How To Trade Price Action – Price action is one of the most popular trading concepts. A trader who knows how to use price action the right way can often significantly improve his performance and the way he sees charts. However, there are still many misunderstandings and half-truths circulating that confuse traders and lead them to failure. In this article, we explore the 8 most important price action secrets and share the best price action trading tips. #1 Order absorption: support and resistance Support and resistance indicate important price levels, because if the price is forced to move repeatedly at the same level, that level must be significant and many market participants use it for their trading decisions . If an uptrend is forced to repeatedly reverse at the same resistance, it means that the relationship between buyers and sellers has suddenly increased. Not all buyers pull out at once, but sellers tend to dominate market activity when new downtrends are initiated. Of course, support and resistance don’t always stop price from continuing a trend. Breakouts can also provide high probability trading signals. Conventional technical analysis says: The closer the price hits a certain level of support or resistance, the stronger it is. However, I cannot fully agree with this. Each time the price reaches a support or resistance level, the balance between buyers and sellers changes. Whenever price hits a resistance level during an uptrend, more sellers will enter the market and enter their sell trades. If price hits the same resistance level again, short sellers will hang in there. This phenomenon is also called order absorption. The resistance gradually weakens until the buyers find no more resistance and the price can continue the uptrend. We can observe this phenomenon when the rejections of a resistance become progressively weaker, and in each case the price can return to the resistance level more quickly. Formations such as triangles or cups and handles are also based on the concept of order absorption. The image below shows such an example. Silver price will soon return to the same resistance level as indicated by the arrows. This suggests that short sellers are willing to always sell at resistance levels. In this case, the resistance level becomes progressively weaker. Also, just before the breakout, the trend was accelerating upwards, as indicated by the dotted arrow. Finally, price breaks through the resistance level and an extended uptrend ensues when no selling interest remains. #2 At any point in the chart cycle, prices can rise, fall or move sideways. This may sound simple, but as we’ve already seen during candlestick analysis, we can quickly gain comprehensive knowledge when we break down complex data into its single components. The screenshot shows that each chart consists of the following five phases: Trend If the price goes up during a certain period, this is called a rally, bull market or simply bull trend. If the price continues to fall, it is called a bear market, sell-off or bear trend. Different trends can have different degrees of intensity. In the next section, we’ll learn the different aspects of trend analysis. Retracement corrections are short price movements in the direction of the prevailing trend. During uptrends, corrections are short-term phases where prices drop. As we will see, during trend phases, price does not always move in a straight line in one direction, but constantly rises and falls in so-called price waves. Phases around consolidation consolidation. During the sideways phase, prices generally move upwards in a clearly defined price corridor and there is no incentive to start a trend. The breakout is a sideways phase where buyers and sellers balance each other out. If the balance of power between buyers and sellers changes during consolidation and one side of market participants gains a majority, a breakout of this sideways phase will occur. The price then started a new trend. Breakouts, therefore, are a link between consolidation and new trends. Trend Reversal If a correction continues for a long period of time and its intensity increases, a correction can lead to a complete trend reversal and start a new trend. Similar to breakouts, trend reversal situations therefore signal a change in price from one market phase to the next. The chart phases can be seen universally as they represent battles between buyers and sellers. This concept is timeless and describes the process that causes all price movements. The trending phase pushes the price higher, indicating buyer excess. Consolidation marks temporary trend breaks; However, a trend continues until price reaches a new high during an uptrend. The corrections show a short-term increase in opposition. If these are closed, the trend continues its movement. On the other hand, long correction phases eventually turn into new trends when the force rate changes completely. While the order and strength of phases on individual charts can vary greatly, any chart contains only those phases. If we understand them comprehensively, price analysis becomes relatively easy. #3 Wave Length and Slope Now, let’s get more granular. After seeing that any chart can only be made up of different chart phases, which are made up of price waves, we will explore four different components of wave analysis. They finished our foundation work. Each of the following chart formations, and any chart in general, can be explained and understood with the help of previously learned building blocks. The duration of individual trend waves is the most important factor in assessing the strength of a price movement. During an uptrend, a long rising trend wave that is not interrupted by a correction wave shows that there is a majority of buyers. On the other hand, short trending waves or slow trending waves show that a trend is not strong or is losing steam. The diagram below shows that trend phases are clearly outlined by long waves of price in the direction of the underlying trend. Left: Long trend waves confirm bullish trend strength. As the wave subsides, the trend stops. Right: Downtrends are characterized by long waves of downtrends. However, the length decreases to the downside and the trend soon reverses. The rate at which price increases during a trend is also very important. Broadly speaking, subdued trends have a longer shelf life and a sudden rise in price usually indicates a less durable trend. We can often observe this phenomenon during the so-called (price) bubbles, where prices fall again after an explosive rise. The development of trend and price wave thickness in relation to the overall chart context is also important: accelerating or weak price waves can indicate that a trend is gaining strength or slowing down. Interesting correlations can be made along with the concept of length: a trend is intact if we find long trend waves or long trend waves at a moderate or upward angle. On the other hand, a trend in the trend wave that becomes shorter and shorter and that simultaneously loses its slope indicates a possible imminent end. The screenshot below shows a situation where the length and slope changes during an uptrend. The complete opposite soon followed. More: Trend Strength with Indicators – Announcement: ‘sTrend Rider Indicator – Position #4 – Improve Your Trading Instantly Even if you see the best price action signals, you can greatly increase your chances by only trading at important and significant price levels. Most amateur traders make the mistake of taking price action signals wherever they occur and then wondering why their win rates are so low. In my own trading, I pay close attention to positioning. A good signal in a very important support/resistance or supply/demand area can predict a big trade. On the other hand, even a great price action signal in a bad position is nothing I would trade. To increase the chances of a successful trading opportunity, do not blindly enter trades in these support and resistance areas. It is recommended to wait for more mating grounds. For example, if a head and shoulders formation or a double top appears at a support and resistance level, this can increase the likelihood of a positive outcome. The screenshot below shows how the left head and shoulders pattern played out at the long-term resistance level on the right. Point 4 on the right graph marks where the head and shoulders form. Zooming in and out on your graph can often help you see the big picture better and allow you to gain important clues. When we zoom out, we see that
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