SMC Trading Strategies
Lesson 3
Expansion Candle (Expansion Formation)
Expansion Candles are used as a signal for determining whether price is looking to continue the same trending structure from the previous candle.
Published by Trader Tips,
Published by Trader Tips,
Chapter 1
What is an Expansion Candle?
An Expansion Candle is created when a candle pushes through and closes past the previous candle's wick.
We use Expansions Candles as a continuation signal, meaning when an Expansion Candle is created, we usually expect the next candle to reflect the same directional bias.
However, an Expansion Candle will not guarantee the next candle will close as the same colour as the last candle. Other factors must be included in this projection.
Examples of a Bullish Expansion Candle and a Bearish Expansion Candle.
A Bullish Expansion Candle signals Bullish Strength.
A Bearish Expansion Candle signals Bearish strength.
Bullish Expansion Candle
Example of a Bullish Expansion Candle (2).
For the criteria of a Bullish Expansion Candle (2), the candle would push up and past the Top Wick of the previous candle (1), and most importantly, have a candle closure above the previous candle (1)'s Top Wick.
This signals strength in the Bullish pressure, suggesting the market wishes to continue pushing further in the upward direction.
Following the golden rule of 'always follow the trend', when a Bullish Expansion Candle forms, our bias points to the next candle (3) being another Bullish Candle.
So we would be looking for Bullish setups on the lower timeframes within the next candle (3) after a Bullish Expansion Candle (2).
Bearish Expansion Candle
Example of a Bearish Expansion Candle (2).
For the criteria of a Bearish Expansion Candle (2), the candle would push down and past the Bottom Wick of the previous candle (1), and most importantly, have a candle closure below the previous candle (1)'s Bottom Wick.
This signals strength in the Bearish pressure, suggesting the market wishes to continue pushing further in the downward direction.
Following the golden rule of 'always follow the trend', when a Bearish Expansion Candle (2) forms, our bias points to the next candle (3) being another Bearish Candle.
So we would be looking for Bearish setups on the lower timeframes within the next candle (3) after a Bearish Expansion Candle (2).
What is an Expansion Candle?
An Expansion Candle is created when a candle pushes through and closes past the previous candle's wick.
We use Expansions Candles as a continuation signal, meaning when an Expansion Candle is created, we usually expect the next candle to reflect the same directional bias.
However, an Expansion Candle will not guarantee the next candle will close as the same colour as the last candle. Other factors must be included in this projection.
Examples of a Bullish Expansion Candle and a Bearish Expansion Candle.
A Bullish Expansion Candle signals Bullish Strength.
A Bearish Expansion Candle signals Bearish strength.
Bullish Expansion Candle
Example of a Bullish Expansion Candle (2).
For the criteria of a Bullish Expansion Candle (2), the candle would push up and past the Top Wick of the previous candle (1), and most importantly, have a candle closure above the previous candle (1)'s Top Wick.
This signals strength in the Bullish pressure, suggesting the market wishes to continue pushing further in the upward direction.
Following the golden rule of 'always follow the trend', when a Bullish Expansion Candle forms, our bias points to the next candle (3) being another Bullish Candle.
So we would be looking for Bullish setups on the lower timeframes within the next candle (3) after a Bullish Expansion Candle (2).
Bearish Expansion Candle
Example of a Bearish Expansion Candle (2).
For the criteria of a Bearish Expansion Candle (2), the candle would push down and past the Bottom Wick of the previous candle (1), and most importantly, have a candle closure below the previous candle (1)'s Bottom Wick.
This signals strength in the Bearish pressure, suggesting the market wishes to continue pushing further in the downward direction.
Following the golden rule of 'always follow the trend', when a Bearish Expansion Candle (2) forms, our bias points to the next candle (3) being another Bearish Candle.
So we would be looking for Bearish setups on the lower timeframes within the next candle (3) after a Bearish Expansion Candle (2).
Chapter 2
Equilibrium (EQ) of an Expansion Candle
For a 'strong' continuation following an Expansion Candle, we ideally want to see the Equilibrium level of the Expansion Candle be respected by the candle that follows it.
This means we want to see the next candle's Top or Bottom wick (depending on if it's a Bullish or Bearish Expansion Candle) be created without disrespecting the EQ level.
Equilibrium (EQ) of a Bullish Expansion Candle:
Next Candle's (3) Bottom Wick respecting Bullish Expansion Candle's (2) EQ.
