8 price action secrets every trader should know about
Price action is among the most popular trading concepts and a trader who knows how to use price action the right way can often improve his performance and his way of looking at charts significantly. However, there are still a lot of misunderstandings and half-truths circulating that confuse traders and set them up for failure. In this article we explore the 8 most important price action secrets and share the best price action tips.
#1 Support and resistance zones are better than levels
Support and resistance is probably the most popular price action concept, but only very few traders can actually make money with it. The reason is often very simple, although it’s not as obvious at first glance.
Most traders just use single, horizontal lines when it comes to trading support and resistance which look great in hindsight but fail during live trading. The reason is that singles lines are no effective way of looking at price movements – creating support and resistance zones is much more effective when it comes to understanding price.
The screenshot below shows it nicely: the trader who just uses a single line either misses trading opportunities when price does not reach his lines or he gets thrown out during volatility spikes; the trader who uses zones instead can filter out the noise that exists in the zones.
#2 Highs and lows are all you need to focus on
This point describes a very basic concept, but it’s so important to understand and, sadly, not used widely enough. The analysis of highs and lows offers so much information about trend strength, market direction and can even foreshadow the end of trends and trade reversals in advance.
The analysis of highs and lows can be combined with all conventional trading methods and it’s a very powerful price action secret that should not be one. Here are a few things that will help you understand highs and lows beyond the general trading knowledge:
- Do you see long trend waves with small pullbacks only? (this signals a strong trend)
- Is price barely making higher highs/lower lows? (this could indicate fading momentum)
- Do you see increasing volatility – larger candle wicks – while price makes new highs/lows? (you’ve probably heard the quote that volatility is greatest at turning points)
- An uptrend where price fails to make a higher high should get your attention
I challenge you: take a look at any “textbook” chart pattern out there and you’ll see that the only thing that really matters is how highs and lows form within that pattern.
#3 Location – improve your trading instantly
Even if you see the best and most promising price action signal, you can still greatly increase your odds by only taking trades at important and meaningful price levels. Most amateur traders make the mistake of taking price action signals regardless of where they occur and then wonder why their winrate is so low.
In my own trading, I first draw support and resistance zones and mark supply and demand areas and then wait for price to get there; and I only take a trade when a price action signal forms at my pre-marked price areas. This does not only provide a stress-free trading approach (use price alerts around your levels to even free up more time), but it will significantly improve the quality of your trading.
#4 Everything is relative – get context
A big mistake many traders make is that they treat price action like a blueprint or template trading methodology and just hunt for candlesticks that fit their textbook criteria. In trading, everything is relative and you need to put price information in relation to what has happened before.
The graphic below shows what this means. During the uptrend, you see multiple pinbars but the first two are relatively small, compared to the price action before that. Thus, they don’t offer meaningful signals and the pinbars fail. The real pinbar at the very top showed a very strong rejection where the pinbar was even larger than previous candles.
Always compare the most recent price action to what has happened before.
#5 The 4 clues of candlesticks and price action
This ties in with the previous point and it further demonstrates the importance of putting together the pieces when you trade price action and avoid blueprint-thinking. The 4 following points will help you avoid many of the common trading mistakes people make who just look for blueprint patterns.
1) The length of wicks
If you see a lot of long wicks, it means that volatility and uncertainty is increasing. Especially during market tops or tight congestions, wicks tend to get larger.
2) Bullish vs. bearish wicks
Do you see more/longer wicks to the upside or to the downside? Wicks that stick out to the downside typically signal rejection and failed bearish attempts.
3) Position of the body
Is the body of a candle positioned closer to the top or the bottom of the candle? Bodies that close near the top often signal bullish pressure – especially if the candle comes with a long bearish wick.
4) The body
The ratio between the body and the wicks can tell you a lot. Candles with a large body and small wicks usually indicate a lot of strength whereas candles with a small body and large wicks signal indecision.
#6 Broker time doesn’t matter
We get the question how broker time and candle closing time influences price action a lot. Truth be told, it does not make any difference to your overall trading although time frames such as the 4H or daily will look different on different brokers.
The graphic below illustrates what we mean. The charts show the same market and the same period and both are 4H time frames. They used different closing times for their candles and, thus, the charts look slightly different. Some of the important clues that the left market shows are not visible on the right chart and vice versa. So there is no broker time that is “better” than the other – just the signals you get slightly vary. The most important point is that you make consistent decisions and don’t confuse yourself by changing between different broker feeds.
Don’t stress out about your broker time; over the long-term, everything averages out as long as you stay consistent.
#7 The amateur squeeze and stop hunting
Conventional price action patterns are very obvious and many traders believe that their broker hunts their stops because they always seem to get stopped out – even though the setup was so clear.
It is very easy for the professional trader to estimate where the amateur traders enter trades and place stops when a price action pattern forms. The “stop hunting” you’ll see is not done by your broker, but by profitable traders who simply squeeze amateurs to generate more liquidity. You should either wait for the amateur squeeze to be over or add some extra space to your stop to avoid getting kicked out of potentially profitable price action trades.
#8 Correct market selection
Building a watchlist prior to your trading is important and market selection is a very misunderstood concept in trading. Let me give you an example from my trading: every Sunday I sit down and go through all of the 15+ forex pairs that I consider trading. However, usually only 6-8 make it on my actual trading watchlist for the week ahead. And the main reason why the others get cut is because of low probability price action which usually means tight congestions, squeeze consolidations and narrow ranges with a lot of volatility.
An effective market selection is important and you should only look for markets that offer clear price action and stay away from markets that are too erratic and noisy. Don’t make this mistake of being too fixated on the pairs you trade – rotate them and only focus on markets with good price action.
Most of those tips are probably not considered price action secrets by most advanced traders, but amateurs can usually improve the quality of their trading and how they view the markets by just picking a few of them. If you have any other tips or know about some mistakes traders do in price action trading, leave a comment below.
