This is a guest article form another price action trader. Thanks to Big Swiss for his contributions.
This series of articles explores the foundations of Price Action and why it works. I also wanted to provide a framework for others to begin to understand and explore these aspects without having to be an expert. With everything that is presented, I welcome you to consider what is written, review historical charts and live examples, and see if you arrive to the same conclusions (I believe you will). In short, do not take these aspects as absolute truth (as there are few things that are). However, if they result in you taking a fresh perspective and approach in attempting to understand the language, you may find yourself releasing incorrect presuppositions and obtaining a fresh view. Some things may appear very obvious to you. Wonderful! Keep exploring those aspects as you can continue to build on your strengths. Other things you may find are a bit perplexing. Hopefully some of these conversations can assist you in exploring those aspect further until you have a stronger sense. Where is the best place to find those answers? The market of course!!!
Setting the Table
First, Price Action is founded using three critical aspects: momentum, support, and resistance. Note, for every buyer there is a seller. This is so important that I’m going to repeat it in all capitals – FOR EVERY BUYER THERE IS A SELLER! Since the ES is an institutional market where the majority of the participants are institutions (large volume and resources), and the institutions trade using an edge, that means that each side believes that statistically they are making a logical, voluntary action. You are not going to “fool them”. They are not after your money, and they are not targeting your stops. However, this concept yields a critical key to assist in training. If each participant is voluntarily taking an action to which they see benefit, then the resultant price movements within historical charts show exactly where support and resistance areas exist. If price stops moving upwards, it is because buyers are insufficient in strength at a specific price to result in absorbing all of the selling at a price level. The reverse also holds. The most important implication from this is that it enables you to review historical charts and see where buying and selling pressure existed (support and resistance) logically. This type of studying will familiarize you with how markets move over different periods of volatility (high and low), as well as transitions between a variety of market cycles (trend, trading range, breakouts, extremes . . . ).
Price Bars, Momentum and Exploration
Each bar on a chart represents a price movement within a certain structure. For time charts, the x axis is time. For tick charts, it is number of trades. Then, with the assumption that all price movement is logically based, a bar that begins on its low, and ends on its high is showing a positive bias in an upwards direction. If the bar is a very large bar, then the people who were buying throughout the bar period were much stronger than the sellers for that period. If the bull bar “closes on its high”, then the momentum is slightly stronger to continue in the same direction. Why? Because for that brief period of time the institutions buying at that price agreed that the price gave them an advantage (as many people may only trade long this allows for the justification). It would not have occurred otherwise because if there was not a buyer at that price, and there were sellers in the market, the price would have ticked down to find a buyer, which would have been at a lower price. The implication is that a bar that does
not close on its high or low is not as strong directionally. This is generally true and let’s explore this. Note, this also emphasizes why using good signal bars in trading can make all of the difference towards your bottom line because generally, at least for a brief period of time, there is a higher probability of the next tick to increment in the same direction.
Exploration of Bars Closing on High or Low To Show Momentum
This investigation is not a trading system, and many of the techniques within PATS assist in refining trading to only very high probability trades. However, this exploration, as well as reviewing other charts for confirmation, may begin to show where trading biases can be uncovered.
In the enclosed graphic, I have marked bars which closed on their high or low. I have marked the charts slightly differently but the simple marking should be obvious. Please work through each bar, beginning from the left (as if one was trading), and ask the following questions:
1) If a stop was created above a swing high or low, and one entered on that bar, would it have been profitable for a scalp (marked with a “w” for win and “*” for loss)?
2) Did that bar begin at a swing high or low?
3) How often did the bar after the entry bar close in the same direction? Why do think that is?
4) If a trade was not profitable, why do you think that may be?
Count w=31 Count *=12
This is a chart that many believe would be impossible to trade. What are your current thoughts? Please review the PATS graphic too. While there are stronger rules for PATS entry areas (and we will explore more in potential future articles), see if you can anticipate some of the momentum using similar questions and insights.