GBPUSD - Anatomy Of A Short - Supply D1 + M Pattern

Hey traders,

In this educational piece, we’ll rip apart the anatomy of the M formation via the OFA script amidst the right set of dynamics to capitalise on it.

Firstly, the one thing that we must identify is whether the market is trending or ranging. By taking a look at the GBPUSD daily, we can clearly state that the market has been directional aka trending for quite some time.

Next, we must identify areas that are likely to be rejected on first visits if only due to the previous imbalance of flows that occurred the last time price was at that level. These are price-sensitive locations for a reaction.

Lastly, we must be skillful enough to spot the signal that let us into a trade. In the case of the GBPUSD short opportunity presented, the initiator or trigger was the constitution of an M formation via the OFA script .

Now, what exactly entails when an M formation prints? And what specific characteristics are we after? The best M formation happens at the right locations (as in the example) where the failed leg up runs a far shorter distance than its previous leg, followed by a breakout of structure.

When that sequence of events unfolds, you get in and let the statistical edge play out over long enough sample sizes. What’s appealing about these patterns is the juice there is typically to squeeze, in other words, they tend to provide decent risk rewards. Remember, cut losses short and let winners run!

Be reminded, when applying the OFA script, it has 2 main components to study:

Magnitude: A major clue that will help determine the health of a trend is the type of progress by the dominant side in control of the trend. We need to ask the following question: Are the new legs in the active buy-sell side campaign as identified by the script increasing or decreasing in magnitude?

Velocity: When it comes to the distance the price moves, the magnitude is only ½ the equation. The other ½ has to do with the velocity of the move or the speed. Was the new leg created after a fast and impulsive move? Or did price make a new low or high with the movement being sluggish, compressive and taking too long to form? A good rule of thumb is to count the number of candles it took to achieve a new leg.

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