DIR Return Create A Forum - Home
---------------------------------------------------------
profxvictory
HTML https://profxvictory.createaforum.com
---------------------------------------------------------
*****************************************************
DIR Return to: General Discussion
*****************************************************
#Post#: 322--------------------------------------------------
Price Action
DIR By: fxvictory
Date: February 24, 2015, 10:53 am
---------------------------------------------------------
Contents
1Intro
2Price Action Analysis
2.1Trends
2.2Ranges and Consolidation
2.3Stalls
2.4Failures
3Tails
4Reversals
5Inside Bar Break-outs
6Basic Price Action Reading
7References
8Other Sources
Intro
Some say price action also includes volume and the level 2
"top-of-book", and many price action traders will include
indicators such as moving averages in their analysis, and others
again will also depend on price patterns such as Japanese
Candlestick or Edwards & Magee formations. Some traders who
would not class themselves as price action traders often use
price action to complement their main tools.
While price action has existed since the first market opened,
and early traders on the stock exchanges who read the tape
obviously used price action to help make their trading decisions
- read chapter 1 of the Jesse Livermore book referred to below -
there isn't that much literature detailing profitable trading
strategies based on price action, except the Al Brooks books
(also see below).
In brief, a successful price action trader will study the market
intensively and internalise the meaning and weight of a selected
subset of price action in terms of its likely effect on future
price movement. A certain type of price action behaviour will
trigger bearishness or bullishness. That price action might be
made of multiple small signals, or just one very glaringly
obvious big one.
To define the exact methodology a trader uses is just as
impossible as it is to describe how an art expert knows how to
judge a real Old Master from a fake, or how a firefighter knows
to get out of a burning building seconds before the roof
collapses. The trader might not even be conciously aware of some
of the input. This is learnt by experience from the market.
Commonly quoted advice states that a trader requires five
thousand hours of experience to become an expert.
It is notoriously difficult to define and categorise a list of
price action behaviours. Since this is a wiki which can be
easily edited, the rest of the article will lay out, in whatever
order makes itself apparent, a series of examples of price
action illustrating the principles involved and where possible
an explanation in terms of other market participants (i.e. the
bulls and the bears), their decisions, order flow and supply and
demand.
Price Action Analysis
[top] - [edit]Trends
Here is an example of a trend that usually never happens ("a
perfect trend").
A perfect trend
A perfect trend
Normally in the face of ever-fluctuating supply and demand, a
trend will move in a series of pushes seperated by pull-backs.
Although price action traders generally assume that nothing can
be strictly defined, this doesn't prevent them from giving it
their best shot. The primary method for defining a trend is
through the turning points or swings, referred to as "swing
highs" and "swing lows", or higher highs "HHs" and lower lows
"LLs". A bull trend will have alternating higher swing highs and
higher swing lows - HH's and HL's (higher lows) - and a bear
trend will have lower swing highs and lower swing lows - LH's
and LL's (LH = lower highs).
Swing points (high or low) can be defined in their own way in
varying fashion. A swing high is a high price preceeded by a
certain minimum length of time and followed by a certain minimum
length of time. A swing low is analogous. For example on a bar
chart, a swing high could be any bar with 2 adjacent bars to the
left whose highs are lower than the swing bar's high, and
similarly 2 adjacent and lower bars to the right. It could be 3
or 5
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53154&stc=1&fromvw=1[/img]
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53212&stc=1&fromvw=1[/img]
Virtually every trend will often 'break' its swing count as this
one does at 12:30 by putting in a lower low rather than a higher
low. After a break like that, this time the trend carried on,
making a new HH. Otherwise the trader would start to reconsider
the predicted direction. This is illustrated in the chart
"counting swings".
Lance Beggs of YTC (see link below) defines a mechanical rule to
determine a break of the trend or the swing count as the point
at which the market makes - e.g. in a bull trend - a lower low
than the HL (higher low) that led to the current HH. And
vice-versa for bear trends.
Sticking rigidly to the definition is something that can be done
by a computer. Indicators can be programmed to place the chart
mark-up at each swing point. However smaller breaks occur e.g.
at 12:30 on this chart where the market makes a lower high. A
human trader can ignore such a little anomaly and keep the count
going - a computer can't, or at least would require a lot more
lines of code and processing power.
