH is not a guarantee, it can give false signals, use it in

confluence with other tools.

Trade Setups

Example1: Long setup

1D BTC chart

The above figure is an example of consecutive longs taken on a 1D BTC

chart. After we defined the first HH on a high timeframe, we wait

for a pullback to enter.

1. The first bearish CHoCH signals that the bullish swing run might be

over and a pullback is starting.

2. The second CHoCH breach is a bullish sign indicating that the

pullback might end and a swing run might start.

3 The same strategy is used for the rest of the trades.

Note: Market structure appears on all timeframes, but more often

than not we can get a bearish structure on lower timeframes while

the overall MS on higher timeframes is bullish. The key is to look for

signs of pullbacks (or CHoCH) on the lower timeframes to get with

general MS direction on the higher timeframe.

Example2: Short setup

BTC 1D chart

The above figure is an example of a short trade taken on a 1D BTC

The first bearish CHoCH helps us identify when the bullish

upswing starts to weaken. Once the price breaks the previous

HL, the trend change is now confirmed.

1. Now we wait for a pullback and an LH to form.

2. Second bearish CHoCH is indicative of the end of the pullback;

more aggressive traders enter shorts after it.

3. For a beginner, wait for a double BOS (Break of HL and LL) to

confirm trend change and target previous swing levels.

Swing Structure & Substructure:

The goal behind this section is to add more clarity to the BOS and

CHoCH concepts.

Swing structure is the framework where we lay out our deep swing

highs and swing lows; it highlights the significant price fluctuations.

(Bigger picture)

The substructure is the minor movements happening inside the

larger swing structure. (Smaller picture)

BOS happens in swing structures while CHoCH happens in

Substructures. Also, these structures will be relative to the

timeframe that you are viewing.

4H BTC chart

Above figure is a 4H BTC chart; after the HH, we notice a BOS so we

mark out our deep swing high and low, every price movement

happening in between these two lines is categorized as noise or

minor movements, and we should refer to these substructures

changes as bearish CHoCH or bullish CHoCH.

Bearish CHoCH is the first switch turning the substructure from

bullish to bearish and bullish CHoCH is the first switch turning the

substructure from bearish to bullish. These are the only two

CHOCHs you should care about.

4H BTC chart long setup

The above figure is a long setup taken recently, BOS we waited for a

pullback to enter, the first sign of the start of a pullback was the

bearish CHoCH, and the second sign of the end of our pullback was was the

bullish CHoCH. We enter on the first green candle closing above

the bullish CHoCH and we target the previous HH. Notice that we

waited for a long setup since the swing structure (bigger picture)

is bullish. For confluence, you can use Volume Profile or simply

horizontal levels that are relevant to add more confluence to our

entry trigger.

Conclusion

1. A Higher Time Frame market structure can be used to form a

bias. Then trade the Lower Time Frame range to trade.

2 Understand what BOS is and when it occurs. Use Change of

Character for entries before Break of Structure takes place.

Explained in the various examples.

3. Market Structure should act as confluence in all your trades.

Use multiple tutorial concepts as a confluence for entries.

4. Market Structure understanding is the basic requirement for all

trading. If you don’t have a firm grasp of this concept, it will be

difficult to create your own trading system.

Price Action Trading : The core Foundation of Market Analysis

 

Price Action

NOTE: Price action serves as the foundation for all trading strategies. It embodies the essential elements that drive market movements, making it vital for traders to understand its principles before exploring other technical analysis methods. At its essence, price action trading focuses on interpreting price movements as indicators of market sentiment and public perception. Unlike fundamental analysis, which examines external factors like news events and economic reports, price action integrates these influences into the patterns observable on a chart.

The core idea behind price action is that the market's price behavior reflects a collective reaction to all available information. Therefore, instead of merely responding to headlines or forecasts, a trader can gauge the market's position by analyzing patterns, trends, and formations on the chart. It is fundamentally the examination of price movement over time, often without the interference of external indicators that could cloud judgment. The saying "price is king" holds true here, as historical data tends to repeat itself due to the cyclical nature of human psychology in trading.

Now, let's explore the fundamental principles of price action trading, along with practical techniques and steps for effective implementation. 

