While this goes very in depth and is a bit more complicated than I like, I really like a lot of what this guy is describing when it comes to understanding what each candle is telling you when watching them form on your chart. What he’s done is give you an in depth look at price action and price action trading, and he’s really broken it down into two distinctive categories, one he calls impulsive and one he calls corrective.
What I would like to clarify is that the key, at least in my opinion, is to determine if there is a trend, which would be the impulse move, and then wait on the correction that is sure to come. Once the correction is over, and the trend is resuming, that is the key time to enter the market and join in on the next move, or as he is describing it, the next impulsive move. I like to simply things considerably, and that is one of the benefits of our price action manual, in that we have really simplified learning price action trading.
If you would like to dig a little deeper, then you might enjoy reading this post that was placed at www.traderslaboratory.com by 2ndskiesforex. You will probably need to print out his post and read it through a few times to really grasp what he is saying unless you are already very familiar with price action. While reading it, just remind yourself too that we are looking for the trend (what he describes as the impulsive move), and then waiting on a correction, or his corrective move, and then joining in as the next impulsive move is beginning. These will be the key entry points that I am always talking about and describing in my chart lesson videos.
Anyway, here is what 2ndSkiesForex had to say about impulsive and corrective price action moves:
Now that I have written on the basic components for my working theory of price action, I will build upon this by talking about impulsive and corrective price action moves.
If I had to look at price action as a structure, it would be a pyramid, with the base being how price action is a reflection of order flow (particularly executed transactions). The next part (or level above) from that base would be understanding price action through the lens of impulsive vs. corrective moves.
I will briefly describe what impulsive and corrective moves are, giving the key characteristics of each type of move. Then I will discuss what they generally communicate from an order flow perspective. After this I will talk about what is the general pattern they will form, and how you can use this for your trading.
What Is An Impulsive Move?
An impulsive move is one whereby the market moves quite strongly or heavily in on direction, covering a great distance in a short period of time. These moves tell you when the imbalance between the buyers and sellers is really strong and there is heavy participation from the institutional side.
Logically, more money can be made during these impulsive moves, as they cover more points or pips in less time. They are generally more volatile, and thus provide us with great opportunities to get more R (reward) with less risk since the market will stretch more easily in one direction. But no matter what, we want to be trading with these moves as much as possible, not against them.
Impulsive moves tend to have three characteristics common amongst all of them. These three can help clue you in to when an impulsive move is starting, or in play. They are:
1) Large Candles (bodies)
2) Mostly of one color (blue/bullish, or red/bearish)
3) Closes towards highs/lows of the move
Let’s examine all three points.
1) Large Candles communicate to us there is strong participation and order flow behind this particular candle. Strong imbalances during a candle will translate into larger candles than the norm. When you see large candles forming consistently in one direction, they indicate strong order flow behind them from the institutional side. Since the larger players are behind them, they give us a clue of the direction we want to take, essentially surfing the waves they (institutional) are creating. You can read the rest of the original post here.
Let me remind you again not to let this complicate price action trading for you. In the end, it’s really about learning to spot 3 or 4 repetitive patterns that form at what I call the key entry points. If you can learn to spot only one of these patterns in real time, you can make a good living day trading. If you can learn to spot them all, then it just makes it that much easier to increase your profits. The key is learning to be stealthy and having the ability to sit and watch a chart without entering recklessly.
Most new traders can’t do this. They are continually looking for entries and usually entering at the most inopportune times in most cases. Learn to be patient and wait on the best set ups and spend the time that is necessary to learn to spot these great patterns in real time. Your first goal should be to learn to spot them after the fact at the end of the day when reviewing your charts. Once you can do that easily, you will then begin to notice them forming in real time. We hope you enjoy taking an in depth look at price action and price action trading, and that you can use it to help improve your trading results.
In the end, you will be entering just as a correction is ending, so you are in essence entering against the current small trend, which is hard to understand for those that are not profitable in their trading. It goes against common sense, but if you can learn to force yourself to enter at this areas in the beginning, it will slowly become more natural for you, and eventually it will lead to you becoming a profitable trader if you can grasp price action trading in full. You can find our price action trading manual here: http://priceactiontradingsystem.com/pats-price-action-trading-manual/.