Here are some of the chief characteristics of different types of
trend:
perfect sine-wave trends with regular pull-backs - this
rarely happens - the chart "counting swings" is an example of
something that comes as close to that as it gets (at least for
forex). Not only is the swing count fairly extended with few
breaks, the reversals into and out of pull-backs will be nicely
symetrical, the bars on the chart will show few tails except at
reversals, there won't be any chop and any acceleration or
deceleration of the trend will be smooth and regular at the
start and the end.
strong trends are characterised by big bars and brief
pull-backs and rarely fit entirely onto one chart screen. A
strong trend can commence through acceleration as the trend
builds or straight off from a break-out. The adjacent chart
"strong trend" is typical. It may often end in a "blow-off top"
or "climactic top" where all market participants thinking
with-trend are drawn into the market in a final surge and the
trend ends as the last traders enter and no more with-trend
pressure is left, resulting in either consolidation or a
reversal.
weak trends are best defined as markets where there has been
a visible movement, i.e. opening and closing prices are far
apart, but where all other definitions fail - the swing count is
broken, there is too much choppy action, there are too many bars
with tails, smaller child trends accelerate and decelerate,
pull-backs are large and long-lasting, etc.
accelerating trends become stronger and stronger as in the
adjacent chart ("Accelerating trend").
decelerating trends are usually dying trends, where any
strength in the trend tails off with each push and each push
gets successively shorter to the point where it becomes obvious
the trend has become sideways or even reversed.
choppy trends: typically have a lot of pull-backs, a
constantly breaking swing high / swing low count, lots of tails,
a mix of sharp reversals and rounded turn-arounds. This chart
"Choppy trend" shows a choppy sell-off that made 100 points.
Many traders pay close attention to the number of pushes and
pull-backs in a trend, especially day traders observing a child
trend during the day. Pushes, or the push and the subsequent
pull-back, are also called legs, and a trader may come to expect
a particular number of legs depending on the market, especially
2 or 3 legs, before the trend finishes and goes into
consolidation or retrace mode.
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53214&stc=1&fromvw=1[/img]
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53215&stc=1&fromvw=1[/img]
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53213&stc=1&fromvw=1[/img]
Ranges and Consolidation
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53216&stc=1&fromvw=1[/img]
Strong moves often result in a subsequent period with very
little movement, as seen on this chart ("Ranging market") in
EUR/USD after several days of strong rally.
EUR/USD only moved 80 points all day, despite volatility at the
3min timeframe.
Stalls
When the bulls and the bears are either evenly balanced and
supply equals demand, or when they both dry up in indecision,
and price halts and confines its movement to a very small range,
that's a stall, as on the accompanying chart "Stalling at S/R"
More stalls
More stalls
Stalling at S/R
Stalling at S/R
The trader who already has a bias for the future direction can
use the stall as a low risk entry point - it's low risk because
the protective stop can be placed really close on the opposite
side of the stall to the predicted direction.
The stall doesn't have to be a tiny range, it can be a bit
bigger and looks like a solid block of bars on the chart, either
all heavily overlapping range bars (as at 08:00 on the next
chart - "More stalls") or overlapping dojis (as at 08:30)
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53220&stc=1&fromvw=1[/img]
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53221&stc=1&fromvw=1[/img]
Failures
Depending on the market, a few, several or practically half of
all moves will be immediately preceeded by an attempt to go the
other way which fails.
Breakout failure
Breakout failure
EURUSD 1.2800
EURUSD 1.2800
This example shows the EURUSD interacting with resistance at
1.2800. The preceeding strong bull market decelerated massively
into the 1.2790s and then proceeded to make higher lows, with
big spikes in-between deomonstrating good supply above 1.2800
which repeatedly drove price back down - although each time a
new high was made.
Just as the new higher low looks like it's about to be made just
under 1.2800, the market breaks and the bears look like they
have surprisingly won the battle - but after stalling, it turns
around and powers through the resistance after all.
The last chart shows EUR/USD in European trading breaking out of
the range set in the Asian session. It tries both directions and
fails each way before making a successful break-out.
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53222&stc=1&fromvw=1[/img]
[img]
HTML https://www.bigmiketrading.com/attachment.php?attachmentid=53224&stc=1&fromvw=1[/img]
Tails
Tails are an artefact of the bar chart or candlestick chart and
are the top from the higher of either the bar open or close to
the high of the bar, or the lower tail, from the lower of either
the open or the close to the low of the bar. When a tail is
significantly larger than average, e.g. the lower tail, it is
evidence that demand is pushing price back to the open of the
bar and is generally bearish. A sequence of bars with lower
tails is stronger evidence, and a sequence of bars with tails
breaking support or resistance levels is sign that the market
does not accept price being on the other side of that level.