Principle 1: Simplicity is Key  If It’s Not Obvious, It’s Not There

A price action trader follows a straightforward guideline: if a trade setup isn’t clear right away, it likely doesn’t exist. Trading shouldn’t feel like piecing together a complicated puzzle. There are no riddles or conflicting signals to decipher. The most effective trades are often those that are easily recognizable. An intuitive chart pattern or a simple candlestick formation is much more dependable than a complicated strategy filled with indicators.

Practical Steps to Apply Principle 1:

1. Stick to Clean Charts:

Keep your charts free from excessive indicators. Rely on raw price movements through candlestick patterns or bar charts to ensure clarity.

2. Identify High-Probability Setups:

Seek out well-known patterns like pin bars, engulfing candles, or basic support and resistance breakouts.

3. Trust Your Initial Instincts:

If you find yourself doubting a setup repeatedly, it’s best to move on. The best opportunities should present themselves naturally and with confidence.

By simplifying your approach, you lessen cognitive overload and enhance your ability to make rational trading decisions.

Principle 2: Understanding Market Mechanics – The Auction Concept

Not grasping market mechanics will inevitably lead to losses. The market operates much like an auction house, where prices change based on supply and demand. Essentially, each candlestick reflects an ongoing auction between buyers and sellers.

Practical Steps to Apply Principle 2:

1. Learn the Basics of Market Structure:

Familiarize yourself with key elements like higher highs, higher lows, breakouts, and consolidations.

2. Observe Market Phases:

Markets cycle through accumulation, markup, distribution, and markdown phases. Recognizing these cycles can offer insights into potential future movements.

3. Study Volume:

Volume can confirm price action. A breakout that occurs with high volume is more trustworthy than one with low participation.

Principle 3: Preparation and Patience – The Art of Waiting

Patience is a crucial quality for a price action trader. Making impulsive decisions based on emotions can often result in losses. The most successful traders dedicate more time to preparation and less to executing trades. Jumping into a trade without a solid plan is like trying to find your way through a maze while blindfolded.

Practical Steps to Apply Principle 3:

1. Predefine Trade Setups:

Clearly outline and document the specific conditions that will trigger your entry or exit from trades. For instance, "I will enter when I see a bullish engulfing candle at a key support level, confirmed by volume."

2. Use Alerts and Watchlists:

Instead of constantly monitoring the chart, set alerts at important price levels to avoid making impulsive trades.

3. Practice the 'Set and Wait' Method:

After establishing your entry, stop-loss, and take-profit levels, take a step back. Allow the market to unfold without micromanaging every movement.

A well-prepared trader acts with intention, not impulsivity.

Principle 4: Theory vs. Practice The Necessity of Live Experience

Relying solely on theoretical knowledge of price action is not enough. Trading demands hands-on experience. The first 1,000 trades should be seen as a learning opportunity rather than a quest for profits.

Practical Steps to Apply Principle 4:

1. Backtest Historical Data:

Work on recognizing patterns in past charts to enhance your pattern recognition abilities.

2. Simulate Real Trades:

Use demo accounts to practice your strategies in a risk-free setting.

3. Maintain a Trading Journal:

Document every trade, noting the reasoning behind it, how it was executed, and the results. Review both your wins and losses to spot trends and improve your strategy.

Gaining live market experience helps develop intuition and adaptability.

principle 5: Individual Learning Over Copying Others

Simply adopting another trader's methods without grasping the reasoning behind them is a shortcut that often leads to failure. Achieving success in trading relies more on personal insight than on mere imitation.

Practical Steps to Apply Principle 5:

1. Study Concepts, Not Strategies:

Focus on understanding why a strategy is effective instead of just learning how to implement it mechanically.

2. Follow Experienced Traders for Insight:

Engage with mentors to gain their perspectives, but steer clear of copying their exact methods.

3. Test and Tweak Techniques:

Experiment with different principles and modify them to suit your trading style and risk tolerance.

Individual creativity and critical thinking set skilled traders apart from the rest.

Principle 6: Developing Your Unique Edge

Every successful trader has a unique edge—an approach that resonates with their personality, strengths, and understanding of the market. Without a tailored methodology, achieving consistent success can be challenging.

Practical Steps to Apply Principle 6:

1. Define Your Trading Framework:

Select your preferred markets, timeframes, and strategies.

