Module 2: Chapter 4 – Price Action Confirmation Techniques

Introduction

Price action trading is one of the most fundamental approaches to market analysis, focusing on the movement of price itself rather than relying on lagging indicators. While technical indicators can provide valuable insights, they are ultimately derivatives of price. By learning to read price action directly, traders can identify potential market moves earlier and with greater precision.

This chapter explores advanced price action confirmation techniques that can be used to validate signals from other technical tools or as standalone trading methods. We’ll examine how specific price patterns, candlestick formations, and market structure elements can provide powerful confirmation of potential trade opportunities, helping traders enter positions with greater confidence and precision.

Price Action Foundations: A Brief Review

Before diving into advanced confirmation techniques, let’s briefly review the fundamental elements of price action analysis:

1. Candlestick Patterns: Individual and multi-candle formations that provide insights into market psychology and potential reversals or continuations.
2. SupportA price level where buying interest is strong enough to prevent the price from falling further. and ResistanceA price level where selling pressure is strong enough to prevent the price from rising further.: Price levels where the market has historically reversed, often multiple times, creating zones of buying or selling interest.
3. TrendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). Lines: Diagonal lines connecting successive highs or lows that help identify the direction and strength of a trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend)..
4. Chart Patterns: Recognizable formations such as triangles, head and shoulders, and double tops/bottoms that suggest specific market behaviors.
5. Market Structure: The arrangement of higher highs and higher lows in uptrends, or lower highs and lower lows in downtrends, providing context for individual price movements.
6. Volume: The number of transactions occurring at specific price levels, adding weight to price movements when aligned.
7. Momentum: The speed or velocity of price movements, indicating the strength behind market moves.

Advanced Price Action Confirmation Techniques

1. Multi-Timeframe Price Action Alignment

One of the most powerful confirmation techniques is the alignment of price action across multiple timeframes, providing a comprehensive view of market structure and momentum.

Implementation Strategy:

• Analyze at least three timeframes: higher (trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction), intermediate (entry timing), and lower (precise execution)
• Look for alignment of key price action elements across timeframes
• Give greater weight to signals that appear on higher timeframes
• Use lower timeframes for entry precision, not direction determination

Specific Alignment Patterns:

1. TrendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). Alignment:

• Higher timeframe: Clear trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction with proper market structure
• Intermediate timeframe: Pullback to value area or key level
• Lower timeframe: Reversal pattern in direction of higher timeframe trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).

1. SupportA price level where buying interest is strong enough to prevent the price from falling further./Resistance Confluence:

• Higher timeframe: Major supportA price level where buying interest is strong enough to prevent the price from falling further./resistance level
• Intermediate timeframe: Price approaching the level with momentum slowing
• Lower timeframe: Rejection pattern at the exact level

1. Breakout Confirmation:

• Higher timeframe: Approaching key breakout level
• Intermediate timeframe: Consolidation before the level
• Lower timeframe: Strong momentum candle breaking through the level

Trading Application:

• Only take trades when at least two timeframes align in the same direction
• Size positions larger when all three timeframes align
• Exit positions when lower timeframe signals conflict with higher timeframe structure
• Use higher timeframe structure for profit targets

Multi-timeframe alignment significantly reduces false signals by ensuring that trades are taken in the context of the broader market structure, not just short-term fluctuations.

2. Advanced Candlestick Pattern Confirmation

While basic candlestick patterns are widely known, their effectiveness increases dramatically when combined with specific confirmation elements and contextual factors.

Key Confirmation Elements:

1. Location Confirmation:

• Patterns at key supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels have higher probability
• Patterns at round numbers (psychological levels) have increased significance
• Patterns at Fibonacci retracement levels gain additional confirmation

1. Volume Confirmation:

• Reversal patterns should show increasing volume on the reversal candle
• Continuation patterns should show decreasing volume during consolidation and increasing volume on breakout
• Doji and indecision patterns with high volume indicate stronger potential reversals

1. Size Confirmation:

• Larger candles (relative to recent average) carry more significance
• The size relationship between pattern candles matters (e.g., in engulfing patterns, the second candle should significantly engulf the first)
• Patterns with extreme wicks indicate stronger rejection of price levels