When the level of supply or demand begins to decline, the tails
reduce and any S/R level will become fragile.
EURUSD3MinTails.jpg
When a period of trading shows bars with large numbers of tails
in both directions, it's referred to as chop. Where there are
several overlapping Dojis, especially InsideBars, in sequence,
it is referred to as Barb Wire.
[top] - [edit]Reversals
Supply and demand fluctuate as market participants go about
their business with the result that even at the highest time
frame, price in a free market will oscillate irregularly
backwards and forwards. Each point where the market changes
direction is technically a reversal. EURUSD3MinReversalBar.jpg
We already have definitions of swing points, SwingHigh and
SwingLow and swing points can take various forms on a spectrum
between a perfect V shape with one bar only penetrating alone
many points away from the market before and after, to a regular
U shape which displays a smooth curving change of direction over
many bars.
[wikiimage]EURUSD3MinUturn.jpg|160px|thumb|border|right|Sweeping
turn-around[/wiki]
When the market puts in a symmetrical formation at either end of
that spectrum, e.g. a perfect one bar reversal with a long tail
or a long sweeping turn-around, then traders feel safe making
their predictions of that to carry on. In reality what we
usually see is something in-between.
[top] - [edit]Inside Bar Break-outs
A well-known entry trigger is the inside bar break-out strategy.
A small InsideBar which appears at the top or bottom of very
large bar is unexpected - the market has just experienced great
volatility and has surged in one direction, but now with the
inside bar, demonstrates indecision as the market participants
collectively pause to make a decision whether this large move
should continue or reverse. Whichever way the market moves, it
is likely to continue with similar momentum shown in the
previous bar. EURUSD3MinInsideBarBreakout.jpg
It may fail, and the market might come straight back after
moving only a short way in one direction, but it is mostly just
as good a risk to take the loss and go with the opposite
break-out.
[top] - [edit]Basic Price Action Reading
Reading price action seems easy enough to understand - read what
price is doing on a chart at any given time. Is it going up, is
it going down or is it going sideways? So what advantage is
there to this and why would you want to do it? Well simply put
you’re looking for opportunity. You’re looking for an edge to
make a profit.
Price action reading in hindsight, meaning after the fact, is
relatively easy to master – even seconds after the fact. But,
you do not profit this way as you cannot trade this way. You
need to attain an understanding or a feel for what is occurring
in the now, understand what potentially is causing the price
action to unfold as it is before your eyes and doing so
sub-consciously. The goal is to read price action as you would
the words in a book. Reading words, sub-consciously you form
understanding and ideas; the goal is to think this same way when
reading price action.
Trading is easy, push the go long or go short button, see if you
make a profit, if not exit. You could just enter at any
location, but that would be more in line with gambling – lay
your money down and see what happens. That approach is doomed to
failure. If you have no idea of a stop loss-profit target (risk
reward ratio), no judgment as to what is occurring in the
market, no insight into who is in control - you really have no
chance for success.
Reading price action and understanding market context go hand in
hand. As for example with news releases, the market context
typically includes exceptionally wide and volatile swings.
Review the ES or 6E futures charts at 10:00EST and notice how
volatile that time of day can be. Scheduled reports are
routinely released at that time. The close of a market is also
another crazy time to trade. If you cannot hold overnight you
must exit your position before the market close. Those who can
hold over night will be glad to help you exit your positions.
Successful traders have a firm grasp of market context. Major
and minor swings, number of traders in the market, type of
traders in the market, time of day, time of week, time of month,
time of year , trending or trade range, – all of these and more
make up market context.
The best entries have obvious risk and reward price points which
can be used as stop loss and profit targets. Look back on any
chart and identify these locations. You know the ones, where you
say, If I had entered here and had a stop loose there, look how
far this trade would have run. Once identified, study the bars
just before the obvious entry location – those are the price
action patterns you want to learn to identify allowing you to
prepare for the entry. Also with the prior bars, pay particular
attention to the potential obvious stop loss and profit target
areas. Keep these locations in mind should the market should
prove you right and warrant an entry. Plan your trade and trade
your plan.