2. Assess Performance Metrics:

Monitor key statistics like win rate, risk-reward ratio, and drawdowns to uncover patterns of success.

3. Refine Over Time:

Regularly review and adjust your strategy based on data rather than emotions.

Your edge is your competitive advantage, cultivated through experience and self-reflection.

Principle 7: Pattern Recognition – The Power of Repetition

Price action trading leverages the repetitive nature of market patterns. Human emotions like fear, greed, and speculation lead to recurring formations across various assets and timeframes.

Practical Steps to Apply Principle 7:

1. Master Core Patterns:

Familiarize yourself with essential patterns such as head and shoulders, flags, and triangles.

2. Understand Candlestick Psychology:

Delve into the narrative behind individual candlesticks, determining if a pin bar signifies rejection or exhaustion.

Read more about our candlestick chart pattern master tutorial here

3. Focus on Quality Over Quantity:

Engage only with the patterns you’ve thoroughly practiced and documented.
Profits arise from the disciplined execution of familiar patterns rather than from untested strategies.

Additional Insights and Practical Techniques

To deepen your grasp of price action trading, consider these additional techniques:

1. Support and Resistance Dynamics:
Spot historical levels where the price tends to reverse or consolidate. Breakouts and retests of these levels can often yield high-probability trade setups.

2. Trend Analysis:
Assess whether the market is trending or ranging, as price action patterns respond differently depending on the market structure.

3. Psychological Zones:
Round numbers (e.g., 1.3000 in forex) frequently serve as psychological barriers, affecting trader behavior and price movements.

4. Timeframe Synchronization:
Examine multiple timeframes to align long-term trends with short-term entry signals.

Conclusion

Price action trading is not merely a strict formula; it is a nuanced art based on universal principles. It demands patience, discipline, and ongoing learning. By following the seven core principles outlined here—simplicity, market mechanics, preparation, live practice, independent learning, personalized edge, and pattern recognition—you can build a solid trading foundation.

Pi Coin: A Revolutionary Cryptocurrency or Just Another Fad?

Introduction

In the ever-evolving world of cryptocurrency, a new player has entered the scene: Pi Coin. While Bitcoin and Ethereum have long dominated the market, Pi Coin is attempting to offer something different—an easier, more environmentally friendly way to mine and use cryptocurrency. But is it really the future of crypto, or is it just another passing trend? Let’s dive in and find out what Pi Coin is all about.

What is Pi Coin Exactly?

Pi Coin is a cryptocurrency created with a vision: making crypto mining accessible to everyone. Traditionally, mining Bitcoin or Ethereum requires expensive equipment and consumes a lot of energy. But Pi Coin aims to change that. With Pi, you don’t need any fancy hardware—just a smartphone. Yes, you heard that right. You can mine Pi Coin right from your phone. The idea behind this is to democratize crypto mining and make it easier for people all over the world to participate.

The Origins of Pi Coin

Dr. Nicolas Kokkalis

Pi Coin was founded by three Stanford PhDs—Dr. Nicolas Kokkalis, Dr. Chengdiao Fan, and Dr. Vincent McPhillip in March 2019. They wanted to create a cryptocurrency that was energy-efficient and easy for people to use. So, instead of requiring massive mining rigs, they made it so anyone with a smartphone could mine Pi Coins by simply using an app. Since its launch, Pi Coin has gained millions of users worldwide, all hoping to cash in once the coin goes live on exchanges.

How Does Pi Coin Work?

Unlike Bitcoin, which uses a proof-of-work system that drains much power, Pi Coin operates on a more energy-efficient method called the "Stellar Consensus Protocol" (SCP). This allows Pi to maintain security and reliability without the heavy environmental cost.

The cool part? You mine Pi Coin just by using a mobile app. Once you download the Pi Network app and sign up, you can start mining right away by hitting a button once every 24 hours. This makes it easy for anyone, even people with basic smartphones, to participate and earn Pi.

Can You Buy or Sell Pi Coin?

How to Buy Pi Coin:

Right now, Pi Coin isn’t listed on any major crypto exchanges, so you can’t buy it on platforms like Binance or Coinbase. The only way to acquire Pi Coin is by mining it through the Pi Network app. So, download the app, sign up, and start mining today. All you need is your smartphone and a little bit of time.

