When a trader wants to make a decision in the market, for example, if they are looking for sell trades and the price is near the lower boundary of the market context, all the clues that the market provides suggest that entering this trade would be a good sell trade. However, one should not be deceived by these signals because they are false indications, and entering a trade based on them will not result in a successful trade.
In the Chartical method, when the price is at the edge of the lower market context, we should not look for sell trades. Instead, we should look for reasons that provide entry points for buying. Similarly, when the price moves up, if we open the market on our system for review and the price is near the upper boundary of our desired market context, even if the market shows us every sign and clue for a Long buy trade, we should not execute this buy trade. This is because we know it is an effective tension level—i.e., the highest and most effective level within the market context. It has enough potential to cause a significant change in price behavior. Therefore, any signs or clues are false and should not be used as a basis for entering a buy trade. Instead, contrary to other traders in the market, we should execute a sell trade.
As Warren Buffett says, trends form in places where the general public does not notice, and many people do not believe that a trend is forming there. Regarding Warren Buffett’s explanation, the signs that are forming are new and powerful trends, in places where about 90-95% of people do not believe a new trend is forming. It acts exactly the opposite.
The market context framework is a place where we expect a price reversal when the price reaches it. This level is considered a reliable framework when we are in a suitable market context. For example, the market extensions should not be formed by a large number of candles, and our extension should be 4 to 8 candles long, not, for instance, 40 candles out of 60-70 recent market candles. Such a 60-70 candle market context is not suitable and sufficient for our market. If we are in such a market, we need to move up a few time frames to remove extra details so that our framework is examined based on the correct time frame.
If the market cycle is a range sideways, the market context framework is the upper and lower range levels. But in a trending cycle, for example, after a range, if a significant swing forms and the price exits the range with a strong step and weak correction in a downward direction, then we only have the upper level of the market context framework. In such a market, based on the clues of trend strength and weakness, we do not expect a price reversal until we see signs of weakness. According to the image below, as long as the price does not break the last swing high that did not lead to the last swing low and does not form a significant swing, we are not allowed to draw the lower level of the market context framework. For instance, in the image below, swing 2 marks the end of the downward trend. However, as long as the price oscillates between the two ranges A and C, which are our upper and lower market context frameworks, we are in a range sideways.
For example, if we have a swing at the highest point of the chart and a swing at the lowest point, it means that in this market context, we have two effective swings: the highest and the lowest swings. Thus, this indicates the market context framework.
Between the upper and lower levels of the market context framework, there should be at least a few movements observed. Otherwise, it is not possible to draw a framework based on just 7-8 candles of upward movement followed by a few downward candles that look more like a range.
According to the image below, when the price forms three extensions in an uptrend, we can draw a key level from the start of each extension and the effective swing range. If the price moves contrary to the uptrend after the last extension, i.e., moves from swing D, the first level ahead of the price is level 2, which is drawn from swing C. We are waiting for the price to react to this level, but we do not expect a complete price reversal because, based on the market context of 60-70 candles still active in traders’ historical memory, our upper structure level, which is a key level drawn from effective swing D, and the lower structure level, which is key level 3 drawn from swing A, are considered. Level 2 is in the middle of the market context framework, and so far the number of candles might be 30 or more. We expect the price to reach the lower level. Therefore, level 2 cannot be a serious barrier to the price movement.
Of course, when the price reaches a significant level, we must assess whether the price can break the level or not based on the market situation. Additionally, if the price has broken the level, we need to determine whether the break is strong or not. Moreover, when the price reaches a level, we should not immediately assume a price reversal. Instead, we should expect a price reversal beyond the market context framework.
If the price is near the lower boundary of the market context, even if indicators and other tools provide us with entry signals, we should not consider entering a Short trade. Instead, we should look for reasons and clues for entering a Long trade. This is because it is an effective tension level with significant potential to change the price behavior. We know that this is an effective tension level, meaning the lowest and most effective level within that market context, and thus has enough potential to seriously alter price behavior. Therefore, any signs or clues we receive are false and should not be used as a basis for entering a sell trade. Instead, contrary to other traders in the market, we should execute a buy trade. As Warren Buffett says, trends form in places where the general public does not notice, and many people do not believe that a trend is forming there.