Validating entry locations includes understanding the trade’s
risk:reward ratio. Subconsciously learn how to calculate the
risk:reward ratio. Many trading methods use this value as an
entry guideline– why risk more than you can be rewarded by? One
rule of thumb is a 1:3 minimum. Not all approaches follow this
rule so regimentally. With trading, things are very dependent on
market context. Some methods I have studied use stop losses as
catastrophic stop loses and such stop losses are hit only in
extremely rare occurrence the market does something crazy. Using
a catastrophic stop loss, the trade is managed once initiated,
but a profit target is always known/set in advance. Scaling
in/out can also be incorporated allowing you to fund a “free”
runner trade. For example, once you make profit to cover your
initial risk, you exit a portion and let the remainder run with
the market while managing the trade stop loss accordingly.
By reading price action, you learn to understand where such
entry locations are likely to begin and why. It is absolutely
impossible to always be correct in your read; nothing works
every time because the market context is never the same. More
importantly anything can happen at any given moment. There will
be times when the absolute best setup simply does not work out.
There will also be times when the market takes off for no reason
what so ever. A fine line exists between the prediction of
market movement (which is impossible in my opinion) and reacting
expediently to what is unfolding before you (if the market is
behaving in line with how you are reading it). Reading price
action and reacting as needed requires extreme confidence in
one’s self.
It is critically important to have an opinion on is who is in
control. Why, because it provides a base from which to measure.
Is this a bull market or a bear market or a trading range? In
review of charts, it is easy to see who was in control, but as
already stated you do not trade in hindsight. The sooner you
establish who is in control the sooner you can trade on the
“right” side of the market. Examples of the right side of the
market are: going long at the end of a pullback in an uptrend,
going short at the end of a rally in a down trend or buying low
and selling high in a trading range.
The standard candle stick bar provides insight as to who was/is
in control for the period of the bar. A candle stick bars has a
high, low, open and close value. If the close is above the open,
the bar is an up bar. If the close is below the open, it is a
down bar. Looking at a common 5 minute chart, a large bar that
has no tails or wicks is obviously bullish if it is an up bar
and bearish if it is a down bar. This fact alone provides
insight into who was in control for the duration of the bar.
The tails of the bars provide valuable information as well. If
the distance from the high of the bar to the open or close of
the bar is significantly larger than the body ( the body is the
distance between the open and close) , the top of the candle
will have a top tail or wick. I use the term tail and wick
interchangeably; it just means there is a line that extends from
the top, bottom or both sides of the candle. A large top wick
means the bulls pushed price up to the high, but then the bears
took control and pushed the price back down. Conversely if the
bar has a relatively large bottom tail it signifies the bears
pushed price down to the low only to have the bears gain control
and push price back up. Now consider a bar that has a relatively
large bottom tail, no top wick and is an up bar – this bar is
very bullish. Conversely if a bar has a relative tall top tail
and is a down bar, it is very bearish. Knowing how to interpret
the orientation of candle stick bars aids tremendously in
determining who is in control. Some say the tale is in the tails
– long bottom tails indicate buyers, long top tails (wicks)
means sellers. But again, you must understand market context.
For example given two bars, if the previous bar has a large top
tail and the current bar has the large bottom tail – are the
bulls in control?
Understanding how the market works greatly aids in determining
who is in control. The market utilizes two basic types of orders
– booked orders (such as limit orders) and market orders (filled
when they arrive at the exchange). Yes there are variations, but
at a basic level there are orders on the book and orders filled
when placed. Why is this important to know? Booked orders cannot
be filled by other booked orders. Booked orders can only be
filled by market orders. Thus, traders placing market orders can
be readily and correctly identified as the aggressive traders.
If price is dropping that means trades are occurring at the bid
(the price someone is willing to buy at, yes buy at). The
aggressor is the seller in this case, the initiator of the trade
is a seller. Conversely if price is rising, trading is occurring
at the ask (the price someone is willing to sell at). Aggressive
traders sell at the bid and buy at the ask. You can test this –
during a slow time, to avoid slippage, and in simulation mode,
place a market buy order and see what price you get filled at
(note what the bid and ask are when you enter) and conversely do
the same with a sell. Another way to think of it, if you want to
enter the market long and don’t care about price, are you going
to get the lower or higher price? If you don’t care and you go
long, you’re going to pay the higher price. The ask is higher
than the bid. Aggressive traders, traders who initiate a trade,
sell at the bid and buy at the ask. This fact provides the basis
for a tangible metric to aid in determining who is in control.
