Displacement in forex refers to the high momentum price movement by big institutions in the form of big-bodied candlesticks, which retail traders can use for their benefit and trade in the direction of the displacement to make big profits from the market.
In this post, I will explain displacement from A to Z, so make sure to read the full post because I will also explain with examples. Don’t skip any step so you don’t miss any important points in the trading strategy.
How to identify displacement in trading?
The term displacement refers to real-life physics. When there is large momentum, it’s not easy to stop because it will take some time to stop due to physics. In the same way, we can also see this phenomenon in candlestick charts in the form of big-bodied candlesticks with small wicks. A series of these candlesticks shows the momentum. Remember that a single big candlestick can be a false indicator, so we will always look for a series of candlesticks. Also, there are many other factors that reveal information on the validity of momentum, which I will explain later in this post.
The candlestick chart reveals almost all information about what is happening in the market. In the same way, we can get information on market momentum.
The market is driven by big players and institutions. They cannot place big orders all at once due to liquidity issues. So, they place orders in chunks so they can get enough liquidity and a fair price. We can see this phenomenon on the candlestick chart. So, when we know that big institutions are pushing the market in a bullish direction, we will also look for buy opportunities. This way, we can ride the trends made by big players.
Types of displacement
There are mainly two types of displacement based on the market direction:
- Bullish displacement
- Bearish displacement
Bullish displacement
In bullish displacement, at least 3 or more series of big bullish body candlesticks form on the price chart with small upper and lower wicks. This pattern represents strong buying pressure in the market, and the price will rise in the future.
Remember that a series of candlesticks does not mean these candlesticks will form all at once. One or two small base candlesticks can also form within them. But you should remember the structure of the price. The price structure will reveal that big institutions are placing their orders, and they always place orders in chunks.
When you backtest the candlestick chart, you will be able to determine this price pattern easily.
The main reason for explaining how institutions place orders is to learn the structure that forms when they place orders. If we learn that price structure, we can easily trade with the big institutions. I know it’s not easy to learn in the beginning, but practice and backtesting will make you master this pattern.
Bearish displacement
In bearish displacement, at least three or more series of big bearish candlesticks form with small or no upper/lower wicks.
This represents that there is strong selling pressure in the market, and the price will fall further in the future. So, this pattern shows the selling pressure in the market.
Increase the winning probability of displacement by using BOS
After learning to identify it, the next step is to find the method to filter out the best trade setups. A single market pattern cannot make you a winning trader because the method we have learned can also make false price moves, which results in losing trades. So to overcome this issue, we will add a confluence of break of market structure.
The BOS, or break of market structure, tells us about the future trend direction.
If you don’t know about break of market structure, then kindly read this article completely.
So when price makes a displacement and also a break of structure happens on the price chart, then there is a strong probability of price trend continuation.
As you can see in the image below, when there is a bullish displacement, then the price has also made a bullish break of structure, making our setup more valid.
This method of adding confluences to your trading setup will filter many bad trades and make you a profitable trader.
Price pulls back after displacement
As we have learned, displacement means a series of big-bodied candlesticks will form, which results in the creation of many fair value gaps.
When the price makes a big-body candlestick without any pullbacks or tiny wicks, then a fair value gap forms, which attracts the price later. You should also learn about fair value gaps in detail by reading this article.
So when a fair value gap forms, it means the price will pull back in the future to the FVGs, and then it will continue the trend.
So our focus is to mark these supply and demand zones or FVG zones, and when the price retraces to these zones, we will trade them with a tight stop loss and high risk-reward.
In trading, we cannot buy at an already overbought price or sell at an already oversold price. So we always wait for the price to retrace to the best level, and then we open trades.
This is the best trading method to also manage the risk-reward ratio.
How to trade displacement in forex?
Now we will apply the above knowledge of displacement and make a profitable trading strategy to manage the risk and many psychological factors too.
Because simply learning a good pattern or confluences alone will not make you a profitable trader until you trade with a complete trading plan like a pro trader.
Below I will explain the rules for trade opening, closing, and stop loss; however, you can also make your own strategy that suits your temperament.
Find displacement pattern: First of all, look for a series of big bullish candlestick formations and a bullish break of structure that confirms the bullish trend continuation.
Trade entry: After finding the pattern, mark the FVG and demand zones and wait for the price to retrace to those zones. When the price touches the zone, then you can open an order instantly or wait for a bullish candlestick confirmation.
Stop loss: Place your stop loss below the recent zone or below the last zone that formed during displacement. This is up to you how aggressive or conservative you want to remain in trading.
Take profit: The first take profit will be at the next break of structure in the market. Then you can hold the trade and take profit at Fibonacci extension levels 161, etc.
The bottom line
Trading with the displacement method is a very rewarding and high winning rate method because you will be trading with the institutional traders, not against them.
Also, it’s a simple and effective, not too complex system with many confluences that always confuse retail traders.
Also remember that you can use this trading method on any timeframe. You can also do multiple timeframe trend analysis to increase the winning ratio of your strategy; however, if you fully zoom out your chart and do a trend analysis before finding the pattern, then this is also a good way.
I hope you will like this article. If you have any questions, then don’t forget to ask in the comments. I will try my best to answer your questions.