For price to make a strong Bullish Continuation in Candle 3 after a Bullish Expansion Candle (2), we would ideally like to see the Bottom Wick of Candle 3 form within the upper half of the Bullish Expansion Candle's (2) range (above the previous candle's EQ), respecting the Bullish Expansion Candle's (2) Equilibrium level.
Equilibrium (EQ) of a Bearish Expansion Candle:
Next Candle's (3) Top Wick respecting Bearish Expansion Candle's (2) EQ.
For price to make a strong Bearish Continuation in Candle 3 after a Bearish Expansion Candle (2), we would ideally like to see the Top Wick of Candle 3 form within the lower half of the Bearish Expansion Candle's (2) range (above the previous candle's EQ), respecting the Bearish Expansion Candle's (2) Equilibrium level.
Equilibrium (EQ) of an Expansion Candle
For a 'strong' continuation following an Expansion Candle, we ideally want to see the Equilibrium level of the Expansion Candle be respected by the candle that follows it.
This means we want to see the next candle's Top or Bottom wick (depending on if it's a Bullish or Bearish Expansion Candle) be created without disrespecting the EQ level.
Equilibrium (EQ) of a Bullish Expansion Candle:
Next Candle's (3) Bottom Wick respecting Bullish Expansion Candle's (2) EQ.
For price to make a strong Bullish Continuation in Candle 3 after a Bullish Expansion Candle (2), we would ideally like to see the Bottom Wick of Candle 3 form within the upper half of the Bullish Expansion Candle's (2) range (above the previous candle's EQ), respecting the Bullish Expansion Candle's (2) Equilibrium level.
Equilibrium (EQ) of a Bearish Expansion Candle:
Next Candle's (3) Top Wick respecting Bearish Expansion Candle's (2) EQ.
For price to make a strong Bearish Continuation in Candle 3 after a Bearish Expansion Candle (2), we would ideally like to see the Top Wick of Candle 3 form within the lower half of the Bearish Expansion Candle's (2) range (above the previous candle's EQ), respecting the Bearish Expansion Candle's (2) Equilibrium level.
Chapter 3
Trading Expansion Candles
We use Expansion Candles as Continuation signals.
So, in terms of Directional Bias, we always want to match the bias of Expansion Candle.
So if the previous candle was a Bullish Expansion Candle, we would go into the next candle with a Bullish Bias, looking for Bullish setups on the lower timeframes.
If the previous candle was a Bearish Expansion Candle, we would go into the next candle with a Bearish Bias, looking for Bearish setups on the lower timeframes.
There is an exception to this, but we will cover that in the next chapter.
Trading Bullish Expansion Candles
Example of a 4 Hour Bullish Expansion Candle (2) through the lens of the 15 Minute timeframe.
When we have a Bullish Expansion Candle (2), we are then looking for Bullish setups within the next candle (3) on the lower timeframes.
In this example above, we have a 4 Hour Bullish Expansion Candle (2), so using Timeframe Alignment, we should be looking for setups in the next 4 Hour Candle (3) on the 15 Minute timeframe.
We ideally want to see the EQ of the Bullish Expansion Candle (2) be respected, with the bottom wick of Candle 3 forming above the EQ of Candle 2.
Example of finding a lower timeframe (15 Minute) Bullish setup within a higher timeframe (4 Hour) Bullish Expansion Candle Formation.
It's important that we do not just blindly enter a long trade when a Bullish Expansion Candle is created, we still need to look for an ideal setup for entering a trade.
For example, in the diagram above, we have a sweep of a 15 Minute Swing Low that had mitigated a 15 Bullish Fair Value Gap.
With the 15 Minute Bullish CISD as confirmation, this is an ideal example of a lower timeframe Bullish continuation setup within a higher timeframe Bullish Expansion Candle Formation.
Trading Bullish Expansion Candles
Example of a 4 Hour Bearish Expansion Candle (2) through the lens of the 15 Minute timeframe.
When we have a Bearish Expansion Candle (2), we are then looking for Bearish setups within the next candle (3) on the lower timeframes.
In this example above, we have a 4 Hour Bearish Expansion Candle (2), so using Timeframe Alignment, we should be looking for setups in the next 4 Hour Candle (3) on the 15 Minute timeframe.
We ideally want to see the EQ of the Bearish Expansion Candle (2) be respected, with the top wick of Candle 3 forming below the EQ of Candle 2.
Example of finding a lower timeframe (15 Minute) Bearish setup within a higher timeframe (4 Hour) Bearish Expansion Candle Formation.