1. Time Confirmation:

• Patterns at the open/close of major sessions (London, New York, Tokyo) have increased significance
• Patterns on higher timeframes (daily, weekly) have greater reliability
• Patterns that form slowly over multiple candles often have higher probability than single-candle patterns

High-Probability Pattern Combinations:

1. Engulfing + Pin Bar Combination:

• An engulfing pattern immediately followed by a pin bar in the same direction
• Indicates strong rejection and reversal momentum

1. Multiple Doji Cluster:

• Three or more doji candles in close proximity
• Indicates extreme indecision before a significant move

1. Three-Drive Pattern:

• Three consecutive attempts to push price in one direction, each with diminishing momentum
• Final drive ends with a strong reversal candlestick pattern

1. Failure Test + Reversal Pattern:

• Price briefly breaks a key level but fails to hold, followed by a reversal pattern
• Indicates a false breakout and strong potential for reversal

Trading Application:

• Require at least two confirmation elements before taking trades based on candlestick patterns
• Give higher priority to patterns that form at confluent technical levels
• Use the structure of the pattern itself to determine precise stop placement
• Look for patterns that tell a clear “story” about the shift in market psychology

Advanced candlestick analysis goes beyond pattern recognition to understand the market psychology behind the patterns, significantly improving trade selection and timing.

3. Order Flow Confirmation Techniques

Order flow analysis examines the interaction between buyers and sellers at specific price levels, providing insights into potential price direction based on actual market transactions.

Key Order Flow Confirmation Elements:

1. Absorption Analysis:

• When large sell orders are absorbed without price declining significantly, indicates strong buying pressure
• When large buy orders are absorbed without price rising significantly, indicates strong selling pressure
• Look for price holding steady despite significant opposing pressure

1. Footprint Charts Analysis:

• Examine the volume distribution within each price bar
• Identify imbalances between buying and selling volume at specific prices
• Look for price levels where one side dominates the other

1. Tape Reading Techniques:

• Monitor the sequence and size of trades at key levels
• Look for large blocks of orders hitting the market at specific prices
• Identify aggressive buying or selling through the speed of transactions

1. Depth of Market (DOM) Analysis:

• Observe changes in the limit order book at key levels
• Look for large orders appearing or disappearing at specific prices
• Identify price levels with thin liquidity that may lead to quick moves

Order Flow Confirmation Patterns:

1. Stopping Volume:

• Large volume spike at the end of a trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). move
• Price fails to continue in the trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction despite the volume
• Often indicates exhaustion and potential reversal

1. Absorption Volume:

• Heavy volume without significant price movement
• Indicates large players absorbing the other side’s orders
• Often precedes a move in the direction of the absorbing side

1. Climax Volume:

• Extremely high volume with extended price movement
• Often marks the end of trends or the beginning of significant reversals
• Look for wide-range candles with volume much higher than recent average

1. Volume Delta Divergence:

• Difference between buying and selling volume diverges from price movement
• Example: Price making new highs but with decreasing buying volume delta
• Indicates potential weakness in the current move

Trading Application:

• Use order flow confirmation at key technical levels to validate entries
• Look for absorption before major breakouts or breakdowns
• Use volume delta analysis to confirm the strength of trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). moves
• Identify climax volume for potential reversal opportunities

Order flow confirmation techniques provide a deeper understanding of market dynamics beyond what is visible on standard price charts, offering valuable insights into the actual buying and selling pressure at key levels.

4. Market Structure Shift Confirmation

Market structure—the pattern of highs and lows—provides the context for all price movements. Identifying shifts in market structure offers powerful confirmation of potential trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). changes.

Key Market Structure Elements:

1. Higher Highs (HH) and Higher Lows (HL):

• Characteristic of uptrends
• Violation of this pattern (lower low after a series of higher lows) signals potential trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). change

1. Lower Highs (LH) and Lower Lows (LL):

• Characteristic of downtrends
• Violation of this pattern (higher high after a series of lower highs) signals potential trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). change

1. Equal Highs (EH) and Equal Lows (EL):

• Characteristic of ranging markets
• Multiple equal highs or lows indicate strong supportA price level where buying interest is strong enough to prevent the price from falling further./resistance

