**Trading the Invalidation of Daily Bias — Transcript & Summary | SozAI**
Source: https://sozai.app/transcript/trading-invalidation-daily-bias/

TTrades explains how to trade when a daily bullish bias is invalidated, covering two cases: an opposing candle 2 setup and the failure of the EQ of the previous candle, with TradingView examples.

## Key Takeaways

- Only two invalidation types are traded: an opposing candle 2 setup or an EQ invalidation of the prior candle.
- Invalidating the EQ means expansion beyond it followed by a close through it on the lower timeframe, then a fair value gap retracement can offer a continuation entry.
- Opposing setups usually start with a sweep of the previous day high or low and a change in the state of delivery.
- Confirmation via candle 2/candle 3 closures and continuation entries is required before trading the opposite direction.
- SMT divergence supports the signal but a continuation entry is still needed for a valid trade.

## What the video covers

- The video frames how to act when a daily bias is wrong, assuming a daily bullish bias for the examples.
- The presenter says he only trades two types of invalidation: an opposing setup (candle 2 forming against the bias) or invalidation of the EQ (equilibrium) of the previous candle.
- Invalidation via the EQ occurs when price expands below the higher-timeframe candle's EQ and closes below it on the lower timeframe, after which price may retrace into a fair value gap.
- An opposing setup typically forms when price opens near the previous day high or low, sweeps that level, and shows a change in the state of delivery.
- After an opposing setup or change in delivery, the trader seeks a continuation or a candle 2/candle 3 closure to trade in the opposite direction.
- Price can consolidate and invalidate a bias without creating a trade in the opposite direction; those scenarios are not traded.
- The first example shows a daily candle 2 bullish close and an hourly change in delivery, but price struggles to expand higher and a bearish SMT off the previous day high appears.
- Reversals off the previous day high are identified by the daily candle opening high first, confirmed on the 30-minute timeframe.
- The presenter emphasizes that even when trading a reversal or invalidation, he still looks for a continuation entry for confirmation.
- SMT (smart money technique divergence between correlated instruments such as YM) is used as supporting confluence for invalidations.

## Chapters

1. 00:00 Introduction: Trading the Invalidation of Daily Bias
2. 01:24 The Two Types of Invalidation
3. 02:24 Invalidation by Closing Below the Previous Candle's EQ
4. 02:36 Invalidation by an Opposing Candle 2 Setup
5. 03:51 Example 1: Reversal Off the Previous Day High
6. 04:54 Reviewing the Invalidation Framework and Continuation Entries
7. 07:09 Further Examples and Confirmation on Lower Timeframes
8. 11:05 Closing Points of Interest and Setup Reactions

Answers

## Questions about this video

What are the only two ways the presenter invalidates a daily bias?

He trades invalidations only through an opposing setup forming, such as a candle 2 against the bias, or through the invalidation of the previous candle's EQ. Other forms of invalidation, like consolidation, are not traded in the opposite direction.

How does the presenter identify an EQ invalidation?

Price expands below the EQ of the higher-timeframe candle and then closes below it on the aligned or lower timeframe. A subsequent retracement into a fair value gap can then offer a continuation entry lower.

What role does SMT play in these trades?

SMT divergence, such as YM running higher while ES fails, is used to support an invalidation or reversal signal. However, the presenter still looks for a continuation entry to confirm the trade.

## Full Transcript — Download SRT & Markdown

00:11

Speaker A

How's it going everyone, and welcome back to another video! Here we are going to talk about trading the invalidation of my bias. You have heard me talk a lot about candle 2 or candle 3 closures and having that daily bias. But how do we actually trade that bias if the bias is wrong? That is what we are going to talk about in today's video.

00:25

Speaker A

we actually trade that bias if the bias is wrong? And that is what we are going to talk about in today's video. So in this video, we are going to pretend like we have a daily bullish bias. And that

00:34

Speaker A

So in this video, we are going to pretend like we have a daily bullish bias, and that is what we're going to go into with each of these examples and then understand the invalidations that can occur. Now, within my model, I only approach invalidations of my bias in two ways. That would be an opposing setup that forms, or the invalidation of the EQ. Any other way that an invalidation forms, I'm not interested in trading the other way.

