In previous articles, we explained to you about types of trading orders, such as Buy Stop, Buy Limit, Sell Stop, and Sell Limit etc., in the Jabalameli Price Action method. Now, join us in this article to get acquainted with invalidity rule.
When the price moves in the market, it may react to a level more than once, and since the trader makes his trading decisions based on these reactions, this is important for him.
In the Jabalameli Price Action method, it is very important to know whether this level or range to which the price has reacted several times is valid or not. If that level is invalid, however, the market is reacting to it, and the trader mistakenly thinks that the level is valid and makes a trading decision on that level, in fact, because the trader has not decided based on strong principles, that trading position will not be successful.
When do levels become invalid?
For example, consider a level in the price chart in which the price has broken that level down once, and we can see very clearly that the price has crossed the level, it is called Breakout. Hence, when the price has crossed that level downwards, it has actually activated all Sell Stop and Buy Limit trading orders in that zone of the market because it has come from top to bottom. As mentioned before, whenever the price moves from top to bottom, it activates the Sell Stop and Buy Limit trading orders, hence, these orders have been activated and entered the market and no longer exist.
Now, if the price breaks out that level upwards again, all Buy Stop and Sell Limit orders will be activated. Since all Sell Stops and Buy Limits in that zone were activated by the price going down, and Buy Stops and Sell Limits were activated by the price going up, hence, there are no other trading orders in this zone. And if the price reacts again in this zone in the future, it is only based on the random sequence.
Now look at the picture below:
In the picture above, a correction is formed after a strong leg, and the last swing high created on the left side of the chart is important for many traders. Some traders are waiting for the price to reach the last swing high and buy and some traders, thinking that the price will not be more expensive, are waiting for the price to reach that point and sell. Thus, there are different traders in the market with different mindsets, that is different from each person’s experiences and methods. However, it is important for us that in either case, both of these trading orders are activated in the last swing high.
After a while, for whatever reason, when the price reaches this point again, the same goes for the two types of trading orders and they will be activated; Buy Limit orders, that they think the price will not get cheaper, as well as Sell Stop orders, that they probably think that the price will continue to fall.
Here we come to the conclusion that all models of trading orders at this price have been activated due to that price swing high, and we can no longer expect a price reaction at this point from now on. In other words, if the price crosses a level twice, then that swing becomes invalid and it doesn’t matter to us anymore. From then on, we need to focus on newer swings with inactivated trading orders.
The financial markets are moving so dynamically and constantly, making different forms and swings in the market that, if we do not look at the market based on financial logic and practical knowledge, there may be misunderstanding that these movements are meaningful and have a specific reason. And that’s why we seek to find rules for it and then follow that rule to trade. Join the Chartical Team to learn more and understand the behavior of the current traders in the market.