1. Swing Failure Pattern (SFP):

• Price briefly exceeds previous swing high/low but fails to hold
• Often indicates exhaustion and potential reversal

Advanced Structure Shift Patterns:

1. Internal Structure Break:

• Break of minor swing points within the larger structure
• Early warning of potential larger structure shift
• Example: In an uptrend, a break of a minor higher low before the major higher low is broken

1. Nested Structure Shift:

• Structure shift on lower timeframe contained within higher timeframe structure
• Indicates potential countertrend move within the larger trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).
• Use for countertrend entries with defined risk

1. Structure Shift with Momentum Divergence:

• Structure change accompanied by divergence on momentum indicators
• Stronger confirmation of potential trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). change
• Example: Break of higher lows with RSI making lower highs

1. Failed Structure Shift:

• Attempted structure break that quickly reverses
• Often leads to strong continuation in the original direction
• Indicates strong underlying trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). pressure

Trading Application:

• Use structure shifts as primary confirmation for trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). change trades
• Enter after the structure shift is confirmed by a reversal pattern
• Place stops beyond the structure point that was broken
• Target the next significant structure level in the new direction

Market structure analysis provides a framework for understanding price movements in context, helping traders distinguish between normal pullbacks and actual trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). changes.

5. Wyckoff Method Confirmation Techniques

The Wyckoff Method, developed by Richard Wyckoff in the early 20th century, provides a comprehensive framework for analyzing market cycles and confirming potential moves based on the relationship between price and volume.

Key Wyckoff Confirmation Elements:

1. Effort vs. Result Analysis:

• Compare the effort (volume) with the result (price movement)
• Effort without result (high volume, little price movement) indicates potential reversal
• Result without effort (large price movement, low volume) indicates potential weakness

1. Spring and Upthrust Patterns:

• Spring: Price briefly breaks supportA price level where buying interest is strong enough to prevent the price from falling further. but quickly returns above it
• Upthrust: Price briefly breaks resistanceA price level where selling pressure is strong enough to prevent the price from rising further. but quickly returns below it
• Both indicate potential reversals and traps for traders on the wrong side

1. Accumulation and Distribution Identification:

• Accumulation: Sideways price action with increasing volume on up moves
• Distribution: Sideways price action with increasing volume on down moves
• Both precede significant directional moves

1. Relative Strength Comparison:

• Compare the price action of the instrument to its sector or broader market
• Strength or weakness relative to the broader market often precedes price moves

Advanced Wyckoff Confirmation Patterns:

1. Wyckoff Schematic #1: Accumulation:

• Preliminary SupportA price level where buying interest is strong enough to prevent the price from falling further. (PS): Initial supportA price level where buying interest is strong enough to prevent the price from falling further. after a downtrend
• Selling Climax (SC): Heavy volume selling that exhausts sellers
• Automatic Rally (AR): First significant bounce after the selling climax
• Secondary Test (ST): Retest of the selling climax low
• Spring (SP): Final shakeout below supportA price level where buying interest is strong enough to prevent the price from falling further. before the upward move
• Sign of Strength (SOS): Strong price and volume move up
• Backup (BU): Final retest before sustained upward movement

1. Wyckoff Schematic #2: Distribution:

• Preliminary Supply (PSY): Initial resistanceA price level where selling pressure is strong enough to prevent the price from rising further. after an uptrend
• Buying Climax (BC): Heavy volume buying that exhausts buyers
• Automatic Reaction (AR): First significant drop after the buying climax
• Secondary Test (ST): Retest of the buying climax high
• Upthrust (UT): Final shakeout above resistanceA price level where selling pressure is strong enough to prevent the price from rising further. before the downward move
• Sign of Weakness (SOW): Strong price and volume move down
• Rally (RLY): Final retest before sustained downward movement

1. Wyckoff’s Nine Buying/Selling Tests:

• A series of technical tests to confirm accumulation or distribution
• Includes tests of volume, price spreadThe difference between the ask price and the bid price of a currency pair, representing the transaction cost for the trader., relative strength, and effort vs. result
• Provides comprehensive confirmation before major moves

Trading Application:

• Use Wyckoff analysis to identify the current market phase (accumulation, markup, distribution, markdown)
• Look for springs and upthrusts at key supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels for reversal trades
• Use effort vs. result analysis to confirm the strength of breakouts
• Apply the nine buying/selling tests before taking major positions

Wyckoff Method confirmation techniques provide a structured approach to analyzing market cycles, helping traders identify potential turning points and confirm the strength of market moves.

