buying and selling can’t me you profitable if you don’t have any kind of view. For getting a view of the stock market we need to go through different types of analysis. Let’s say, Technical Analysis, Fundamental Analysis, and Price Action analysis. Today we will be talking about price action analysis.
The term price action itself denotes the action taken after considering the real-time price deviation. Nowadays you must have heard the pro talking about this game-changing tool changing the lives of many. In simple words, we can say that price action is the ultimate tool required to get an edge over others in terms of trading. Price action provides you the real-time structural movements which are more than sufficient to come to a decision on the probability stuff.
KEY TAKEAWAYS
1). Price action allows you to capture big trendy moves, by doing top-down analysis at different time frames.
2). Moving averages in price action can give you an accurate idea of the candles formed, as the name moving average suggests… the average of all moving candles its can be 5,9,50,100, anyone.
3). The chart patterns and candle stick patterns later derive the price action, the most common chart patterns that we hear are – double top or double bottom, rising wedge, bullish/bearish flag, and pole, head, and shoulders.
4). Some of the major tools of price action are – Trend lines, support, resistance, and demand and supply zones.
5). Observe the areas where the price has been trading most.
Components of price action
TRADING VOLUME
The total number of shares traded on the stock market, total futures contracts traded on the futures market, or total complete lots traded on the currency market make up the trading volume. Since there is no centralized exchange for the currency market, it is challenging to determine the precise number of transactions. Volume can be estimated in a number of ways though. Its primary application is to locate market support and resistance levels and assess the force of price changes, although it works best when combined with other theories and techniques for price analysis.
Time frames
The first step in getting ready for trading is to take a snapshot of the price movements on a longer timeframe than the one you plan to trade in. For instance, if I wish to trade on the one- or four-hour charts, I switch to the daily timeframe and carefully mark the control and value areas on that chart. If I want to day trade on the 30- and 15-minute timeframes, I go to the four-hour timeframe, find the large value there, and mark it on the chart. If I wish to trade on the five-minute period, I move to the hour and conduct the value area analysis there. These timeframe correlations are, however, not inflexible. Look first at the present price location on the timeframe you will be trading in to determine what higher timeframe you should use to draw the value on. Then scroll back to the same chart and try to put it into context. Is the present price movement a component of an uptrend, a downtrend, or a sideways movement? Recall the talk about how a trend shifts when a price begins to make value below an uptrend and above in a decline. Find the area where the price developed value that impacted the trend in the following higher timeframe. Go to the subsequent higher timeframe if you can’t find it there.
FAIR VALUE AREA?
As you might have inferred from my comments above, the fair value of any given forex pair, stock, or commodity is the price range where it has traded the majority of the time, where supply and demand were balanced, and where both buyers and sellers were in agreement that the price range reflected their current expectations. They are content to keep the price where it is now because they believe it to be a fair price at this time.
Things to remember
• Pay attention to the zones above and below where the price hasn’t traded much. That is excess.
• Seek to leave out as much blank space as possible in order to correctly separate value from excess price.
• Repetitive up and down movements in the same price area are what create value.
• Imagine that the horizontal time axis on your chart disappears.
The blank space in between price movements does not exist anymore.
These motions will result in a bulge or swelling.
This bulge is the value area.
Where prices traded the least, on the top and lower sides of the bulge, there will be nearly flat land.
That is the excess price.
• After marking the value areas on your chart and getting used to spotting them, extend them one by one