00:48

Speaker A

invalidation of the EQ. Any other way that a invalidation forms, I'm not interested in trading the other way.

00:54

Speaker A

These are the only two scenarios. So here you can see we have the anticipation for a bullish bias up and through the previous day high, as we expect a continuation. But what happens? Price opens, immediately trades higher into that previous day high, and then forms a reaction. We are manipulating off of this high or forming a reversal. If that is confirmed on the lower time frame, then I can look to trade this back into the range, or to the other side of the range, depending on how large this wick is. If we have a small wick that supports expansion to this current low, or if we have a large wick, I'm looking back in towards the opening price or the EQ of the previous candle.

01:11

Speaker A

reaction. We are manipulating off of this high or forming a reversal. If that is confirmed on the lower time frame, then I can look to trade this back into the range or to the other side of the range depending on how large this wick

01:24

Speaker A

Now, the other way I invalidate a trade is if price is closing below, on the aligned time frame, the EQ of our previous candle. So here you can see price opens, has a shallow wick which supports expansion lower, and then is trading below the EQ of this higher time frame candle and closing below it on the lower time frame. Let's go take a look at this with a lower time frame picture.

01:39

Speaker A

closing below on the aligned time frame the EQ of our previous candle. So here you can see price opens has a shallow wick which supports expansion lower and then is trading below the EQ of this higher time frame candle and closing

01:53

Speaker A

So here we're going to take a look at the invalidation of the EQ. You can see we have a bullish trend. We're going into the next day bullish. Price opens, makes a high, a change in the state of delivery, but most importantly, phases of price around that EQ. We have expansion below the EQ, and then what? We retrace back up, and what do we do? We have a retracement into a fair value gap, and we're looking like we're going to trade lower, right?

02:03

Speaker A

bullish trend. We're going into the next day bullish. Price opens, makes a high, a change in the state of delivery, but most importantly phases of price around that EQ. We have expansion below the EQ and then what? We retrace back up and

02:18

Speaker A

So this is an invalidation of a setup because of how price traded, right? We have a reversal at this high here, expansion, retracement, and we're invalidating that EQ. So what can I do? I can look in that area there and look for a continuation lower, looking for candle 2 or candle 3 closures, and looking to trade that lower.

02:24

Speaker A

So, this is an invalidation of a setup because of how price traded, right? We have a reversal at this high here, expansion, retracement, and we're invalidating that EQ. So, what can I do?

02:36

Speaker A

Now, the other way I invalidate a bias is that opposing formation, right? So this would be a candle 2 forming against me. You can see that's generally when we open up near our previous day high or previous day low here. We open up, sweep that previous day high out, we have a change in the state of delivery, and I can be looking for that move back lower, back to liquidity resting inside that previous day's range or the previous day low, depending on the size of the wick. So what am I going to do here once that opposing setup has formed, or that change in the state of delivery? Then I would seek a continuation or a candle 2 or candle 3 closure, looking to trade that the other way.

02:49

Speaker A

be a candle 2 forming against me. So you can see that's generally when we open up near our previous day high or previous day low here. We open up, sweep that previous day high out. we have a change

03:01

Speaker A

Now, just to review, those are the only two types of invalidations that I will look to trade. Price can consolidate and invalidate my bias, but those do not set up trades in the opposite direction. These are the only ways that I'll look to trade. And once again, that is an opposing setup that will form, which is candle 2 forming in the other direction, or the invalidation of an EQ, which is really just the setup failing, and I can anticipate it to trade the other way.

03:15

Speaker A

opposing setup has formed or that change in the state of delivery then I would seek a continuation or a candle 2 or candle 3 closure looking to trade that the other way. Now, just to review, those are the only two types of

03:28

Speaker A

So let's get into TradingView and go over a few examples of this. Here we are in our first example, and you can see we have taken out a relevant low here on the daily time frame, as well as forming a candle 2 closure with a very strong bullish close. Going to the hourly time frame, we have a change in the state of delivery. It's valid to be looking for an upside move in this following day. You can see we print this T-spot here, and then we're forming a continuation to go higher. Now let's see if we get this move higher.

