How to Read Price Action.
Price action is the art of learning how to read and interpret the candles printed on our charts. I have already written an article in the “Basics” section of my website. If you haven’t read this yet, please take your time to read it – Trading with Price Action.
Price action is like a different language and it will take you some time to get to grips with it. Once you begin to understand the reason why certain candles are produced the story of price action begins to unfold.
The candles we look at that form the price action are amazingly informative, the size and shape of the candles can indicate the momentum. So large sized candles with large bodies indicate strong momentum and small candles indicate indecision (weak momentum).
We want to be on the side of the current strong momentum and so using the size of the candles and trading in line with the larger candles is very important.
Impulsive and Corrective candles.
Impulsive candles are very easy to spot, they simply show up as large candles usually with large bodies. So the high and low of the range is large and they really do pop out on the charts due to their size. They indicate strong momentum.
Corrective candles are the opposite, they show up on the charts as small weak candles, they tend to form after a large impulsive candle and indicate a time where the market is taking a breather before moving on.
As the markets are unable to continuously move in one direction, we have to expect price to reverse a little after a big move. The reason this happens is because when the market does make a strong move in one direction, traders who got in on that move have to take profit at some point and this is when we get price reversing or move sideways on us.
So we have defined that the size of the candle is very important and that we want to trade with the current strong momentum.
Candle wicks, are the thin pointy parts found at the top and bottom of the candles and they too can tell us a lot about what is going on. The wicks indicate where price has been rejected and the larger the wicks the stronger the rejection.
The wicks are our best friends because we can use them to help us mark our support and resistance levels (key levels). It’s not rocket science but like anything it takes practice to convert the candles structure into information we can use.
Check out – How to mark support and resistance levels.
The time frame on which we look at the price action is worth mentioning. The reason being the larger the time frame the more accurate and valid the price action is.
Why?, well if you compare the 1hr chart to the daily chart we have to realise that a candle that has taken a whole 24hrs to form is going to be way more important than a single 1hr candle.
Therefore, we must remember to make sure if we do venture onto the lower time frames to trade, the price action candle we take has to be larger than all of the other candles around it. All too often we will see pin bars or engulfing bars being printed on the 1hr charts but these are what suck in the newbie traders and cause accounts to be drained.
The best way to think about this is to ask yourself – “Does this candle stick out from the rest of the candles and scream out –TRADE ME!!!!”
This simple question will help keep you from taking those sucker trades, we just don’t need to take.
Putting it all together.
Therefore, the candles that get printed help us to read the price action, it’s like a jigsaw puzzle we just have to use all of this information and put it together to get a good picture of what is going on in the markets.
All the information we need is printed on the charts to help us understand what price has done previously, where price has been rejected and what the current momentum is.
No indicator or robot has the ability to do this, and this is why price action is a very competent way to assess the charts and trade consistently.