Why Price Isn't Random — Full Breakdown & Transcript

[00:00] Why price is not random. 30 some years ago nobody sat me down and explained order flow. I watched the rubble get touched three four times and I didn't know why. I just knew something was pulling

[00:13] price back to it over and over like it had a job to do and it took months before I understood what that job was. So here's what very few people are going to tell new traders. Every candle on your

[00:26] chart is a record of a transaction. Somebody bought, somebody sold at the same time. And behind a chunk of those trades sits an institution moving size it cannot fill in just one shot. And that's

[00:41] the whole story. Liquidity, balance, order blocks, structure, these are not separate tricks you memorize off a checklist. They're one language describing the same thing from different angles.

[00:55] where size is resting, where size already moves, and where size is about to move next. And if you've bounced around different mentors, you've probably heard six different names for the same candle.

[01:07] And that's fine. Names change, but the order flow underneath doesn't. So let's walk through the way I actually think about it. At the root, this is all Dow theory, a 100-plus century truth that we are still talking about today,

[01:23] even though we might use different languaging. So let's not worry about the glossary. Let's get into what these things actually mean and how you can use them. Liquidity is just resting orders, stop losses, raise out entries, profit targets,

[01:37] all sitting at price levels that people are watching individually, but they add up to a pool worth targeting by institutions. So equal highs are a liquidity pool.

[01:50] So are equal lows. Every time price prints two highs close to the same level, retail traders start placing stocks just above that second high because that's what every course tells them to do.

[02:02] Institutions know that. They know where retail puts their stocks because retail puts them in the same three, four places every single time. Trendline liquidity works the same way.

[02:14] I don't use trendlines. That's going to be probably the most controversial thing I'm going to say. but let's say you draw a trend line and you draw a trend line under a series of higher lows and higher highs and you find a cluster of stocks sitting, you guessed it, just below

[02:28] because somebody somewhere taught a whole generation of traders to trail their stocks under the trend lines. But I'll tell you this. I tell this to my room, my trading room every morning. Friends, don't let friends draw trend lines.

[02:41] All right, so there's liquidity that builds across sessions. All right, session liquidity can be yesterday's high, Yesterday's low, a level from a few days back that never got touched again. Price has a habit of returning to those old highs and lows long after everyone's forgotten why they mattered.

[02:59] Because that's unfinished business. Those are unfilled orders. They're still sitting there. Here's the part that took me kind of an embarrassing long time to really click. A breakout isn't proof of strength.

[03:12] It's a lot of the time a liquidity grab. Price pushes through a level just far enough to trigger those Momo chasers, fill the orders, makes it look like a breakout, and then what happens?

[03:27] It turns around and goes right back into the range it came from. Because the move was never about direction. It was about collecting orders. Fair value gaps. Once you're watching for liquidity, the next question is where price actually wants the return to fill in.

[03:43] There's something called a fair value gap. Now, you remember I referred to Charles Dow before, talking about a hundred-plus-year-old philosophy that's been renamed and reused, and that's fine, right? Well, fair value gaps are very simple.

[03:55] They're multi-hundreds. They're centuries-old Japanese candlestick patterns. So a fair value gap that has three candles to the upside is also known as three soldiers. Three candles to the downside, it's known as three crows.

[04:09] The reason I give you the history is to let you think about the fact that, wow, this isn't new. We're still talking about this century later. There's some real truth behind it. That's the reason I love being a history, kind of major, if you will, of trading.

[04:25] So let's think about, again, a fair value gap. Now you know what it really is. It's three candles. The middle one moves so fast so aggressively that it leaves a gap between the wick of the first candle and the wick of the third So the first and third candles cannot overlap in their range

[04:43] No buyers met sellers there. It's considered to be empty. That's why three soldiers and three crows are very easy to recognize and, again, century-old patterns. Because empty space in price isn't random.

[04:57] It's usually the footprint of an institution filling orders too quickly for the market to keep up with and price as a habit of wanting to come back and fill that before continuing. Not always.

[05:09] Nothing is always. Not every gap gets filled. But when you start marking these on your charts, you'll notice a cluster right where real moves often start. So it looks like a breakout, and it retraces, shaking out weak hands, and then it continues in the direction.

[05:25] How many times have you said, oh my gosh, it did what I thought it was going to do, move higher, move lower. It stopped me out first and then turned around. And traders think, oh, someone's out to get me. The market's out to get me.

[05:38] The market doesn't even know we're there. It's just working within these imbalances. Now I've had traders tell me this feels like magic the first time they see it work. And they're not looking at it as retail traders, but they're looking at it from the standpoint of what's the psychology of size beneath it.

[05:55] It's not magic. It's an imbalance between buyers and sellers. Big enough that price prints a hole instead of a smooth staircase. Mark that gap, that space between, say, in a three soldiers up pattern with three up candles.

[06:11] Mark the space between the first candle's high and the third candle's low. That space is your fair value gap. And you'll start to see whether the levels were respected, revisited, or it was just noise and completely ignored.