How to Sell Pi Coin:

Since Pi Coin is still in its "Testnet" phase, you can’t sell it just yet. However, once Pi Coin transitions to the "Mainnet" phase, it will be listed on exchanges, allowing users to sell, trade, and invest in Pi Coin freely. For now, though, your Pi Coins are more like digital tokens—valuable, but not yet tradable.

Caution: Be wary of any third-party services claiming to buy or sell Pi Coins. These are likely scams, as the Pi Coin network hasn’t yet reached the point where trading is possible.

Where is Pi Coin Listed?

As mentioned earlier, Pi Coin hasn’t yet been listed on any cryptocurrency exchanges. The Pi Network team has made it clear that they plan to launch the coin on exchanges once it moves to the Mainnet phase. This is a big milestone for Pi, as it will allow the coin to be traded and valued on the open market. Now the time has come and. Pi Network (PI) is scheduled to be listed on multiple cryptocurrency exchanges on February 20, 2025. Here are the details:

OKX (OKEx):

Deposits Open: February 12, 2025, at 2:45 am UTC

Call Auction: February 20, 2025, from 7:00 am to 8:00 am UTC

PI/USDT Spot Trading Begins: February 20, 2025, at 8:00 am UTC

Withdrawals Open: February 21, 2025, at 8:00 am UTC 

For more information visit KX (OKEx) official website.

MEXC Global:

PI/USDT Trading in the Innovation Zone: February 20, 2025, at 8:00 am UTC 

Withdrawals Open: February 21, 2025, at 8:00 am UTC

Deposits' opening time is to be determined. For further details, please consult MEXC Global's official announcement. 

Bitrue:

PI/USDT Trading Commences: February 20, 2025, at 8:00 am UTC

Bitrue is also organizing a deposit contest with a 10,000 USD prize pool. For more information, please visit Bitrue's official announcement. 

Additionally, Pi Network is set to launch its Open Network on February 20, 2025, and is preparing for listings on major exchanges, including Binance and OKX. This development signifies a significant milestone in Pi Network's integration into the broader cryptocurrency ecosystem. 

Please note that trading times are listed in Coordinated Universal Time (UTC). Given your location in Naaldwijk, South Holland, Netherlands, you are in the Central European Time (CET) zone, which is UTC+1. Therefore, trading will commence at 9:00 am CET on February 20, 2025.

What is the Price of Pi Coin?

Right now, there’s no official price for Pi Coin because it’s not yet available for trading. Since the coin isn’t listed on exchanges, it doesn’t have a market value like Bitcoin or Ethereum. The Pi Network’s creators have been pretty transparent about this—Pi Coin won’t be tradable until after the Mainnet launch.

Pi Coin Price Predictions: What’s the Future?

Pi Coin’s future is still a big question mark. Since it’s not yet listed on exchanges, predicting its price is impossible at this point. However, that doesn’t mean people aren’t speculating about its potential.

What Could Affect Pi’s Price?

Mainnet Launch: Once Pi Coin moves to Mainnet and gets listed on exchanges, we could see some serious price action. Depending on demand, Pi could either skyrocket or experience volatility.

Real-World Use Cases: The more people use Pi for actual transactions, the higher its potential value. If Pi Coin can attract businesses or platforms that accept it as payment, that could drive up its price.

Competition: Pi Coin will face stiff competition from established coins like Bitcoin, Ethereum, and newer, energy-efficient cryptocurrencies. How it performs in this competitive market will determine its long-term value.

How to Mine Pi Coin on Your Phone

Mining Pi Coin is incredibly simple compared to traditional cryptocurrency mining. Unlike Bitcoin, which requires expensive hardware and high electricity consumption, Pi Coin allows users to mine using just their smartphones. Here’s how you can start:

1. Download the Pi Network App

Get the app from the official stores:

Android (Google Play Store): Download Pi Network

iOS (Apple App Store): Download Pi Network

2. Sign Up & Create an Account

You’ll need to register using your phone number or Facebook account. After that, you’ll be asked to create a username and enter an invitation code (optional but required to join the network).

3. Start Mining by Tapping a Button

Unlike Bitcoin mining, which runs constantly on high-powered machines, Pi mining works by simply tapping the mining button once every 24 hours. This confirms your activity and keeps your mining session going.

