Trading with Price Action is a simple way of technical analysis without indicators. Its direct method of making price patterns as signals makes its accuracy unquestionable.
However, not a few believe that the ability to read Price Action is a strategy that is not easy to master. That’s why the secret of Price Action then becomes one of the interesting learning topics to study.
The following 7 secrets of Price Action may no longer be “secret” for professional traders. But for those of you who are beginners or who are still thirsty for Price Action knowledge. The tips below can be input to improve the quality of Price Action analysis in a simple way.
7 Secret Price Action Trading Strategies
Order Absorption
So far, we have been used to the principle “the more often the Support Resistance is tested, the stronger its position will be”.
But in the breakout scenario, the opposite happens. Trading experts from Tradeciety believe that the strength of buyers and sellers changes the balance every time the price tests Support Resistance.
For example, when price touches resistance in an uptrend, sellers will enter to take advantage of the opportunity for a reversal from that important level. But in the next test, the strength of the incoming seller is often reduced.
So even though the resistance is tested again, the position is not getting stronger, but getting weaker. This is called order absorption.
Its main characteristics are seen in the price return to the Support Resistance level which is getting faster after turning back from the test (retest). Examples can be seen in the following chart:
Five Phases of Price Movement
It is common knowledge that the direction of price movement is divided into 3 types: uptrend, downtrend, and sideways.
However, if it is broken down further, there are actually 5 phases in each direction of price movement. Understanding these 5 phases can help you to read price movements as a map of market forces.
Trend
Signs: Buyers (uptrend) or sellers (downtrend) dominate strongly.
If a price continues to rise in a period, then that condition can be said as a rally, bull market, or uptrend. On the other hand, a consistently falling price is called a bear market, sell-off, or downtrend.
Correction
Sign: Opposition strength increases in the short term.
A correction is a short move against the current trend. During an uptrend, a correction means the price has decreased in the short term. And vice versa if the price is in a downtrend.
Consolidation
Signs: The power of buyers and sellers is balanced; trend movement stops temporarily.
This is a sideways phase that is marked by a horizontal price movement within clear Support Resistance boundaries. Again, it is important to remember that during consolidation, the price moves in a corridor and there is no impulse that triggers the start of a trend.
Breakout
Signs: The power of one of the parties (buyer or seller) to end a draw from the consolidation phase.
After the balanced power of buyers and sellers causes sideways, then sooner or later the ratio of power between the two sides of the market will begin to change.
This change causes a breakout after the price has consolidated. If the buyer or seller succeeds in confirming their dominance. Then the price will break the Support (if the seller wins) or Resistance (if the buyer wins) limit. This will start a new trend.
Reversal
Signs: Opposition forces have succeeded in seizing market dominance.
If the correction does not continue to the main trend or turns into a consolidation phase, the price will experience a reversal.
The signs can be seen in the intensity of the correction that continues to increase. Just like a breakout, a reversal also marks the start of a new trend.
Prioritize Patterns in Strategic Locations
What do you do if you find an important candlestick pattern or Chart Pattern that signals a reversal or consolidation? Directly use it as a reference entry? To increase the chances of profit, it is best to avoid such a move.
Focus vigilance only on important patterns detected in strategic locations, such as Support Resistance (SR) or Supply Demand (SD) areas.
The secret of Price Action is actually already widely known but is often ignored by amateur traders. Strategic areas such as SR and SD were formed not without reason.
So, gathering price action around strategic locations can provide better confirmation of Price Action signals to be used as entry and exit indications.
Furthermore, make sure that the price indicated in the Support Resistance or Supply Demand area is supported by additional signals.
For example, if you find the formation of the Head and Shoulders pattern confirmed to have broken through Support on the H1 time frame, then don’t immediately determine a short position before there is additional confirmation.
The chart below exemplifies the technique of looking for additional confirmation by looking at price movements on higher time frames.
It can be seen that the sell signal from the Head and Shoulders pattern on H1, was confirmed by the price movement in the Daily time frame bouncing down from the resistance limit.
Price Patterns Don’t Have To Be In Accordance With Theory
Why do many novice traders struggle or even fail to trade with Price Action? One of them is because of their “innocence” to look for the exact same pattern as the theory.