[06:24] Order blocks. If a fair value gap tells you where the imbalance happened in a swift moving market, an order block tells you where the institution actually built the position that caused it. Look at the last candle going in the opposite direction before a strong impulsive move. That candle is usually the order block.

[06:41] If price rallies hard, the last down candle before the rally is your bullish order block. It's the last spot where sellers were still in control before size stepped in. That's flipped it. Not every one of those candles is worth trading.

[06:55] I use two filters before I trust one. First, did that candle actually create a fair value gap on the way up? If the move afterward is smooth with no gap, that candle's probably not where the real entry happened.

[07:07] It's somewhere further along and you might need to drop to a different time frame and a different time horizon to take advantage of it. Not every setup is going to be found on our favorite time frame.

[07:20] That's why I always remember there's three time horizons I focus on. Five-minute for day trading, daily for swing trading, and weekly for long-term trading. All right, the second thing. Did price go on to break a prior high or low after that candle?

[07:35] If it didn't, you don't know whether that was institutional positioning or just noise that fizzled out. When both of those line up, you've got a level worth watching for a return. Market and wait for price to get back to it.

[07:48] And that's your trigger. Before we go further, this is starting to click a little bit for you. Understanding the history, understanding why we're still talking about some of these techniques. Hundreds of years later, hit like, drop a comment, telling you which one of these concepts you've never had explained clearly before.

[08:04] It helps me to know what to cover deeper on the channel. The daily cycle. Zoom out from individual setups and you'll start to notice trading days itself have a rhythm. It's actually called a day trading clock.

[08:16] It ranges, grabs liquidity, it looks at time to make certain types of volatility or reversal windows, and then it delivers. Most sessions open with price doing very little.

[08:29] In other words, in terms of clarity. As soon as the bell rings, you might see a huge candle. Price is building a range. It's moving sideways. There's a lot of price discovery in the first five to 15 minutes after the bell if you're looking at a five-minute chart.

[08:42] In fact, a lot of times, you'll get sort of these highs and lows that we've talked about as price moves to a level, finds liquidity, and gets rejected from it. That range is the market building its own fuel. And if that range is occurring between 9.30 and 10 o'clock, it's known as the clearing range or the opening range.

[09:00] All right, then comes the part that traps most retail traders. Price is going to push out of that range. They grab the liquidity above it if it a clearing range break to the upside or below it if it a clearing range break to the downside And for a few minutes it looks like it going to have real follow through in that direction That is what liquidity grabs look like

[09:21] And it's the part I watch for more than anything else in my own trading. If price grabs the highs of that 30 minute high to low range, the clearing or opening range, I'm leaning towards usually a bearish sweep for the rest of, say, the next 10 to

[09:40] even 20 minutes. Now, if it goes down to the lows and it looks like a breakdown and all the MoMo traders run in, I'm leaning bullish. Again, it's not a guarantee. In fact, you might say, Rob, how do you know which opening range breakouts are more likely

[09:54] to break out and continue or break down and continue? Great question. Here's how you know the difference between those opening range breaks that continue and the ones that fail. And it's really simple.

[10:06] One word, trend. If there is no trend present at the time of the break through the highs or the breaks down through the lows, it's more likely going to be a failed break, a liquidity grab, and price will re-enter the range.

[10:21] If it's a trending morning and the market between 9.30 and 10 and even after is in a trend, the opening range breakout has a better chance of follow through. So the structure dictates whether or not the break has a higher probability of going or a lower probability of going.

[10:38] And for the most part, I'd say if you're looking at most mornings where you see the opening range, most of the time it's a non-trending environment. So there's no guarantees in opening range breakout trading.

[10:51] Do I fade that or do I look for follow through? The difference between fade, which is expecting the liquidity grab and watching price re-enter the range, and follow through, which is a momentum follow through, the difference is market structure.

[11:05] Chop versus trend. So again, there's no guarantees in this business, but we do have probabilities. And once you watch this pattern play out across enough sessions on enough different instruments,

[11:17] you stop being surprised by it. You start anticipating it. You start imagining, is this a trend? What it can do? Is this a trap? What it's likely to do? The same liquidity logic stretches across days, not just sessions.

[11:31] Yesterday's high and yesterday's low are some of the most reliable liquidity magnets you'll find on any chart. In fact, I'll even add the previous session's close as well. I've lost count on how many sessions I've watched the open, drift towards the previous day's lows, sweep it by a handful of points, and then rally the rest of the morning or even the session.

[11:50] Retail sees that sweep and panics because it looks like the low is about to give way completely. Institutions see the same sweep and treat it as exactly what they needed, a pool of stops to fill their positions again.

[12:05] That's why I always mark the previous day's high or low, the previous day's close. If you're a fan of learning pro-final, you can even mark the previous sessions, value area high and value area low.

[12:18] No single level is magical. What we're trying to find are obvious levels where everyone can see it. Think about this for a moment. Most traders will teach these super secret things, right?