03:40

Speaker A

that will form, which is candle 2 forming in the other direction or the invalidation of an EQ, which is really just the setup is failing and I can anticipate it to trade the other way.

03:51

Speaker A

And you can see we are really struggling to form any sort of bullish expansion. Here we have a continuation right here, which should hold price if we're going to trend higher. But what do we notice about this continuation? As we zoom in, it is getting disrespected. But now, not only do we have a bearish change in the state of delivery with SMT off a previous day high, but we're also invalidating this continuation, where we should not see price return to if we're going to remain in a bullish trend. Now, it's safe to say that we have formed what? A reversal off of a previous day high. So instead of price opening up and forming a low, or the wick of the daily candle, to then trade higher, we are opening high first.

04:02

Speaker A

a candle 2 closure with a very strong bullish closure. Going to the hourly time frame we have a change in the state of delivery. It's valid to be looking for an upside move in this following day. You can see we print this T-spot

04:16

Speaker A

So what we can do is get a better look by going to the 30-minute time frame around the open. Down here on the 30-minute time frame, what do we notice about our daily candle? We did have that open high first, which is a bearish sign. We have a 30-minute change in the state of delivery right here. Now we have taken out the short-term low. We want to see the reaction we get here, but it's important to note what else we have: a candle 2 closure on the 4-hour here, which says if we were going to get a candle 3 continuation, we can get that or open. So what do we notice? We trade higher. Are we still respecting this area? Yes. But we would need some bearish price action or a new continuation to trust this. And what do we notice after this close?

04:24

Speaker A

And you can see we are really struggling to form any sort of bullish expansion.

04:28

Speaker A

We have formed a new continuation here on the 30. So going into the open, it's reasonable to expect that, because of the hourly time frame, we have formed an SMT off this previous day high, as well as a new continuation on the 30-minute. We could look to see this trade lower. We could look to take an entry here, put our stop on this high, and then look back into the range. Now, what did we learn about in the PDF in terms of targets? So let's go to the hourly time frame here. In terms of targets, what can we be targeting? We can look back to the EQ or to the previous day low. That could be our target. So let's see how that works out.

04:40

Speaker A

But now, not only do we have a bearish change in the state of delivery with SMT off a previous day high, but we're also invalidating this continuation where we should not see price return to if we're going to remain in a bullish trend. But

04:54

Speaker A

You can see we do hit that EQ, and then we go ahead and reach for that previous day low, and that's where we are at currently. But just to review, if we're going to have an invalidation of a daily framework, it's either going to occur by invalidating the EQ, or a reversal forming off the previous day high, or essentially a candle 2 in the opposing direction. So you see how we are forming this candle 2 in the opposite direction. Generally, I want to see that paired with an SMT or some sort of continuation. At the time, we did have an SMT with YM, and YM ran higher, so we formed an SMT here. But we have a continuation entry that provides a framework to trade that invalidation. So even if I'm trading a reversal or an invalidation, I'm still looking for a continuation.

05:08

Speaker A

what we can do is get a better look is go to the 30-inut time frame around open. So, down here on the 30-inut time frame, what do we notice about our daily candle? We did have that open high

05:17

Speaker A

Let's get into another example. Here we are in our next example, and what do we have? We have a candle 2 closure here, and that is paired with an SMT off of this low. So it would be valid to be looking for price to trade higher in this following day. Let's go down to the hourly time frame. You can see we have a nice V-shaped reversal here. So we could be looking for price to trade higher, as long as we run out this consolidation low and then trade through the highs.

