Reading the past and present price movements of a chart accurately creates an understanding based on probability what direction the particular instrument is likely to move next. This is known as “PRICE ACTION”.
One of the main advantages of using price action is that it is not lagging. It is always the “now” price. Therefore, if you are using it to either setup or confirm trades you know the decision you are making is based on current price and time.
Let me show you how to begin understanding how to read the price action of a single vertical bar and how significant this knowledge is in making trading decisions.
HOW TO BEGIN READING PRICE ACTION?
We particularly analyse OHLC vertical bars. (This stands for Open, High, Low, Close)
We use OHLC bars for our analysis. We like this style of the OHLC bar chart because in comparison to any other chart type (such as candlestick charts) it gives a clearer indication where the close of that price bar is in comparison to the high or low price of that bar.
The CLOSING price is the most important price to look at in any single vertical as it confirms the price action of that bar.
Qualifying a single vertical bar as having more buying pressure or selling pressure is the position of the close in relation 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.
This knowledge now gives you the probability of that markets next significant move going higher or lower. Most importantly it gives you the exact price a market has changed its price action direction. This is when a market moves in the opposite direction as anticipated and breaks either the previous price bars low or high when technically it shouldn’t have done so. This in turn means you exactly know where a STOP placement should be.
How important is knowing this when it comes to minimising risk? We have to say…Massively!
After learning to analyse Single OHLC bars the next step is learning more of the basic price action set-ups such as the Dual vertical bars, Outside Vertical bars, Inside Vertical bars and low volatility
Let’s Look more closely at How to Analyse a Single Vertical Bar Correctly.
The Open Price begins a new trading period.
The High Price of the bar is formed when selling pressure overpowers the buying pressure.
The Low Price of the bar is formed when the buying pressure overpowers the selling pressure.
The Close is confirmation of price action and the sum total of all buying and selling pressure within that bar. The function of the close is to confirm price action.
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” or Mid point of the bar.
Calculating the mean of the bar is done 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 bar and above the mean is Bullish bar.
In the example above (as per the diagram) it is a BULLISH bar because the close of the bar is closer to the high in comparison to the low.
Therefore, as a bullish bar there is a greater probability that the next trading period should break the high of this bar before it breaks its low. The low of this bullish bar would be a strong support area it until such times as the high is broken to the upside. Remember we know if its low is broken when the probability was for it not to be then the bullish outlook has changed to a bearish outlook.
Think about this and you will quickly see how this will immediately help you in your trading decisions.
REMEMBER THE ADVANTAGES OF TRADING USING PRICE ACTION ARE;
It is NOT LAGGING. No Cluttered charts.
It easily determines Buying and Selling pressures.
It indicates Clear and Precise Support and Resistance areas.
You know to the EXACT Point/Pip when a New Trend Begins & has Ended. (This enables you to know at all times where a PROTECTIVE STOP should be placed!!)