It's important that we do not just blindly enter a short trade when a Bearish Expansion Candle is created, we still need to look for an ideal setup for entering a trade.
For example, in the diagram above, we have a sweep of a 15 Minute Swing High that had mitigated a 15 Bearish Fair Value Gap.
With the 15 Minute Bearish CISD as confirmation, this is an ideal example of a lower timeframe Bearish continuation setup within a higher timeframe Bearish Expansion Candle Formation.
Trading Expansion Candles
We use Expansion Candles as Continuation signals.
So, in terms of Directional Bias, we always want to match the bias of Expansion Candle.
So if the previous candle was a Bullish Expansion Candle, we would go into the next candle with a Bullish Bias, looking for Bullish setups on the lower timeframes.
If the previous candle was a Bearish Expansion Candle, we would go into the next candle with a Bearish Bias, looking for Bearish setups on the lower timeframes.
There is an exception to this, but we will cover that in the next chapter.
Trading Bullish Expansion Candles
Example of a 4 Hour Bullish Expansion Candle (2) through the lens of the 15 Minute timeframe.
When we have a Bullish Expansion Candle (2), we are then looking for Bullish setups within the next candle (3) on the lower timeframes.
In this example above, we have a 4 Hour Bullish Expansion Candle (2), so using Timeframe Alignment, we should be looking for setups in the next 4 Hour Candle (3) on the 15 Minute timeframe.
We ideally want to see the EQ of the Bullish Expansion Candle (2) be respected, with the bottom wick of Candle 3 forming above the EQ of Candle 2.
Example of finding a lower timeframe (15 Minute) Bullish setup within a higher timeframe (4 Hour) Bullish Expansion Candle Formation.
It's important that we do not just blindly enter a long trade when a Bullish Expansion Candle is created, we still need to look for an ideal setup for entering a trade.
For example, in the diagram above, we have a sweep of a 15 Minute Swing Low that had mitigated a 15 Bullish Fair Value Gap.
With the 15 Minute Bullish CISD as confirmation, this is an ideal example of a lower timeframe Bullish continuation setup within a higher timeframe Bullish Expansion Candle Formation.
Trading Bullish Expansion Candles
Example of a 4 Hour Bearish Expansion Candle (2) through the lens of the 15 Minute timeframe.
When we have a Bearish Expansion Candle (2), we are then looking for Bearish setups within the next candle (3) on the lower timeframes.
In this example above, we have a 4 Hour Bearish Expansion Candle (2), so using Timeframe Alignment, we should be looking for setups in the next 4 Hour Candle (3) on the 15 Minute timeframe.
We ideally want to see the EQ of the Bearish Expansion Candle (2) be respected, with the top wick of Candle 3 forming below the EQ of Candle 2.
Example of finding a lower timeframe (15 Minute) Bearish setup within a higher timeframe (4 Hour) Bearish Expansion Candle Formation.
It's important that we do not just blindly enter a short trade when a Bearish Expansion Candle is created, we still need to look for an ideal setup for entering a trade.
For example, in the diagram above, we have a sweep of a 15 Minute Swing High that had mitigated a 15 Bearish Fair Value Gap.
With the 15 Minute Bearish CISD as confirmation, this is an ideal example of a lower timeframe Bearish continuation setup within a higher timeframe Bearish Expansion Candle Formation.
Chapter 4
When should you avoid trading an Expansion Candle?
First of all, as a disclaimer, it should go without saying that like with everything in trading, an Expansion Candle doesn't provide a certainty for how the next candle will play out, it's just a characteristic that we use to determine the strength of buying/selling pressure.
But to be more specific, there are 2 scenarios where we should be cautious about trading an Expansion Candle:
When the Expansion Candle has hit a Key Level.
After more than 3 consecutive Expansion Candles.
Avoid trading Expansion Candles that have hit a Key Level
Example of Expansion Candles failing to continue expansion after hitting a Key Level.
If during the Expansion Candle, or during the candle that follows it, we see a mitigation of a PD array such as an External Liquidity Level or a Fair Value Gap, we have to assume that this is where a new phase of price action might occur (a new swing high/low can form), meaning we could potentially see reversal in the directional bias.
So we cannot blindly trust that the next candle after a expansion candle will always be another expansion candle, we have to consider the larger market structure as a whole, instead of just using the 1 candle as our analysis.
This means as a good rule of thumb, when a new Swing High/Low or FVG is hit, we wait for a confirmation of whether the market is creating a continuation move, or a reversal move. This allows us to revaluate the structure and determine whether we should switch our directional bias.
