Price action: the "Footprint" of money
Basic concepts of the price action negotiation strategy:
"What is Price Action?" It is a frequent question of the aspiring operators. Obtaining an answer as "price action is the movement of price over time" or similar, leaves many beginning traders feeling that they still do not understand exactly what the price action is or how to trade with it. In this tutorial we will give examples of graphs of what action is exactly the price and explain how you can make use of it in your negotiation.
Ready? Let us begin…
Let's start with the basics. In the chart below, we are analyzing some of the most basic negotiation terminology with price action:
Note: The term "candle" describes the trade with candle graphics, you will see that "candle" and "bar" are sometimes used interchangeably, a "bar chart" is a form of graphic representation that does not use candles, but simple bars They show the same information as a candle, but in a less visually appealing way. For more information on candlestick charts, see this candlestick chart tutorial.
Ascending bar: an ascending bar or "bull bar" is a bar with a height higher and lower than the previous bar. The bars above marked above are in an uptrend. In general, the closure is higher than the open one in an upward bar, but sometimes it can have the closing lower than the open one and it can still be an upward bar, as with the black bar that we see in the previous example of "top bar". This can happen in aggressive tendencies like the ones we see above, because as you can see, the highs and lows of that black bar are still above the highs and lows of the previous bar. The ascending bars show that buyers or "bulls" are still in control
Descending bar: a descending bar or "bearish bar" is a bar with a lower level higher and a lower level lower than the previous bar. Notice in the previous example how the closing is lower than the open in the highlighted downs, this is typical of most lower bars, although not necessary, as we saw in the bar above. The descending bars show that sellers or "bears" are still in control.
Inner bar: also sometimes called narrow range bar, an inner bar is a bar with a height that is lower than the height of the previous bar and a minimum that is higher than the minimum of the previous bar. Some traders do not consider an interior bar that has a high equal or equal low as an internal bar, others do. The inner bars generally represent the indecision of the market. As in any bar, the closer they come between opening and closing, it shows how undecided the market is, since neither buyers nor sellers have control.
External bar: also sometimes called mother bar, wide range or envelope bar, an outer bar is a bar with a height that is higher than the previous or next bar and with a low that is lower than the previous or next bar. thus encompassing the previous bar or the next bar. Since the closing was substantially greater than the open bar example in the previous outer bar, it shows that buyers were in control.
When the opening is in the last quarter / third of the bar and the closing is in the upper quarter / third of the bar, it is said to be bullish and that the buyers are in control. When the open is in the upper quarter / third of the bar and the closing is in the last quarter / third, it is said to be bearish and is involved with the sellers in control.
Another definition used for this bar, especially if candlestick diagrams are used, is that opening and closing has to include the previous bars of opening and closing, and not only the highs and lows of the bar. With this definition, the wide-range bar or the surround bar does not need to have a higher high or lower low to qualify. The first definition probably came up with bar charts where opening and closing is harder to notice.
What is a price action trading signal?
As the markets move, they leave behind what I call a "footprint", this imprint is the action of the price and, sometimes, it leaves us clues as to which direction it is going. These "clues" are known as trading signals of price action / price action patterns / price action configurations or price action trading strategies.
What we are looking for is a price action signal to give us a certain "confirmation" of an entry in the market. We will see in a moment how to combine the action of the price with the "confluence" in the market to find high probability entries, but for now let's focus on an individual price action input trigger.
In the chart below we can see examples of one of my favorite price action trading strategies, the investment settings of the pin bar. Note; we include a configuration of "failed" pin bars only to show that not all configurations will work; just like in real-life trade:
Trading price action with confluence
Confluence: a point in the market where two or more levels cross each other, forming a point of "hot spot" or point of confluence in the market. In the dictionary, confluence means' a meeting of people or things; competition'. So, basically, when we look for confluent areas in the market, we are looking for areas where two or more levels or analysis tools intersect.
In the following chart, we are looking at an example of how to negotiate the price action with the confluence. A "confluent" level or point in the market is one that provides some weight to the configuration of the trade. For example, in the chart below, the pin bar shows the rejection of an obvious level of horizontal resistance in the market, as well as the dynamic resistance between the EMA of 8 and 21 days (red and blue lines). Another factor of confluence in the following graph is the bearish trend. If you have a price action configuration that is in line with the trend, such as the pin bar in the following chart, it is also considered a point of confluence. Therefore, in the chart below we have 3 confluence factors that validate and strengthen the case of a short entry from the configuration of the pin bar:
1) bearish trend
2) Rejection of horizontal resistance
3) Dynamic resistance rejection
How to use the price action to determine the market trend:
The following table has the maximums and minimums of the swing marked both in an uptrend and in a bearish trend. The price in a given time frame is in an uptrend if it is making a higher maximum (HH) and a higher minimum (HL) and in a downtrend if it is making the lower highs (LH) and the lows more low (LL). If the price is doing something else, it is in a consolidation pattern: range, triangle, pennant, rectangle, etc.
The trend is considered valid until the price no longer reaches higher and higher minimums in an uptrend or lower ups and downs and lower lows in a downtrend. After a trend breaks, there is usually a period of consolidation that is easier to see in a shorter time frame. With practice, you can visualize this without looking at the lowest time frame.
When the price is in a tight consolidation pattern, it will often be called "shear" or "lateral" price movement. When the price is in a higher consolidation pattern, it is said to be in a "quotation range" without a pattern of tendency to ups and downs. In the chart below, we can see an example of a stricter consolidation area or a "discontinued" price action and then a larger consolidation area that was a more defined "trading range":
Use the price action to trade with a trend and consolidation market
"Trading with the trend" is a fairly general phrase that often causes confusion for beginning traders who have not yet found an effective strategy for trend trading. The way I trade with the trend is simply to look for one of my high probability price action trading strategies to form with the daily chart trend, ideally from a "confluence level" within that trend. Trading in a consolidating market is best done when a market is limited to a range; in a larger consolidation phase rather than in a "choppy" consolidation phase. Adjusted consolidation can be negotiated, but it should be done in lower timeframe charts and it is better to leave it until you are very good at negotiating the daily chart first.
The following table is an excellent example of the action of the trading price "with the trend", as well as the stock price action in a limited range market:
In conclusion…
Now you must have a good understanding of the basic concepts of stock price trading. One thing I did not mention in this article is in what time frame you should start learning to trade. All the pictures in this lesson were made in the time frame of the daily chart, and it is very important that you first learn to negotiate in the daily charts before going further down in the time frame. The reason is simple, the daily chart offers the clearest and most accurate view of the price action of a market, and the lower in the time frame, the more random market noise exists. Just as you need a solid foundation to build a house, you need a solid foundation to become a successful trader, and learning how to trade in daily charts before going further down in the time frame will help you build that foundation.
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