From a reading to a trade

The six steps

1. Background. Name the phase on H1. Last major event was strength or weakness, and price has not contradicted it. Part 3.
2. Event. On M15, find the sign of strength or weakness. Climax, stopping volume, shakeout, or their mirrors. Parts 4 and 6.
3. Location. Is the event at a level? A demand or supply zone, a swept high or low, a structure point. Events at levels are the ones worth waiting for.
4. Test. Wait for the return on low volume. Narrow spread, close off the extreme. Part 5.
5. Confirmation. A bar that closes beyond the test bar in the direction of the trade, on volume above the test bar.
6. Levels. Entry at the confirmation close or a limit at the test bar's extreme. Stop beyond the event bar's extreme. Target at the last opposing zone before the move that produced the event.

The long, drawn

Here is the full sequence for a long, with every level marked.

• Bars 1 to 3: markdown on rising volume. Bar 3 is the selling climax, widest spread and largest volume, close off the low.
• Bar 4: stopping volume. Opens lower, huge volume, closes near its high.
• Bar 5: the automatic rally.
• Bars 6 and 7: the test. Two narrow down bars on the lowest volume in the sequence, both closing off their lows. No supply.
• Bar 8: confirmation. Closes above the test high on rising volume. Entry at 4,116.5, the confirmation close.
• Stop: 4,098, below the climax low. If price goes there, the reading was wrong and the trade should not exist.
• Target: 4,152, the last supply area before the decline started. Roughly two to one on this drawing.

Note what the test did. Without it the entry would have been somewhere in bar 4 with a stop under bar 3, a risk twice the size for the same target. The test is not a formality; it is the whole reason the trade has acceptable geometry.

The short, drawn

Now the mirror.

• Bars 1 to 3: markup on rising volume. Bar 3 is the buying climax: widest up spread, largest volume, close in the middle.
• Bar 4: supply confirmed. Opens higher, closes down on heavy volume.
• Bar 5: the automatic reaction.
• Bars 6 and 7: no demand. Two narrow up bars on the lowest volume in view.
• Bar 8: confirmation. Closes below the no demand low on rising volume. Entry 4,291.
• Stop: 4,310, above the climax high.
• Target: 4,256, the demand area that launched the rally.

Shorts on gold need one extra bar of patience. Part 6 explained why: tops sprawl. If the no demand rally is followed by a second one on even lower volume, the second is the better entry, and the stop is the same.

Sizing and management

Risk is the distance from entry to stop, and the position is sized so that distance equals the amount you are willing to lose, one percent of the account for most people. The stop loss and take profit article covers the arithmetic and the ATR stop article covers the case for volatility based stops if the climax bar is enormous.

Management is simple and boring. Nothing changes until price reaches the target or the stop, with one exception: if a sign of weakness prints on the way to a long target, a buying climax or an upthrust at a level, close the trade. VSA that got you in can get you out. Moving the stop to break even after the first push is optional and costs you trades that test twice; do it if you cannot sleep otherwise, not because a rule says so.

When not to take the trade

• The event was on a news bar.
• The test came on high volume and closed on its extreme.
• The event is in the middle of a range with no level nearby.
• The stop distance is more than the recent average bar range times two; the climax was too large to trade on this timeframe, go up one.
• The higher timeframe background disagrees. A buying climax on M15 inside an H1 accumulation is a pullback, not a short.

Course navigation. Previous: Part 9, VSA on spot gold. Course index: VSA course for gold. Next: Part 11, Mistakes and checklist.