6. Harmonic Pattern Confirmation

Harmonic patterns are precise geometric price formations based on Fibonacci ratios that identify potential reversal zones. When confirmed by specific price action elements, they provide high-probability trading opportunities.

Key Harmonic Patterns:

1. Gartley Pattern:

• XABCD pattern with specific Fibonacci ratios
• Point D is a 78.6% retracement of XA

1. Butterfly Pattern:

• XABCD pattern where point D extends beyond point X
• Point D is a 127.2% or 161.8% extension of XA

1. Bat Pattern:

• XABCD pattern with specific Fibonacci ratios
• Point D is an 88.6% retracement of XA

1. Crab Pattern:

• XABCD pattern with extreme extension
• Point D is a 161.8% extension of XA

1. Cypher Pattern:

• XABCD pattern with specific Fibonacci relationships
• Point C must retrace between 38.2% and 61.8% of BC

Harmonic Pattern Confirmation Elements:

1. Completion Zone Confluence:

• Multiple Fibonacci levels converging in the same area
• Additional technical levels (supportA price level where buying interest is strong enough to prevent the price from falling further./resistance, trendlines) aligning with the completion zone
• Multiple harmonic patterns completing in the same area

1. RSI Divergence Confirmation:

• RSI divergence at the completion point of the harmonic pattern
• Adds significant weight to the reversal probability
• Example: Bearish RSI divergence at point D of a bearish Gartley pattern

1. Candlestick Confirmation:

• Reversal candlestick pattern at the completion point
• Examples: Pin bar, engulfing pattern, or doji at point D
• Indicates rejection of the price level and potential reversal

1. Volume Confirmation:

• Decreasing volume during pattern formation
• Volume spike at the completion point
• Indicates exhaustion of the move and potential reversal

Advanced Harmonic Trading Techniques:

1. Nested Harmonic Patterns:

• Smaller harmonic patterns within larger ones
• Provides multiple confirmation levels
• Increases probability of the trade

1. Harmonic Pattern Clusters:

• Multiple different harmonic patterns completing in the same area
• Creates a high-probability reversal zone
• Example: Butterfly and Gartley patterns completing at the same level

1. Time Symmetry Analysis:

• Analyzing the time taken for each leg of the pattern
• Looking for symmetry or Fibonacci relationships in time
• Adds another dimension of confirmation

1. Alternate Projection Methods:

• Using alternate Fibonacci projections for target identification
• Helps identify multiple potential reversal points
• Provides a framework for partial profit-taking

Trading Application:

• Wait for the pattern to fully complete before entering
• Require at least one additional confirmation element
• Use tight stops just beyond the completion point (point D)
• Consider scaling out at multiple profit targets based on Fibonacci retracements of the pattern

Harmonic pattern confirmation techniques combine precise mathematical relationships with price action confirmation, creating a structured approach to identifying potential reversal points with clear entry, stop, and target levels.

7. Volume Spread Analysis (VSA) Confirmation

Volume SpreadThe difference between the ask price and the bid price of a currency pair, representing the transaction cost for the trader. Analysis examines the relationship between price spreadThe difference between the ask price and the bid price of a currency pair, representing the transaction cost for the trader. (range), closing position, and volume to identify potential market turning points and continuation signals.

Key VSA Confirmation Elements:

1. SpreadThe difference between the ask price and the bid price of a currency pair, representing the transaction cost for the trader. Analysis:

• Wide spreadThe difference between the ask price and the bid price of a currency pair, representing the transaction cost for the trader. bars indicate strong buying or selling pressure
• Narrow spreadThe difference between the ask price and the bid price of a currency pair, representing the transaction cost for the trader. bars indicate lack of interest or consolidation
• The position of the close within the bar indicates which side won the battle

1. Volume Analysis:

• High volume indicates increased participation and potential significance
• Low volume indicates lack of interest or temporary exhaustion
• Volume trends (increasing or decreasing) provide context for price movements

