Introduction to Price action I: What you need to know before you start

Why choose price action trading?

One of the benefits of the price action is that it works very well on higher time frames used by large banks that have enough capital to move the market where they want. Retail traders do not have such possibilities, but they can use price action on higher timeframes to identify what these market players did in the past and what they will probably do again.Another advantage is that by using the price action it is possible to identify different patterns that are repeated in the markets with a certain probability.

Once you learn how to read these market patterns, you will clearly know what you are looking for in the market and therefore it will be easier for you to determine the parameters of the trade. An example of such a pattern is a trendwhere higher highs and higher lows alternate regularly in the case of an uptrend or lower high and lower lows in the case of a downtrend.

A disadvantage of the price action is that there are several different patterns in the market, and each trader can see something else in the chart. Where one trader sees a continuing downtrend, another may see a potential to reverse that trend. Learning to readthe charts objectively is a skill that is not easy. To master it, hundreds of hours of hard work will be required.

What price action trading helps us track?

While using the price action method in trading, we have to focus on several things:

• Trends
• Support and resistance levels
• Price response on support and resistance levels.
• Candlestick formations
• Price patterns or formations

The crucial thing in the market in relation to price action trading is the market's context or structure. When trading with the price action, you need to look at the market in certain contexts that provide us with comprehensive information. The market structure is not determined by one or two candlesticks, but it requires a much broader view of the market.

In addition, we will alsobe interested in the length of the candlesticks, whether the candlesticks are close to their highs or lows, whether one color of candlesticks predominates, how fast they reach a certain level, etc. Based on this, we can then identify impulsive movements and corrections.

Impulsive movement can be characterized as a movement where long candlesticks are present, candlesticks close near to their highs or lows, and one color of candlesticks predominates within this impulsive movement. Impulsive movements are often very fast. Trading against impulsive movements is very risky.Two examples of bearish impulsive movements are shown in Figure 1. In the highlighted area, you can see long black candles closing near their lows

_{Impulsive movements in price action trading}

On the other hand, the corrective movement is a movement where the candlesticks are usually shorter and they often alternate. The movement also takes a longer time. The corrective movement follows the impulsive movement and is usually directed against it.The corrective movement is used for timing the trade in the direction of the previous impulsive movement.

Trends

The trend is rising or falling. We know from a chapter about the trends that the upward trend is characterized by a series of higher highs and higher lows, while the downward trend is characterized by lower lows, followed by lower highs. Trends are volatile or non-volatile. If we identify a trend, the principle is to always trade in the direction of the trend, which is more likely to succeed than trading against the trend.
 

_{Example of a downtrend in price action trading}

Figure shows what a typical price action chart looks like. Only the price without indicators is displayed. There are marked places on the chart where there was a significant change of direction for easier orientation. In this case, the price is moving in a downtrend based on a series of lower lows and lower highs.

Supports and Resistances

Supports and resistances (or resistances) are other important elements of the price action method. These are areas where the price of an instrument tends to stop and turn. If the price comes close to the area of support, it is the level where buyers enter the game and they do not allow theprice to go below this level. If, on the other hand, the price approaches the resistance level, the sellers step in and do not allow the price to move higher.

In our example of a downward trend, we could identify some resistances and supports, see figure:
 

_{Identifying Support and Resistance}

From the above picture, we can notice one thing, namely if a support gets broken it becomes a new resistance, and the same is also true in the opposite direction when broken resistance becomes a new support.

Reaction to support and resistance levels

Another important element of the price action is identifying a response that has occurred on support and resistance levels. Only after that, it is more clear what direction the price is going to move and the trader may take a trade if the trading idea is in line with the market context. Thus, if the market is moving in a downtrend, the trader should only take short trades, if the market is in an uptrend, only long trades should be taken.

These reactions can be identified by candlestick formations. We will talk about them in the next chapters. If the reaction on support and resistance level moves against the market context, the context is negated and the trader should not trade in such a situation.

Key terms