Study path

XAUUSD is the price of gold expressed in US dollars. For each period, the candlestick chart summarises the opening price, the closing price, the high and the low; the timeframe is the duration of each candle (for example M5 = 5 minutes, H1 = 1 hour, H4 = 4 hours). This study path uses the convention 1 pip = $0.10 of price movement; some brokers define the gold pip differently, so it is worth checking the symbol specifications. The spread is the difference between the buying and selling price and it varies during the day. Session times (Asia, London, New York) are always given in UTC.

Before studying entries you need to know how much you are willing to lose on a single trade. The stop loss marks the point at which the initial idea is considered wrong. Position size is derived from the accepted risk and the stop distance: for the same risk, a wider stop requires a smaller position. The risk/reward ratio compares the potential loss with the potential gain. No method guarantees profits and losing streaks are normal.

A swing is a turning point in price: a high with lower candles on either side, or a low with higher candles on either side. A sequence of higher highs (HH) and higher lows (HL) describes an uptrend; lower highs (LH) and lower lows (LL) describe a downtrend. When highs and lows stay within a band, the market is ranging.

Retracements after a break of structure

After a break of structure, price rarely continues in a straight line: it often pulls back over part of the move it has just made before resuming or changing direction. This pullback is called a retracement.

To describe it, first measure the impulse, i.e. the leg that broke the structure: in a bullish break it runs from the low where the move started to the high reached after the break; in a bearish break, conversely, from the high to the low. The midpoint of the impulse is the equilibrium (50%). The upper half, above 50%, is the premium zone: prices that are high relative to the impulse. The lower half, below 50%, is the discount zone: prices that are low relative to the impulse.

We study where price retraces relative to these zones because it lets us describe the depth of a retracement in a consistent way that can be compared from one case to the next: after a bullish break, a retracement that stops in the premium zone is shallow, while one that reaches the discount zone is deeper. By recording cases in the diary you can check over time, on historical data, how price behaved in each situation, without taking the outcome for granted.

Key concepts

• Retracement: price moving back over part of the impulse.
• Impulse: the leg that broke the structure, measured from low to high (or from high to low).
• Equilibrium at 50%; premium zone above, discount zone below.
• Where the retracement sits is something to observe, not a prediction.

Demo account exercise

On historical H1 or H4 charts in a demo account, find ten breaks of structure. For each one, mark the impulse from the low to the high of the leg that broke the structure (from the high to the low if the break is bearish), draw the 50% level and shade the premium and discount zones. Then scroll the chart forward and note how far the retracement went, in which zone price reacted and what happened next, with the date and time in UTC.

Common mistakes

• Choosing the wrong impulse: starting from a low or ending at a high that does not belong to the leg that broke the structure.
• Measuring the impulse on a different timeframe from the one on which the break was identified.
• Treating a move into the premium or discount zone as an automatic signal: the zone tells you where price is, not what it will do.

Support and resistance are zones where price has reacted several times in the past. Multi-timeframe analysis works top-down: on H4 you define the prevailing direction and the main zones, on H1 you refine the structure, and on M15 you observe how price approaches the zones. The M5 timeframe is used only in the entry phase (Level 6).

A BOS is a break in the direction of the current trend, for example a new high above the previous one in an uptrend. A CHoCH is the first break against the sequence, for example a close below the last higher low in an uptrend, and it indicates a possible change in the market's character. A false breakout occurs when price moves beyond a level but quickly comes back inside it.

Once the context (structure and zones) has been defined, price action helps you understand whether price is reacting in a zone. Confirmation candles show a shift in pressure between buyers and sellers. Timing is studied on the M5 timeframe, observing the price reaction without anticipating it.

Many orders, including stop losses, cluster above obvious highs and below obvious lows: equal highs and lows, and session, previous-day and weekly levels. A sweep is when price briefly moves beyond one of these levels and then comes back. For session levels, it is best to always use the same time windows in UTC and to state the exact date of each level.

A fair value gap is an imbalance across three consecutive candles in which the first and third do not overlap. An order block is, generally, the last opposite-coloured candle before a strong move. High-impact US news (for example employment and inflation data or central bank decisions) can cause rapid moves and a widening of the spread. Stops tend to build up near the most obvious levels, which is why these often become targets for sweeps.

Fibonacci retracements and extensions

The Fibonacci tool, available on almost every charting platform, divides an impulse into percentage levels. It is drawn from the start to the end of the impulse: in a bullish move from the low to the high, in a bearish move from the high to the low. On the chart, 0% coincides with the end of the impulse and 100% with its start; the intermediate levels show how much of the impulse has been retraced.

The most commonly used retracement levels are 38.2%, 50%, 61.8% and 78.6%. The 38.2% and 61.8% levels derive from the ratios between numbers in the Fibonacci sequence; 78.6% is the square root of 0.618. 50% is not a Fibonacci number: it is added by convention because it marks the midpoint of the impulse, i.e. the equilibrium seen in Level 3. Read it carefully: the tool measures the retracement from the end of the impulse, so in a bullish impulse the 61.8% and 78.6% levels fall in the lower half (discount zone) and 38.2% in the upper half (premium zone).

The 127.2% and 161.8% extensions are projected beyond the end of the impulse, measured on its length, and are used to study where a move might reach if it continues beyond the end point. On some platforms they appear as -27.2% and -61.8%. They do not indicate where price will go: they are reference points to be verified.

On its own, a Fibonacci level says little. It becomes worth studying when there is confluence, i.e. when it coincides with other independent elements: a structural reference (a previous high or low, an order block, a fair value gap), a liquidity level (equal highs or lows, session or previous-day levels) or the premium/discount zone consistent with the direction of the structure. The more elements overlap in the same area, the more attention that area deserves in the analysis, but it remains a hypothesis to be verified, not a certainty.

Learning objectives

• Draw the tool on the correct impulse, from start to end.
• Recognise the 38.2%, 50%, 61.8% and 78.6% levels, knowing that 50% is a convention.
• Use the 127.2% and 161.8% extensions as study references.
• Look for confluence with structure and liquidity.

Demo account exercise

On historical data in a demo account, choose ten impulses that broke the structure on H1 or H4 and draw the tool on each one. Note at which level, if any, price reacted during the retracement and whether there was confluence in that area with a structural reference or a liquidity level. If the move continued beyond the end of the impulse, note what happened near the extensions. Write down your observations before scrolling the chart forward.

Common mistakes

• Drawing the tool on minor swings or on an impulse that did not break the structure.
• Drawing in the wrong direction and reading the levels the wrong way round.
• Treating every level as a guaranteed reaction point.
• Filling the chart with levels until you see confluence everywhere.
• Moving the tool after seeing how things turned out.

Once we have the results of our tests on historical data, we will add the resulting observations here.

The last level brings the previous ones together: context on the higher timeframes, structure, liquidity, zone, confirmation on M5 and risk management. The method is studied with a written plan, tested through backtesting on a demo account and improved with a diary in which every case is recorded and reviewed after the fact.