Price Action Trading Strategy

Follow Price, Not Your Thoughts

“What is Price Action Trading?”

Price action trading is a method that relies on historical prices (open, high, low, and close) to help you make trading decisions.

Price action tells you what the market is doing — and not what you think it should do.

PRO TIP : This isn’t the Holy Grail strategy.

But, if we give time to learn price action trading, we trade with cleaner charts, and can pinpoint entries & exits with better precision.

Support and Resistance : The Reality

First, let’s understand what’s Support and Resistance

Support — A horizontal area on chart where we can expect buyers to push the price higher.

Resistance — A horizontal area on chart where we can expect sellers to push the price lower.

Here are a few examples…

SUPPORT :

RESISTANCE :

PRO TIP : Always draw areas for Support and Resistances, and not horizontal lines.

When Support breaks it become Resistance. And when Resistance breaks it become Support.

Resistance acting as Support

But why Support becomes Resistance when it breaks and vice versa ?

Because when the price breaks Support, traders who are long are losing money.

So, when the price rallies back to Support, this group of traders (buyers) can now get out of their losing trade at breakeven — and that initiates selling pressure.

And that’s not all because traders who missed the breakdown will want to short the markets which increase the selling pressure.

And that’s why when Support breaks it tends to become Resistance and vice versa when resistance breaks, it becomes support.

Dynamic Support & Resistance

Dynamic Support & Resistance means Support and Resistance “move along” or “glued” with the price instead of being rigid. Hence called as Dynamic.

As mentioned above, Support & Resistance are horizontal areas but these are work when market moves in a range not in trending market.

Hence, dynamic support & resistance work well in trending markets.

Examples : The 20-period Exponential Moving Average can act as dynamic Support in trending market…

How Markets Moves or Phases of Market

The markets are not static, they are continuously moving. It can in an uptrend, downtrend, range, low volatility, high volatility.

But if we look at broader picture, there are generally four phases of market in which market reacts :

1. Accumulation
2. Advancing
3. Distribution
4. Declining

Phase #1: The Accumulation Stage

The Accumulation stage occurs after a decline in price, and it looks like a range market in a downtrend.

Things to watch out for :

• Occurs after the price have fallen.
• It looks like a range market with obvious Support and Resistance areas — in a downtrend.
• The 200-day Moving Average is flattening out.

Example :

Phase #2: The Advancing Stage

The Advancing Stage is an uptrend with a series of higher highs and lows.

Things to look out for :

• Occurs after the price breaks out of Resistance in an Accumulation stage
• We see a series of higher highs and lows
• The price is above the 200-day Moving Average
• The 200-day Moving Average is starting to point higher

Phase #3: The Distribution Stage

The Distribution stage occurs after a rise in price, and it looks like a range market in an uptrend.

Here are the things to look for:

• Occurs after the price have risen.
• It looks like a range market with obvious Support and Resistance areas — in an uptrend
• The 200-day Moving Average is flattening out.

Phase #4: The Declining Stage

The Declining Stage is a downtrend with a series of lower highs and lows.

Things to look out for :

• Occurs after the price breaks out of Support in a Distribution stage
• We see a series of lower highs and lows
• The price is below the 200-day Exponential Moving Average
• The 200-day Exponential Moving Average is starting to point lower.

But Why To Know Phases of Markets ?

If we can recognize the current stage of the market, then we can adopt the appropriate trading strategy to trade it.

If the market is in an Advancing stage, then we want to be a buyer (not a seller).

This means we can look to buy breakouts or pullbacks.

If the market is in a Distribution stage, then we know there’s a huge potential downside if the price breaks below Support.

This means we can look to short the breakdown of Support or wait for the breakdown to occur, then sell on the pullback.

What’s Next?

In next blog, I will describe the secrets of candlestick patterns and how to read them in order to take trades.

By that time put on some efforts to practice into above techniques.