The 3-Method Framework: Simplifying Technical AnalysisMost traders get caught up in complex indicator setups, thinking that more tools equal better results. We rely on moving averages to tell us if prices are trending up or down, and we depend on support and resistance levels to predict market movement. But what if I told you there's a simpler, more powerful way to read the market using pure price action?
Today, I want to share my experience and understanding of bias and expectations for the next candle formation. This approach is refreshingly simple because we don't need to understand every single price movement - we just need to focus on what matters most.
Method 1: Opening Price Comparison
The first method is beautifully straightforward. For a bullish bias, the current opening price should be above the previous opening price. That's it. Sounds almost too simple, right? But simplicity often holds the greatest power in trading.
For Gold yesterday, we simply needed to compare the latest opening price on the Daily timeframe with the previous opening price. It's that simple.
Method 2: Mid-Level Analysis
The second approach involves comparing mid-levels between candles. We compare the mid-level of the previous candle with the mid-level of the candle before that. I know it might sound a bit complicated when explained this way, but once you visualize it on your chart, the concept becomes crystal clear.
Still on Gold, we just compare the 50% or mid-level of the previous candle with the candle two periods back from the latest candle on the daily chart.
Method 3: Expansion Expectations
The third method helps us anticipate expansion in price. Traditional complex methods require analyzing numerous factors, but this simplified approach only needs two candles before the current one. Here's how it works: we use the high and low of the candle two periods back, and the open and close (body) of the previous candle. If the previous candle's body sits within the high-low range of the two-candle-back formation, we can expect price expansion.
The beauty of this method is that we don't care whether the price is bullish or bearish - we simply expect expansion to occur. Think of it like a compressed spring: when price gets squeezed within a previous range, it often seeks to break out in either direction. We're not predicting the direction, just the likelihood of significant movement.
Still on Gold, I randomly selected all inside candles on the Daily timeframe. Remember, the purpose is only to expect expansion, not direction. If you want to use this for directional bias, make sure you apply the additional analysis required.
Remember, there are no guarantees in trading, but this method provides valuable insight into potential market expansion.
Advanced Combinations for Enhanced Analysis
Combining Methods 1 and 2 creates our most accessible approach since you only need two candles. When both the opening price and mid-point from two candles ago indicate bullish conditions, we can expect the current candle to follow an OLHC bullish pattern.
You can see the 3 examples I've provided in the image, and all of these are applicable across all timeframes, both daily and 4-hour.
Combining all three methods offers a more sophisticated analysis, particularly useful for anticipating market reversals. This involves marking the current and previous opening prices, comparing mid-levels from the last two candles, and identifying the high/low range from two to three candles back.
Now I'm adding Inside Candles from 2-3 periods back (My personal rule is maximum 3 candles before the current candle, or this analysis will lead to analysis paralysis).
The Bullish and Bearish Rules
Bullish Rule 1:
Opening price above the previous opening price
Mid-level of the previous candle above the mid-level of the previous candle before that.
Inside candle formation (optional)
Bearish Rule 1:
Opening price below the previous opening price
Mid-level of the previous candle below the mid-level of the previous candle before that.
Inside candle formation (optional)
The Secret Sauce: Timeframe Harmony
Here's where the "devil is in the details" comes into play. You might find perfect bullish conditions on your chart, but the market still reverses. The secret lies in using this method on Daily and 4-hour timeframes simultaneously.
Simply understand it from the chart.
Simply understand it from the chart.
If Rule 1 conditions are met on the daily chart, they must also align on the 4-hour chart. When the 4-hour contradicts the daily, follow the 4-hour signal as it might indicate a "sell on strength" or "buy on weakness" scenario.
The formula is simple: must align with
I've never tested this on 1-hour charts because the Daily and 4-hour combination provides sufficient accuracy for my trading approach.
Enhanced Rules for Precision
Rule 2 makes the inside candle formation mandatory rather than optional. Sometimes you'll encounter mixed signals where the mid-level suggests one direction while the opening price suggests another. The solution? Drop down to a lower timeframe for additional confirmation.
I don't recommend using this method below the 4-hour timeframe, but you can certainly apply it to Monthly or Weekly charts for long-term bias determination. The key is analyzing both Daily AND 4-hour timeframes together, not just one or the other.
When timeframes conflict, often just one key level provides the confirmation you need - typically a previous Monthly or Weekly high or low.
Final Thoughts
Pure price action mastery isn't about having the most sophisticated setup or the most indicators on your chart. It's about understanding the fundamental relationship between opening prices, mid-levels, and candle formations across meaningful timeframes.
This approach has served me well because it cuts through market noise and focuses on what price is actually telling us. Start with these three methods, practice identifying the patterns, and gradually build your confidence in reading pure price action.
Remember, consistent profitability comes from mastering simple, reliable methods rather than chasing complex strategies. Keep practicing, stay disciplined, and let price action guide your trading decisions.
Good Luck! :)
