Step #2 -Termination Conditions & Contextual Awareness

Analyzing the tops and bottoms - using larger charts for contextual awareness

Technical analysis and all trade setups are built on the principle of continuation and termination. At termination areas and conditions, stop taking the trend trades to keep your winning percentages high. The patterns that cause the market to terminate trends are easily identifiable in real-time. Termination conditions will determine tops and bottoms. They help us to create a context of what should happen next. Termination patterns on more than one chart will create the opportunity to trade with a new trend going in the opposite direction, typically with the HVA trade. Spend time studying historical charts, termination conditions, what areas or conditions stopped a trend.

Termination conditions build on the Fibonacci and trigger line continuation principles you have learned in the prior section. Let us review Fibonacci above or below LOCATION, DIRECTION, and SPREAD concepts; in the following enhanced picture from the "termination condition section" of the trading plan, it will become intuitive which Fibonacci areas are going to produce a winning short and the Fibonacci areas in which you should stop taking shorts and exit any short positions.

Continuation and Termination Fibonacci areas as dictated by T3 Trigger Lines

It is equally important to confidently recognize the trigger line direction and location condition needed to signal when a termination condition has broken, signaling a continuation of the trend. This process of reading Fibonacci and trigger lines direction location and spread in the "NOW MOMENT" will allow you to stop and start trading effortlessly and confidently stay in tune with the market and take any available trades from the Nexgen plan.

There are times when you will be in a situation where you may opt to trade into a termination condition. Ensure you have studied and recognized the indicator-based reasons why you take a medium probability trade. Typically when there is a strong trend or well-defined momentum on the smaller charts, this will be the termination exception condition. This is defined as a medium probability trade.

MEDIUM PROBABILITY TRADE- defined as when most indicators line up for a trade and one or two issues exist. This will be the vast majority of your trades. You will execute medium-probability trades and manage them assertively. If there is trouble in your way, you may take a portion of the position off at that trouble and reduce the risk to a zero loss level.

A new trader (wrongly) believes not taking medium probability trades will improve results, and somehow, may avoid the risk of loss. This is not the case. Most experienced traders will execute all medium probability trade setups and manage them tightly. The sooner you take these trades, the sooner you will feel comfortable. By giving yourself more opportunities to win, your profit potential may increase dramatically. Two examples will follow.

when might you trade into a termination condition if ever?

The following chart is another medium probability trade example. There is a trade into a "potential" termination condition yellow one-to-one on the 13-2 chart. We may execute into this 13-2 "potential termination spot" as dictated by a "VERY-STRONG" 5-1 and 8-range trigger line configuration, an HVA line, plus a stranded seller's antenna bar signal. (Notice the LONG list of reasons that must be present to trade into a potential termination spot). You will also typically find more assertive management and a smaller first profit target a good idea when trading into a termination condition on 13-2 and 5-1 charts.

Trading into a potential termination condition based on small chart strength

Termination conditions (OR LACK OF) also add context to the market. When the indicators present what Nexgen calls a "GREAT TOP or GREAT BOTTOM" as defined by the Fibonacci areas, Trigger Lines, and Divergences, the subsequent trend trades in the new direction will have a much greater chance of winning. Those tops or bottoms that are "NOT GREAT" will alert you to breakout failures and invoke more stringent trade management when taking those breakouts.

The following picture is a typical example of a 13-2, 21-3 chart. Initially, you focus on the 13-2, 5-1, and 8-range charts while executing a 5-1 trend trade. "Something" pushes the market up to the 13-2 Fibonacci edges for a second chance short. SEE TRADING RULES ENTRY STRATEGIES for conditions that may make the market reach the edges. After the price touches the 13-2 Fibonacci areas, "edge trades" may be taken. Ultimately, the 13-2 chart makes a "NOT GREAT" bottom. This may be caused by any number of 5-1 termination conditions such as 3 divergences, Fibonacci areas on small charts, or no reason at all. As price reaches Fibonacci areas on the 13-2 chart a second time, you must "zoom-out" and understand the context of the "NOT GREAT" 13-2 chart bottom combined with the current Fibonacci and trigger line reading on the 21-3 chart. The expectation is that the downtrend may continue when there is divergence on the 21-3 high pivot, strong trigger line configuration at Fibonacci resistance. This will enable you to immediately start looking for continuation shorts to capture the down move to Fibonacci support as the markets finish the move.

