Video Transcript:
A strong rejection, or a reversal, is when the price goes one way, then suddenly turns and aggressively goes the other way. Those are very important places to watch for on any chart. Every trader sees them, and many traders are trading them because they represent strong support and resistance zones but not all of them. Sometimes it’s just a trap and it fails, and that’s why I’m shooting this video: to show you my four-point checklist, which you can use as well to tell whether a rejection is a strong one and you want to trade it, or whether it’s a trap and you should avoid it.
So, let’s get to it. This is what I call a rejection. It is when the price goes one way very aggressively and then turns and goes the other way, also very aggressively. This is a rejection, and this is what this video is going to be all about. Rejections are very, very special because many traders place their trading decisions around them. And it doesn’t really matter what strategy they use, because when something like this happens, everybody who is trading this chart sees that and plans their trading around it, because this is clearly the most important place on that chart, right? So no matter which strategy you trade, when you see this, you simply can’t ignore it. That’s the beauty of rejections.
Now, many traders use those as support and resistance zones, which is completely fine. The only problem is that they don’t always work as strong support and resistance zones. This is actually what I want to focus on in this video. I want to teach you how to tell whether this rejection will work as a strong support or resistance zone, or if it’s likely a trap that will eventually not work as strong support, and a lot of people will burn their money there.
So, as I was saying, I have a little checklist, and the goal of this checklist is to tell whether this is a good trading opportunity or not. In other words, is this a good support or resistance zone, or is this a trap? Here are all four points. The first point is that the market should be rotating, right? First point on the checklist. Second point, the rejection needs to be strong. Third point, the volumes need to be distributed well. And the fourth point, there needs to be a fair value gap.
If all those points check out, then the rejection is most likely going to work. It’s most likely going to be a strong resistance or support zone. Now, all those conditions don’t need to be met, because in trading nothing is ideal, obviously. So, at least for me, it’s fine if only three conditions from this little list are met. If three conditions are met, then I still trade the rejection. I still consider it a strong support or resistance zone, right? Obviously, if it’s all four, then even better. But if three conditions are met, it is still good to trade. All right?
Now, let’s put this into action and let me show you how I trade this. I’ll give you two examples of two trades. In here, I have that checklist for you so we can check it as we go. So the first thing, the most important thing to do, is identify a good rejection using this checklist. So, let’s check out this one, this rejection right here.
Is the market rotating? Yes, it appears to be rotating. Even though I don’t have the volume profile printed here, you can see that the market is going up and down, up and down. It’s rotating, right? So yeah, this checks out. Is the rejection strong? Look at the high. Is it strong or not? There’s this clear high, right? The high of this candle. So yeah, it is a strong rejection. So that’s good as well.
Now, let’s check out the volumes. Are the volumes distributed? Well, we have this heavy volume zone right here. Very good-looking. And above that, a low volume zone. All good so far. The market is rotating, the rejection is strong, and volumes are distributed well. Now, is there a fair value gap? There is, right here a fair value gap showing us the aggression of sellers. So all this checks out, right? We have a strong rejection. Now the only thing we need to do is trade this.
So how do I trade it? After I spotted a good-looking rejection, I want to see a pullback back into the zone where the heavy volumes were formed before. This is a resistance for me. The resistance is not at the top of the rejection. It is the heavy volume zone. That’s the most important zone, because the heaviest volumes in that rejection were formed there, right? So that’s the resistance I want to trade.
Resistance is not just a level. It’s always a zone. The beginning is usually at the beginning of that heavy volume cluster. And ideally, if it’s also the beginning of the fair value gap and you’d be surprised, but very often it is. It aligns: the beginning of the heavy volume zone and the start of the fair value gap. So in this case, this would be the short level. And if the price hits that level, then it is short from there.
So again, you need to see a rejection. You wait for a pullback to the heavy volume zone, and from the beginning of the heavy volume zone you go short. All right, this is how I trade rejections.
Let’s take a look at another example in here. This is a bullish scenario. We have this rejection, and again, the first thing is we need to check whether this is actually a good rejection, or if it is a trap. All right, so let’s go through the checklist again.
First thing, is the market rotating? Look at this: up and down, up and down, up and down. Yes, the market is rotating. Is the rejection strong? Yeah, this is a beautiful low. This is a strong low. Let me delete that so you can see it better. Right strong low. So all good so far.
Are the volumes distributed? Well, we have a clear volume cluster in here. Below that, a low volume zone. So yeah, volumes are distributed well. Is there a fair value gap? Well, in this case, I would prefer the fair value gap to be somewhere in here, right above this heavy volume zone. We do have a fair value gap, but it is a little bit higher. Let me mark that for you. This bullish fair value gap begins in here, but I would prefer if it actually began in here, at the beginning of the volume cluster.
In this case, it’s not so clear-cut, but if we go through the checklist, then the market is rotating, the rejection is strong, and volumes are distributed well, but the fair value gap is above the place where I would like to trade. It’s not above the heavy volume zone. So in this case, I would look at it like this, because the fair value gap is there, but it’s a bit higher, right?
So if I wanted to be strict, the checklist would look like this, but still, three conditions are met, which means this is still a good trade to take, right? So how to trade this? Mark the beginning of the heavy volume zone, and you can use a limit order there. Just place the limit order, wait for the pullback, and when the price hits that level, hits your limit order, then go long from there.
Now, I haven’t mentioned stop-loss and take profit yet, and in this case, it’s very, very simple. Let’s start with the stop-loss, which is, at least for me, always at the bottom of the rejection right here. This is the stop-loss, because the price really shouldn’t go past that point. If it does, then the low is breached, and there’s no telling where the price could go from there, right?
And regarding the take profit, you want to trade with at least a risk-reward ratio of one or better, which means that in this case the take profit would be somewhere in…
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