Trading Academy Day 31: Rejection Blocks

Summary

In this Day 31 video of the Trading Day Academy, the speaker explains the concept of **Rejection Blocks** and their use in trading, particularly when paired with **SMT Divergence**. A rejection block is the wick to the body of a candle at significant swing points, such as swing highs or lows. The speaker highlights how these blocks can help traders identify protected levels and place precise stop losses. When combined with **SMT Divergence**, rejection blocks become a powerful tool for confirming entry and exit points. The video provides practical examples and emphasizes the importance of using these techniques at key price levels.

Takeaways

• 😀 Rejection blocks occur at swing points, specifically at swing highs or swing lows, and are identified by the Wick to the body of the candle.
• 😀 Rejection blocks are most useful when paired with SMT (Smart Money Technique) divergence, especially at critical swing points.
• 😀 Rejection blocks are not used on every swing point or candle; they are most effective at important highs or lows with significant market movement.
• 😀 When an SMT divergence occurs, the high or low identified should be protected, and price should not move beyond that Wick if the divergence is valid.
• 😀 A valid rejection block involves price action touching the Wick to body of a swing high or swing low, with price ideally not exceeding this level.
• 😀 In trading, use rejection blocks to define stop losses. If a position is entered near the Wick of a swing high or low, the stop loss should be placed just beyond the opposite side of the block.
• 😀 The concept of 'fair value gap' is referenced where the midpoint of the rejection block is used to determine break points for price movement.
• 😀 The use of rejection blocks is demonstrated through real-world examples like ES sweeping lows while NQ does not, signaling that the low should be protected.
• 😀 When trading rejection blocks, zooming into smaller timeframes, like 15-minute or 5-minute charts, helps refine entry points and stop loss placements.
• 😀 Always check for SMT divergence before relying on a rejection block; a confirmed divergence strengthens the reliability of the rejection block and its ability to hold.
• 😀 The instructor encourages viewers to join the Discord community to ask questions and engage in discussions about trading strategies and concepts covered in the Academy.

Q & A

What is a rejection block in trading?

A rejection block refers to the wick-to-body area of a candle at a swing point, such as a swing high or swing low. It occurs when price action reaches this wick and reverses direction.

Why are rejection blocks paired with SMT (Smart Money Techniques) important?

Rejection blocks paired with SMT are important because they help identify key levels where price action is likely to reverse. SMT divergence indicates a potential discrepancy in market behavior, and when combined with rejection blocks, it provides a stronger signal for entry or stop placement.

How does an SMT divergence influence the use of rejection blocks?

An SMT divergence occurs when one market (like ES) makes a higher high while another (like NQ) makes a lower high. This discrepancy signals that the swing high or low should be protected, and the rejection block at this level becomes a critical point for a potential reversal.

Can rejection blocks be used in every swing point?

No, rejection blocks should not be used at every swing point. They are most effective when applied to significant swing highs or lows, particularly when paired with SMT divergence.

What should traders do when price action reaches a rejection block after an SMT divergence?

When price action reaches a rejection block after an SMT divergence, traders should look for confirmation that the rejection block is holding, which typically means the price will not move beyond the wick to the body of the swing high or low. Traders can then enter the market with a stop placed just below or above the rejection block.

How do you determine where to place a stop loss when using rejection blocks?

When using rejection blocks, the stop loss should be placed just below a swing low or just above a swing high, depending on whether you're going long or short. This ensures that if price breaks the rejection block, the trade is invalidated.

What is the relationship between rejection blocks and fair value gaps?

Rejection blocks can be thought of similarly to fair value gaps. The midpoint of the rejection block is used as a reference point, and if price action closes a body above this midpoint, it often signals a potential move towards the high or low of the rejection block.

What is the ideal scenario for using rejection blocks in conjunction with SMT?

The ideal scenario for using rejection blocks with SMT occurs when there is a clear SMT divergence, and price action reaches a significant swing point. The rejection block at this point should be used as an entry signal, with the stop placed just below or above the swing low or high.

Why is it important to pair rejection blocks with SMT divergence rather than using them independently?

Pairing rejection blocks with SMT divergence adds a layer of validation to the trade. The SMT divergence signals that a swing point is likely to hold, and the rejection block at that point further confirms where price action is likely to reverse.

What role does the timeframe play when identifying rejection blocks?

The timeframe is crucial when identifying rejection blocks, as they are typically more reliable when observed on higher timeframes, such as the one-hour chart. However, traders may also look for them on lower timeframes, like the five-minute or one-minute chart, to fine-tune their entries.