In fact, price movements are dynamic, always changing all the time. If you only trade on the exact same pattern as what you are learning, then the big players will actually take advantage of that naivety to make a profit.
So, know that the secret of Price Action is not to stick to theory. Stop looking for perfect patterns when trading for real.
Learn to think and trade like a professional trader. that is, by understanding the rules of forming price patterns so that you know how to recognize valid patterns even if they don’t exactly match the theory in forex books.
Four Principles of Reading Candlesticks
As is well known, candlesticks are one of the most favorite types of price charts because of their detailed and easy-to-read descriptions.
The anatomy of a candlestick itself is actually simple, but there are many ways of interpretation that make novice traders confused when they first learn candlesticks.
According to Tradeciety, actually, the easy way to read candlesticks lies in 4 principles, namely:
- Shadow Length: The longer the Shadow, the higher the uncertainty and volatility.
- Shadow Bulls vs. Bearish: Shadows that are more elongated to the downside generally signal the market’s refusal to continue the price decline. Conversely, a more elongated Shadow means that there is a refusal to continue rising prices.
- Body Position: Is the Body candle closer to the Top or Bottom side? Body position closer to the Top indicates bullish pressure and vice versa.
- Body Size: candles with a large Body and a small Shadow generally reflect a large trend strength. On the other hand, candles with small bodies and long shadows can be interpreted as market uncertainty.
Don’t Worry About Broker Server Hours
Differences Often, traders question the differences in charts at various brokers.
“Why does broker A have a bearish candle while broker B doesn’t?” Then, “How come the candle at broker A has a very long Shadow while the candle at broker B doesn’t?”
Some follow server hours based in London, New York, Singapore, and other areas that have different time zones. Therefore, the difference in the shape of the candle between brokers is mostly due to the difference in the server time.
Brokers who adhere to the London server hours, for example, will of course follow the closing price which takes place earlier than the New York server hours.
Although the chart above shows the same pair and time frame (EUR/USD H4), it can be seen that there are some differences in candlestick patterns.
For example, when broker A shows an Engulfing formation, broker B’s chart does not show a similar pattern. Does this affect Price Action analysis? The answer is no, as long as you consistently manage your strategy with charts from the same broker.
Note that although broker B did not show the Engulfing pattern at point (1), then other patterns with long Shadow (wick) were formed which showed reversal signals at points (2) and (4).
These two signals do not appear on broker A. Meanwhile, point (3) shows that the chart on broker A has a Pin Bar, while broker B does not show the same thing.
If summarized as a whole, both broker A and broker B both show two signals of candlestick patterns, even though the locations and patterns are different.
According to experienced analysts who contributed to Tradeciety, such conditions are common and nothing to worry about. Too much-comparing charts between brokers will only make your Price Action analysis more confusing and inconsistent.
In the long term, the average signal that appears from candlestick patterns on each broker’s chart will not be much different. Traders only need to carefully identify and confirm the appearance of candlestick patterns on their respective charts.
The First Breakout Of The Trendline Is Not A Secret Entry Signal
The last price action comes from using Trendline. This tool is one of the most basic and easy-to-understand analytical tools. However, its implementation can be considered a little tricky because trendline creation is subjective, it can be different for each trader.
To avoid these difficulties, you should not immediately take a position after the price breaks from the Trendline.
You also don’t have to wait too long for an opportunity from a pullback, because there are more realistic recommendations to look for entry opportunities from the Trendline breakout.
The trick is to wait until the price breaks through the last High or Low before a break occurs.
For example, you see an opportunity to sell after the price drops through the ascending trendline, so wait for the price decline to pass the previous Low to place an Entry position.
The same can also be applied if you find a buying opportunity when the price breaks out of the rising trendline.
Price Action Secrets Only Works If…
You’re being realistic.
That is, don’t force signals that aren’t actually valid just to perpetuate a personal perspective. Price Action analysis largely relies on understanding to read price movements and take advantage of ideal patterns.
So, you will be vulnerable to making subjective decisions that can be detrimental if they are not based on a basic understanding of Price Action itself.