Price Action

Price action is simple yet effective if used correctly. It's all about closely observing and interpreting the raw data of a stock's price movement, including its opening, high, low, and closing prices. This approach relies on past observations to predict future price movements with a high degree of certainty.

Unlike other trading methods that rely on indicators, price action trading allows me to analyze the market purely based on price movements. I've found that this approach gives me a clearer and more accurate understanding of market trends and helps me make better trading decisions.

Reading price action involves analyzing various aspects of the price chart, such as candlestick patterns, support and resistance levels, trend analysis, volume, price patterns, and other indicators.

A typical trading day for me begins with analyzing price charts. Each bar on the chart represents a specific time period, such as a 5-minute chart in this example. By observing patterns in these bars, I can gauge market sentiment and make informed decisions. In particular, a bullish engulfing bar suggests market strength, while a bar with a long tail, like a doji candle, may indicate potential weakness or a possible reversal.

In the given example, it shows fewer sellers barely driving the market further down, followed by a bullish engulfing pattern indicating a possible reversal. In this scenario, you could take a long trade, targeting a return to the Volume Weighted Average Price (VWAP) while setting a stop-loss at the recent low. This represents a simple 2:1 risk-to-reward ratio or otherwise disrespected.

One aspect of price action trading that I find particularly intriguing is the concept of market "memory." This means that the market tends to remember important price levels from the past, which can act as support or resistance in the future. That is why many traders tell people to always look left when looking for possible take profit areas. Understanding these levels has helped me anticipate market movements and make profitable trades.