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.

Buyers vs Sellers

In the land of the squiggly line, it is becoming easier to find someone who thinks George Bush is intelligent than it is to find traders online who read price action for a living. I preface it with the online because I know there are still many professionals out there who trade with minimal or no indicators, but the are usually too busy making copious amounts of money to be hanging around the online world.

A recent article in Technical Analysis of Stocks & Commodities featured an interview with Jack Broz. Jack is a member of the Chicago Board of Trade (CBOT), and trades Bonds and Dow futures in the pits, and from the screen. In this interview he made some interesting observations of floor traders, but it was this paragraph that warmed my heart:

"… The bias of the floor. Are the floor traders trying to buy dips, or are they trying to sell rallies? Are they bullish or do they want to buy strength? What levels are they using? One thing I have noticed as I trade more is that nobody in the pit uses indicators."

Nobody uses indicators in the pit, which of course seems obvious in hindsight considering the chaos that is the pit of CBOT:


Not really a place for the squiggly line is it. The speed and frantic nature of the pits ensure that trading is done with the minimum of frosting.

What I think is forgotten at times is we are trading financial markets. It is called a market for a reason, it is no different than your local farmers market or super market, it is still a place for someone to either buy a product they need from someone who want to sell it to them, or vise versa. It doesn’t matter if you are buying an apple, shoes or gold, either way the process is the same, you buy from someone who wants to sell.

The most successful technical traders are those that know what this might look like on chart. If you have a long bias on an instrument, i.e. looking to buy, who are you buying from? Sellers, stating the obvious I know, however the amount of traders I have worked with that seem to forget this simple fact indicates that perhaps it is not as obvious as it seems.

If you are at a market, that market has fruit and vegetable stalls, arts and craft stalls and hardware stalls and you want an apple, chances are you are going to look for the physical characteristics of someone selling an apple. You might be looking for a Greek man with an apron, a fruit van or other similar products in the general genre of apples. If someone has a stall with pears, chances are their are apples there as well. Certainly a much better chance than if they were selling hammers.

Back to our buying idea, there are two things we need for price to go in our direction:

1. Someone to buy from (sellers)
2. Other buyers to support the purchase (momentum)
   

Knowing where new buyers are can be difficult to spot. In the majority of cases they are the silent minority, they have left little or no footprints as they are not in the market as yet. In fact, you, as a potential buyer, are one of those exact buyers.

Potential sellers however have left tracks, they are already in the market, and so spending your time looking for where they were could be a much more productive use of your charting time. The most desperate sellers are those that are feeling the pain of a losing position. We all know the feeling, when we are holding a losing position and are going through the “if it just comes back to break even” game.

This scenario is most commonly called reverse polarity. This is where support becomes resistance and resistance becomes support. Visually this usually looks like:


So if we are buying, looking for sellers at previous resistance (i.e. where sellers last came into the market), in this instance looks like a fantastically easy way to find who you are going to buy from. Naturally things aren’t always that clear cut, for example:


While there was one polarity change here, we had a couple of turns that seem to turn in mid air. Some might put it down to a mysterious ratio found in the ancient pyramids, sunflowers and the patterns in the hair on my left arm (you know who you are). While others might look for reasons in price itself.

The theory of sellers in a panic wanting to offload them to buyers can take a different visual form. To the left is a close-up of one scenario. Here we have six blue candles, which at first glance makes you think six bullish candles.

Candle three however is anything but a bullish candle. It’s long upper wick indicates this is very much a bearish candle, with heavy selling coming in at the top of the range. Another instance of reverse colour blindness.

The next three candles however returned to strong bullish candles. There must have been a strong reason to be going short in an uptrend. After the close of candle three, those sellers would be feeling rather chuffed at their intelligence, thinking they have picked the top. The next three candles reverse those feelings quickly, and that comfort now turns to panic, and they are now more than happy to offload their positions to anyone wanting to buy.

Let’s go back to the previous chart with this in mind and look at those mysterious turns again:


Not so mysterious .. certainly no ancient mathematics involved in these cases. You can see in the zoomed in versions that each case this time had sellers being reversed on quickly, providing some very eager sellers looking for others wanting to buy what they have (see the link to the farmers market … knew I would get there).

There are many variations on the theme, but breaking things down to the core of market behavior; buyers and sellers, can sometimes clear the brain enough for you to make some money. Have other visual representations of this scenario? Let us know.

Related Posts :

1. Trading Support and Resistance

Sources :

1. Buyers vs Sellers | Written by Akuma99, December 16th, 2008 at 10:05 pm.

10 Tips For Beginner Traders

Since I have started posting here I have received quite a few questions from readers, fans and enemies (or is that frenemies) regarding how they can make their million dollars a day. I usually tell them if they want easy money, then there is a vacancy at the Happy Ending Massage Parlour down the road, just send me your resume, im sure things will work out. Trading is not about fast money, gambling is, nor is it supposed to be easy.