1. Closing Position Analysis:

• Close near the high of a wide-range bar with high volume indicates strength
• Close near the low of a wide-range bar with high volume indicates weakness
• Close in the middle of the range indicates indecision

1. Prior Bar Context:

• The significance of a bar is determined by its relationship to previous bars
• A narrow-range bar after a wide-range bar indicates potential continuation
• A wide-range bar after a series of narrow-range bars indicates potential breakout

High-Probability VSA Patterns:

1. Stopping Volume:

• Wide-range bar with extremely high volume
• Close in the middle or opposite the trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction
• Indicates potential exhaustion and reversal

1. No Demand Bar:

• Narrow-range up bar with low volume
• Indicates lack of buying interest during an uptrend
• Warning sign of potential reversal

1. No Supply Bar:

• Narrow-range down bar with low volume
• Indicates lack of selling interest during a downtrend
• Warning sign of potential reversal

1. Effort vs. Result Imbalance:

• High volume (effort) with small price movement (result)
• Indicates absorption and potential reversal
• Example: High volume down bar that closes near its high

1. Test Bar:

• Bar that moves below the previous bar’s low but closes in the upper half
• Low or average volume
• Indicates successful test of supportA price level where buying interest is strong enough to prevent the price from falling further. in an uptrend

1. Upthrust Bar:

• Bar that moves above the previous bar’s high but closes in the lower half
• High volume
• Indicates potential trap for buyers and reversal

Trading Application:

• Use VSA patterns at key supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels for entry confirmation
• Combine VSA analysis with trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction for higher probability trades
• Use specific VSA patterns to identify potential reversals early
• Apply VSA analysis to multiple timeframes for comprehensive confirmation

Volume SpreadThe difference between the ask price and the bid price of a currency pair, representing the transaction cost for the trader. Analysis provides insights into the intentions of large market participants, helping traders identify potential turning points and continuation signals based on the relationship between price action and volume.

8. Fibonacci Confirmation Techniques

Fibonacci retracements and extensions identify potential supportA price level where buying interest is strong enough to prevent the price from falling further., resistanceA price level where selling pressure is strong enough to prevent the price from rising further., and target levels based on mathematical relationships found throughout nature. When confirmed by specific price action, they provide powerful trade entry and exit signals.

Key Fibonacci Confirmation Elements:

1. Multiple Fibonacci Level Confluence:

• When multiple Fibonacci levels from different swings converge at the same price
• Creates a stronger supportA price level where buying interest is strong enough to prevent the price from falling further./resistance zone
• Example: 61.8% retracement of one swing aligning with 38.2% retracement of a larger swing

1. Fibonacci Time Analysis:

• Applying Fibonacci relationships to time instead of price
• Looking for potential reversals at Fibonacci time intervals
• Adds another dimension of confirmation when aligned with price levels

1. Fibonacci Extension Targets:

• 127.2%, 161.8%, and 261.8% extensions of previous swings
• Identify potential reversal or target zones beyond the previous swing points
• Particularly useful for trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). continuation trades

1. Fibonacci Retracement Zones:

• 38.2%, 50%, and 61.8% retracements of previous swings
• Identify potential reversal or continuation zones within the previous swing
• Particularly useful for countertrend entries in strong trends

Advanced Fibonacci Confirmation Patterns:

1. Fibonacci Reversal Pattern:

• Price retraces to a key Fibonacci level (typically 61.8% or 78.6%)
• Forms a reversal candlestick pattern at that exact level
• Volume increases on the reversal candle

1. Fibonacci Extension Rejection:

• Price reaches a key Fibonacci extension level (typically 161.8% or 261.8%)
• Forms a rejection pattern (pin bar, engulfing) at that level
• Indicates potential exhaustion and reversal

1. Fibonacci Expansion Pattern:

• Three-wave pattern where the third wave is a Fibonacci relationship to the first
• Typically 161.8% or 261.8% of the first wave
• Provides precise target for the move

1. Fibonacci Cluster Zone Trading:

• Identify areas where multiple Fibonacci levels converge
• Wait for price to reach the cluster zone
• Enter on the first reversal signal within the zone

Trading Application:

• Use Fibonacci retracements for countertrend entries in established trends
• Use Fibonacci extensions for profit targets in trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). continuation trades
• Require price action confirmation at Fibonacci levels before entering
• Look for confluence between Fibonacci levels and other technical levels

Fibonacci confirmation techniques provide a mathematical framework for identifying potential reversal and target levels, helping traders make precise entries and exits when confirmed by supportive price action.

