Why The Impulse Move Is Key To Understanding Markets

What could be simpler than an impulse move through a level?

Well… simplicity is deceiving, because it turns out there’s a lot going on behind a simple impulse move.

Directional Bias

An impulse is simply a move that’s larger and faster than the surrounding price action, and ideally through a key level without pausing.

When the market makes an impulse move, it’s giving you a heads-up to directional bias. If the impulse was through a key support/resistance level, there’s a good probability it will bounce when it returns.

Now, if trading were only as simple as that, we could end this article here and everyone would be a trillionaire by this time next week!

Obviously there’s a lot more to it. We need to know the context of the impulse move:

• How did the market return to the level? Did it make a V shape or a slow channeled pullback? (see an article on this here).
• What’s happening on the higher timeframes? Are we into key supply or demand? More on that in this article.

But as basic building blocks of technical analysis go, the impulse move is one of the most important to know.

Liquidity

Ok, let’s look at a real chart – here’s the Nasdaq on the 1 hour timeframe. You’ll notice my Volume Profile is set to the visible chart area, rather than session profile – that’s just how I like it, and it serves to highlight the important aspect of this chart.

We can see the impulse move through support (the white line) gave us a bearish heads-up. When the market returned to the white line, it became resistance, giving an opportunity to sell.

Contrary to popular belief, those big impulsive candles that represent awe-inspiring moves are created by a lack of liquidity. The less order volume there is to overcome, the faster price is going to be able to move through. When the market returns to that area, it finds there are not many orders to fill and reverses. In Volume Profile speak, this is a Low Volume Node (marked by LVN on the chart).

Conversely, you’ll find the market tends to grind lethargically around High Volume Nodes as there is plenty of order volume to fill.

In short, the market is on a constant mission to find areas of liquidity, where it can settle down, light a cigar and put it’s feet up.

GBP/USD Example

Here’s a rather extreme example on the monthly GBP/USD chart.

During the 2008 market crash, the market made a huge impulse through the prior swing low (support). That gave us a bearish bias on the monthly timeframe.

Your opportunity to sell was when the market returned to the white line.

There are many impulses on this chart, but the second impulse I have marked was at the time of the Brexit vote in June 2016. See how the price shot through support without looking back?

In this case, the market poked it’s head back above the line into supply and fell away again. An additional telltale sign was the Bear Channel back to supply.

I’ll leave it as an exercise to the reader to spot the Low Volume Nodes on this chart and how they act as confluence.

Supply & Demand

Looking at the previous chart, it should come as no surprise that impulse moves are the basic foundation of Supply & Demand trading.

A supply or demand zone only exists because the market made an impulsive move away from an area of consolidation.

If there’s no impulsive move, there’s no zone. This is an error new traders often make – finding “zones” on a chart with no impulse move.

Let’s take a look at this 4 hour USD/CAD chart to illustrate this point:

Notice the fast impulsive move down. This is the cue we need to find a supply zone. The zone is drawn from the start of the impulse move to the candle wicks above the consolidation area.

Sure enough, the market gives a nice sell setup later in the month.

The same can be applied in reverse for demand zone opportunities. We get a nice bullish impulse move up on the 11th of the month.

On the 16th, there’s a buy opportunity and if you missed it, there’s a second chance on the 23rd.

If you want to learn more about drawing Supply & Demand zones, visit this article here: Supply & Demand Trading Strategy

Conclusion

By now, you should now have a good understanding of why impulse moves are so important and the logic and reasoning behind the moves.

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