How Head Fakes Work | Supplementary Material

Alright guys, what's going on? This is Ryan with blockroots. And in this video I want to go over the anatomy of a head fake. So I want to talk about the mechanics of a head fake. Alright? And in this example we have a head fake to the upside, right? So we'll often see that bitcoin will paint some type of range, alright? Establish a high and a low. There'll be a battle in between, between buyers and sellers. And then, you know, we'll breach one side of the range convincingly, trend upwards, downwards, whatever direction, and then start the same pattern again. Now a lot of the times you'll see that, you know, there's a little bit of a narrative to these ranges or rather these head fakes, rather, you know, when you break to the upside, it's, you know, to fill liquidity of larger players. You know, many times that does occur in markets. But I think it's also important to understand just from a mechanical standpoint how this happens, right? How the move ends up being so swift to the other side. Okay, so we understand that one. As I mentioned in the trading workshop, buyers become sellers immediately. So what I mean by that is that once you buy, you are a seller at that point and once you sell, you are a buyer. So at any point we need to identify where each side of the market would be in fear and where they would get out if they were wrong. So if we're looking at this low time frame range right now we see that we put in a low. And what I've done is I basically drawn out the rotations within it with this red line so that you could just pretty much just follow the pattern of price action and see exactly what it's done. So we put in a low, alright? We put in a high, alright. And what this establishes is two key areas that longs and shorts are wrong at. So shorts are wrong above this point, okay? Longs are wrong below this point. And these two swing points or key areas are going to be what determines where traders get out and where other traders may consider getting in. And because of this, these swing points can be taken advantage of by larger traders. And not to turn this into a narrative and say that these head fakes are to fill liquidity for larger passive players. I just want to talk about mechanically how this occurs. We have the low, we have the high over here. Now, anytime within this range, the more time that we spend at the bottom, the more longs are in fear if they're already in position. So that's why I say getting in position in the mid portion of this range, especially if you're in a downtrend for longs, is very dangerous because the more we spend time down here, the more against the wall that they actually are. And when you're in fear and when you're back is against the wall and you're in position, you know, we know, we know how, when that adds up, what type of effect that has. Right. So we can get violent moves because we have a lot of traders that are potentially offsides and if they're pressured just enough, we have these, you know, breakouts for longs or squeezes for shorts, or breakdowns for longs and squeezes for shorts. But nevertheless we have the low. Okay, we come down and test the lows again. Alright, so what do we likely do at this point? We likely have more shorts that are anticipating a break of this. We likely have longs that are looking to place an order here in anticipation of the lows tested again. So we're still building our open positions between here. So ultimately what happens is as you move more and more sideways within the center of a range, you're just building, you're just increasing the open interest. Right? So shorts are opening up, longs are opening up. There's no definitive move outward to, to the upside or to the downside. So what happens? Okay, we have a head fake, we have a break above a high. And what does this do for shorts who are anticipating shorting this high? All right, and then it breaking down. Okay, you'd likely have them shorting this high and then taking profit at the low. So what happens when they're pressured? Okay, they close out because their stops are up here. So what you'll see on an exo chart or on a tensor, if you're looking at footprint, you'll see a lot of buy volume here, a lot of market buys right towards the top. So you see these imbalances up here. So if I go to tensor right now, or rather go to xo, you'll see that at the top we have an imbalance of buy orders over here and that's because the top was breached and essentially those are shorts closing out. So again what also we have is we have buy stop trigger. So we have longs that open up right here. So when longs open up right here, their anticipation is that this continues to the upside. Okay, so you'll have longs placed stops down in the center. Okay, you'll have longs placed their stops down here. So based on this swing, low, longs will say okay, if this is breaking up, maybe I'll define my risk down here at the bottom of this structure. More often than not it'll be the bottom or somewhere within the middle. So somewhere within this market structure. So what happens if the market is still weak in this case and we're in a downtrend? Price will come back down into the center of a range and that's a problem. And that's when you have to start paying attention. Because if we have a head fake up here, it's likely that the market is going to travel in the opposite direction. Now why is this gaining even more fuel at this point? So think where buyers are wrong. Buyers are wrong if price moves back down here. Shorts would have been correct if price moved back down here. But they're out of the trade at this point by being stopped out up here. So what does that mean if you're using an OCO order? So where if one of your orders is triggered in this case, if a short is stopped out, their whole bracket is canceled, so their take profit is removed down here. So any form of liquidity and buy side action we would have had here in the form of take profits that are stacked here, those are gone by stopping out these shorts. So there's less of a floor here at this point. Not only that, all of these longs that entered at the breakout as price approaches this level, they're going to be essentially held to the fire. And if it breaks this level at this point we have the longs with their stop orders to get out of their trades. We have no more fuel at this point from the take profits that would have been here with shorts since they were exited out of this trade up here. And then we also have the breakout trader stops. So we have long stops to get out of trades and then we have short stops to get in trades. So essentially sell stops. So for example, since this low was painted, you'll have traders that are looking to take advantage of a breakout to the downside. And with this essentially perfect storm of longs having stops down here, shorts no longer having take profit down here. So no more buy side liquidity. And having this sell side liquidity in the form of a breakout, what you would use as a conditional order to take advantage of something like a breakout of this low, you have all this downside momentum. So this is exactly how head fakes works. So when you see this occur to the upside, alright, if you see for example, you know we are painting a range and you know whether this is the higher time frame or the lower time frame. Okay. There's more weight to it, obviously if it's a higher time frame. But if we make a high, okay, and then break this high and then convincingly or shut down and we come back down in the center of the range more often than not, this is going to be a signal that we should not be at this point long. And if anything, we should be looking for shorts. So again, this works. If we invert this chart, this works for longs as well. So if we have a head fake to the downside, but we close back above and we are back in the middle range, we have to consider how this mechanically works in the opposite direction. Alright, guys, so hopefully this was informative. I felt like it was important to talk about this. I briefly touched on in the workshop. These are the things you have to consider when you're painting a range. You have to consider where buyers are wrong, where sellers are wrong, where the major swing low and swing high is okay. And how you would feel if you were in position and you were approaching that boundary for your position, for it still to have a valid thesis. Okay, what would your actions be? So as always, guys, it's been a pleasure. This is Ryan with Blockroots, Exercise, Proper risk management and trade effectiveness.