If price thrusts downward who is in control? You might say well
dah, the sellers are. But guess what, at the start of a large
down move and a large reversal, the charts will look exactly the
same – a thrust downward. Force yourself to determine/pick who
is in control, based on what you read from the chart – this
judgment needs to become a habit. Always have an opinion of who
is in control. So what If you’re proven wrong, when proven wrong
you still end up knowing who is in control.
There can be and many times is a difference between the
aggressor and who is in control.
I have come to think of the heard as the aggressor. The herd is
the vast majority who are trading. Think of stampeding cattle.
What gets them all aggressive and moving in one direction? Who
controls the heard? There are stories of getting the heard all
fired up, running full steam ahead only to fall off a cliff to
their death. So if the heard are the aggressors, who is it that
is in control? More importantly how can you determine the
sentiment of who is in control?
Many times more than not, the aggressor is not in control. Many
times the aggressor represents the laggards – always late to the
party and rushing in chasing the market.
Take for example a price drop that plummets 10 ticks in seconds
on high volume. Imagine all the trades that must have occurred,
all the orders filled for this to occur. Then you see price stop
at a value it has stopped at before, to the exact tick. The
exact same price point hit, just a few minutes ago. Ask
yourself, with heavy volume and the thousands of traders in the
market – how is it that price stopped to that exact tick? Is
this a random occurrence? Look back to the left of a chart to
aid in what is occurring on the right hand side of the chart.
Review your charts to see what happens the majority of the time
when you get a double bottom (DB matching lows) or double tops
(DT matching highs). Who is in control on these locations? This
type of action appears almost magical, price tries to move past
some value but the move/attempt is repeatedly rejected. On a 5
minute bar you can see the intra-bar movement repeatedly hitting
that low, but it simply will not pass that value. In this
example down thrust, someone sells and someone immediately buys.
No matter how much selling volume there is, all the sell orders
are instantly bought up. No way is this random. Knowing how the
market works, the aggressors are trying to go lower, but for
some reason the market won’t go down. The heard is being
re-directed by the controllers.
And with that said, also consider the vastness of the market, so
many traders with their own agenda. Recall it was stated that
nothing works all the time. In review of charts, take note of
what happens when a DT or DB location fails to hold.
You have undoubtedly have heard “the trend is your friend”. Well
who is in control in a trend? You want to be on their side and
you want to be in control too.
You read price action to ascertain who is in control
You read price action to learn where the laggards are as
they become “trapped traders”
Have you ever been in a trade only to have the market
immediately go against you? How do you feel? If you’re smart
what do you do? You exit the market. It is also very true that
at every trade there is an initiator and the remaining trader.
If you initiate an exit due the above scenario (for example exit
a short entry), someone else needs to pick up the other side of
your trade in order for it to be filled. Ask yourself, if you’re
exiting because you’re feeling pain – who in their right mind is
entering? In this example/context, the ones who are in control,
the bulls, the buyers, that’s who is making so you can exit
safely. How nice of them…
Imagine price is moving strongly downward. An aggressive trader
jumps on the bandwagon and enters short. They are an above
average trader and place a stop order just above the entry bar.
They place an “obvious” profit target at a respectable
risk:reward ratio. Price now starts to move in their direction,
volume increases meaning others are jumping on the bandwagon.
But all of a sudden price stalls - it just will not go lower and
is just shy of an “obvious” risk:reward ratio profit target.
Price then starts heading upward towards the obvious stop loss
exit, but it does not hit the exit either. Time moves on and
magically price starts moving downward again. The aggressive
trader’s emotions are going crazy – at first they were elated as
it seems they were on their way to an easy profit. Then all of a
sudden they almost got stopped out – whew what a close call. And
now price is coming down again, yes this trade is going to work.
Then it happens – price stops to the tick of the previous
thrust, it just refuses to go down any further. The bulls, who
are in control, are again rejecting again the 2nd attempt down
of the bears – and to the tick. The laggard trader is trapped.
What to do? Indecision ensues, do I exit now with partial
profit, but my rules say never ever change my targets, what to
do what to do what to do, panic sets in…. Price now races back
to the stop loss. What happens next? What happens when those
exists are hit? What happens if they exit with partial profit?