checking 21-3 chart when you reach the edge of Fibonacci

Do not let the 21-3 chart stop you from taking strong 13-2 trigger line 5-1 trend trades. Typically, users will hesitate "due to the 21-3 chart" only to look back and realize they skipped a high probability 13-2, 5-1 trend trade. The same chart highlights the only time you need to use the 21-3 chart which is when the price reaches the Fibonacci areas and the 13-2 triggers are no longer wide and strong.

This is a chart and the trade taken in class that day. We did not take the trend trade; however, the edge trade was executed using a limit order at the spot. The entry was at the spot due to the extra strong nature of the trigger lines on all charts and a pivot stop-out entry on the 8-range chart. The entry was taken using a limit order. Attempting to minimize risk and maximize gains, executing a limit order to sell short at the Fibonacci edges proved profitable.

The following chart shows why contextual awareness is also critical when the 13-2 chart reaches the mid-band and Fibonacci areas for the first time. With a "NOT GREAT" top on the 13-2 chart, the 21-3 chart strong trigger line configuration, Fibonacci resistance, combined with a large gap to the 13-2 large triggers, the experienced user sees a potential low that will present opportunities for continuation long trades. A new user may hyper-focus on 13-2 chart strong down triggers and mistakingly look for short trades on the 5-1 chart. Each time price reaches Fibonacci and Mid bands on 13-2 chart, check the 21-3 chart for context.

Check 21-3 chart when 13-2 price hits Fibonacci or mid-bands for context

Two more key concepts important to understanding contexts are one more bounce or the ability to trade directly into Fibonacci areas. After a "NOT GREAT TOP OR BOTTOM" that also has a strong 21-3 chart trigger line, you will typically see "one more bounce" from the mid-band and Fibonacci areas on the 13-2 chart. Then after a "GREAT TOP OR BOTTOM," you can trade into the same Fibonacci areas while the 13-2 trigger lines are strong. This daily occurrence presents a "sticking point" with new traders who tend to hyper-focus on 13-2 and 5-1 termination conditions. In class, we use this picture from the video below it, Trading the Edges Tops and Bottoms, to illustrate this point.

Mid band and Fibonacci 1 more bounce and "trading into Fibonacci areas"

Termination conditions are an in-depth subject that the text here only scratches the surface. We recommend watching the following video to reinforce termination conditions and the contextual relationship regarding trend trades, hva trades, and effectively trading management conditions.

Termination Conditions and Building Contextual Awareness

When the charts get stuck between termination conditions at the top and the bottom, the market usually moves into a "choppy" phase. It is normally catastrophic or boring as heck for those who only take high probability trend trades; this look is advantageous for market flow traders who focus on 3 key items at the top or bottom. The first is a pivot stop out of a prior divergence. The second look is when the market stops at yellow one-to-one yellow dots. The third look is when the edges should hold as denoted by stranded buyers or sellers at the edges. When you add 2 or 3 of these market flow generated trades in a range-bound area, you will add opportunities to profit until the market decides to break out of the range. The following picture shows termination conditions in action and the market flow opportunities.

trading the market flow signals from termination areas in chop.

The following chart shows you a typical edge trade that may be taken when the 21-3 triggers suggest you can trade the edges after a deeper pullback to a termination condition that is expected to hold based on the trigger line configuration. When the 13-2 chart low is "not great", you will expect the price to bounce one more time.

At this time, go to the "termination condition section" and study this section with the start-stop, trigger lines LOCATION, DIRECTION, SPREAD knowledge you have built.

At this point, you may also wish to download replay data and start studying the patterns as the market unfolds using Ninja Trader's market replay feature. CLICK HERE FOR REPLAY INSTRUCTIONS. When doing replay, it is best to focus on ONE CONCEPT at a time. So when you are studying termination conditions, you only want to study the termination condition during your early market replay sessions. You do not need to trade until you are absolutely comfortable recognizing the Fibonacci and T3 Trigger line patterns that cause continuation or termination of the trend.