Finding Setups:

Type 1:

Type 2:

Within how I trade, there are two types of context/setups:
Type 1: Following a corrective retrace (seeking resumption of the prior move).
Type 2: Within a flat, trading either the B-wave or C-wave reversal.
Of course, both types require a reversal structure + entry trigger.

When it comes to analysis, the whole point is to identify these setups.
While yes, analysis also provides a general understanding of the situation – my main goal is to find an actionable opportunity (or to determine I do not have an opportunity at the moment).
It’s important not to get lost in analysis, simply wanting to ‘be correct, to the point of losing sight of the main goal: Trading.

Wave Analysis:

One way to achieve this, and the way you see me use the most, is through wave.
Identifying where price is in a wave count allows me to determine which type of setup I should be looking for.
For example:
– Impulsive Waves (1,3,5,A,C): Represent expansion. Higher frequency of type 1 setups within
– Corrective Waves (2,4,B,W,X,Y): Represent compression. Lower frequency of type 1 setups within. Higher frequency of type 2s.
Notice that the end goal of a count is not to simply ‘predict’ what price will do, but to identify actionable opportunities along with price objectives. When things go to plan, it may appear ‘predicted’, but that’s a byproduct. My job is to identify opportunities, or a lack of opportunity, and respond accordingly within my system.

With that said, wave is not the only type of analysis that can be used.
Pause for a moment and ask, “what types of HTF candles will host type 1/type 2 setups?”

Candle Analysis:

Expansion:

We already know that Type 1 setups are more common within expansive price action (or in wave language, impulsive).
So, what do expansion candles look like? Directional candles.
A directional candle above or below the prior candle’s range (both moving the same direction) objectively represents active expansion.
This does not necessarily mean price will continue to expand, but it shows active directional control in that moment.
Within these candles, I should expect more Type 1 setups to form.

Correction:

Type 2 setups form in corrective/compressive/trap action… What does this look like, candle wise?
Generally speaking, this looks like failure to expand.
If price is moving back towards a prior high (or low in the case of a downtrend), and FAILS to hold above, price is clearly showing a lack of expansion.
Type 2 setups are built on buyer/seller exhaustion and/or liquidity sweeps, allowing price to trade back through a range… This is what is seen here.
So, when price fails to expand beyond a prior high/low, I should be looking for Type 2 setups.

Also notice, when the flat plays out there will be expansion candles within it. So INSIDE a type 2 setup, there can be type 1 setups along the way.

The goal of this write-up is to share another way to read price/read context and understand what is happening between buyers and sellers.
– Wave allows us to define/categorize price action (impulsive vs corrective) and deduce possible paths as a result. There are elements of both “what is happening right now?” and “what paths may follow?”
– Candle analysis allows us to objectively describe what is actively happening in the market. Is this expansion? Or not expansion?
Both are fluid, and adjust with price action as new evidence is provided.
Neither wave, nor these candle patterns are cheat codes programmed into the market. They are a language for us to read price and understand what type of participation, if any, that we should have.