05:30

Speaker A

candle 2 closure on the 4 hour here which says if we were going to get a candle 3 continuation we can get that or open. So what do we notice? We trade higher. Are we still respecting this area? Yes. But we would need some

05:43

Speaker A

Let's see what happens here. You can see we do reach into this low, into this fair value gap, and then we are looking for a continuation over this level here. Now what do we notice about this continuation? It's taking so long to form that this is just becoming a consolidation. Let's see how we trade around this previous day h

05:49

Speaker A

We have formed a new continuation here on the 30. So going into the open, it's reasonable to expect that because of the hourly time frame, we have what? We have formed a SMT off this previous day high as well as a new continuation on the 30

06:04

Speaker A

minute. We could look to see this trade lower. We could look to take an entry here, put our stop on this high and then look back into the range. Now, what did we learn about in the PDF in terms of

06:15

Speaker A

targets? So, let's go to the hourly time frame here. In terms of targets, what can we be targeting? We can look back to the EQ or to the previous day low. That could be our targets. So, let's see how

06:26

Speaker A

that works out. You can see we do hit that EQ and then we go ahead and we're reaching for that previous day low and that's where we are at currently. But just to review, if we're going to have

06:37

Speaker A

an invalidation of a daily framework, it's either going to occur by invalidating the EQ or a reversal forming off previous day high or essentially a candle too in the opposing direction. So you see how we are forming this candle too in the opposite

06:51

Speaker A

direction. Generally, I want to see that paired with an SMT or some sort of continuation. So at the time we did have an SMT with YM. YM ran higher. So we formed an SMT here. But we have a

07:04

Speaker A

continuation entry that provides a framework to trade that invalidation. So even if I'm trading a reversal or an invalidation, I'm still looking for a continuation. Let's get into another example. So here we are in our next example. And what do we have? We have a

07:19

Speaker A

candle 2 closure here as well as that is paired with an SMT off of this low. So, it would be valid to be looking for price to trade higher in this following day. Let's go down to the hourly time

07:30

Speaker A

frame. You can see we have a nice V-shaped reversal here. So, we could be looking for price to trade higher as long as we run out this consolidation low and then trade through the highs.

07:41

Speaker A

Let's see what happens here. You can see we do reach into this low into this fair value gap and then we are looking for a continuation over this level here. Now what do we notice about this continuation? It's taking so long

07:56

Speaker A

to form that that this is just becoming a consolidation. Let's see how we trade around this previous day high. Here you can see we reach into that previous day high. We want to look at the phases of price here

08:08

Speaker A

because this is where we would form an invalidation if it's going to occur. What do we have on this next candle? We have an SMT and a change in the state of delivery off of the previous day high.

08:20

Speaker A

So now you see how we are forming accumulation manipulation and we can see a distribution lower. Now the whole idea behind an invalidation trade within the fractal model is if we're not going to form a swing point and trade higher.

08:33

Speaker A

Well then what is going to fail? This swing is going to fail. And if that swing fails, we now have candle 2's low as our draw on liquidity. So now we have a change in the state of delivery. We

08:44

Speaker A

can anticipate a price to move lower here. So, we can either trade this reversal here or what else can we do? We can look for a continuation to form as well.

08:54

Speaker A

And it's quite choppy in there, but we do get a move lower to that drawn liquidity. So, just to review, if we are looking to trade a invalidation trade, we have to one have a proper framework or a proper setup that then fails. And

09:08

Speaker A

by fails, it either forms an opposing setup off a previous day high or low, or it is disrespecting the EQ. So you notice we have that step one, we form that reversal off previous day high and then it also helps that we get the

09:22

Speaker A

closure below the EQ signaling for a continuation lower into this low. So here we are in our next example and we are on gasoline futures. You can see we have a nice V-shaped reversal with a candle to closure on the daily. So

09:36

Speaker A

looking into this next candle, if we're looking for a continuation higher, what do we want to see? open low into this area. A continuation to form and to trade higher into the failure swings above. Let's see what happens.

