PRICE ACTION

TRADING
 Introduction
Technical analysis is the cornerstone of any trader in the markets, even if a person employs
indicators to trade, having a strong technical understanding will enable them to anticipate
price changes and make even better, quicker judgments. Unlike fundamental analysis, which
looks at a company's financial and economic fundamentals, technical analysis focuses on
price action and chart patterns to make trading decisions.
Think of it as detective work for traders and investors, going through past market behavior
to anticipate where prices might go in the future. The idea is that by studying the charts, one
can identify trends, patterns, and buying/selling opportunities that are not immediately
obvious to the naked eye.
So, grab your magnifying glass and get ready to dive into the world of technical analysis,
where past performance can often predict future price movements.

So, here’s what you will learn –

• What is Price Action Trading and is it better than indicators?
• Learning about Candlesticks – the foundation of price action trading
• Market Trend and Phases – 4 stages of the market
• Understanding Impulse and Correction – How a stock moves
• Basics of Price Action Analysis
• How to Analyse Charts using Price Action
• Support and Resistance Analysis – Avoid the mistake that 90% of traders make by
using one trick
• Putting it all together
• Trade Examples
• Bonus – Multi-timeframe Strategy to spot perfect trading opportunities.

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 What is Price Action Trading?
Price action trading is a style of trading that focuses on analyzing and making decisions
based on the price movement and patterns of a stock, rather than relying on indicators or
economic fundamentals. By observing how the price of a security has reacted to various
market events and trends in the past, price action traders aim to predict future price
movements and make trades accordingly.
Price action traders focus on understanding the market structure, identifying key levels of
support and resistance, and observing patterns in the price movement of a stock to take
their trades. They believe that all market information is reflected in the price of the stock
and that studying price movement over time can provide valuable insights into the
market's behavior.
Price action trading is often used by traders who prefer a simple, straightforward approach
to analyzing the market. The technique can be used to trade various assets, including
stocks, currencies, commodities, and more. It requires a deep understanding of market
dynamics and a strong ability to interpret and analyze price movements, but it can be a
very effective method for those who have mastered it.
In essence, price action trading is like following the plot twists and turns of a stock's price,
looking for opportunities to buy low and sell high.

Does It Work Better Than Indicators?

Trading indicators are mathematical calculations based on the price and/or volume of a
security. These calculations produce a line or histogram on a chart, which can help traders
identify potential buying or selling opportunities.
Indicators are often used in technical analysis as a way to interpret price and volume data,
providing additional information that can assist traders in making informed decisions.
Some common indicators include moving averages, Bollinger Bands, and Relative Strength
Index (RSI).

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Here is an illustration of RSI –

When used properly, the 30 and 70 levels reduce any uncertainty about what the market is
doing. Most sellers in the present period ought to have sold by the time the RSI reaches 30.
So, we ought to think about buying. However, skilled traders will instantly recognize a
support area marked in red and would be already ready to buy the stock.
As we examine what is happening rather than the resulting lagged estimates, naked price
movement offers early cues. Without using any indicators, price action trading can be
profitable with the right frame of mind. It can be difficult to consistently make the proper
decisions, but indicators are useful complementary tools for doing so. However, relying
exclusively on indicators all the time would lead to tragedy.

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 Candlesticks
The Foundation Of Price Action Trading

Candlesticks are a type of price chart used in technical analysis to represent the price
movements of a stock over a specified period. Each candlestick typically represents a
particular range, it can either be 5 minutes, 1 hour, 1 day, or even a month. It shows four
pieces of information: the opening price, the closing price, the highest price, and the
lowest price.
The body of the candlestick is the difference between the opening and closing price and is
shown as either a green or filled red rectangle. If the closing price is higher than the
opening price, the body is often green, indicating a bullish (upward) market trend. If the
opening price is higher, the body is often red, indicating a bearish (downward) trend. The
lines above and below the body are called "wicks" and represent the high and low prices for
the period.

In short, candlesticks provide a visual representation of price movements over a specified

period and can help traders identify trends, support and resistance levels, and potential
trading opportunities.

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 Market Phases And Trends
Market phases refer to the stages an asset's price goes through as it moves from low to
high or vice versa, as described in my previous answer. Understanding market phases can
help traders identify key inflection points in an asset's price movement, which can be used
to inform trading decisions.
Trends, on the other hand, refers to the direction of price movement over a certain period
of time, such as up, down, or sideways. Traders use trend analysis to identify the direction
of the market and make trading decisions
By combining an understanding of market phases and trends, traders can have a
comprehensive view of an asset's price movement, which can be used to make informed
trading decisions.