The potential for enormous wealth is there granted. Look at the pure mathematics of compound interest, the most powerful force in the world (Einstein). But usually things don’t turn out that way. We are after all emotional beings with (hopefully) a life other than trading, things just don’t turn out as cleanly as the columns on an excel spreadsheet. Humans are mistake riddled beings, it’s just some know how to hide them better than others.

"You make money when you exit,
not when you enter."

As hard as it may be to believe, despite consistent trading for close to a decade, I am not a billionaire just yet. I make some nice monthly percentages, I trade actively around two hours a night, and I have a gorgeous wife, a cute child, a hairy chest and a wooden leg. I still do some programming work (my trade) and will retire (from 9-5) a month before my 35th birthday. I started with $53.60, trading will make that my retirement income.

I don’t however like being (too) rude to those starting out, and so after they strangely decline the alternate job offer, I usually provide the following 10 tips for the beginner trader;

1. There is nothing price doesn’t say, we just don’t like to listen.
2. Common sense makes uncommon cents.
3. “Most technical analysts were originally fundamental analysts, I’ve never heard of anyone who made the journey in the opposite direction.” (Brian Marber)
4. You make money when you exit, not when you enter.
5. The trend is your friend if your friend is the trend.
6. Insert the word “hopefully” before every instance of “will” in your trade idea.
7. Get out when your reason for getting in no longer exists.
8. You do not know what the market will do, the quicker you realise that, the richer you will be.
9. Most people on trading forums are there for the same reason as you.
10. Respect your trading elders (not necessarily with the first name of Alexander).
    

I could go on with more terrible proes but I will spare you the pain, there are many more that one day I may post, but let us know if you have some of your own trading laws.


Sources :

1. 10 Tips For Beginner Traders | Written by Akuma99, October 27th, 2008 at 9:47 am.

Trading Support And Resistance

Do you think you could earn your fortune from one horizontal line? If that horizontal line was a conga line of rich millionaires with holes in their pockets, then certainly you are a big chance. Throw on a Hawaiian shirt, fire up some Beach Boys and you are on your way. For those not fortunate enough to be invited to the last Donald Trump Bar Mitzvah, there could be another way (although granted the first way sounds much more fun).

The theory behind Support and Resistance is really very simple, when price turns and doesn’t return to it at the point of observation, that is resistance or support.


When you see a bounce off support like we did at the closing hour of the SP500 yesterday, trading these levels seems splendidly easy. Of course, as is everything else to do with trading, it isn’t as easy as first glance. Here is the counter-argument for trading Support and Resistance on the SP500.


Six identified support are resistance areas, six failures, not such a good method at all then is it. Recently while getting my thai strethcing massage and a pedicure, I printed out ten years worth of data on the AUDUSD spot currency pair. On it I marked the clear weekly support and resistance levels. I then tested how many of them held for at least one retracement, an attempt to be realistic with real time trading practices.

The result from this study was that clearly many others don’t do the same due diligence. The results were not pretty, well below 50% success. Taking these levels at face value obviously isn’t going to cut it in the age of the smooth equity curve.

Clearly something else is needed to help identify those that hold, so I took advice from the most experience market expert in the business, who has been telling traders what to do for centuries, price. Let’s go back to the chart of ugliness, the six out of six loser chart and see where price told us that a support or resistance level was going to hold :

1. A strong bar up with a close at it’s absolute high, next bar gapped slightly and closed up, certainly no indication there of a reversal.
2. A consistent run up into resistance, even an aggressive trailing entry behind each low would not have got you in here, again no sign.
3. The only one that gave a hint of a turn, a small reversal bar with a lower close bar to follow, the stronger move up compared to the smaller move down either side of the pivot might have hinted of a lack of follow through, but really that is hindsight analysis, so a loser there.
4. A very small pause bar at support, looking for confirmation next bar gave us a strong momentum bar below support, no signal there.
5. Finaly another strong bar up intro resistance, no low was taken out, so no signal until the high right at the top of shot.
   

Six levels, only one of them gave even a hint that it was going to hold. Simply listening to what price is telling you would have kept you on the sidelines avoiding the carnage that the blind traders had to endure. Now to look at the opposite scenario, when price does hold, this time on the Dow Jones.

1. This is the kind of thing authors eyes get attracted to, it is also what cause sweeping statements about trading support and resistance in public forums. This time price gives us a sign, a move to support, an inside bar to indicate indecision, and a nice momentum bar with a lower tail to indicate the bulls are in control.
2. Not so effective, but a signal none the less, a move to resistance, and nice big long doji bar, and a small move down off resistance. Not a retirement trade, but certainly a chance to lock in break even.
   

It is clear when trading support and resistance it’s just as important to listen to price as it is to have your fly done up. If you don’t, you are in for some embarrassment in hindsight. Listening to price can give you hints about whether a level will hold, whether you apply it to support and resistance, fibonacci (don’t get me started), or any other mathematical bullocks you like.

Listen to price as though the Greater Power is speaking directly to you, as the market too is bigger than all of us, it just speaks to us a little more often.

Related Posts :

1. Buyers vs Sellers
2. Reading Price Action
   

Sources :

1. Trading Support And Resistance | Written by Akuma99, October 24th, 2008 at 4:19 pm.