Price Action Basics and Its behavior

We would like to continue our studies on price action and Here I would like to tell you how apple trade went well although, there was strong selling after upside breakout, I was confident that buyers will step and move the price way beyond.

I want to start this post with this strange sentence. We will talk about trading logic. How do you make decisions? Do you look for signs of buyer and seller and act accordingly?

Keep you trading simpler !

Think about simple thing – price action itself (trend, movement) will not allow you to benefit from that. Some movements are continued, some are reversed. It depends on current market conditions, but probability of success will be close to 50/50 if you simply follow price action (subtract spreads and rapid volatility spikes and you will get perfect strategy for failure).

So, what works?

If you dig deeper than simply following price action, you will understand that supply and demand will drive the market. But supply can be short-term, then transform into demand and vice-a- versa. So, you have to rely on professional supply and professional demand and be able to distinguish it between other fluctuations.

All that we learn here is designed for that. Professional demand (or supply) in most cases is ongoing demand. But are we naive enough to think, that professional buyer will uncover his actions for you in easy identifiable and straight forward way?

No, they don’t do that! There are numerous attempts to capture signs of professional activity using volumes. Some traders think that if they have volumes, they have real information. Poor guys!

Volumes are also misleading. So, one can not be successful in trying to capture big buyer from the market… if he thinks in conventional way.

Market tells you a story and you should understand this story

Combining nuances and clues (even number of volumes if you like) in the whole picture. Here are several examples:

1. Market breaks out from a level and keeps level above. You see strange passive behavior of sellers – market shows you levels with very low volatility and holds there twice! If sellers were interested in this market, they would probably responded immediately. But you see no participation – something wrong with the supply is going on here.

Therefore you can anticipate that big guys are buyers! They’ve collected all supply below and no one wants to go against them at least for a while.

Not surprisingly price breaks out to the upside again.

2. There’s neutral day after the breakout. If there were short-term traders who have made this breakout, they would liquidate pretty soon. But nothing happens – nothing at all! All day price goes back and forth with very low tempo. It means that probably those buyers were big (institutional) buyers. Every time you analyze the market, you make narrative. Be sure that your narrative is reasonable and relies on solid market logics There are some important principles:

1. Insitutional buyers will sell on the upside breakout (not downside)

2. Low volatility after high volatility (directional breakout) shows lack of participation. The less liquidity (participation) we have near current levels, the more odds that market will auction higher.

Is it complex?

Yes, it is. But this is mindset that requires from you some disbelief, some critical view, some commitment to dig deeper and see what is hidden. That what trading is about.