9. Pivot Point Confirmation Techniques

Pivot points are calculated supportA price level where buying interest is strong enough to prevent the price from falling further. and resistanceA price level where selling pressure is strong enough to prevent the price from rising further. levels based on the previous period’s high, low, and close. They provide objective levels where price may reverse or continue, especially when confirmed by specific price action patterns.

Key Pivot Point Levels:

1. Central Pivot (P):

• The main pivot level, calculated as (High + Low + Close) / 3
• Acts as the primary reference point for the current session

1. SupportA price level where buying interest is strong enough to prevent the price from falling further. Levels (S1, S2, S3):

• Calculated levels below the central pivot
• Potential areas where price may find supportA price level where buying interest is strong enough to prevent the price from falling further.

1. ResistanceA price level where selling pressure is strong enough to prevent the price from rising further. Levels (R1, R2, R3):

• Calculated levels above the central pivot
• Potential areas where price may find resistanceA price level where selling pressure is strong enough to prevent the price from rising further.

1. Camarilla Pivot Points:

• Alternative calculation method providing closer supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels
• Particularly useful for range-bound markets

1. Woodie’s Pivot Points:

• Places more emphasis on the closing price
• Often used by day traders for intraday levels

Pivot Point Confirmation Patterns:

1. Pivot Rejection Pattern:

• Price approaches a pivot level and forms a rejection candlestick pattern
• Examples: Pin bar, engulfing pattern, or doji at the pivot level
• Indicates potential reversal from the pivot

1. Pivot Breakout Pattern:

• Price breaks through a pivot level with strong momentum
• Confirmed by increased volume and wide-range candles
• Indicates potential continuation beyond the pivot

1. Pivot Range Pattern:

• Price oscillates between two adjacent pivot levels
• Creates a temporary range-bound environment
• Trade bounces between the levels until a breakout occurs

1. Multiple Pivot Confluence:

• Different pivot calculation methods showing levels in the same area
• Creates a stronger supportA price level where buying interest is strong enough to prevent the price from falling further./resistance zone
• Example: Standard pivot R1 aligning with Woodie’s R1

Advanced Pivot Trading Techniques:

1. Opening Price Pivot Relationship:

• Analyze where the market opens relative to the central pivot
• Opening above the pivot suggests bullish bias for the session
• Opening below the pivot suggests bearish bias for the session

1. Mid-Pivot Levels:

• Calculate additional levels between standard pivots
• Creates more granular supportA price level where buying interest is strong enough to prevent the price from falling further./resistance framework
• Useful for precision entries and exits

1. Pivot Point Moving Average:

• Create a moving average of daily pivot points
• Identifies the longer-term pivot trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).
• Provides context for current pivot levels

1. Multi-Timeframe Pivot Analysis:

• Compare daily, weekly, and monthly pivot levels
• Identify areas where pivots from different timeframes align
• These confluence areas have increased significance

Trading Application:

• Use pivot points as primary supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels for intraday trading
• Enter trades when price reacts to pivot levels with confirming price action
• Place stops beyond the next pivot level
• Target the next pivot level in the direction of the trade

Pivot point confirmation techniques provide objective, calculated levels for potential market turning points, helping traders identify high-probability entry and exit points when confirmed by supportive price action.

10. Supply and Demand Zone Confirmation

Supply and demand zones represent areas where institutional orders have previously entered the market, creating imbalances that often lead to significant price movements when revisited. When confirmed by specific price action, these zones provide high-probability trading opportunities.

