Narrative Explained (Stop Being A Pattern Trader)

Introduction

This tutorial is designed to help traders understand the concept of narrative in trading, emphasizing the importance of recognizing market dynamics rather than merely chasing price patterns. By grasping these principles, you can improve your trading consistency and decision-making.

Step 1: Understand the Problem with Pattern Trading

• Recognize that relying solely on price patterns (like breakouts or gaps) can lead to inconsistent results.
• Identify that trading patterns without context can result in trading in the wrong direction and getting caught in market manipulations.
• Realize that the effectiveness of any price pattern depends on the broader market narrative.

Step 2: Define Your Trading Narrative

• Develop the ability to answer the question: "Why should price move towards a specific level?" This establishes the foundation of your trading narrative.
• Ask yourself:
  • Who has been making money in the market?
  • Are buyers or sellers currently in control?
• Understand that a clear narrative helps in rationalizing entry points and reduces the likelihood of chasing patterns blindly.

Step 3: Analyze Market Structure

• Use charts to analyze price swings and identify where highs and lows form.
• Investigate:
  • Why did the market form highs or lows at specific points?
  • What are the implications of these formations for future price movements?
• Look for signs of order flow changes, such as transitions from sell programs to buy programs.

Step 4: Apply the Concept of Liquidity

• Understand that liquidity is crucial in narrative trading.
• Identify where buy-side and sell-side liquidity are located:
  • Buy-side liquidity is often engineered above key highs.
  • Sell-side liquidity is typically found below significant lows.
• Anticipate market behavior around these liquidity areas to make informed trading decisions.

Step 5: Develop a Trading Strategy Based on Narrative

• Formulate a trading strategy that integrates your understanding of narrative:
  • Buy in discounts where buy-side liquidity is likely to be attacked.
  • Sell in premiums where sell-side liquidity is likely to be targeted.
• Use market maker models to frame your trades based on whether you are in a bullish or bearish market cycle.

Conclusion

Incorporating narrative into your trading approach allows for a more systematic and logical understanding of market movements. By focusing on the underlying reasons for price actions rather than just patterns, you can make more informed trading decisions. Start by analyzing market structure and liquidity to enhance your trading strategy. As you develop your skills, remember to continually refine your narrative understanding and adapt your trading tactics accordingly.