Price action trading = inspecting price for market clues
Price action trading is a rule-based method that looks at price action or rather reaction to important levels. Time frame plays an important rule putting together a complete picture about trend while price phenomenon like bull trap/bear trap can reveal clues and provide trading signals.
Important elements of price action trading
- Aligning time frames, understanding when a trade is with-the-trend, potential reversal or simply counter-trend.
- Support and resistance levels. The most significant ones are well tested and very revealing. The easiest ones to find are periodic highs and lows like 52-week highs, lows, month-month, week-week levels.
- Candlesticks show price action. A lot of tails or spikes show price fighting at key levels. Traditional candlestick patterns are also useful but have to be used in conjunction with support resistance levels.
- My favourite phenomenon are bull traps, bear traps aka false breakouts aka wash n rinse. These action screws up the plans of even sophisticated traders because they are false signals that herd traders into a wrong trade, or to trip stop losses.
Chart #1 – Weekly time frame that shows year-year price action
- We can see that gold price XAUUSD is making year to year low. Corresponding year highs confirm immediately that in this very high time frame, gold is trending down.
- 2013-low is $1180. This is a very important level for technical, psychological reasons.
- 1180 is a support. If price cannot go below, it naturally cannot fulfil the current downtrend.
- Marked 1-2-3 are three instances when price have been reversed at 1180 or vicinity. These three points can be used by gold bulls to justify that there is a triple bottom at play.
- As long as price stays above 1180, it can rally to higher levels.
- Therefore 1180 is a pivotal level.
Chart #2 – Daily time frame that shows month-month price action
- We can see that 2 price forays below 1180 have been reversed and bears lost money. These are bear traps.
- Some traders also describe bear traps as selling climaxes. Sophisticated bulls use selling climax as buy entry.
- Price is now above $1180 and that gives gold bulls much hope.
- Prior to December, Gold fell for 4 consecutive months.
- In a strong movement, Gold rallied above November high and is therefore bucking month-month trend.
- For now, the breakout is a false one as price fell below the breakout level of November-high and is now trading below.
- The false breakout is also a bull trap that bears could use as short signal.
Chart #3 – 4-hourly time frame that shows week-week price action
This is the last chart because we don’t scalp and we don’t like noise on the lower time frames. Very important question to readers right now: if the big boys in the gold trade are ‘trapping’ each other, what should individual traders do?
- Gold did a 1-2 retracement week of the bottom of November.
- It did a bearish expansion i.e. price movement lower than before that is supposed to be resumption of downtrend in line with month-month and year-year trend. This happened last week and early this week.
- That bearish expansion was cancelled abruptly when price exploded higher.
- But that same higher move is as we can see a false break out. This type of expand lower and higher week is very rare.
Bearish continuation strategy and bullish reversal strategy
Now that price is in the middle and first waves of buyers and sellers were both destroyed, why now? The best way to make money is to trade with the trend. This means that the higher time frame year-year and month-month is at this point dominant and unbroken.
- A way to trade this level is to wait for price to retrace higher to re-test old resistance and that is the orange zone. A test and fail here confirms the false break on Monday and gives one the chance to short with a tight stop. This setup and entry is also in line with big picture.
- On the other hand, if price exceeds the orange zone and stays above, then there may be a true reversal. Look for higher month-month price action (chart #2) for confirmation. This is the bullish reversal strategy.
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.