Price Action

Introduction to Price Action

Investors and analysts often perform different analyses for the stock and commodities that are traded in the market. These analyses include both functional analysis and technical analysis. These analyses are done by considering different factors in regards to the commodities and stocks that are traded.

Understanding these factors that form an important part of such analyses is essential to all traders both individuals and organisations. One such factor that is involved in the technical analysis of the stocks or commodities is the price action. This is a very important part of the technical analysis and forms the basic of all technical analysis and is therefore important to understand.

What is Price Action?

Price action refers to the movement of the security’s price which is plotted over a particular time period. This is an important factor or strategy as most traders solely depend on this for making important Trading decisions. Price action is also important for analysts as it forms the basis of technical analysis of the stocks or commodities involved.

Price action is presented on charts in different forms to make it easy to understand for the traders. Technical analysis and its derivatives depend on this price action. Many technical analysis derivatives like the moving averages are calculated from price action. Hence, it is an important factor in the technical analysis of stocks or commodities.

Traders use different chart patterns like the candlestick chart patterns to understand the price action more easily as these patterns indicate the upward and downward movement of the security’s prices more specifically and clearly which makes it simple for the traders to understand. Candlestick patterns like harami cross, engulfing pattern and three white soldiers are most commonly used for this purpose.

Price Action Trading? Yes, price action forms the basis of technical analysis and helps you in timing entries and exits better without relying on news or opinions.

Many short-term traders mainly rely on price action and the formations and trends that help them make trading decisions.

Price action can be analyzed using charts that plot prices over time. Traders use the different charts for improving their ability to analyze trends, breakouts and reversals.

But the main problem here is that since there’s so much information out there like candlestick patterns, chart patterns, trendlines, etc. it makes it challenging to take trading decisions.

Novice traders often have this questions-Where do I start? What should I look for?

So in today’s blog, we will discuss 7 things you should consider before placing an order when doing price action trading

1. Market Structure

The first thing that a price action trader should see is the market structure, i.e. which stage the market is in.

The market structure consists of 4 stages:

Stage 1- Accumulation

The accumulation stage occurs when the market has bottomed, and the early buyers begin to buy, figuring that the worst is over.

This stage looks like a range market but in a downtrend. When the price moves lower, bullish traders start buying as they consider the prices “too low” that exerts buying pressure in the market.

Aso, bearish traders in there in the market who keep on selling, in the hope that the downtrend will continue.

When we combine both buying and selling pressure, the market reaches an equilibrium stage and consolidates. If the prices break upside, then we can say that the market has bottomed and the trend has reversed to uptrend as shown below:

Stage 2- Advancing

The advancing stage occurs when the market has been stable for a while and starts moving higher.

At this stage, most traders start recognizing the uptrend and are looking for buying opportunities.

Stage 3- Distribution

The distribution stage looks like a range market but in an uptrend.

When the price moves higher, bearish traders enter and start taking short positions as the prices are considered to be “too high” which puts selling pressure on the market. But, at the same time, there are still bullish traders who are still buying, hoping that the Trend will continue.

When we combine both buying and selling pressure, then the market consolidates. If the price breaks below the lowest level, we enter the last stage i.e. Distribution phase.

Stage 4- Downtrend

When the prices start making lower lows, we can say that the downtrend has begun, which is the last stage.

So before placing any trading order, one needs to understand in which stage the market is in, as explained above. This will help the price action traders to understand whether to buy, sell, or stay out of the markets.

2. Support and Resistance

After seeing which stage the stock/market is in, the price action needs to decide whether to buy or sell.

If the market is in an advancing phase, one can initiate long positions; however, if the market is in a downtrend phase, one can initiate short positions.

After making this decision, one needs to analyze the support and resistance levels, i.e. the potential buying or selling pressure zones.

Support is a zone of potential buying pressure where buyers could step in and push the price higher, whereas resistance is a zone where sellers could step in and push the price lower.

The support and resistance zone tells us where to buy and sell. If the prices reverse back from the resistance level, one can short the stock.

And if the prices reverse back from the support level, one can buy the stock.

And now the question is, When do you enter a trade?

3. Entry Level

When the prices breakout from any price pattern, candlesticks, support or resistance levels, the price action trader can take a long/short position at that point.

But wait!! Don’t enter the position as soon as the breakout happens. Instead, one should wait for the closing price or the next trading session, and if it sustains the breakout, the trader can take a buy or short position.

For example, if you see a Bullish Harami candlestick pattern after the downtrend, you should enter a long position if the prices open higher the next day.

4. Stop Loss

Wait! Are you entering your long or short position without determining the stop-loss level? If yes! Then you are making a terrible mistake due to which you can suffer a lot of losses!

Even the best trading setup could result in a loser. This is why it is important to know when to get out of your trade before things get worst.

And this can be solved by using stop-loss, which will help you protect your position so that you don’t incur losses if the trade goes against your expectations.

Now the question comes where I should put stop-loss. Well, there are many ways to determine that.

For example, if you spot a Bullish Harami candlestick pattern, then you can place a stop loss at the support or low of the previous day’s candlestick.

5. Higher-Timeframe

But did you look at the higher timeframe trend before placing the trading order to buy or sell?

Yes, it’s important to us to look at the higher-timeframe trend i.e., if you trade by using daily charts, you should also look at the weekly charts to determine whether the trend is in uptrend or downtrend.

6. Volume

Also, looking at the volume is important before placing your order. If there is no rise in the volume when the breakout happens, then the price action trader should be doubtful in taking that position.

A trend reversal should always be supported by an increase in volume. There are many volume indicators with the help of which you can analyze volume in the stock.

7. Exit Level

You should also determine the exit level before even entering the position. Yes! It is also important to determine the exit level before we place the buy/sell order.

The exit level can be determined by a certain percentage, support/resistance level, or the price target in the case of chart patterns.

After determining all the above things, you are now ready to place your trading order, whether long or short!

To learn more about price action strategies, you can any of the following courses and webinars as discussed below:

Course on Price Action Trading

1. Complete Price Action Course

Price is the ultimate king in the stock market and the reason we can see profit or loss.

Technical analysis is the art of using data points to your advantage and taking informed decisions while entering, trailing and exiting a position on any timeframe.

Whether you are a trader or an investor, technical analysis is the key to overcoming wrong entries and subsequent headaches due to MTM losses.

This course on price action will help you understand how to be a price action trader.

2. Intraday Price Action Trading Using CPR

Price Action Trading Technique and CPR is an efficient approach which if properly understood, will allow an individual to be in a comfort zone in all kinds of environments such as a trading range or a trending market.

The participants in the market have to make either of the two decisions, whether to buy or sell. Price Action Trading Technique and CPR helps you buy or sell at appropriate prices and time junctures based on the market dynamics.

Whether you are a very short-term trader trading on an intraday basis or an investor for the longer term, Price Action Trading Technique and CPR are an essential part of the toolkit for market participants.

3. High Probability Price Action Trading

The average man does not wish to be told that it is a bull or a bear market. He desires to be told specifically which particular stock to buy or sell.

He wants to get something for nothing. He does not wish to work. He does not even wish to have to think.

In this master class, you will learn about various Technical Analysis patterns which provide a high probability trade set-up.

The speaker will discuss the patterns which work on various asset classes like Stocks, Indices, Commodities, Currencies, Futures and Options.

We will focus on The Reactive Trading System built on the principle of taking entries only after the market confirms your opinion.

Webinars on Price Action Trading

1. Price action and Pullback Trading

The beauty of a well thought out pullback trading system is that you enter the market or place your first trade only after confirming how the market is going.

Doing this will help you eliminate entering the market with a false signal. Pullback trading is a fantastic starting point for new traders.

This Webinar will cover price action and pullback concepts along with complete price action and Pullback Trading system.

2. Precision Price Action Trading

Precision Price Action is an art of trading in the stock markets without using any of the indicators.

Price is always the leading and driving force in the market. Learn the art of studying and learning price behaviour without using any indicators.

3. Understanding Price Action Trading in Technical Analysis

In simple terms, Price Action Trading is underrated in technical analysis and often ignored by traders.

This webinar aims to prove the importance of price action trading and Dow theory with practical chart examples which will release the complicated approach towards trading rather than looking into complex trading systems.

4. Smart Reversal Price Action Strategy

Price Action is the art of trading the financial markets without a single indicator. Instead, the price itself is the key to making most of your decisions.

Price is the ultimate truth that is in sync with reality. With the help of this webinar on price action, one can understand the power of Reversal’s strategy to trade strong retracements.

This concept is crystal clear with specific rules and strong entry, stop loss and target levels. There is absolutely no discretion in this journey.

Bottomline

Price action interpretation is highly subjective. As a result, when two traders analyze the same price movement, it’s common for them to come to different conclusions.

A negative downtrend may be visible to one trader, but the price movement may indicate a probable near-term turnaround to another. Thus, one should remember the above 7 things before entering any position!

We hope you found this blog informative and use it to its maximum potential in the practical world. Also, show some love by sharing this blog with your family and friends and helping us in our mission of spreading financial literacy!