Price behaviour after sharp moves
After a large move in a short time, price can follow one of three broad paths: it can continue in the same direction, move sideways, or give back part of the move. Which one it will be is often not clear from the first candles. After sharp moves, volatility tends to stay high for a while.
What is a sharp move?
A sharp move is price covering a large distance in a short time, compared with the market's usual volatility. On a chart it usually shows as several long-bodied candles in a row or a single very large candle. What counts as sharp is not absolute; the same percentage move can be sharp in a calm market and ordinary in an active one.
Sharp moves often come with a zone breaking, unexpected news or leveraged positions being closed out in bulk. In crypto they can also come at weekends or overnight, when trading is thin.
Three possible paths afterwards
After a sharp rise there are three broad pictures price can follow. After a decline the same apply the other way round.
Continuation
After a short pause price makes new highs in the same direction. Pullbacks stay shallow.
Consolidation
Price moves back and forth in a narrow range near the top of the move. The move is neither extended nor given back; the candles get smaller.
Partial retracement
Price gives back part of the move, often towards its middle or towards the zone it started from. That does not mean the whole move is erased.
Volatility clustering
Large moves rarely come alone. After a sharp candle, the chance that the next candles are large too is higher than in a calm period. This is called volatility clustering: active periods tend to come together, and so do calm ones.
Clustering says nothing about direction. The large candles after a sharp rise can go up or down. All it says is that, right after the move, price may keep moving in wide ranges.
Why the first reaction can mislead
The candles right after a sharp move are the period in which the market adjusts to the new price. Price can move quickly one way and then the other; long wicks and candles that contradict each other are common.
So the first pullback or the first new high does not on its own show which picture will follow. A first reaction on a small timeframe (1H) can be just a wick on a single 4H or 1D candle. What usually makes the picture clearer is the next closes and the zone price holds in.
What it shows, what it does not prove
What it shows
- That price covered a large distance in a short time, compared with its usual volatility
- That volatility may stay high for a while after the move
- Which of continuation, consolidation or retracement the next candles are closer to
What it does not prove
- That the move will continue or be given back
- How deep a retracement will be
- That the first reaction decides the direction of the next move
The MarketLevelMap view
How it relates to zones
A sharp move often passes through one or more zones quickly. Because price did not pause in them, if it comes back those zones are tested for the first time. That is why, in a partial retracement, price moving towards the zone the move started from, or a zone it passed on the way, is a common picture.
Because candles are wide after sharp moves, price can move in and out of a zone with long wicks. Reading the zone as a band rather than a single line, and judging a breakout on the close, helps filter out the noise of this period.
Often confused with
For general information only. Not investment advice.Last updated: