Price Action Analysis in Detail
In this article, I am going to discuss Price Action Analysis in detail. Please read our previous article before proceeding to this article where we discussed Candlestick in detail. As part of this article, we are going to discuss the following pointers in detail.
- What is Price Action Analysis?
- Understanding the advance features of CANDLESTICK
The ultimate guide you will ever need to understand CANDLESTICK and its characteristics. Once you complete this article, then you will no need to recognize any CANDLESTICK patterns.
What is Price Action Analysis?
The Price Action Analysis is the movement of price in the chart. Candlestick format shows clear price action, I mean what buyers and sellers are doing in that period. Their activity clearly shows in CANDLESTICK
So to learn price action we have to learn all the basic and advanced feature of candlestick
5 steps to candlestick analysis
Step1: The size of the body (high to low)
Find the body of your timeframe. The candle body shows a lot of information such as
- A long body is showing strength
- A narrow-body shows weakness
- When consecutive bodies become larger and larger, it shows an increase in momentum
- When consecutive bodies become smaller and smaller, it shows slowing momentum
- If up or down move with greater than average body candle it shows volatility high
How to compare?
- current candlestick with respect to the previous candle
- current candlestick with respect to the same swing
- current candlestick with respect to the previous swing
Step2: The length of wicks
- Larger wicks show that price has moved a lot during the duration of the candle but it got rejected, shows the presence of supply or demand
- At major support and resistance levels. Candlewick becomes larger it indicates volatility. This generally happens after long trending phases before a reversal happen from support and resistance level
- One more thing: the longer the shadow, the more likely prices will move in the opposite direction of the shadow
- Long wick candles do not always signal a reversal if the wick of rejection candle engulf by subsequent move it fails, it called reverse rejection
- If it appears between the trend it shows trend cont. ( as a small pullback in smaller time frame)
- While a single long long wick indicates possible of prices moving in the opposite direction of the wick, a cluster of multiple wicks indicate that prices are likely to move in the same direction of the wick created and if the body closing the direction of the trend
Step3: The ratio between wicks and bodies
Understanding the relationship between the open and close when compared to the high and the low of the present bar
- Open price tells us where the balance between buyers and sellers at the opening of that period
- Close price tells us where the balance point was at the end of the period
Etep4: Volume contains
WYCKOFF BASIC LAW
- THE LAW OF SUPPLY AND DEMAND: When demand is greater than supply then the price will rise to meet this demand and conversely when supply is greater than demand then the price will fall
- THE LAW OF CAUSE AND EFFECT: The effect will be indirectly proportional to the cause other words a small amount of volume action will only result in a small amount of price action. If the cause is large then the effect will be large vice a Versa
- THE LAW OF EFFORT VS RESULT: Similar to newton’s third law. Every action must have an equal and opposite reaction, in other words, the price action on the chart must reflect the volume action below. Effort (volume) seen as the result (price), where validated and anomaly comes to consider
Wide spared candle
Price action –
Strong BULLISH market sentiment. The price action has risen sharply higher and closed at or near the high of an up candle.
- The associated volume should, therefore, reflect this strong sentiment with a ‘strong’ volume. As we can see in the above example is, if the volume is above average(effort vs result), then this is what we should expect to see as it validates the price. The smart money is joining the move higher and everything is as it should be.
- If the volume is below average or low, this is a warning signal. The price is being marked higher, but with little effort. The move is not genuine. If we are in a position, we look to exit. If we are not in a position we stay out and wait for the next signal to see when and where the smart money is now taking this market.
Narrow Spread Candles
Price action – weak market sentiment
- A narrow spread candle should have low volume – again effort vs result.
- NARROW SPREAD CANDLE WITH HIGH VOLUME. If the volume had represented buying, how can the spread be narrow? There are only two possible explanations for a narrow spread up candle on a very high volume.
- Either the professional money is selling into the buying [see the end of a rising market]
- There is a trading range to the left and the professional money is prepared to absorb the selling from traders locked into this old trading range
Step5: RELATIVE OR 2 CANDLE PRICE ACTION
DIRECTION OF CANDLE
The relationship of each bar high/low relative to the previous bar
- An up bar starts an upswing and confirms the end of a downswing
- A down bar starts a downswing and confirms the end of an upswing
- The inside bar does not break the previous high low, hence they do not affect the direction of the current swing
- Outside bar breaks both the previous high and low, it introduces uncertainty in the market structure. Outside bar in upswing cont the upswing and outside bar in the downswing cont the downswing. Typically an outside bar not end or start a price swing without down bar or a break below the swing low an upswing will cont
DIRECTION OF TREND WITH RESPECT TO CANDLE POSITION
Context or Background
CANDLESTICk should not be analyzed in a vacuum. A candlestick always must be analyzed in the context of what has happened in the past.
Context is what current candlestick shows with respect to the previous candlestick
- The current candlestick larger or smaller than previous ones? Which shows momentum increases or decreases
- Is the size-changing meaningfully or not? Buying or selling pressure
- Is volatility increases or decreases
- Is the change happening during an active trading period or not? For example, candlesticks in mid-period generally dead or inactive.
TESTING PRICE LEVELS
The concept of testing refers to the market moving towards a price level to “test” if the price level will accept reject the market’s advances.
The high and low of each price bar are natural support and resistance levels and the wick generally acts as supply and demand zone. The test of these levels or zones show the undercurrents of the market and is critical for reading price action.
THREE PRICE BARS/expectation
With a clear read of 2 BAR PRICE ACTION (DIRECTION, CONTEXT, TESTING), we are able to form an expectation of the market in the third candle. We would expect the market to move in a certain way in the third bar with our read of 2 bar price action. The confirmation or failure of our expectations of the third bar reveals more about the market and adds to our price action analysis.
To form expectations, we need to make a very simple assumption about how the market should behave and should not behave.
Essentially, the market has momentum and inertia. bearishness should follow bearishness and bullishness should follow bullishness. When it does not obey this assumption, we have to cautious, Maybe a possible change in market direction.
Some more examples
In the next article, I am going to discuss How to Trade with Smart Money. Here, in this article, I try to explain Price Action Analysis i.e. the step by step process to study CANDLESTICK and how to find swing high and swing low and characteristics to find swing high and swing low.