If we are in a down move, those exits are buy orders. So now we
have the bulls that are in control having defended the low a
second time (double bottom). We also have the trapped trader
exits that turn into more buy orders. Demand is building and
supply is gone signified by the fact that price would not go
down. What’s gona happen to price?
Enter the market to ease the pain of trapped traders in the
direction of observed control (trend).
Limits, fractals and abstract thinking are applicable to price
action reading. Here is one way to understand what thinking at
the limit means. Stand facing a wall, 4feet or so from it. Now
take a step half way to the wall, then repeat, again and again
and again. Will you ever hit the wall? Fractals and limit
thinking are an interesting combination when applied to trading.
As an example of the fractal nature of trading consider a 1
minute, 5 minute and 10 minute chart. If a high is made on the
10 minute chart, that same high is also made on the 5 minute and
1 minute chart. Price action reading is fractal in nature -
price is simply represented or printed in finer or more course
detail on charts. On the 1 minute chart you will see pull backs
whereas on the 10 minute chart you will only that action as
intra bar movement. Both will end with the same high/low
extreme, it’s just that one illustrates with more detail. The
detail may provide you, or better stated, you may perceive
opportunity in the detail where as another trade will call it
noise. There is no right or wrong here, just what you perceive,
how you react and how you trade (your style). Just remember the
smaller the time frame, the smaller the opportunity. If you take
this concept to the limit, to the single tick, the same
principles still apply. With this said, there are always easier
ways of doing things – you could fly to California or you could
walk, one is just easier. Al Brooks advocates the 5 minute chart
for Price Action Reading, but it will work on any highly liquid
market with any periodic measure.
In keeping with the microscopic view (at the limit if you will)
, at every price point traded there is a potential trapped
trader because for every buyer there is a seller and for every
seller there is a buyer. The higher the density of trades, the
higher the probability of a trapped trader whose pain you can
“help” ease. Trapped traders will gladly allow your fill with
their stops. Based on this does it not make sense to look for
these highly probable, highly dense trade areas on the chart?
This is why looking back to the left becomes important. Those
previous peaks and valleys represent high probability locations
of prior traders. I know of many methods that use closes of bars
and just as many that use highs and lows of bars. Many methods
use previous session highs and lows. Common trading methods,
widely accepted methods serve up (more like T up) these highly
probable locations on a silver platter. Patterns form and
methods work, not due to magic, but due in part to being
self-fulfilling in nature. If the majority of current traders
within the heard believes the EMA20 price cross method, guess
what the high likely hood of price action within the market (at
that moment in time) will be when the setup occurs. And for
every buyer there is a seller, so someone is always left holding
the bag if you will. You need to understand the market you trade
in; you need to get a feel for the way it behaves. Don’t chase
the market, rather like in chess, think ahead of the next move
and be prepared to take action when your thoughts are proven
right. Don’t be greedy – but do be profitable.
You’re seeking to be on the side of control, you want to remain
in control of your trade. If you’re in the market and not proven
right – do not hesitate to exit. There is no hoping involved in
trading – you are either proven right or you exit. Don’t let the
market make that decision for you. You need to be in control of
your trading, not the market. Lean to read where the high likely
hood of trading will occur – you can easily identify these
locations by reviewing your charts. Look for the locations where
you say If I had entered here look what opportunity was
available. Then consider what the market looked like just prior
to that and look for that “setup” when reading price action in
real time. Look for control, remain in control and trade in the
direction of control.
I have recently started taking screen shots of moves that I
believe are great setups. When trading live I take the screen
shot as soon as I recognize it forming. I store these in a
folder with a name based on the name I give the setup (for
example 1st pull back). I periodically review the folders of
images, sort of a flash card type approach to teaching my brain
what to look for. I want to build my sub conscious mind to
recognize this image as it forms just as I teach my mind to read
what is going on – who is in control and where are the trapped
traders I can help. Trading is very much mental – it needs to
become second nature.
