The other day in the Live Room a new student asked the question ‘What is Price Action?’
My answer was along the following lines:
To ascertain whether price is trending, reversing or moving sideways we need to look at current and previous price action on whichever is our chosen time frame. We need to look at the fractal highs and fractal lows (i.e. the zig zags) taking place as the market moves in waves when moving up, down or sideways.
If price is making successive Higher Highs and Higher Lows then we can say that the market is trending up, similarly if we can see that there are Lower Highs and Lower Lows then the market is trending down and if they are of equal Highs and equal Lows, or thereabouts, then the market is probably consolidating and moving sideways. If you are at a point where it is difficult to decide either way then the market may be at a turning point. To make it clearer to you can draw a trend line joining the highs and another connecting the lows. This also may show whether price is in a channel, an expanding (megaphone like) pattern or a reducing (wedge or triangle like) pattern. More on patterns at a future date.
So when planning our trades and before pulling the trigger we need to be as sure as we can be of the likely market direction in our chosen time frame and by looking at what price is and has been doing is a useful method of deciding this. Of course this doesn’t mean you shouldn’t look at time frames above and below your chosen one to ascertain the context of your planned trade, remember the Top Down/Bottom Up approach mentioned in my previous Blog entry.
Top Trading Tip: When planning your trades ask yourself ‘Where is price now, what is price really doing and do I want to get involved?’ and do the same on all time frames.
Happy and Safe trading
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