Overview
This lecture comprehensively covers price action trading, focusing on market structure, trends, candlesticks, support and resistance, volume analysis, breakout and pullback strategies, reversal trading, inside bars, pin bars, and trading gaps. Practical approaches and key trading techniques are presented for various market conditions.
Introduction to Price Action Trading
- Price action trading relies on analyzing price and volume without heavy reliance on indicators.
- Market participants seek an "edge" using technical, fundamental, quantitative, or price action analysis.
- Price action reveals current market behavior rather than predictions.
- Trading success depends on psychological discipline and strategy compatibility.
Market Structure & Phases
- Market is mainly driven by institutions ("smart money"), not retail traders.
- Market cycles through three main phases: uptrend (advancing), downtrend (declining), and consolidation (ranging).
- Accumulation phase: institutions quietly build positions after a decline.
- Uptrend: price rises, trend traders profit.
- Distribution: institutions sell off positions, market stays range-bound.
- Downtrend: strong selling, high volatility, trend traders can short.
Trends and Trendlines
- Trends can be uptrend, downtrend, or sideways/ranging; trend identification depends on timeframe.
- Uptrend: marked by higher highs and higher lows; downtrend by lower highs and lower lows.
- Trendlines connect swing points and act as support/resistance.
- Trend strength is judged by number of swings, slope, and duration.
- Sideways trends include range contraction, range expansion, and triangular ranges.
Candlestick Patterns
- Candlesticks show open, high, low, close (OHLC) for a period.
- Key patterns: marubozu (strong trend), pin bars (hammers, hanging man, shooting star, inverted hammer), spinning tops, dojis (indecision).
- Marubozu signals strong buying/selling; pin bars signal potential reversal.
Support and Resistance
- Support: price level attracting buyers, halting declines; resistance: price level attracting sellers, halting advances.
- Identify by zooming out, marking major reaction points, aligning price zones, and drawing horizontal or zonal lines.
- Treat support/resistance as areas rather than precise lines; strength confirmed by repeated touches.
Trading with Support and Resistance
- Level is more likely to break if tested multiple times in short order.
- Trade reversals from strong price rejections (pin bars, engulfing candles) after a momentum move.
- Trade breakouts using patterns like ascending/descending triangles or moving average build-ups.
- Check higher timeframes for consolidations to find actionable levels in lower timeframes.
Volume Analysis
- Volume = number of shares transacted (not bought + sold).
- Compare today’s volume to 10-day average for context.
- High volume with price rise = institutional buying, bullish.
- High volume with price fall = institutional selling, bearish.
- Low volume = weak participation, possible traps.
- Delivery volume indicates real investor interest.
Breakout Trading
- Breakout: price moves past key level with momentum.
- Successful breakouts often occur near structures and in trend direction.
- Avoid breakouts far from structure or against trend (risk of false breakout).
- Look for price build-up, higher lows into resistance, or lower highs into support.
- Confirm with volume, candlestick close beyond level, and potential RSI convergence.
Pullback Trading
- Pullback: counter-trend move within an overall trend, often due to profit-taking.
- Buy dips (uptrend) or sell rallies (downtrend) at areas of value (support, trendline, moving average).
- Entry trigger: reversal pattern at area of value.
- Place stoploss below swing low (uptrend) or above swing high (downtrend), using ATR for a buffer.
- Targets: prior swing highs/lows or resistance/support.
Reversal Trading
- Reversal: trend changes direction.
- Avoid catching falling knives (buying crashing markets).
- Trade reversals at clear reference points (support, resistance, moving averages) with confirmation.
- Look for break in market structure: e.g., uptrend stops making higher highs and lows.
- Use higher timeframe analysis for context.
- Set conservative profit targets; trail stops to ride a new trend.
Inside Bar Pattern
- Inside bar: candle where high/low are within previous candle’s range, signals indecision or volatility pause.
- Stronger on higher timeframes.
- Can trade as breakout (trend continuation), reversal (at key levels), or trend trading (pullbacks).
- Beware of false breakout (hikake pattern).
- Best traded with small range/low volatility; use ATR for stoploss.
Pin Bar Pattern
- Pin bar: candle with small body, long tail (at least 2x body), strong price rejection.
- Bullish pin bar: tail down, reversal up; bearish pin bar: tail up, reversal down.
- Most effective at clear trends or key support/resistance.
- Do not rely on a pin bar alone for trend reversal.
Gap Trading
- Gap: price jumps between periods, creating empty space on chart.
- Common due to news, demand/supply imbalances, or institutional action.
- Gaps can act as support/resistance zones.
- Most gaps eventually fill, but timing is uncertain.
- Gap types: breakaway, runaway, exhaustion.
- Trade gaps with confirmation from volume and pullbacks; ideal strategies depend on gap type and location.
Key Terms & Definitions
- Price Action — analysis of price movements without extensive indicators.
- Trend — overall market direction (up, down, sideways).
- Support/Resistance — price levels where buying/selling pressure emerges.
- Pin Bar — candlestick with long wick, signaling reversal.
- Inside Bar — candle within previous candle’s range, sign of indecision.
- Breakout — price moves beyond a significant level with momentum.
- Pullback — short-term move against the prevailing trend.
- Gap — absence of trading between two price periods, creating a discontinuity.
- ATR — Average True Range, measures volatility to set stoploss buffers.
- Volume — total number of shares traded during a period.
Action Items / Next Steps
- Practice drawing support/resistance zones and trendlines on historical charts.
- Backtest breakout, pullback, and reversal trade setups.
- Review candlestick patterns (pin bars, inside bars) for confirmation.
- Analyze gap types and practice gap trading setup identification.
- Build and refine a personal trading checklist for trade entries and exits.