4. Increase Mining Rate

You can boost your mining rate by:

Referring Friends – Inviting more people to join the network increases your mining rate.

Becoming a Contributor – After mining for three days, you can secure your network by adding trusted members, further increasing your earnings.

Becoming a Node (Future Feature) – In later stages, advanced users will be able to set up Pi Nodes using computers to validate transactions.

5. Keep Mining Consistently 

Since Pi mining doesn’t require hardware power, it won’t drain your battery or slow down your phone. Just open the app once a day and tap the button to continue earning Pi Coins.

Pi Coin in the News: The Buzz Around It

Pi Coin has generated a lot of excitement—along with a fair amount of skepticism. On one hand, the idea of mining a cryptocurrency from your phone is groundbreaking. On the other hand, many critics point out that Pi’s centralization and lack of a clear use case could hinder its success.

In the news, Pi Network’s growing user base has caught the attention of investors, but many are holding back until Pi reaches its Mainnet phase. Until then, the coin remains more of a speculative investment than a fully functioning currency.

Conclusion: Is Pi Coin Worth It?

Pi Coin certainly has a lot of promise. Its mobile mining system makes it accessible to just about anyone with a smartphone, and its environmentally friendly approach to crypto mining is a welcome change. However, the coin is still in its early stages, and there are many questions about its long-term viability. Investors should exercise caution and wait until Pi Coin is listed on exchanges before jumping in. Until then, Pi remains an exciting experiment in cryptocurrency, but whether it becomes a major player or fades into obscurity is yet to be seen.

Disclaimer: This article is for informational purposes only. Cryptocurrency investments come with risks, and individuals should do their own research before making any investment decisions.

Master the art of Risk Management following our Tutorial here Risk Management

For more details about pi visit these sites  https://p.network/ // https://github.com/PiNetwork/pi-whitepaper  https://coinmarketcap.com/

Mastering Risk Management: A Trader's Gauide to Long Term Success/ A beginner to Advanced level Trading cource Part#3

                                                                                 

                                                                        

 Risk Management                                                                                   

Risk in trading refers to the possibility of incurring financial losses due to

adverse market movements or unforeseen events. Financial markets are

influenced by a lot of factors, such as economic indicators, geopolitical

events, and market segments, which can lead to price fluctuations. These

fluctuations can result in significant gains or losses for traders. 90% of the

traders lose money due to a lack of risk management. Everything that we will

discuss in this tutorial will aim at possibly making you part of the remaining 10%

who doesn’t lose all their money?

 Invalidation:

As a trader, the market is the first and foremost authority that will rate your

performance.

Let’s discuss the most important piece of information in trading - to know

when you’re wrong or your trade invalidation point.

For example, concerning the image above, a good analogy for
invalidation would be a passenger on a bus. He wants to get some ice
cream, the bus goes through multiple paths and the path it will use
today is not clear. There is one stop with ice cream on each route as
discussed above. The moment he reaches the stop with ice cream, he
has to get off, regardless of which route it was, he can’t stay on the bus
and hope that the next day the bus will take him to the other shop.
Similarly, as a trader, you are supposed to exit the trade at either target
or your stop, regardless of where the trade goes first, it needs to get
closed. Invalidation is a critical concept in trading that helps traders
manage their risk and make more informed decisions. Think of it as a
safety net or an emergency exit in a building. If things don't go as
planned, you know where to exit to minimize damage. In trading terms, if
your trading idea or hypothesis doesn't work out as expected, the
invalidation point is where you acknowledge this and exit the trade to
minimize losses.

Now, why is invalidation important?

1. Risk Management: Invalidation is a cornerstone of effective risk
management. By defining an invalidation point, you're essentially
setting a stop-loss level for your trade. If the market hits this level, it
means your initial analysis was incorrect, and it's time to exit the trade
to prevent further losses.

2. Emotional Control: Trading can be an emotional rollercoaster. By
setting an invalidation point, you're making a premeditated decision

about when to exit a trade. This can help reduce the influence of

emotions like fear and greed on your trading decisions.

3. Account Preservation: Regularly hitting your invalidation point without

managing your risk can lead to significant losses over time. By

respecting your invalidation point and exiting trades when necessary,

you can preserve your trading account balance and live to trade

another day.

