When you observe how seasoned traders approach the market, you'll come to realize that they all give utmost importance in monitoring and interpreting Price and how it moves across different time frames. This becomes more evident when you check their chart setups. You'll observe that they rely on very minimal technical indicators. Why is this so?
The answers are all embedded in the Price.
In this post, we will provide a brief guide on how Price can be interpreted using Price Action and how it can vastly impact your trading performance.
What is Price Action?
Price Action refers to how the price of an asset, security, or stock moves across specific time frames. It is the major basis in interpreting the price chart to spot trends, breakouts and reversals.
For most veteran traders, successful analysis and interpretation of Price Action is the holy grail of technical analysis. If you are able to understand Price Action, you'll be able to position yourselves properly as the market moves.
Major Elements of Price Action
Volatility
Rate of fluctuation in price movement. High volatility refers to bigger and faster swings in price whereas low volatility refers to a consolidating movement in price.
Volume
Amount of shares being traded at any given time frame. Volume validates Price Action. The bigger the volume, the stronger the price action is.
Trend
Direction in which the price is moving to. Price action will form trends depending on the current rate of institutional buying or selling. Sustained buying form uptrends. Sustained selling form downtrends. And controlled distribution of buying and selling create a sideways movement.
Price Action during a Bull Market
Price action during a Bull Market is defined by heavy institutional buying. This is illustrated in the chart as an uptrending formation comprised of higher high and higher low candles.
During a Bull Market, the approach is to go aggressive. Since price action moves higher with little pullbacks along the way, the trade strategy shifts to a "buy high, sell higher" stance.
Note: Technical Analysts regard the general market to be a Bull Market if the current price is able to move in an uptrend above the MA200 (seen in the picture as the yellow line) for more than 6 months.
Price Action during a Bear Market
Price action during a Bear Market is defined by heavy institutional selling. This is illustrated in the chart as a downtrending formation comprised of lower high and lower low candles.
During a Bear Market, the approach is to go defensive. Price action dictates to wait for institutional selling to subside. As the market bottoms out and forms a basing pattern, traders can then start to accumulate and sell on strength at recovery.
Note: Technical Analysts regard the general market to be a Bear Market if the current price is moving below the MA200 (seen in the picture as the yellow line) for more than 6 months.
Price Action during a Consolidating Market
Price action during a Consolidating Market is defined by controlled buying and selling. A sideways market is distinguished by a constricted trading channel which is defined by key supports and resistances.
During a Market Consolidation, the approach is to buy the bounce and sell at immediate resistance. Price action is fairly predictable since it moves in between clearly plotted support and resistance levels. Traders can then anticipate each swing and score quick profits.
Note: Technical Analysts regard the general market to be a Sideways Market if the current price moving in between major market support and resistance levels for at least 3 months.
Analyzing Price Action
Traders who monitor and study Price will use Price Action Analysis to determine underlying market opportunities.
Here are simple steps that outline the methodology of Price Action Analysis
Determine the overall market trend. Each trend will demand a different trade strategy so you have to adjust accordingly.
Filter stocks based on volume. Volatile and trending stocks can generate multiple trade opportunities.
When you have a condensed list of stocks that show strong demand, you can now narrow it further by using technical analysis to identify the risk:reward ratio, entries and exits. Craft a trade plan based on the collected information.
Carefully note the buy and sell signals based on the trade plan you have formulated. As the market moves, be aware to execute on your plan depending on the signals that it generates.
Value Does Not Move Stock Prices; People Do
Remember that the underlying drivers of Price Action are the big financial institutions. They are the whales of the market that have the deep pockets to move prices at will. Our goal as traders is to align ourselves based on the direction of their trade activity. And one of the ways to do this, is through Price Action Analysis. Now that you know how important Price is, you need to deliberately analyze and monitor it in order to be always at the winning side of the trade.
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