Price Action every trader should know

Price action every trader should know:

 

  1. Support resistance
  2. Trend
  3. Time frames
  4. Correct market Selection (uptrend, down trend or sideways)

Price action is a trading technique used by traders to read a security or markets based on actual price movements rather than relying on technical indicators. Understanding these concepts will help you develop a strategy of disciplined trading.

1.  SUPPORT/RESISTANCE, somewhere price has changed direction repeatedly. The only reason price moves in the market is because of the imbalance in the demand and supply zone!   Demand and supply zones can be seen as support resistance level. The continuous shift in the balance between supply and demand results in dynamic pricing and sometimes a volatile market. When supply exceeds the demand, prices start to fall; whereas when there is not enough supply to meet the demand, prices start to rise.

A support level is where buyers step in and become more aggressive, therefore keeping price from going lower.  In other words,  A  support level is a price level that works as a floor to stop the further fall of the stocks. As price declines towards support, selling pressure declines due to lower price, and buyers become more aggressive due to this lower price.  However, when price breaks below a support level, the broken support level can turn into resistance. Best support levels can be found at previous swing low levels, at uptrend lines, Fibonachi retracement levels and on moving averages lines .

A resistance level is where sellers step in and become more aggressive and, therefore, keep prices from going higher. Resistance level is the opposite of the support level.  As price rallies towards resistance, buying pressure declines due to higher prices, and selling pressure increases. Short sellers get aggressive at the resistance levels! Best resistance levels can be found in previous swing high levels, down trend lines, Fibonachi retracement levels and below moving average lines.

What can happen at support resistance levels:

  1. turn from them
  2. break them
  3. push through them by just enough to stop you out before it reverses – false breakout

Tip: The more times support or  resistance zone is tested,the higher possibility that it will broken.  Support and resistance zones can hold for a long periods of time. They can be tested a few times;the first break out attempts typically fail. It takes time to get familiar with support resistance breakouts or failed break out zones.

 

$CADUSD DAILY

 

$AAPL Daily  horizontal support resistance analysis:

 

Tip :  Support resistance levels have to be seen as a zone  rather then an exact price level. When a resistance zone is  broken and price rises above it, it can become  future support level.  Once a support zone is broken and price breaks below it,it can become future resistance level. Support resistance zones can be found in any times frames such as daily,weekly,monthly, hourly,15 min  etc.

 

Technical Indicators can be used to find support resistance: Moving averages, trend lines,Fibonacci retracements etc.

$USDJPY 4 HOUR CHART ANALYSIS SHOWING HOW MOVING AVERAGES CAN WORK SUPPORT AND RESISTANCE.

 

 

 

2. TREND LINES:

Trendlines: Trend lines are probably the most common form of technical analysis in stock trading. Trend lines can be as accurate as any other method if drawn correctly. To draw trend lines properly, all you have to do is locate two major tops or bottoms and connect them.

There are three types of trends: downtrend (lower highs), uptrend (higher lows) and sideways trends (ranging).

It takes at least two tops or bottoms to draw a valid trend line but it takes three to confirm a trend line. Range bound moves are normally looks like price is moving within a box. Image by traderbulletin

How to draw them: In an uptrend trend lines are drawn below the price and in a downtrend, trendlines are drawn above the price.

Trend lines become stronger the more times they are tested. A formal uptrend is when each successive peak and trough is higher than the ones found earlier in the trend.  A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend.

 

$EURUSD 60 MIN CHART ANALYSIS:

 

Tip: Be aware of   counter trend moves (pull backs) and consolidation within an uptrend or downtrend. You need a lot of practice to be familiar with trend lines use.

  3. Time frame:

An investor must know his time frames. A day trader could trade off hourly chart, 15 min and 5 min chart to find short term trend. A swing trade typically focuses on daily/weekly and 60 min charts to find his entry/exit. A long term position trader could focus on monthly charts while using weekly/daily charts for entry/exits. Short terms time frames are risky and longer term trades give you more time to adjust your positions. To find the big picture you have to look at the higher time frames like weekly, daily. Smaller time frames don’t show you the big picture or levels.  Finding chart patterns in bigger time frames such as daily, weekly or hourly can pay a trader handsomely. In this image you can 4 different time frames.

 

 

Daily candle is formed at the end of the day! It is important to analyze small time frames candles to see the intraday candle/price patterns for entry exits

4. Correct market and stock selection:

Market can go up, down or sideways.  It is important that Investors are aware of the current market condition. At times, you may see that market keeps going up breaking previous day’s high, forming a higher low formation. That’s when we can say that we are in an uptrend. On the other hand, you will see that market keeps going lower breaking previous day’s low as it makes a Lower high formation which tells us that we are in a downtrend. In between the two,  you have sideways movements where markets can be range bound. In sideways moves, market gives a feeling as if market is going to break in one way or the other, they often become inflection point. It is important to understand those turning points well.  Most importantly investors must remember that there will be always situations when you will misread the market, the chart or the news. In those scenarios you have to respect your stops and stay away from trading for a while, otherwise one can face big losses.