Reading Price Action

Reading Price Action means different things to different traders, just like “going long” means different things to a trader than a porn star. Price action can talk in several layers (like onions, not everyone likes onions, cake! .. everyone likes cake! .. cakes have layers). The talk comes from the macro level of price patterns and formations, to the micro level of single bars or candlesticks. Looking at what micro level price action is telling you gives you hints on when macro level patterns might play out.

Reviewing each type of macro pattern is beyond the scope of this article (and beyond the knowledge of this author), but some specific patterns will be addressed in later articles. Instead we can look at the micro level from a days action on the currency markets.

The concept for me for micro analysis is quite simple. Look for where buyers are, where buyers were and vice versa. A chart is nothing more than a story of buyers and sellers battling it out for supremacy, with their blood trails left behind for us all to see.

I will caveat this analysis with one thing, when it comes to forex analysis, single candle analysis (note not candle formations) on a daily or a four hour chart is pointless. The currency market is a market with no daily close except for the friday weekend close, which even in itself is slightly different for all.

A daily close is essentially invented by which session we deem most important, but this can change between markets and between currencies depending on the happenings at the time.

A four hour candle depends entirely on when your broker starts the day off for you. Mine might open Monday markets at 7am Sydney time, your at 8am, that would mean my four hour candles close and hour before yours, how can we tell which close means what?

So why not exclude the hourly or the weekly from this single candle analysis? The weekly close does make sense, the retail currency market across the globe closes at approximately the same time on a Friday, so a weekly candle close has some significance. True it is approximate, but in a weekly context it is certainly close enough.

An hourly chart also makes sense. An hour is an hour is an hour, doesn’t matter if it is the 3pm or 10am, it is still the end of an hour everywhere, so everyone is seeing a close of an hourly candle at the same time, giving it some meaning.

An example of one days action on a 15 minute chart is below. This is one I prepared a few days ago (when I originally intended to write this article) on the EURJPY spot currency cross (click to enlarge):


There is an aweful lot of annotations there I know, so I will let the picture do most of the talking. There are a couple of things to note however.

Firstly, trader pain is important, sellers and buyers out of the money are going to look to close at break even more often than not, especially those that get caught out by strong moves with no stops. So watch for a sign of buyers or sellers being reversed upon quickly, chances are they are in panic mode and wanting to close.

The next thing is to ignore colours, in this chart a black candle is one with a lower close than open, a white candle with a higher close than open. They should not be called bull or bear candles based on their colour. The close vs open relationship does not necessarily indicate whether that period was dominated by the bulls or the bears. A candle with a long upper wick yet a slightly higher close (doji) is a bearish candle not a bullish one. It is why the old timers always seem to have better price reading skills (I am talking the pre-computer old-timers). They had to hand draw charts, and so colour was not necessarily a factor and they didn’t have technology to make them lazy.

Don’t let the convenience of technology make you forget that there is a story being told. It is too easy with automated systems, computer generated indicators and complex charting techniques to forget that we are still trading the discrepancy between supply and demand, nothing more.

To be a professional trader, you need to work out how to take money from the ametuer traders, as there is not enough to go around for everyone. If you learn (from yourself and others) what the ametuer trader would do (i.e. no stops, late buying and selling, panic and elation) then you can take advantage of those reactions when reading the charts and refining your entries. Be the exception, not the norm.

Related Posts :

1. Buyers vs Sellers
2. Trading Support and Resistance
   

Sources :

1. Reading Price Action | Written by Akuma99, October 31st, 2008 at 10:26 am.