Smart Money Vs Retail Investors

In the market phases of trading, smart money and regular investors have various
responsibilities to perform.
Smart money refers to large institutional investors, such as hedge funds and investment
banks, who have access to significant resources, including expert analysts and large
amounts of capital.

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Retail investors, on the other hand, are individuals who buy and sell assets for their
personal accounts. These people comparatively have low resources and funds to cause any
significant movement in the stock.

4 STAGES OF MARKET PHASES

The four stages of market phases in trading are:
Accumulation: This is the stage where smart money, such as institutional investors, start
to buy and accumulate the stock.

Tips to Spot Accumulation Phase -

1. Generally found on stocks that are in a downtrend.
2. Very Long and Choppy Consolidation.
3. Stock is unable to make new low

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Mark-up: In this stage, the price of the stock starts to rise as more and more investors
become aware of the stock’s potential and demand for it increases.

Tips to Spot Mark-Up Phase -

1. Stock breaks out of Accumulation Phase.
2. Stock forming Higher Highs and Higher Lows.
3. Low Volume on Corrections.

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Distribution: In this stage, the smart money starts to sell their positions, causing a drop in
the stock’s price.

Tips to Spot Distribution Phase -

1. The stock starts taking a pause, momentum slows down.
2. Stock is unable to make new high
3. High Volumes at the Top

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Mark-down: This is the final stage where prices continue to decline as the general public
starts to sell their positions, leading to a significant drop in price.

Tips to Spot Distribution Phase -

1. The stock starts taking a pause, momentum slows down.
2. Stock is unable to make new high
3. High Volumes at the Top

These four stages repeat in a cycle and understanding these phases can help traders make
informed decisions.

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 Impulse and Correction
The markets don't always move straight forward. It has a natural recurrent pattern, and
this process includes impulsive and corrective actions.
But what is that?
Impulse move:
An impulsive market move occurs when it moves quite strongly or significantly in one
direction, covering a long distance in a brief amount of time. These moves let you know
when there is a significant imbalance between buyers and sellers in the stock.
There are typically three characteristics that all impulsive moves have. These three can give
you a heads-up when a stock is in an impulsive move.
1. Large Candles
2. Strong Volume
3. The majority of Candles are of the same color (Green for Buying/Red for Selling)

Corrective move:
The market move is very slow and occurs after a strong impulsive move. Comparatively
corrective moves are easier to spot, they have exactly opposite characteristics of impulsive
moves.
1. Large Candles
2. Strong Volume
3. The majority of Candles are of the same color (Green for Buying/Red for Selling)

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As shown in the chart above, the impulse legs are very strong and have strong and bigger
candles whereas the corrective legs are shorter and have smaller candles. As a trader, we
should always focus on getting into the stock in these impulsive moves.

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 Understanding Price Action
Price Action trading involves making trading decisions based solely on the analysis of price
movements, without relying on indicators or other technical analysis tools.
So the first thing to do is to get rid of all the indicators for now and have a clean chart as
shown below. To trade purely on price action it is important to open clean charts and try to
understand market structure and phases.

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If the price is moving from the lower left corner to the upper right corner, that particular
stock or asset is in an uptrend meaning there is more demand for that stock. If the price is
moving from the higher left corner to the lower right corner that stock or asset is in a
downtrend and has more sellers than buyers.

Understanding How a Stock Moves

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The stock initially moves to the upside as there are new buyers in the market, there comes
a point where the buyers who have bought the stock at the lows book their profits, that is
where the stock stops moving up and the price is pulled back because of the selling that
takes place by the initial buyers.

After the profit booking is over, the stock again starts to move up, now with even more
buyers, as those who were not able to pick the stock at the lows are also trying to buy the
stock at this point. The stock breaks the previous high inviting more buyers into the
market. The level from the stock reversed is now considered as a low and the high that was
broken is considered as the previous high.

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The stock continues to move up and starts to form higher high and higher low as shown in
the chart, this is an indication that the stock is in an uptrend, the higher low level becomes
an important part for the stock as buyers may lose confidence if that level is broken.

