One of the main principles that I encourage everyone to trade with regardless of their particular method or system is that price is king, and that price always leads.
So it should come as no surprise that you can see some very powerful signals simply by looking at a price chart.
That doesn’t mean that you can go trading based solely on what you see in the price action, because that would violate the other core principle namely that of always having a strong confluence of reasons.
But the information in this section can become very useful if you apply it correctly to your trading.
I will show you some very useful patterns and formations shortly but I will begin by showing you one of the most important indications that price gives us; direction.
Direction is defined by price in two ways, first you can look for the market flow (which is covered in the previous section of this course). Secondly you can look for the formation of successive highs and lows.
The formation of successive highs and lows on the price chart is best looked for on the medium term timeframes such as 15 minute or 1 hour particularly if you are day trading. These formations are quite visual and may take some practice in order to be able to consistently see them on the price chart.
The first example of successive highs and lows that I will show you are those that form when the market is heading up. As you may expect these are seen as higher highs with higher lows on the price chart.
When you see higher highs and higher lows, this is usually a very powerful indication that whatever any other indicators may be telling you, the price is on its way up.
A chart example of what these look like is below:
You can see here that as the price is going up it tends to fall back down slightly before continuing on up. This process is called a retracement.
As soon as you see that the price is making higher highs and higher lows this is a good reason not to try and go short and even better reason to start looking for opportunities to buy.
When you use this information along with the other things that I will show you in this course such as Market flow and recognized levels of Support and resistance you will be able to create a very powerful trading plan.
As you may expect when price is probably going to drop, it will make a series of lower highs and lower lows on the price chart.
Here is an example of that on a price chart:
In this example you can see that as price is making a succession of lower highs and lower lows it pulls back up slightly, this process is also called a retracement.
This process is the direct opposite in terms of the price giving clues as to its next move, in that if you see this setting up you would be wise to put any aspirations that you may have about going long on hold and instead look for a nice trading opportunity to the downside.
One important point to make here is that many new traders have a fear that they may miss the action if price starts to move.
Again one of the main things I try and teach people is that the reality of the market is that price never just goes in one direction and there are almost always retracements along the way. This means that there will be plenty of opportunities to get a piece of the move once you have safely determined which direction price is going in.
This makes the market a lot more predictable than many people realize and it is these retracements that we look to use in order to enter the market once we are sure of the overall direction.
So before you take any trade, always check for this kind of price action in support of that trade and if it doesn’t support it, think about staying out and waiting for a better set up.
Next: Candlesticks