[12:31] No one else sees this but me. What's the value in that? The reason so much of what we're talking about in this video and on my channel works is because they're obvious. When they're obvious, the main difference is, do the sellers overpower the buyers or do the buyers overpower the sellers?

[12:49] Because we're all seeing the same level. Why does one trader look at a ceiling and think it's a momentum move and the other trader looks at a ceiling and thinks it's going to be a fade? We're all looking at the same level and that's the value.

[13:01] So don't get cute about your levels. Don't try to look for secret levels, super secret, no one else sees them levels. because no one makes money in a trade by themselves. No one wins alone.

[13:13] So find those obvious levels. And not because price is guaranteed to touch them, but because when it does, we already know what to do. Did it just grab liquidity or is it actually a breakdown? Is this happening in chop or is this happening in a trend?

[13:27] Is this happening at the tail end of the initial balance or clearing range? Look at the time, especially if you're day trading, or is this happening somewhere in between? you start stacking all these reasons together, the rhythm of the day, say looking at a five-minute chart, starts to become a little repetitive.

[13:45] The daily cycle we just covered usually answers this question really fast So three things shopper trend where are those obvious levels And what time of day are they being tested Last piece, and it's the one that ties everything together.

[13:59] How do you actually know when a trend is continuing versus turning? In an uptrend, every time price breaks above the last ring high, that's continuation. It's also what I like to call an attention grabber

[14:11] because most traders are keying off new highs. It grabs attention, and attention is where money flows. Structure holding, trend intact. But the moment price breaks below the last thing low, something's often changed.

[14:26] And that's not supposed to happen in a healthy uptrend. And when it does, it's usually the first sign that control has skipped away from the buyers to more of the sellers, and it's going to get choppy. I know a lot of traders get lost trying to spot this on a normal candlestick chart.

[14:41] So here's a trick that I've used for years. use a indicator which you can download for free on TradingView called the grab candle and wave. It's going to color code your candle. I've been using these color coded candles for over 25 years.

[14:55] And it's going to put a moving average. It's actually three moving averages based on the 34 exponential moving average on your chart. When price is consistently pink and green, it's above the 34 wave.

[15:09] When price goes red, it's below. When price is cutting through in and out of the wave, and the wave's moving sideways, and the candles are green and red and blue and green, all the mix of colors, you've got CHOP.

[15:21] So now you've got a color-coded way to determine a trend versus a downtrend versus an uptrend, and CHOP using those two free candles. Again, TradingView, G-R-A-B, candles. I've been using these for 25 plus years.

[15:36] I created them very early in my career so I could solve exactly the problem we're talking about here. So once you make this shift, it becomes very obvious almost instantly. You'll see a clean series of higher highs and higher lows.

[15:49] They'll be green. They'll be above the wave. And then you start to get the lower low break. You'll get a blue candle, sometimes a red candle. We break the wave. You start to see the pattern. And that break is really your signal to stop assuming continuation.

[16:04] Blue candles mean neutral. Red means bearish. So red goes to blue, then red. Now we know there's a shift. And you're going to start asking whether or not the whole story has changed for that time frame.

[16:17] Now, combine that with the liquidity grab we talked about earlier, the streak of old highs, right before the break, and you've got a much better institutional picture in one setup. The liquidity taken, structure broken, again, delivery underway.

[16:33] So if you bring it all together, none of these six things work in isolation. And that's honestly where most traders get stuck. They learn order blocks on Monday, fair value gaps on Tuesday. They try to trade them separately and sort of one connected lead of order flow.

[16:49] Add in the grab candles. Start to look at the time of day. Then look for those patterns and you've got a complete recipe. So you start with liquidity, always. Ask where the resting orders are before you ask anything else.

[17:02] And here's a really good reason to think about that. Who's heard the saying, if you look around the poker table, you don't know who the structure is? It's you? It's kind of the same idea. And I think about that whenever I'm keying up my charts and trying to find these levels.

[17:15] So then I watch for the grab of imbalance that leaves behind and the structure breaks that confounds the story. That's the sequence in that order. That's what I've built over 30 plus years, almost 40, of trading around what I look for on the chart.

[17:31] I open every single morning. Take one of these six concepts. Spend a couple weeks doing nothing but marketing it on your chart, training your eyes to start seeing the way price moves around it. Then add the next one.

[17:43] Don't rush the whole framework at once. It's too busy. I've watched too many traders try to run before they could read a single three folders or three crows or before they could see the liquidity ground, before they got that habit of looking at the time of day.

[17:56] Eventually, it's kind of like tying your shoe. The first time you tried, someone's explaining it to you, made your brain hurt. But after a while, muscle memory, like shifting a car, same thing. Just go through it piece by piece. If this helped make sense of a topic that you just think it's buried in jargon,

[18:12] do me a favor, like the video, subscribe if you're new here, and tell me in the comments which concept you want me to break down further on its own here at the channel. Thanks as always. I'll see you in the next video.