WHY USING PRICE ACTION IS YOUR GATEWAY TO TRADING SUCCESS!!
Trading any Financial Market successfully is challenging at best but is even more challenging when one has not got a proper methodology. Having a methodology that has stood the test of time and one that will continue to do so is a minimum requirement in order to be a successful and winning trader.
Trading price action from a technical analysis point of view is a professional way to trade any financial market. It is a leading methodology and not lagging unlike using indicators such as moving averages etc. Indicators do have their uses but should not be used as the leading way from which to take trading signals. It is also worth noting that all indicators are a function of price so therefore it is reasonable to conclude that being able to analyse price action correctly gives one a leading edge and the basis from which to form better trading decisions. Price action has always existed in all financial instruments and in all time frames and will always continue to do so.
HOW DO YOU READ PRICE ACTION?
To begin reading price action you need to begin by learning how to analyse a single vertical bar. I particularly analyse OHLC vertical bars. (This stands for open, high, low, close vertical bars.) I like OHLC bars over candlesticks as they give a better reading of price action within that single bar.
The close is the most important thing to look at in any single vertical bar. This is because it is the last piece of information within that bar. Sometimes I read of people talking about the open being the most important. This is not correct because it is the oldest piece of information relating to that bar. What qualifies a vertical bar as having more buying pressure or selling pressure is the relation of the close in comparison to the high or low of that bar. A close closer to the high is a sign the buyers are in control and a close closer to the low of the bar indicates that the sellers are in control.
Why does this matter?
This matters greatly because it indicates the probabilities of the high or low of that bar being broken next. Let us assume each vertical bar represents one day then a close of todays vertical bar being closer to the high indicates that tomorrow should see prices going higher than today’s high (at least to begin with).
Learning this is the beginning of understanding the very basics of price action. As I have said many times there is much more to price action than being able to analyse a single vertical bar (if only it was that simple) however, it is also surprising how important the information is within that bar for the purposes of analysing future direction. There are many good signals a single vertical bar can give when using them on a Daily time frame especially if trading the indices such as the Dow Jones or FTSE etc and also when trading the major currency pairs. This can be surprising to some but certainly not to myself. In doing my analysis when trading a financial instrument I always look at the single vertical bar of that instrument on a daily and even weekly time frame just to get a feel of the direction the instrument has the highest probability of going in the medium to longer term and compare that to where it is trading now. This quickly lets me know if the direction of the instrument presently is in a counter trend to the bigger picture or trending in the direction of the bigger picture. This is a piece of analysis that I believe should always be done before deciding a trade because it is always prudent when trading of a smaller time frame to take trading signals only in the direction of the bigger trend. Getting used to doing this consistently will quickly increase your success rate. It’s not long before you will find doing this analysis becomes second nature. It should be considered the first piece of the jigsaw to being “a winning trader”.
Let us look at how to analyse a single OHLC vertical bar.
Step 1 – Look where the close is in relation to the open.
Step 2 – The most important step is discovering if the close is closer to the high or low of the bar.
This is done by finding the “Mean” of the bar.
Calculate the mean of the bar by adding together the high price and low price and dividing by 2
If the close of the bar is below the mean it is Bearish and above the mean is Bullish.
Assuming the high price in the above example was 200 and the low price was 100 then the “mean” is 150. In the example displayed you can see the close was above the “mean” and closer to the high. Assuming this was a Daily vertical bar then our basic signal would be for prices to break the high price of this bar tomorrow before they break the low price. Using this information and putting it into a trading plan of action is very beneficial.
Let’s look at an example of real charts of the Dow Jones Daily OHLC bars and discover the great signals.
The example below taken from a real trading chart equates to a 1220 point profit over a 16 day trading period beginning on the 17th December 2014 and ending on the 9th January 2015.
Trading a spread betting account assuming you are based in the UK at £10 per point this would have equated into a profit of £12200 over this 16 Day period. Remember this is just taking the signals of a Daily OHLC chart. The signals given were both “Buy” signals and “sell” signals.
The next step of trading using the “Price Action Trading Method” is that of looking at how to analyse and trade both low volatility and high volatility OHLC bars.
Learning this information and then putting it into action is very much what is needed to formulate a professional like trading methodology.