So what is price action exactly?
Simply put, price action is a security or tradeable assets price plotted on a chart over time. This refers to the up and down movement of the value of that individual asset, commodity, or security. This movement of the price is the basis for technical indicators such as moving averages, to be calculated from. Price action can be used in many ways like identifying support and resistance levels, and enabling you to spot “break-outs” or “reversals”.
How is this plotted on a chart?
Many traders utilize “candlesticks” because of the information they can provide within a certain time period, however, there are many ways to plot this on a chart. For instance, there are line charts, which are commonly seen as the most basic, and Heikin-Ashi candlesticks, which calculate the average price for the current bar. Please note that Heikin-Ashi candlesticks (while very similar to regular candlesticks) will display the price in a different manner on the chart and that this will distort the value of the current price. When viewing a chart in a higher timeframe however, this can provide valuable insight to the current underlying trend. This is especially helpful in long term market investment strategies and is utilized heavily by futures and options traders to more clearly see price movement during “pre-market” and “post-market” times.
Can you use this to your advantage?
When viewing a chart and actively trading, you likely already know how much time you dedicate to trading and how often you decide to enter or close out positions. This is fundamental and should be considered closely when first determining what kind of trader you are. Swing traders who leave positions open for longer and do not partake in intra-day trading can find price action analysis to be of great value. Stripping a chart bare with only a few moving averages can be very useful, especially if you catch yourself “over-analyzing” a particular security for the perfect entry or exit. Giving yourself a fresh perspective without all the clutter and other momentum oscillators is a strategy I use myself very often. Usually on higher time-frames (4HR+) this can provide the “big picture” view of the general trend in the market without getting caught up in all the rapid volatility of say, a 5M chart. This is a huge advantage when taking larger, longer term positions because now you are only utilizing smaller timeframes to pinpoint a specific price you are comfortable with entering or exiting the market at, instead of looking at all the different timeframes wondering what’s really going on. The biggest advantage of analyzing price action is identifying support and resistance in price levels.
But how do you identify support and resistance?
This is something that a lot of newer traders have trouble with, and it’s understandable. When first looking at a chart this will not be obvious to those still learning, and for more advanced traders this has become second nature to the point where it’s actually difficult to explain because they seem to identify them so quickly and easily. You must learn some basic candlestick theory before learning how to spot these areas. So, the be brief, each candle represents 1 unit of the timeframe you have selected for the chart to be viewed at. So, if you select a 4HR chart, every candle represents 4 hours of time. Those “wicks” you see on the candlesticks represent the highest or lowest the price was for that individual timeframe.
Now that wasn’t so hard to understand right? Support and resistance levels don’t need to be hard to spot either, so it’s best to not overthink it. In their most basic form, they are areas of high supply or demand. So, this means that an area of resistance for the price to move up is where sellers are likely to overwhelm buyers, and vice-versa for areas of support. Below is an example of this and how areas of support can turn into resistance as well as do the opposite. Take a look closely at the candlestick wicks as well, and how price moved above and below these areas rapidly but then stabilized. When the price action moves sideways like below, this is a very uncertain time for the market and it referred to as “ranging”, meaning the price is fluctuating only in a certain price range.
A little more help please? What are moving averages?
This image below is the same as above except with a couple Exponential Moving Averages. This is a lesson all on its own but just so you know, a moving average measures the average price over a predetermined set of candlesticks before the current one. It takes these averages and it forms a line to represent this sum. These moving averages are set to 10 (Green) and 20 (Orange) meaning that each one respectfully calculates the average price of the previous 10 or 20 candles respectively. Notice how on a large price fluctuation the lines cross giving a “signal” that the trend in price action has changed. As the lines grow further apart the trend is strengthening, and when they get closer together there either is no trend, or the trend is about to change soon when they cross. This is another way to help you identify trend especially in a sideways market since these lines are usually a little more “dramatic”, for lack of a better term. Keep in mind though, this is what’s known as a “lagging indicator” so it won’t tell you as a trend change is happening right away, this is another indicator meant to assist you in finding that “big-picture” we discussed before.
Summing it up
Price action is a very important fundamental to understand before diving into trading, and please remember that to completely understand some of the concepts you also have to learn other basic knowledge such as candlestick theory. This should not be used by itself when trading, I always recommend using at least 2 indicators to double check yourself and get a “second opinion” on what you are interpreting. There are many indicators, some of which I will go over in a latter issue. I hope you found this article useful, and again, this article similar to my last one is more geared for less experienced traders, those that want to learn more, or more experienced traders that want to refresh their own fundamentals.
If you would like to learn more about indicators, technical analysis as basic as candlestick patterns, or as advanced as harmonic trading, I offer private one-on-one sessions for those willing to take a more in depth approach to understanding. To those interested please feel free to contact me on Discord @Kobra Trading#7666, or on Twitter @kobratrading.
Once you rely on your own trading methods & knowledge because of the tools you’ve chosen to learn about and properly use, you will become truly financially free.