Transcription
Most traders chase candles, but they never learn the structure that actually drives every major move. But the truth is, every major move begins from the same hidden pattern. It's a simple structure that tells you where price is cheap, where price is expensive, and where the next move is likely to go. That structure is called contraction, and it's the core of the master pattern. Once you learn how to draw these contractions and project the expansion lines from them, the market stops looking chaotic and starts looking like a blueprint.
Today, I'm going to show you how to spot contractions, how to draw them, how to use the expansion lines, also known as value lines, to find high probability buy and sell zones. Let's dive straight into it.
Part number one, what is contraction? Contraction is simply a point in the market where price compresses. It's the moment the market stores energy before the next expansion. There are three types of master pattern contractions. Two bar contractions, which is the simplest form. Three bar contractions, which is slightly tighter structures, and the multibar contraction, a cluster of candles forming a tight range. When you learn to identify contractions, you're basically reading where the smart money is positioning before the market moves. Let us now dive into the contraction logic so you can understand how it works.
The first contraction is known as the two bar contraction master pattern. It's simply calculated by using two candles. We're typically going to use higher time frame candles, 4-hour candles, and even daily candles. The higher the time frame that you use two bar contractions, the better because if you use this on a lower time frame, you're going to get many false signals. So, use higher time frame candles to calculate this. This is also known as inside bars. I'm sure you've heard of it before. Basically, how you calculate it is you take two candles and you want to see the second candle inside the first candle, simply showing a lower high and a higher low. So whenever you're getting two candles on the chart and you get the simultaneous lower high and higher low occurring on the second candle, that lets you know this is a two bar contraction master pattern. And then you simply draw a box around the contraction zone and draw a line out the center of the box, which becomes the expansion line.
Then we've got the three bar contraction master pattern. This is using two inside bars. So you typically have a mother candle, which is the bigger candle. Then you get two candles after it. Each one is consecutively inside the candle before it. So you're basically getting a mother bar with a candle inside it with a lower high and a higher low. And then another candle that has a higher low and a lower high. So it's two consecutive candles with higher lows and lower highs inside a mother bar. Once you get this on your charts, you just draw a box around it. You project a line out the center of the box. And there you have your contraction and expansion lines from this three bar master pattern.
And then lastly, we've got the multibar contraction master pattern. This is where we get this lower high and higher low occurring through multiple candles at the same time. It's when you get the swing points that start tightening. They start forming this contraction tighter and tighter until you get the simultaneous lower high and higher low. Then you draw a box around it. You project a line out of the center of that box. And then you get this expansion line that is determined from this multibar contraction. These are the three different kinds of contractions that you can identify on the charts. They all work in a very similar fashion, but there's different ways of identifying them.
Part two, how to draw the contraction boxes. Drawing them is really simple. Step number one, identify the simultaneous lower high and higher low within two, three, or multibar contractions. Step two, draw a box around that tightening of price. And step three, draw a line out of the center of the box, which is the expansion line and the value line. The contraction box is your starting point from when you plan your trades. When the box breaks, the market expands.
Part number three, expansion lines. From the center of the contraction box, we project outward the expansion lines. These lines are powerful because they give you value. Below the expansion lines is our discount buy zone. Above the expansion lines is our premium sell zone. Price constantly interacts with these value lines. This is where smart money buys low and sells high with structure, not emotion. Once you understand value, you will know where to plan your trades around. These value lines are magnetic levels.
Now, let me show you how to identify this on the charts. Here I am on the charts and I'm looking at the Bitcoin chart. So, first I want to help you identify the two bar master pattern. The two bar master pattern is really just inside bars. So, if we're looking on the chart here, we're simply going to look for two candles and the one candle is going to be inside the previous candle. Here is one of them over there. So you can see this green candle is inside the previous candle. We're looking for that lower high and that higher low. That is one of them. Let's see if we can find another one. Just scan the charts. Here you go. So this one, these two are inside. So this is actually a three bar master pattern because this one is inside previous one and the next one is inside the previous one. So these two bars are inside the candles before it. So this would be a two bar master pattern. Let's look over here. You can see over here. This is one over here. And what these symbolize in the market when you get this kind of contraction occurring, it simply means there's either weakness occurring or there's strength occurring. So the market is either going to break down or expand up. You can see in every one of these cases, we get contraction, the market dumps. We get contraction, the market dumps. We get contraction, the market dumps. Because remember, after contraction comes expansion.
So then we mark out our expansion lines up the center. And I typically just mark out the expansion line till it reaches the next contraction box. You see I mark out expansion line till next contraction box. Expansion line. There you go. You can however drag them further and you'll notice price responds to them. Look how price is responding. It's finding resistance at this level. Then eventually it breaks this level. So you can drag these lines out and across and you'll notice price will react and respond to them in the same method that we use our master pattern trading strategy. So for more clarity over here you can see we've marked out this one over here. This one is a two bar master pattern. This one is also a two bar master pattern. And then this one over here is a three bar master pattern. You can see here. Look at this. Price just got right close to this value line and then it reversed. So often times what you're going to see these value lines are going to also be strong support and resistance levels. They're also going to be fantastic areas to look to base your trades. When price is underneath value over here, you look for your long positions. When price is above value, we look for short positions. You can see look for long position under value. Short position above value. Right now price is undervalued. So, this could be a position where we would start looking for a long trade because we've got the value line over here. Price is under it. There's a high probability price is coming back to value. If you can just remember that value lines are magnetic levels and price always loves to come back to value.
