Where the chart fitsDrivers say why. The chart says when and where.
Most traders find a chart pattern first and build the trade around it. That is backwards: your drivers say why a market should move, and the chart only shows when to act, where you are wrong and where to aim.
Chart first is backwards
Most traders find a beautiful chart pattern first and then build the whole trade around it. That is backwards. As the lesson on technicals and fundamentals showed, the fundamentals give you the reason and the chart gives you the timing.
In a thesis, that splits the work cleanly. The drivers, such as interest rates, inflation and growth, tell you why the market should move. The chart answers 3 other questions: when to act, where you are wrong and where to aim. A level is a place on the chart. It can show you where to act, but the reason has to come from the drivers.
One question for the chart
When you open the chart, you ask one question: does the price structure, meaning the shape of the recent highs and lows, support my idea? There are 4 structures you will see again and again, shown below.
If the structure supports your view, you have your timing. If it does not, you wait. You do not change the view to fit the chart.
Price pushes through a level that held before.
Price comes back to check a level it just broke.
Price bounces sideways between 2 levels.
Price keeps making higher highs or lower lows.
The AUD/CHF example on the chart
Take the AUD/CHF thesis from the lesson on writing a thesis: you expect the Australian dollar to weaken against the Swiss franc, and your drivers already point down. On the 1-hour chart, price has just made a lower high, a bounce that could not reach the last high. It is back at an old floor that broke and is now acting like a ceiling.
The structure agrees with your view, so now you have the why and the when. Notice that the chart did not give you the idea. It only showed you the moment to act on an idea you already had.
Where you are wrong, and where you aim
Next, you decide where you are wrong. If price climbs back above the last high, the structure is broken and your idea is over. You write that down before you enter, and your stop goes above that high.
Then the target. The drivers here are big and slow, so you aim for a swing trade that lasts days to weeks, with a target near the last level where buyers stepped in on the weekly chart. A short momentum idea would aim closer. The horizon of your drivers decides which one fits.
Put together, the chart added 3 lines to your thesis: the structure, the point where you are wrong and the target. The reason was already there.
A level is a place, not a reason. When the chart and your reason disagree, trust the reason.
In short
- The drivers tell you why a market should move. The chart only tells you when and where to act.
- Ask the chart one question: does the structure, whether a breakout, a retest, a range or a trend, support your idea?
- Write down where you are wrong and where you aim before you enter. When the chart and your reason disagree, trust the reason.
Questions
Which timeframe should I use?
In the example, the 1-hour chart times the entry and the weekly chart sets the target. Your drivers set the horizon, and the chart has to fit it.
What if the structure never lines up?
Then there is no trade yet. The thesis can stay valid while you wait, and sometimes the right structure never comes.
Key terms
- Market structure
- The pattern of highs and lows on the chart. It tells you whether a market trends or ranges, and where the key levels are.
- Breakout
- When price leaves a range or crosses a key level with conviction.
- Retest
- When price comes back to a level it just broke, to check whether the level now holds from the other side.
- Range
- A market that moves sideways between a ceiling and a floor instead of trending.
- Trend
- A market that makes higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend).
- Support and resistance
- Price areas where buying (support) or selling (resistance) stepped in before. Old resistance often turns into new support after a break.