States of the Market
The four states price moves through, the transitions that are allowed (and the ones that are traps), and how they map to accumulation, manipulation, and distribution.
States of the market is one of the foundations you should memorize. Price is always doing one of four things, and knowing which state it is in tells you what can happen next and what cannot.
The four states
- Consolidation: price moves sideways in a range, building orders. This is the accumulation phase.
- Expansion: a strong, directional move out of the range.
- Retracement: a pullback against the expansion, usually back to an order block or fair value gap.
- Reversal: price changes direction, ending the previous move.
What price can and cannot do
Price always goes from a consolidation to an expansion first. From an expansion it can move to a retracement, a reversal, or back into a consolidation. The key rule: price can NEVER go straight from a consolidation to a reversal, and never straight from a consolidation to a retracement. Those moves only come after an expansion.
The allowed path
Consolidation leads to expansion. After an expansion you get a retracement (continuation) or a reversal. A retracement that holds returns to an OB or FVG, then price expands again.
Look at these first candles. They barely move and overlap each other in a tight sideways band. Price is resting and undecided. We call this a CONSOLIDATION.
Spot it: Highs and lows are about equal and the candles overlap: no clear staircase up or down.
The consolidation-to-reversal trap
When price looks like it is going straight from a consolidation into a reversal, treat it as a trap. A real turn comes with an AMD reversal pattern: price manipulates first (a liquidity sweep) before it distributes the other way.
AMD is accumulation, manipulation, and distribution. The accumulation is the consolidation. Price cannot reverse straight out of it: first it manipulates, usually by sweeping the liquidity just outside the range, and only then does it distribute into the new direction.
First, price moves sideways in a range, building up orders. This is ACCUMULATION, the same thing as a consolidation. The matching lows line up into a level. Remember liquidity from the earlier lesson? That level is sell-side liquidity (SSL): a pool of stop orders resting just under the range.
Spot it: Two or more lows lining up at the same price = a liquidity level (SSL).
Key takeaways
Four states: consolidation, expansion, retracement, reversal. Consolidation always leads to expansion. A reversal or retracement only comes after an expansion, never straight from a range. A turn out of a range needs a manipulation (sweep) first.
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