Do You Understand The Hierarchy Of The Market?


Markets move based on confluence. This confluence is attained by the collection of relevant data. The data points are in turn gained from the different levels of indicators. Let’s address some basics. In a bull market, an effective trader buys dips. This strategy is not continued into a bear market. The strategy is now adjusted to sell pumps. If you invert the chart of any bearish trend you will see that selling pumps becomes buying dips. I am going to try and keep this as simple as possible. If I were to invert some charts you are likely to have a better understanding. So let’s do that. Below is the “inverted” S&P, which looks like a pretty decent buy opportunity, correct?

There is a beautiful bounce off of support, which looks like a good entry for a long. However, it is actually inverted, meaning it’s actually a rejection at the point of resistance. Two weeks ago I said that this would happen. How did I arrive at this conclusion? Well, I gathered data and then simply observed which side had the most confluence. This data and “conclusion” is then mentally filtered through a “market hierarchical order”. Markets follow a chain of command and understanding how that hierarchy operates gives you an edge.

Lower Level Signals

Many have chosen to base their outlooks and trade ideas on “lower level indicators”. I pointed this out to those who challenged my trade idea of shorting ETH a week ago. In my post, “Short ETH – What I Am Expecting In The Market”, I addressed the fact that I had begun building a short ETH position. This was challenged by a few readers on various platforms. You have to understand that at this level, everyone was bullish. ETH was about to break the $2K level when I published the article. A few days later and ETH is trading at $1696.00 at the time of writing. Everyone was simply focusing on lower-level indicators instead of gaining a better perspective through a more “complete” analysis.

Isolated Data

Simply extracting all the “positives” while excluding all the “negatives” is a biased viewpoint. I am neither bullish nor bearish in the short to medium term. I process the data and then go with whichever outcome has the most confluence. Simultaneously, I need to ensure that the higher-level indicators are in agreement with the outcome. This is where many are currently making a crucial mistake. An incomplete analysis void of observing hierarchical order will not produce an effective market indicator. A trend is a higher level indicator, yet not the highest. Despite what some have said, there is no bullish trend, the trend is still clearly bearish. There is no reversal at this point, meaning that any move up will be met by the dominant trend, being bearish. There are other higher-level indicators that are even more powerful than this particular example.

Final Thoughts

Despite the many voices “advising” me that ETH was about to soar, I continued building my ETH position because my thesis was not based on a single isolated “positive scenario”. If you are not putting together a thesis for your trade ideas then you are simply gambling. A single point of data does not produce a successful trade. These are the facts, clearly displayed in the current price action. A week ago you could have argued your bullish viewpoint very convincingly. However, reality has destroyed the bullish case and is simultaneously validating the bearish thesis. Be careful of what you want to happen eventually leading you down a path of deception. Remain with data and learn to interpret it more effectively with every trade and in time your success rate will improve significantly. All the best for the weekend ahead! See you next time!

Leave a Reply

%d bloggers like this: