Technology has changed and continues to change the financial world in so many positive ways-- from helping the little guy with small account to access any exchange to buy and sell stocks, futures and commodities anywhere in the world at a steep discount commissions to giving us the all the tools everyone needs to trade like the pros with instant access to news, charts, indicators, charting tools. Information overload is the norm for the average trader where every piece of knowledge is paramount. However, there is one consequence that has left traders crippled without essential ingredient for success: price action.
This is the modern day equivalent of tape reading. In the former times when charts were only available to the professionals and the only source of information were the prices being printed from the ticker tape machine. Those individual investors who were serious about trading had to painstakingly hand drawn their own charts. By doing manually drawing these charts, they became to understand what patterns look like, how prices move, where the support and resistance are located. Today, with the charts available at the touch of a button, reading charts became a lost art. Why? With the computer, a trader a bring up numerous charts with the latest and greatest indicators... many indicators. Traders were fixing their eyes on the indicators more than the price itself (curious enough, most indicators are derived from prices so traders are focused on the secondary indicator and not the absolute indicator: price). Many older and experienced traders have been successful not from reading indicators but through price action. Many indicators come and go and new ones will come along but price action will always be around. Learning to read price action will only strengthen trading skills in any market and any condition.
What is price action? Price action is the movement of the prices in one bar showing the High, Low, Open and Close in relation to price movements in previous bar(s), whether it is in 1-minute, 60-minute, or daily charts. The main area to pay attention to is how it's High and Low is related to the previous bar(s) High and Low—HIGHER HIGH and HIGHER LOW concept (LOWER HIGHS and LOWER LOWS for downtrends). This principle helps identify the state of the market, whether it is motionless or in a direction of a trend or possible trend (up or down). This is the basic foundation of price action.
The example above shows the bars and where it’s headed—in an uptrend by making Higher High and Lower High. Take a look at example below.
From the chart above, the direction of the market is clearly showing a downtrend by making Lower High and Lower Low than the previous bar.
Once this basic concept is studied, understood and practiced in real time, the next step is more challenging. From reading price action from bar to bar, the step is to group number of bars and compare it with another group of bars. Below is an example.
In the chart, the bars is be grouped to reduce and noise by highlighting the pivots (shaded squares). These are the areas to determine where the market is going judging by its HIGHER HIGHS and HIGHER LOWS principle. The price action comes in waves... rising and falling, rising and falling. By marking these pivots, the eyes will simplify market structure into a simple question: is the market going up, is it going down or is it going sideways? Here’s the view of the weekly chart from the same areas as the above chart.
The market has been in an uptrend so the daily chart action has reinforced the uptrend with HIGHER LOWS and HIGHER HIGHS.
Here are the advantages to using price action:
· It is a leading indicator, not a lagging indicator (many indicators are based on price so it lags by a few bars if not more).
· Any timeframe, any market, price action doesn't change (wave-like actions) except the frequency and the width (personalities of each symbol).
· Helps quickly identify the market’s bias (up, down, or sideways).
· Helps identify entry and exit points.
Not many traders understand or use price action as their choice of weapons to trade, choosing indicators alone to make their decisions, leaving them to know the indicator but not the market. They may only see the price charts when they're about to make the entry or exit. But having a grasp of this concept gives a trader a major advantage… the trader understands the market structure better than the other traders. Use it with an indicator or two along with volume and support and resistance, with time the P/L will prove that price action is an indispensable tool.
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This article was first submitted and posted at
MrSwing.com.
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