Now, let's look at the different types of invalidation:

1. When

2. Where

3. How

Invalidation can sometimes be simple, for example, if the BTC price reaches

$20,000 before reaching $30,000 then our long trade idea is wrong. Often, it

might not be so simple, but HOW and WHEN the price reaches that $20,000 mark

also plays a part as your trading plans get more and more sophisticated.

CryptoCred has covered these concepts excellently and quickly in

his tutorial series. The above classification is elaborated below with some

examples:

1. Where: There is when a specific price level that you expected to act as

support or resistance doesn't hold. For example, if you thought $50

would act as support for a stock, but if the price falls to $49, your idea has

been invalidated.

Example: If the price goes below the blue level, then my long trade idea is no

longer valid.

2. When: Here, the invalidation is tied to a specific timeframe. For instance,

if you expected a coin to pump after an airdrop announcement or the

entire market to pump after a bullish CPI but it doesn't, your idea is

invalidated.

3. Combination of Where and When: This is when you expect the price to

reach a certain price point within a specific time frame after an event

(like a news release), but the price doesn't move as expected.

Or the reason can be technical, like if we have a 4-hour candle close

above $100 today, then that is a breakout from that level and we go

long.

Example:

4. When and How: This occurs when the price movement is less than

expected within a certain time frame after an event. For example, if you

expected a 5% price move after a range low sweep but price moves

only 2 percent and shows weakness, your idea is invalidated.

Or you expected a 10% price swing after Elon Musk's tweet but the price only

moves 2% then you know that effect was not as expected and your idea

is invalidated.

NOTE: Trade ideas can get invalidated even when you are in profit.

Invalidation of trade especially when factoring in the How and When factors

does not always mean your trade has to be in a loss, the idea can be proved

wrong even in profit so the best path forward in such a scenario is to close the

trade in profit and move on to the next one.

Remember, these are just examples. The actual invalidation point will depend

on your trading strategy, risk tolerance, and specific market conditions.

A common question amongst new traders is whether they should have a

fixed stop loss percentage, for example: 5 percent.

Stop loss should be based on TA alone. Every setup is different and fixed

percentage stop loss will not work.

Now, let's anticipate some potential questions you might have:

Q: How do I set an invalidation point?

A: This will depend on your trading strategy and the technical analysis tools

you're using. Some traders might use support and resistance levels, others

might use technical indicators like moving averages or Fibonacci

retracements. The key is to have a clear rationale for your invalidation point

and to stick to it once the trade is live.

Q: What if my trade hits the invalidation point but then reverses in my

favor?

A: This can happen, and it's one of the challenging aspects of trading.

However, it's important to stick to your plan. If you start ignoring your

invalidation points, you can end up holding onto losing trades for too long,

which can lead to significant losses.

Q: Can I adjust my invalidation point after the trade is live?

A: Generally, it's best to stick to your original plan. However, there may be

situations where it makes sense to adjust your invalidation point. For example,

if there's a major news event that changes the market conditions, you might

decide to adjust your invalidation point. But be careful not to adjust your

invalidation point just to avoid exiting a losing trade.

I hope this gives you a clearer understanding of invalidation in trading. It's a

crucial concept that can help you manage your risk and make more

informed trading decisions. Remember, the goal isn't to avoid losses entirely

(which is impossible), but to manage your losses effectively so that you can

stay in the game over the long term.

 The Importance of Risk Management

Risk management is essential for every trading strategy or approach, as a

trader cannot achieve profitability if they suffer significant losses from a few

unfavorable trades. Safeguarding your capital is crucial, as it guarantees

your survival and enables you to recover from challenging periods, whether

they last for a week, a month, or even a year. Now, let's address the first

question: What should be the size of your trading account? Without a doubt, it

is important not to invest all of your money into your trading account. Instead,

it should be substantial enough that losing the entire account would have a

significant impact, yet not so substantial that it would lead to financial ruin.

The table below shows how much profit is needed to recover your losses

during a drawdown. Therefore, it’s important to cut your losses. For example, if

you lose 80% of your capital, you need to make 400% just to break even.