Now, let me show you how to draw out the multibar contractions. These are the ones a lot of people find challenge with, but I'm going to show you an easy way to do this. I recommend taking this tool over here. It's called the path tool. And then all you're going to do is you're going to mark out the swing sizes. So you mark out the swings. This just gives you a nice easy way to identify swing points because then you can easily identify the contraction boxes, especially when using the multibar. We're going to identify contraction boxes from multiple candles and not just one, two, or three candles. So you can see over here I've marked out all these levels. Now I'm simply going to look for areas within this zigzag pattern. Can you see these are basically zigzags we've created? I'm going to simply look for an area where we get a lower high and a higher low. So here is one of them right there and see. Let's make this a nice dark blue. Make it stand out. So that would be one of our areas. Remember once we've got the contraction box, we mark a line out the center. That becomes our expansion line. So this is one of the areas we can see, are there any more? There's no more. But bear in mind, I'm on the weekly time frame. So you want to use either a weekly time frame or a daily time frame or at least a 4-hour time frame to identify the two bar master patterns. When it comes to the three bar master patterns, you can use any time frame. And when it comes to the multibar that I'm showing you right now, you can do this on multiple different time frames. So right now, this is our weekly contraction zone and expansion line.
Now we can go to a daily chart. You can see we can go to a daily and then we can mark out the daily contraction zones and expansion lines. So I grab the path tool again and you'll see I just start marking out those zigzags. This is a very easy way to do it. Once you practice it more and more, you'll be able to identify this with your eye. You'll just be able to look at the chart and you'll be able to easily spot these contraction points. You see, all you're doing is you're taking the swing highs, the swing lows, you're marking them out, and we're just simply looking for contraction. All right, so let us zoom in now. Now that we've marked that on the chart, we're looking for simultaneous lower highs and higher lows. And you can see over here, so here is our first one. You can see over here, this is one over here. You can see simultaneous lower high and higher low. And then we're going to mark out a line from the center. And you can see, look how price is respecting this level, guys. Look how it's respecting that level. And we can drag it all the way across. There you go. There's one of them. Let's see if we can spot any more. Here's another one right over there. Bear in mind now we're working on the daily value lines and contraction zones. So, let's mark out over here. This is our weekly. So, let's make it green. And the blue ones are our daily. And then we could even go onto a lower time frame, like a 4-hour time frame, for instance. The multibar master patterns we can use on any time frame. We can use the higher time frame value lines to identify bias and then we can use the lower time frame to identify entries.
So if I just zoom into this area over here going to do the same thing as before. Just going to mark out these higher lows and lower highs. You can see here we go. I would recommend taking charts, practicing this. Get good at identifying this without having to use the zigzags. It's very easy to spot. Once you get it and understand it, you'll be seeing them everywhere and it'll be super easy to identify. So, I'll just use that little zone. You can see over here is one of them right over here. Now, I'm going to make this one a yellow one because that's our 4-hour. We can mark out the center. And let's look for another one. This looks like another one right over here. I typically will draw the one till it reaches the next. You can of course extend them further as well. Let's see over here. Do we have another one? Here you go. We've got another one right over here. Let's draw our expansion line out the center. If you guys want to learn how to use these contraction lines, expansion lines, click this video above right now. I'm going to give you a link to a video where I go into more details of how this works.
Now, let's see if we can spot some without the zigzag pattern. You can see over here. Here is one. Look at this. And how did I identify this, guys? It's a squeezing of price. Can you see price is squeezing over here? Gets tighter and tighter and tighter. Where it's super super tight, that is exactly where you put this value line. And you can see here contraction, there we go into expansion. Look, we get the zigzag out and around the value line. And then price goes into the trend phase. So you can see the three phases that are playing out perfectly in this master pattern. Let's see if we can spot another one. This looks like another one right over here. You can see lower high, higher, low. We can mark out our contraction and expansion lines. And there you go. You can see price breaks out of the box. It reverses and comes back to value. Breaks under the value line. It settles under the value line. And then it goes into the trend phase. Let's see if we can find another one. Here is one over here. And then we mark out our expansion line out the center. Whenever price is under the value lines, this is where we want to look for long positions. And we can trade back to value or beyond. Here's another one. This tight little range. You can see, look how tight it gets. Going to make this yellow. And I'm going to draw the expansion line out the center. And there you go. You can see here we've got this whipsaw out of the contraction box. Whenever price is above the value line, that's where we want to look for our short positions. Either trading back to value or beyond value. Price will typically whip saw around the value line three to seven times before it shoots off into the trend phase. You can see over here expansion phase, trend phase, and here we go. We get another one. Can you see this tightening of price over here? So, you can see on the 4-hour time frame, we get many more than we do on the daily. And the daily gets more than it does on the weekly. So, as we go down the time frames, we will get more of these. All depending on how you like to trade, what kind of a trader you are. But you can see here, this is what we call a single leg expansion. That's where we get contraction. Price breaks out of contraction and it just expands into one direction. You get either multileg expansions or you get single leg one leg breakout expansion. You can see it comes all the way down here. Price breaks out. This is the region you would look for a long position. And as you can see over here, price is respecting this value line and respecting this value line. Look at this guys. Look, let me zoom up on this and just show you the precision. Price comes just down to this value line and reacts off. It responds off of it. So, what I recommend marking out the higher time frame value lines and expansion lines and the lower time frame and then you can get precision in being able to identify the best places to look for longs and the best places to look for short positions. I highly recommend practicing this over and over till you become an expert at identifying contraction and expansion. Keep practicing your contractions and value lines. It's one of the most powerful ways to understand the real structure of the market. But if you want to mark out these instantly and cleanly without guesswork, my tool indicator X automatically draws every contraction box and every expansion line for you in real time. You'll see the value zones instantly so you can focus on execution instead of markup. You can check it out using the link below. If you want to learn more about this master pattern strategy, I recommend clicking this next video right now. I'm going to go into more details on the actual strategy behind how this works, so you can build upon your knowledge and become highly proficient in using the master pattern concepts. Click the link now and watch this next.