The mechanics of trading are not difficult. What is difficult is
remaining in and maintaining mental control. Excitement and
frustration are hard emotions to keep in check. Remaining in the
“zone” focused on what is unfolding as told by price action is
challenging and hard to do. It is extremely difficult to sit on
your hands when you see the market accelerate and you’re not in
the market. It is equally difficult to remain in the market when
you are proven right and everything is indicating continued
movement in the identified direction. And it is most challenging
to exit when you are not proven correct. One way to remain in
mental control is ensuring you are making your trading
decisions. You can only control yourself, you cannot control the
market. If you decide to get out of the market make sure it is
because you decide to do so meaning exit before you catastrophic
stop loss is hit. It’s akin to seeing an eighteen wheel semi
speeding down the road directly towards you; as soon as you
identify this situation does it not make sense to get out of the
way? Letting the market take you out by hitting your stops
become mentally challenging. Learn to listen to yourself. Learn
to distinguish between the inner voice that is all excited about
seeing a market thrust and the inner voice that identifies
opportunity and trapped traders.
Reading price action is tool to aid in successful trading.
Understanding how to read the market will provide you with the
reasons why a DT or a DB works. It defines why the BPB (breakout
pullback) works. Patterns and methods are valid in trading, but
reading price action provides reasons why they work and provides
you an edge before they print. At first you may think your
anticipating the move, but remember you cannot predict the
unpredictable. You are reacting to the provided information you
are receiving in real time that then leads to the pattern.
Another way to understand price action involves supply and
demand. Why does price go up? Why does price go down - supply
and demand or the lack there of. High demand means the supply is
low and conversely high supply means demand is low. When the
availability of an item to buy is low, what happens to its
price? It rises. Think about gold, it is rare with a supply
lower than the demand so its price is relatively high.
Conversely, the supply of dirt in the world is higher than that
of gold and thusly the price of dirt is less than the price of
gold.
So how do you measure supply and demand? With trading, I don’t
think you adequately measure it. The reason being you are not
provided the reasons why someone is buying or selling. You do
not know if they are selling to exit with profit, selling to
exit with loss, or selling to enter the market. All you know is
that trades occurred at a location. But I know you can react to
supply and demand changes when identified.
There are millions of possible reasons why supply or demand
change. I recall something I read one time about this
techno-wizard showing a very wealthy old crony beans trader, his
latest and greatest Holy Grail indicator. The techno wizard says
all excited to the old crony – see this arrow this is a strong
highly probable buy signal that works 95% of the time. The old
crony says really, grabs the phone and places an order to sell
1000 bean contracts at the market. Just as the market starts to
raise a few ticks, it almost instantly drops 10 tics. The old
crony then says to the techno wizards, thanks. The point is you
never know what is occurring. You can be assured that supply and
demand will change. Large institutions always have orders to
sell or buy – because that’s what they do. The High Frequency
Trading (HFT) computers may have just been programed with a new
algorithm and it is being tried out for the first time. Some
episodic news related item (Japan Earth quake) may have just
occurred without warning. Some rouge trader may have just pushed
the sell button. There are endless possibilities and all can and
do affect supply and demand. But what can be recognized are
areas where prices has hard time moving through, areas of
support and resistance. You can also watch intra bar and get a
feel for what rejection and continuation looks like within the
market your trade. Remember the fractal nature of the market,
intrabar on the 30 minute can be a significant trend on the 1
minute.
When demand increases, price increases. When supply increases,
price falls. In a trending market, when demand increases, supply
falls and when supply falls, demand increases. Demand could be
increasing, and then profit taking could occur causing a
monetary drop in price, only to take back off upward again.
That’s what a first pull back looks like in a trend.
Price has found equilibrium where demand and supply are in
check. Price seeks equilibrium.
Equilibrium is identified on the chart as congestion –
overlapping bars or barbed wire as Al Brooks calls it. Demand
and supply for the moment are equal. When either side gains
control, price moves again, and continues on a path seeking
equilibrium. Again, you are looking for control. Is supply in
control or is demand in control.
At the end of it all, what really causes price movement is greed
and fear of human beings. Greed brings you into the market and
fear takes you out. You enter because you observe an opportunity
to profit. You exit for two possible reasons. If you exit with a
profit, your fear is not so hard to accept, the fear of losing
the profit potential you have. If you exit for a loss, your fear
is more profound, the fear of losing more than you started with.
Price Action reading provides the ability to define an edge. It
provides a measure you can use in any liquid market. It is as
close to the Holy Grail of trading that you will ever find and
you will still need to apply discretion. It offers you a way to
understand and explain market movement and allows you a
repeatable way to determine who is in control. Being in control
and on the side of control is a definite advantage in trading.
At its essence price action reading is the basis of all trading
methods.
*****************************************************
Page 1 of 1