One of my favorite models for the markets is Auction Market Theory (AMT).  AMT is the underlying theory for Market Profile (MP).  It simply says that all markets are auctions where buyers and sellers negotiate for a fair price of the underlying instrument.  When prices become cheap, buyers step in which cause prices to rise.  When prices become expensive, sellers step in which cause prices to fall.  Price will stay in a range until the fair price expectations of the buyers and sellers change.  A change in expectation can be caused by any number of things; market news, economic information, technical breakouts, weather, some outside event, etc.

What is important in day trading is knowing what the buyers and sellers are doing.  You want to know who is currently in contol of the market.  If you know who is in control, you know which way you want to be trading.  So how do you know whether the buyers or the sellers are currently in control of the market?  By reading price swing highs and lows.

Here are some abbreviations for new traders:

HH – a Higher swing High; when price moves above the previous swing high
HL – a Higher swing Low; when price was moving down, then turned up without moving below the previous swing low.
LL – a Lower swing Low; when price moves below the previous swing low
LH – a Lower swing High; when price was moving up, then turned down without moving above the previous swing high.

Buyers are in contol of the market when the market is making HHs and HLs. This is called an up trend. Sellers are in control of the market when the market is making LLs and LHs. This is called a down trend. Anything else is a mixed trend and it is not clear at that time who is in control.

So when do buyers take control in a down trending market and start an up trend? Three things need to happen:

1. Buyers need to move price back up to the previous swing High.
2. Buyers need to push price through the previous swing High to make a HH.
3. Once sellers start moving price back down, the buyers need to turn price back up before reaching the previous swing low forming a HL.

At stages 1 and 2, buyers are trying to take control of the market. At stage 3, you can assume buyers are now in control of the market. This HL is a good place to enter the market. If you are following my methodology, this needs to happen near an SR area.

For sellers to take control in an up trending market, the opposite needs to happen:

1. Sellers need to move price back down to the previous swing Low.
2. Sellers need to push price through the previous swing Low to make a LL.
3. Once buyers start moving price back up, the sellers need to turn price back down before reaching the previous swing high forming a LH.

In the first two stages, the Sellers are trying to take control. In the third stage you can assume that the sellers have control.

The 3 stages for buyers and sellers changing the trend helps explain why pull back trades are higher probability trades than break out trades.  In a breakout, the buyers or sellers are at stage two; making a HH or LL.  They are trying to take control of the market, but they have not proved that they control the market yet.  With a pull back trade, the buyers and sellers are now at stage three and have proved that they have control of the trend.

The most profitable way to trade is to trade with the trend. If you constantly read the price swings, you will know if the buyers or sellers or neither are in control. Profitable trading is much easier if you trade with the party who is in control.