How to identify a Strong Impulsive Move
It is time to start from the beginning and see how you can determine whether a trading range is likely to develop based solely on price movement now that you know what a trending market and a ranging one look like.
You will discover that all of the aforementioned instances of varying markets share a common characteristic. Before sideways movement begins to form, the trend’s final impulsive move or powerful move in line with the trend is very large, nearly vertical, and devoid of any pertinent corrections.
When a trend is in place and you are trading with it according to your trend-following strategy, it is essential to halt your current course of action and be ready for a trading range if you notice a large, impulsive move.
This is the first indication that the trend is coming to an end and that the pair is getting ready for sideways trading from price action. Although this is obviously not always the case, it is quite probable that the pair will begin trading sideways in most cases when you observe a significant directional move without any corrections like this one.
Now is the time to get ready for range trading and ignore your “trade with the trend” trade setups. Generally speaking, this powerful and abrupt rise needs to be at least twice as large as the trend’s most recent correction move. The Fibonacci retracements tool can be used to evaluate this.
The tiny red line pointing against the uptrend is the final correction move that comes before the large impulsive advance upward. The impulsive advance is more than twice as large as the correcting move, as can be seen by charting the Fibonacci retracement levels from the beginning to the conclusion.
The impulsive move would have been precisely twice as large as the correctional move if the 50% retracement level had been located at the second HH of the trend, when the correction started. Let us look at another illustration.
The following is the reasoning behind this. Since the trend in these two instances is upward, the buyers are in complete control, outbid the sellers, and begin at the bottom to raise the price. These purchasers are closing some of their orders and withdrawing their winnings from the market as a result of the corrections.
They repurchase and raise the price when the correction takes place and the price drops again at a favorable level. When they raise the price that quickly and without making any adjustments, it indicates that almost everyone who wanted to purchase that pair has done so, and soon there will not be anyone remaining to do so.
Simultaneously, the vast majority of traders who went long will have to begin closing their orders and withdrawing their gains from the market. At that point, the impulsive movement comes to a halt and the sideways movement starts.
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The purchasers are worn out from pushing the price up too quickly and too high; they will be taking profits for a while and will not be raising it any higher anytime soon.
Furthermore, if you observe how trends act, you will notice that the subsequent correction will correspond with any minor impulsive movement.
You should always anticipate a trading range or correction move that is sizable in both duration and time if the impulsive move is large, as shown in the above chart. In summary, you should always be ready for range trading when a powerful, steep, impulsive advance occurs without obvious corrections.
This is not a must for a trading range to occur; occasionally, trading ranges will emerge without significant impulsive moves before them, but in roughly 90% of cases, I have seen that they do so following such swings.
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