09:50

Speaker A

You notice we're not respecting this EQ. Now, we can still get a bullish reaction out of it. And EQ does not mean it's automatically going to fail, right? It just means that it's unlikely to expand or we need to see more confirmation

10:03

Speaker A

pretty quickly. Let's see what happens. You can see we're just failing to form any reaction or continuation out of this area. And now we're forming a bearish setup. So what are we seeing? We're forming bearish opposing candles and

10:18

Speaker A

we're closing below the EQ, which means we're likely to reach for this previous day low. What do we see? We form another continuation, in which case we could look to get on side and then we go ahead and run out that low. So, this is an

10:31

Speaker A

example of where we don't take out our previous day high, but we just disrespect the EQ and never form a bullish continuation, which sets up a bearish framework to trade this into that candle 2 low. So, here we are in

10:44

Speaker A

our next example, and what do we have? We have a nice V-shaped reversal, a very strong close into the highs, and a bullish candle to closure on the daily.

10:53

Speaker A

So, what would we want to see? We'd want to see price open, trade lower into a point of interest, which we have a nice fair value gap right here. Respect the EQ and trade higher. Let's see what happens.

11:04

Speaker A

So, here you can see we're in that point of interest. Let's see if we can get a reaction out of here to form a continuation.

11:11

Speaker A

And you can see we are consolidating. That does not look good for a reversal to continue higher here. And now you can see we are getting a very aggressive closure below the EQ. Now, once again, it doesn't mean that price can't reverse

11:25

Speaker A

here and then trade higher. It's just once price reaches beyond that EQ, it's not a small wick anymore mechanically.

11:32

Speaker A

It's less likely to expand. So, for instance, if we form a low here, price can expand higher. If we went ahead and formed a low here, then we're kind of fighting that daily candle to get back towards the daily open and the liquidity

11:44

Speaker A

around it. So, generally, I prefer to trade the continuations, though. So, let's see if we can see where this is going to go. Well, it expands, disrespects this. Does it get bought back up? No. So, we can anticipate a

11:56

Speaker A

continuation lower into where that candle too low. And there you can see we get a failed candle 2 because we can't form a bullish setup and thus it is just a bearish setup. So, for our next example, we're going to go back one day.

12:10

Speaker A

And what do we notice? We have a candle 2 closure and we do get a continuation into this previous day low. Now, what do we notice about this previous day low?

12:18

Speaker A

We get a nice V-shaped reaction. So, we're forming a reversal candle here. Now, if we're going to form a reversal off of this previous low, where could we look for price to trade back to the EQ?

12:29

Speaker A

And does it do that? It does. Right now, we're closing over the EQ or disrespecting it. So, we could look for price to trade to this swing high. Now, like I said, this isn't a 100% thing.

12:40

Speaker A

You can see we're not always going to reach for that previous high, especially if a correlated asset like dollar here on USD JPY takes it out. But just because you see a closure through the EQ or an invalidation trade occurring

12:53

Speaker A

doesn't mean it's always going to go hit the targets, right? You have to have that discernment. Although most of these examples have been on the daily time frame, this is a fractal concept as my fractal model is. So here you can see we

13:06

Speaker A

have expansion, a consolidation, we run out the low with a candle to closure. So we could be looking higher in this next month. Let's go down to the daily time frame. So, here we are on the daily time

13:18

Speaker A

frame. We have that confirmation. As we let this play ahead, where would we want to see price react from? Well, we didn't get a very strong closure. We need price to react or run out this low into a fair

13:29

Speaker A

value gap, right? And then start to trade higher here. So, this is really our one opportunity for price to trade higher here. Let's see what happens. You can see we immediately disrespect that and then close below. Closing below the

13:43

Speaker A

EQ here means that we could be looking for price to go where? To fail or to reach for these lows. Now, it's not always going to occur. We have to watch the phases of price. If this gets bought

13:53

Speaker A

back up, it can go higher once again, right? It's not an all or nothing thing.

13:59

Speaker A

Let's see what happens. We do get that continuation into that low. Now, I hope you learned something from this video.

14:04

Speaker A

If you did, please consider liking and subscribing. And just in summary, you need to have a valid fractal model to then have an invalidation. You can't just trade an invalidation without a model forming. So don't try to just

14:17

Speaker A

pattern trade this. Use some context. Use some higher time frame trend and be safe. Have a good one.

Topics: daily bias invalidation candle 2 candle 3 EQ change in state of delivery SMT fair value gap TradingView ICT-style trading

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