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Steps to start your analysis
1. Open a clean chart and recognize the direction of the stock looking at the corners.
2. Start looking for highs and lows.
3. Mark the high and low on the chart and see in what market phase the stock is in.
4. Highlight the recent higher low in case of an uptrend or recent lower high in a
downtrend as these levels if broken can change the trend of the stock.

This chart indicates how a move is started and completed. The move to the upside starts
with the break of the accumulation phase, the stock starts moving up forming higher highs
and higher lows. When the higher low level is broken the trend changes and the stock
starts to move downwards.

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 Analyzing Charts Using Price Action
Stock Moving In An Uptrend

Change in trend -
1. Stock is in a downtrend
2. Stock makes a new low
3. Stock tries but is unable to make a new low, this is where accumulation starts.
4. High of the consolidation breaks, this is where the downtrend has changed and now
the stock is in an uptrend.
5. The stock starts moving up and making a higher high and higher low.

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Stock Moving in a Downtrend

Change in trend -
1. Stock makes a new higher high
2. Stock is unable to make new high and breaks the higher low level.
3. Stock starts a corrective leg, this is where distribution starts.
4. Low of the correction breaks, this is where the uptrend has changed and now the
stock is in a downtrend.
5. The stock starts moving down and making lower low and lower high.

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 Support and Resistance
Support and resistance are key price levels that are used in technical analysis to identify
potential turning points in the market.
Support is a price level where a downward price trend is expected to pause due to
increased buying activity. In other words, it is a level at which buyers are thought to be
more willing to step in and purchase the asset, preventing the price from falling further.
Resistance is the opposite of support and is a price level where an upward price trend is
expected to pause due to increased selling activity. It is a level at which sellers are thought
to be more willing to sell, preventing the price from rising further.

What we have learned so far -

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As you can see from the chart, the high and low areas act as support and resistance levels.
Here the highs when broken have acted as support for the price to move back up again.

How to mark Support and Resistance like a Pro

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This is the most basic mistake that new traders make, marking support and resistance
levels with a line, professional traders always mark support and resistance areas as shown
below.
Amateur Way to Mark Support and Resistance

Marking Support And Resistance as Areas

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In the above examples we can clearly see, when the support was marked in a line, the price
came below the level which could have hit the stoploss of a trader who wants to buy, but
when the support is marked as an area, the price reverses exactly from the marked zone.

Support Becomes Resistance and Vice Versa

Yes, that's correct. In technical analysis, it's commonly observed that a level of support can
become a level of resistance once it is broken. Similarly, a level of resistance can become a
level of support once it is breached.

For example, if a stock price is falling and hits a certain level where buyers start to step in,
the price might stop falling and start to rise. If the price then rises above this level, it
becomes a resistance level, as sellers might be more likely to sell at that price, causing the
price to fall.

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 Putting It All Together
Marking Low and High as Support and Resistance Areas

As we have seen highs and lows marked with a line, we now mark these levels as areas.

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 Using Multi-Timeframe Analysis to Spot The
Best Trading Opportunities
The multi-timeframe analysis is a method used in technical analysis to examine price
action across different timeframes to gain a better understanding of market trends and
make more informed trading decisions.
It involves analyzing the same asset on multiple timeframes, such as daily, 4-hour, and 1-
hour charts, to identify different patterns and trends that might not be visible in a single
timeframe. This helps traders to assess the overall market trend, identify key support and
resistance levels, and confirm signals generated by their trading strategy.

Multi-timeframe Strategy Steps -

1. Open Daily Chart and mark important high and low areas.
2. Shortlist stocks that are approaching and are very close to these areas.
3. Go on the 1-Hour Timeframe and wait for the price to react, either to go up after
hitting the support area or coming down after hitting resistance.
4. Wait for the break of the accumulation/distribution phase or a recent higher low or
lower high.
5. Stoploss should ideally be below the accumulation phase and the target should be
double the size of the stoploss giving you a risk-to-reward ratio of 1:2.

Bonus Tip – Look at the volume indicator when the stock breaks out of either the
accumulation or distribution phase, if there is an increase in the volume, the chances of a
profitable trade go up.

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Starting Analysis on a Daily Timeframe

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1 Hour Timeframe

Steps -
1. Observing the marked Support Area on the Daily Timeframe.
2. If the stock reacts and starts moving up wait for the first correction which can be a
accumulation phase.
3. If the correction breaks, the stock may start a new trend and this is the point where a
trader can enter the trade.

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Daily Timeframe

1 hour Timeframe

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