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Three Market Scenarios Explained

Published by Ali Muhammad
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Three scenarios are the building blocks of trading market patterns. The candlestick chart consists only of these three basic scenarios, and all other patterns originate from these three, which I will discuss in this post.

When there is fear in the market or when the market is in a decisive phase, the price will start consolidating inward. This means each price wave will be shorter than the previous one, and the price will consolidate to a single point. However, when the market wants to take a big step or start a long trend, it will grab liquidity in the form of a broadening pattern. In this case, each successive wave will be larger than the previous one.

Additionally, when the market moves up or down, it does so in the form of higher highs and lower lows.

To master technical analysis, a trader must accurately identify these three market patterns.

What are the three scenarios?

The three most basic market patterns, which are also the building blocks of technical analysis, are:

  • Scenario 1: Inside bar
  • Scenario 2: Directional bar
  • Scenario 3: Outside bar

Believe me, if you analyze the trading chart like a professional, you will not find any other patterns except these three scenarios. These patterns help simplify the complex market structure.

Now, I will explain each scenario in detail to make it easier for you to understand and use in live trading.

Scenario 1: Inside Bar

The inside bar is a candlestick pattern that consists of a “mother candle” and an “inside candlestick.” The inside candlestick forms within the range of the mother candlestick.

This is the simplest way to determine inside consolidation. If we analyze this pattern further, each inside bar candlestick represents inward price consolidation on lower timeframes. For example, if you find an inside bar on the H4 timeframe, you will observe an inward consolidation pattern on the 15M or 5M timeframe. In this scenario, each successive wave will be smaller than the previous one until the price breaks through the outer trendlines and starts a new trend.

Scenario 1 Inside bar

Significance of Scenario 1

When Scenario 1 appears on the chart, it indicates the price is in a decisive phase. Market makers are determining the future direction based on supply and demand. If there is more demand in the market, the price will break the inside consolidation in a bullish direction. If there is more supply, the price will break in a bearish direction.

During inside consolidation, traders should wait for an opportunity. Avoid trading during Scenario 1 because the market can move in either direction. Trade only what you see. For example, if the market breaks the inside consolidation in a bullish direction, trade only in the bullish direction.

This approach helps you trade with the trend.

Scenario 2: Directional Bar

Scenario 2 indicates the market direction, either bullish or bearish.

Price moves up through higher highs and higher lows, and it moves down through lower lows and lower highs. Directional bars provide clarity on the trend.

what is Candlestick

When the market starts a new trend after a consolidation phase, the price will move in the form of directional bars. Minor consolidations may occur during the trend, but the major trend is determined by directional bars.

On lower timeframes, directional bars appear as price swings that move up or down.

Scenario 2 Directional bar

Always remember that price alternates between directional bars and inside or outside consolidation. This is how price moves on a candlestick chart.

Scenario 3: Outside Bar

Scenario 3, also known as stop-loss hunting or liquidity grab, involves price grabbing liquidity before starting a big trend. This pattern comprises an inside candlestick followed by an engulfing candlestick. When the most recent candlestick fully engulfs the previous one, an outside bar pattern forms.

On lower timeframes, this appears as a broadening price pattern, where each successive price wave is larger than the previous one. It is the opposite of Scenario 1.

Scenario 3 Outside bar

Significance of Broadening Pattern (Scenario 3)

Retail traders often place stop-losses above or below the high/low of candlesticks or price swings. Market makers use the broadening pattern to hunt stop-losses and grab liquidity. During this pattern, price breaks previous highs and lows to gather liquidity and start a big trend.

Stop Loss Hunting Pattern

Without sufficient liquidity, market makers cannot initiate major trends. Thus, the broadening pattern marks the starting point of big trends.

To ride big trends, you must thoroughly understand Scenario 3.

The Bottom Line

Price always forms one of the three scenarios discussed above. You can simplify your analysis by focusing on these three scenarios. Without understanding them, mastering technical analysis is impossible.

Spend time practicing these patterns to develop expertise and accurately predict the market.

If you have any questions about these market scenarios, feel free to comment below. I will do my best to assist you in trading.

Thank you!

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