Key Supply and Demand Zone Characteristics:

1. Zone Creation:

• Supply Zones: Areas where price dropped sharply, indicating strong selling pressure
• Demand Zones: Areas where price rallied sharply, indicating strong buying pressure
• The stronger and faster the move away from the zone, the more significant it is

1. Zone Strength Factors:

• Fresh zones (never tested before) are stronger than tested zones
• Zones on higher timeframes are stronger than those on lower timeframes
• Zones with larger imbalances (bigger moves away) are stronger
• Zones that form after news or major events have increased significance

1. Zone Visualization:

• Supply zones are drawn as rectangles above current price where selling pressure previously emerged
• Demand zones are drawn as rectangles below current price where buying pressure previously emerged
• The zone extends from the first candle of the move to the last candle before the sharp move away

Supply and Demand Confirmation Patterns:

1. Zone Rejection Pattern:

• Price enters a supply/demand zone and immediately forms a rejection pattern
• Examples: Pin bar, engulfing pattern, or doji within the zone
• Indicates potential reversal from the zone

1. Zone Sweep Pattern:

• Price briefly pushes beyond the zone before reversing sharply
• Indicates a stop hunt before the actual reversal
• Often creates a stronger move in the opposite direction

1. Zone Consolidation Pattern:

• Price enters a zone and consolidates briefly before moving in the expected direction
• Indicates absorption before continuation
• Look for decreasing volume during consolidation and increasing volume on breakout

1. Zone Failure Pattern:

• Price enters a zone but fails to reverse as expected
• Indicates the zone has been consumed or is no longer valid
• Often leads to strong continuation beyond the zone

Advanced Supply and Demand Techniques:

1. Nested Zones:

• Smaller zones within larger zones
• Creates multiple layers of supportA price level where buying interest is strong enough to prevent the price from falling further./resistance
• Increases probability when price reacts at the intersection

1. Zone Strength Qualification:

• Develop criteria to rank zones by strength
• Consider factors like timeframe, freshness, and creation context
• Trade only the highest-ranked zones for better results

1. Zone Confluence Analysis:

• Identify areas where supply/demand zones align with other technical levels
• Examples: Fibonacci levels, trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). lines, or pivot points
• These confluence areas have increased significance

1. Zone Flip Technique:

• When price breaks through a supply zone, it often becomes a demand zone (and vice versa)
• These “flipped” zones often provide strong supportA price level where buying interest is strong enough to prevent the price from falling further./resistance
• Look for confirmation when price returns to the flipped zone

Trading Application:

• Identify supply and demand zones on higher timeframes first
• Wait for price to approach these zones on lower timeframes
• Enter only when confirming price action appears within the zone
• Place stops beyond the zone boundary
• Target the next significant zone in the direction of the trade

Supply and demand zone confirmation techniques focus on areas of significant institutional activity, helping traders align with the “smart money” and identify high-probability entry and exit points when confirmed by supportive price action.

Practical Trading Systems Using Price Action Confirmation

The Multi-Confirmation Reversal System

This system requires multiple forms of price action confirmation before entering reversal trades, significantly increasing the probability of success.

System Components:

• SupportA price level where buying interest is strong enough to prevent the price from falling further./Resistance Levels
• Candlestick Patterns
• Volume Analysis
• Market Structure

Entry Rules:

• Price must approach a significant supportA price level where buying interest is strong enough to prevent the price from falling further./resistance level
• A reversal candlestick pattern must form at the level
• Volume must increase on the reversal candle
• The reversal must align with the higher timeframe market structure
• Enter on the close of the confirmation candle

Exit Rules:

• Take Profit: At the next significant supportA price level where buying interest is strong enough to prevent the price from falling further./resistance level
• Stop Loss: Beyond the high/low of the reversal pattern
• Trailing Stop: Move stop to breakeven after price moves 1:1 risk-reward, then trail behind significant swing points

This system combines multiple confirmation elements to identify high-probability reversal points, reducing false signals and improving trade selection.

The Breakout Confirmation System

This system uses specific price action confirmation techniques to distinguish between genuine breakouts and false moves.

System Components:

• Key Breakout Levels (supportA price level where buying interest is strong enough to prevent the price from falling further./resistance, trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). lines, chart patterns)
• Volume Analysis
• Candlestick Patterns
• Market Structure

Entry Rules:

• Price must break a significant level with a strong momentum candle
• Volume must increase significantly on the breakout candle
• The first pullback after the breakout must hold above/below the broken level
• Enter on the first continuation candle after the pullback

Exit Rules:

• Take Profit: At the next significant supportA price level where buying interest is strong enough to prevent the price from falling further./resistance level or measured move target
• Stop Loss: Below/above the pullback low/high
• Trailing Stop: Trail behind significant swing points once the trade shows profit

This system helps traders avoid false breakouts by requiring specific confirmation elements and waiting for the first pullback to confirm the breakout’s validity.

