Price is a representation of mass psychology. This is because markets are moved by the activities of people. The psychology of human beings, deeply conditioned in the process of long evolution has not changed very much. It has some patterns and they are reflected in the charts through some ways. Price action aims at understanding psychology of the market using those patterns.
No one can predict where the market will go the next moment. However, we do have high degree of estimation if we know the structure of anything. Similarly is the case with markets. By having a structure, we can now tame the uncertainty to a large extent…
With the complete chaos and noise associated in charts, price action serves a great deal in reducing the noise to a large extent. Also, many times we listen traders saying… “Oh! I was faked out this time…”. One can avoid many false signals if one understand the market sentiments overall.
It is lot easier to define Risk Vs Rewards using price action compared to relying on any specific indicator. This is because volatility of the market often outsmarts any specific calculation. Inspite of being correct, many times traders are stopped out before the market resumes where they thought it would go. Price action also has problems associated with that, but to a very less extent.
We all know that market either goes up, or down or sideways. The entire aim of whole of technical analysis, if it was to be summed up would be to accurately predict which way, out of the three, is the market going to head.
Now, in this discussion, I will be pointing out certain things regarding the sentiments. In my opinion it is only partially right to say whether a market is in an uptrend or a downtrend or rangebound. It would be more accurate if we could define the swing structure of what we are considering.
Now, as you can see, I have plotted the downtrend and the uptrend in the charts. However, if another trader, at the same time was looking on a daily or weekly chart, he would have seen that as a Range bound period.
Also, when I said it was in a downtrend, another trader sitting on one minute chart could consider it a very strong uptrend for his 1minute chart during when the price strikes the lower channel and returns back to the upper one.
Now, all three people could be right. The minute chart trader could have profited by going long near the lower channel of downtrend. And also, the one who shorted it. The minute chart trader would however exit quickly and hourly trader will have to wait.
In general, the lower the chart, The more trending tendency increases and the larger the chart, more range bound tendency increases.
However, the trending tendency in lower charts, though it may appear trending, but it is of small units compared to the trends which occur in larger charts. A 50 pip move could be a strong trend in tick/minute charts but has little significance in weekly charts.
basic price channel.
Have you observed that when prices of products go high, people tend to spend less. And when they go very low, people tend to buy very much. A good example of that can be seen during discount sales fares. And then there is an equilibrium point where there is an equilibrium maintained between the consumers and the producers and there is balanced activities going on.
The same scenario occurs in Markets. The reason why channels are formed are because of instability between consumers and producers (Buyers and sellers). That is why there is always and always movements seen in some channels or the other. When there is enough stability, prices tend to be in range for days. And a little bit of imbalance causes trends in the markets.
So in this lesson we learn a concept that price moves in channels. In our coming discussions, we will learn how to create and identify those channels accurately for our benefits.
There are lots of different kinds of channels. But for simplicity, we first analyzed the reasons behind the basic price channels. And they are also the most common channels formed in the markets.
Only a general term. Stepping stones are places in a price channel, where it is very very high probability that the pricewill go in our favour. These are the places where the price moves way ahead of our stop loss and gives us opportunitiesto lock some of the profits. The reason why we talked about price channel and creating it earlier in the lesson, is becauseit gets very difficult to identify stepping stone if the price channel is not made.
What is confluence?
When many different things, point out to a same probable result, we call it confluence. We already know where a stepping stone lies. But knowing that is not everything. We need to make sure that it will not break the channel and go against our favor. For that we need to look for multiple confirmations. So, in the coming posts, we will be seeing different types of confluence and how they appear. There may be only some or one of them present among the many listed. Yet, it could be our decision making confluence whether we want to enter or not.
This is one of the best confluences. I rank this as rank one amongst my confluence lists. Whenever I see price finding support or resistance at a certain level, which is also serving as a stepping stone, I am in the trade. To exactly know whether a support or resistance is a good one, we zoom out of the charts and look if that line/zone previously acted as support /resistance to a good extent or not.
And then we pay a close attention to the candlesticks. To know more about candlestick patterns, you can check theInformed Trades University. But mostly the common candlesticks that occur are – dojis, pinbars, Inside Bars, Bullish/Bearish Engulfing, Morning/Evening stars, Hammers, Harami etc.
“An impulse wave tends to correct itself till common Fibonacci ratios before heading towards its usual direction.”
The Fibonacci are found not only in the markets, but also in the whole of Universe, like in measurements of the galaxies, in our DNA, in our heartbeat ratios, in the growth of a flower and all of creations. In fact it was observed that people tend to think in a similar way, which resembled the pattern of some Fibonacci numbers and ratios.
But, we should not blindly jump into the trade if a Fib Retracement level is reached. For Fibs to qualify, there should be some support-resistance present at that time.
There could be different other confluences also, but these are the major onesand if you master them, it is very much more than sufficient for our trading.
Double Tops – Double Bottoms
Head and Shoulders/ Reverse Head and Shoulders
Flags and Pennants
Broadening Tops/Bottoms Broadening
Cup And Handles