Avoid trading Expansion Candles after more than 3 Consecutive Expansion Candles
Retracement during Expansion Phase.
When the market delivers price to a new Draw on Liquidity, a lot of the time it isn't able to push all the way to the new target without having retracements.
A retracement during an Expansion Phase is common when the buyers in a Bullish Expansion, or sellers in a Bearish Expansion run out of fuel before reaching their target. This can either be from a lack of new buyers/sellers entering the market, or traders might just be happy taking profits with how price has expanded so far.
After retracing and potentially using an FVG as Liquidity (fuel), we then might see the market realign and continue the Expansion Move if it hasn't hit the Draw on Liquidity it was targeting.
A good rule of thumb is to be cautious trading an Expansion Candle when we have already have 3 consecutive Expansion Candles in a row. This helps to avoid trading an Expansion Move that might be weakening in strength.
When should you avoid trading an Expansion Candle?
First of all, as a disclaimer, it should go without saying that like with everything in trading, an Expansion Candle doesn't provide a certainty for how the next candle will play out, it's just a characteristic that we use to determine the strength of buying/selling pressure.
But to be more specific, there are 2 scenarios where we should be cautious about trading an Expansion Candle:
When the Expansion Candle has hit a Key Level.
After more than 3 consecutive Expansion Candles.
Avoid trading Expansion Candles that have hit a Key Level
Example of Expansion Candles failing to continue expansion after hitting a Key Level.
If during the Expansion Candle, or during the candle that follows it, we see a mitigation of a PD array such as an External Liquidity Level or a Fair Value Gap, we have to assume that this is where a new phase of price action might occur (a new swing high/low can form), meaning we could potentially see reversal in the directional bias.
So we cannot blindly trust that the next candle after a expansion candle will always be another expansion candle, we have to consider the larger market structure as a whole, instead of just using the 1 candle as our analysis.
This means as a good rule of thumb, when a new Swing High/Low or FVG is hit, we wait for a confirmation of whether the market is creating a continuation move, or a reversal move. This allows us to revaluate the structure and determine whether we should switch our directional bias.
Avoid trading Expansion Candles after more than 3 Consecutive Expansion Candles
Retracement during Expansion Phase.
When the market delivers price to a new Draw on Liquidity, a lot of the time it isn't able to push all the way to the new target without having retracements.
A retracement during an Expansion Phase is common when the buyers in a Bullish Expansion, or sellers in a Bearish Expansion run out of fuel before reaching their target. This can either be from a lack of new buyers/sellers entering the market, or traders might just be happy taking profits with how price has expanded so far.
After retracing and potentially using an FVG as Liquidity (fuel), we then might see the market realign and continue the Expansion Move if it hasn't hit the Draw on Liquidity it was targeting.
A good rule of thumb is to be cautious trading an Expansion Candle when we have already have 3 consecutive Expansion Candles in a row. This helps to avoid trading an Expansion Move that might be weakening in strength.
Chapter 5
When is an Expansion Candle considered Higher Probability?
The best Expansion Candles to trade are found directly after a new Reversal (Swing High/Low) has formed after hitting a Key Level.
The reason being is this is when a new phase of price has been decided, so this is the best price opportunity for traders to enter trades for the new phase, resulting in a larger volume injection compared to if we were already half way through the Expansion Move where traders might already be taking profits.
Examples of an Expansion Candles after a CRT Swing Point formation and an Engulfing Swing Point formation.
The best Expansion Candles to trade are typically the 4th Candle after a new Swing Point has formed.
We have 2 Swing Point formation (Reversal) frameworks that we use to find the best Expansion Candle trade setups, which are:
We will be covering both of these Swing Point frameworks in the next couple of lessons.
When is an Expansion Candle considered Higher Probability?
The best Expansion Candles to trade are found directly after a new Reversal (Swing High/Low) has formed after hitting a Key Level.
The reason being is this is when a new phase of price has been decided, so this is the best price opportunity for traders to enter trades for the new phase, resulting in a larger volume injection compared to if we were already half way through the Expansion Move where traders might already be taking profits.
Examples of an Expansion Candles after a CRT Swing Point formation and an Engulfing Swing Point formation.
The best Expansion Candles to trade are typically the 4th Candle after a new Swing Point has formed.
We have 2 Swing Point formation (Reversal) frameworks that we use to find the best Expansion Candle trade setups, which are:
We will be covering both of these Swing Point frameworks in the next couple of lessons.
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