Risk Management

Trading Trident

Before entering a trade, you need to determine your “Trading Trident”, which

is a combination of 3 things:

1. Entry Triggers as per your trading technique

2. Established invalidation levels (Stop loss)

3. Defined reversals (Profit-taking)

Entry Triggers: Entry triggers are your reasons for entering a trade.

Typically, a combination of reasons, also known as confluence,

increases the likelihood of a trade's success and provides a

comparatively more secure point of entry. In the example below, our

entry trigger was the retest of a resistance level that has turned into

support.

Stop Loss: The price in the opposite direction of the trade where the

trade is exited, at a loss. At this level, the reason for the entry becomes

invalidated according to TA and the price can then move in the

opposite direction, probabilistically. The next example shows the

importance of a predetermined invalidation level. The entry was made

on the retest of a resistance that has turned into support, but the price

failed to hold above that level and eventually broke down.

Target: It is the possible price level that the asset might touch based on

previous trends or confluence AND where a possible reversal could

occur. Target is the next path of least resistance from where the price

might reverse.

Risk to reward: (R: R)

The combination of the three key components of the Trading Trident forms

R: R. This ratio denotes how much money you make on a successful trade vs

how much money you lose on being unsuccessful on the same trade.

RISK/REWARD RATIO =(Entry point − Stop Loss Point)

                                              (Profit Target − Entry Point)

               

Let’s take an example:

You buy an asset for $100; you have a target of $200 and a stop loss of $50.

What is your R/R for this trade?

R: R  =  (100 − 50)= 50= 1

            (200 − 100)  100  2

A risk/reward ratio of 1:2 signals that you are willing to risk $50 to make double

Here is an example of the R: R ratio on a chart:

Risk per trade

Most traders agree that it is advisable to limit the risk to 2-5% of the total

account balance per trade. My personal preference is 2-3% risk per trade as I

mostly scalp and the number of trades per month is high.

Some people stick with 1%. The following table demonstrates that even if your

win rate is 60%, there will come a point when you will face five consecutive

losing trades.

It is crucial to survive these situations with enough capital to remain

unaffected, and this is where the calculation of position size and risk per trade

becomes essential.

                               Probability of a losing streak based on your strategy win rate

Probability of a losing streak based on your strategy win rate

Now a question that you might ask yourself is how do traders with low win

rates turn out to be profitable?

Profitability relies on two main factors: R: R and win rate. The win rate is

calculated by dividing the number of winning trades by the total number of

trades and then multiply the result by 100 to get a percentage. For

example, if a trader executes 100 trades and 60 of them are profitable, the

win rate would be 60% calculated as:

Win Rate = (Number of winning trades) X 100

                     (Total number of trades)

The following table illustrates how much R: R is needed for a certain level of

win rate. For instance, if your win rate is 50%, you would break even with an R:R

ratio of 1: 1.

Now let’s say you have an R: R equal to 1: 2, but you don’t know which win rate

percentage would be needed for you to breakeven. The formula is as follows:

Breakeven Win Rate =_______1_________X 100

                                      The sum of R: R ratio

                                                         

                                                                             =   1

                                                                             2 + 1

                                                                              = 33%

Hence a win rate of 33% is needed for a breakeven at 1:2.

Note: Always find your win rate then choose trades with R: R that suit your win

rate.

 Position Sizing

Position size in trading is calculated based on several factors, including risk

tolerance, account size, and the specific trade setup. The goal is to determine

the appropriate size to trade in order to manage risk effectively.

Here's a common formula for calculating position size:

Position size = ____Capital at Risk______________________

                               Distance or Percentage to Stop Loss

Example 1: 

Let's break down the components of this formula in the next

example: You have $10k and choose to risk 3% of that amount. Your stop loss

is 5% below your entry.

Position Size = 300   

                         0.05

                            =$6000

If you wish to engage in trading with a position size of $6k, you have two

options. The first option is to long or short using the full $6k without employing

leverage.

Example 2: 

Alternatively, you could choose to utilize leverage, such as 5X

leverage, which would require a margin of $1,500. By doing so, your potential

loss would be limited to 3% instead of 60%.

Example 3: 

Another example is if you have a capital of $1k and are willing to

risk 1% per trade, which is $10. Stop loss is 5% from entry; what’s your position

size?

Answer: Position Size =  10   

                                         0.05

                                      =$200

Q: How do I determine the right position size for my trades?