The Trend Continuation System

This system uses price action confirmation to identify high-probability entry points within established trends.

System Components:

• TrendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). Direction Analysis
• Fibonacci Retracement Levels
• Candlestick Patterns
• Market Structure

Entry Rules:

• Identify the prevailing trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). using higher timeframe analysis
• Wait for a pullback to a key Fibonacci level (typically 38.2% or 50%)
• Look for a reversal candlestick pattern at the Fibonacci level
• Confirm that the pullback maintained proper market structure (higher lows in uptrend, lower highs in downtrend)
• Enter on the close of the confirmation candle

Exit Rules:

• Take Profit: At the previous trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). extreme and beyond (Fibonacci extensions)
• Stop Loss: Below/above the pullback low/high
• Trailing Stop: Trail behind the 21 EMA once the trade shows profit

This system helps traders enter established trends at optimal points with clear confirmation, improving entry timing and risk-reward ratios.

The Supply and Demand Zone System

This system focuses on trading from institutional supply and demand zones with specific price action confirmation.

System Components:

• Supply and Demand Zone Identification
• Candlestick Patterns
• Volume Analysis
• Market Structure

Entry Rules:

• Identify significant supply and demand zones on higher timeframes
• Wait for price to approach these zones on lower timeframes
• Look for rejection candlestick patterns within the zone
• Confirm with increasing volume on the rejection candle
• Enter on the close of the confirmation candle

Exit Rules:

• Take Profit: At the next significant supply/demand zone in the direction of the trade
• Stop Loss: Beyond the zone boundary (plus a small buffer)
• Trailing Stop: Trail behind significant swing points once the trade shows profit

This system aligns traders with institutional activity by trading from areas of significant supply and demand, improving trade probability and risk-reward ratios.

Common Pitfalls and Optimization Techniques

Common Price Action Confirmation Pitfalls

1. Confirmation Bias: Looking only for confirmation that supports your existing bias rather than objectively analyzing all available information.
2. Overanalysis Paralysis: Requiring too many confirmation elements before entering trades, often missing good opportunities while waiting for “perfect” setups.
3. Ignoring Context: Applying the same confirmation criteria across all market conditions without considering whether the market is trending, ranging, or in transition.
4. Recency Bias: Giving too much weight to recent price action and ignoring the broader historical context of supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels and market structure.
5. Indicator Dependency: Using indicators as primary decision tools rather than as confirmation of price action, leading to lagging entries and exits.

Optimization Techniques

1. Personalized Confirmation Checklist: Develop a personalized checklist of confirmation elements that align with your trading style and timeframe, requiring a minimum number before entering trades.
2. Market Condition Adaptation: Adjust your confirmation requirements based on market conditions—require fewer confirmations in strong trends and more in ranging or volatile markets.
3. Timeframe Alignment Process: Develop a systematic process for analyzing multiple timeframes, starting with the highest relevant timeframe and working down to your execution timeframe.
4. Objective Pattern Recognition: Define specific, measurable criteria for each price action pattern you trade, removing subjectivity from pattern identification.
5. Performance Tracking by Confirmation Type: Track the performance of trades based on the specific confirmation elements present, identifying which combinations work best for your trading style and market conditions.

Conclusion

Price action confirmation techniques provide traders with powerful tools to validate potential trade opportunities and improve entry timing. By focusing on the direct movement of price rather than lagging indicators, traders can identify potential market moves earlier and with greater precision.

The most effective approach combines multiple confirmation elements across different analytical frameworks—candlestick patterns, market structure, volume analysis, and supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels—to create a comprehensive view of market conditions. This multi-confirmation approach significantly reduces false signals and improves trade selection.

Remember that price action analysis is both a science and an art. While specific patterns and techniques can be defined objectively, their interpretation requires experience and judgment. Continuously refine your price action reading skills through practice, review, and adaptation to different market conditions.

By mastering the advanced price action confirmation techniques covered in this chapter and incorporating them into your trading approach, you’ll develop the ability to identify high-probability trade opportunities with greater confidence and precision.