Answer: The right position size can depend on several factors, including your

risk tolerance, the size of your trading account, and your trading strategy.

Some traders use a fixed percentage of their account for each trade. For

example, you might decide to risk no more than 2% of your account on any

single trade. Others might adjust their position size based on specific

trade and market conditions.

Q: Can I change my position size after a trade is live?

Answer: Yes, you can typically adjust your position size after a trade is live by

adding to or reducing your position. However, it's important to have a clear

plan for managing your trades and to stick to that plan. Frequent changes to

your position size during a trade can increase your risk and make it more

difficult to manage your trades effectively.

NOTE: I have discussed the basics of position sizing and provided examples

for the same. However, after you have gained some experience as a trader or

simply have been consistently trading for more than a year then you can

increase your position size and take more risk (greater than just 1-2%). This

can be done for high-conviction trades, or in cases where you might have

some insider information as you learn more and network more.

Leverage

Warning: Trading on high leverage is extremely risky and is not

recommended for absolute beginners before you finish this tutorial.

Having said that, leverage trading is also known as margin trading, it allows

you to trade with a larger position size than you have available. Leverage in

trading refers to the use of borrowed funds to increase the potential return of

an investment. It allows traders to open positions that are larger than the

amount of capital they have in their accounts.

Example: 

if a trader has $1,000 in their account and uses 10x leverage, they

can take a position worth $10,000. The broker lends the trader additional

$9,000 to take this larger position.

 Connection between Leverage and Position Size

Leverage and position size are closely related because leverage allows

traders to increase their position size without adding more capital to their

account. However, while leverage can amplify profits, it can also amplify

losses.

If a trader uses leverage to take a larger position and the trade goes in their

favor, they can make a significant profit. But if the trade goes against them,

they can incur a significant loss. This is why it's important for traders to use

leverage carefully and to manage their position size appropriately.

Leverage pros and cons

Example:

 If you are trading at a leverage of 3x, and if you make a loss then

your loss is going to be 3 times larger than if you would’ve traded without

leverage. The more leverage you use the closer your liquidation price will also

be to the price where you have entered the trade. Liquidation means you

have lost in some cases your entire position in the trade or in the worst-case

scenario your entire account balance. If you really insist on using leverage

then I would really recommend to never really go above 5.

Example of 1x leverage: You have $1k as position size, price increases by 1%.

This means you have made 1% of the $1k as profit which is $10. On the other

hand, if the price drops by %1, you lose $10.

Now let’s look at the 3x leverage example: This means now you have $3k

position size, $1k from your own capital and $2k borrowed from the exchange.

If the price increases by 1%, you gain 3% profit on your own capital instead of

1% which is $30. If you close your trade, the $2k will be returned to the

exchange and you keep the $30 profit. On the flip side, if the trade goes

against you, then you pay back the $2k to the exchange, and you lose $30 of

your own capital which is $1k in this case. Never enter a trade with your entire

account size and always use the correct leverage to meet the position size

relative to your own portfolio.

Example 3: Real World Example

Let's say you have a trading account with $10,000, and you follow a risk

management rule where you risk only 2% of your account on any single trade.

This means the maximum amount you're willing to lose on a trade is $200 (2%

of $10,000).

Now, suppose you want to buy a stock that's trading at $50 per share, and

you've set a stop-loss order at $45. This means you're willing to risk $5 per

share.

To calculate the number of shares to buy (your position size), you would

divide the total amount you're willing to risk by the risk per share.

In this case, that's $200 divided by $5, which equals 40 shares. So in this trade,

your position size would be 40 shares.

These examples illustrate how leverage and position size come into play

when taking a trade. By understanding these concepts and using them

wisely, you can manage your risk and potentially increase your profitability in

trading.

Mastering risk management is not just about protecting your capital—it’s about securing your long-term success in the financial markets. The difference between those who succeed and those who fail often comes down to how well they manage risk. By applying the right strategies, staying disciplined, and continuously learning, you put yourself in the best position to thrive.

Remember, trading is a journey, not a sprint. The more you educate yourself, the stronger your foundation will be. Make sure to check out our other blogs to deepen your understanding of trading basics and market dynamics. Keep learning, stay patient, and let smart risk management be your guide to success!

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