Understanding Price Action by Chris Capre

[2ndSkiesForex 10]

What Is Price Action?

 

Before I begin discussing various price action strategies, methods and tools for reading and trading price action, I must begin with a working definition of 'what is price action'. From this broad working definition of price action, I will then talk about how it relates to order flow and the relationship between price action and order flow.

 

By explaining these basic premises which form the root of my approach to trading price action, I will be able to further explore price action trading in my follow up articles.

 

A Broad Definition of Price Action

 

The broadest working definition of price action would be to define it as 'Price's movement over time'. Unfortunately, this is vague by itself, so I will expand this definition by saying 'on any timeframe'.

 

Technically, this means that on a tick chart, if the price of the AUD/USD moves from 1.1000 to 1.1001, this one pip adjustment in price is a working example of price action. So in its’ rawest form, price action = price's movements over time on any time frame.

 

These various price fluctuations will look different based on what time compression (time frame) you are using when looking at price action on any instrument.

 

What Is Order Flow?

 

Order flow is a general term which refers to the transactions (buying or selling) that cause the price of an instrument to fluctuate.

 

Any transaction, whether it be a market order, a buy limit order, buy stop order, etc., is an order or transaction.

 

All of these transactions on a daily basis refer to the order flow in the market, or the flow of orders, so this is what I am referring to when I talk about order flow on a basic level.

 

Price Action and Relationship to Order Flow

 

The bottom line is price does not move unless there are transactions or orders in the market to buy/sell the pair at whatever price the institution or trader wants to. Thus, all price movements and price action are the result of order flow. It does not matter if a participant bought or sold the EUR/USD because of a fundamental event, such as Ben Bernanke telling the market he is keeping interest rates on hold till 2014. None of that is why price moves. Price moves simply because of the transactions that are executed in the market. Because of this - price action is really the offspring of order flow.

 

Many things can affect price action and how it manifests, such as;

 

-The total liquidity available in the market for that instrument

-The total number of buying and selling orders executed in the market

-The volume (size of the position) of each buying and selling order executed in the market

 

But ultimately, when there is a balance between the buyers and sellers in terms of orders, the market will have no directional bias. This creates a range-bound environment for price action.

 

However, when there is an imbalance in the order flow between the buyers and sellers, this will create a directional bias in the price action, and it is this balance or imbalance we should be learning to read in the price action because it will communicate to us the directional bias, along with where the institutional players are likely getting in and out of the market.

 

Thus, trading price action is not about trading simple patterns, like pin bars, inside bars, and just responding to the pattern. That leaves you totally un-empowered because there will be times when trading pin bars are optimal, and where they will fail miserably. Your success as a trader to use price action patterns successfully will be in your ability to read the price action and understand what it is communicating.

 

Just some basics of what can be gleaned from learning to read price action are;

 

-Speed of buying and selling

-When a trend is likely to continue or reverse

-Key locations institutions are entering and exiting the market

-Optimal places to put your entries, stops and limits

-Whether your price action signal is likely to succeed or fail

and more...

 

Thus, it is critical to learn how to read the price action and order flow behind it.

[Bluejay 10]

Thanks for this, looking forward to more ...

[SunTrader 10]

..... . Thus, all price movements and price action are the result of order flow......

 

But ultimately, when there is a balance between the buyers and sellers in terms of orders, the market will have no directional bias. This creates a range-bound environment for price action....

 

Range-bound zones most times are caused by an imbalance as well. One side holding the other back. Once the weaker side folds price moves out of the range.

[pat15 10]

Thank you Skies for this important aspect of trading and understanding it. Hope you will expand more on this subject and get valuable comments/explanations from others on this forum. I hope that those who will comment -ve or see no value stay away.

 

One Q on speed of Price action . many times such an action is so directional that getting an entry is difficult ..and it happens so fast over a period of 15-20 -30 mins that it becomes a matter of faith to pull the trigger and hope for the best ... once the move is over there will be some pull-back but by then the entry is a bit iffy and reward way too small.

 

Would appreciate your thoughts on such an intense P/A ...

 

 

Thank you

 

 

Pat

[2ndSkiesForex 10]

Range-bound zones most times are caused by an imbalance as well. One side holding the other back. Once the weaker side folds price moves out of the range.

 

Hello SunTrader,

 

As a whole, range bound markets would be a balance in the order flow at that point in time. Its two sides agreeing upon a general value and as long as neither side takes a more dominant stance, then the range will hold.

 

However, there will be micro moments inside the range where one side will exhibit strength until it reaches the other end of the range whereby it will test the other players strength.

 

There are some circumstances whereby a range will be the result of slightly more dominant order flow from one side or the other - usually this occurs after a strong trend, when there is profit taking, but not much of an entrance of players from the other side.

 

Then this would be the result of an imbalance - albeit a lesser one.

 

But as a whole, if there is a balance, there will be no directional flow or very little. When the imbalance gets strong enough, then a direction will dominate.

 

But yes, there can be times where a range is the result of an imbalance, just less often for most ranges.

 

Good comments though.

 

Kind Regards,

Chris

[2ndSkiesForex 10]

Thank you Skies for this important aspect of trading and understanding it. Hope you will expand more on this subject and get valuable comments/explanations from others on this forum. I hope that those who will comment -ve or see no value stay away.

One Q on speed of Price action . many times such an action is so directional that getting an entry is difficult ..and it happens so fast over a period of 15-20 -30 mins that it becomes a matter of faith to pull the trigger and hope for the best ... once the move is over there will be some pull-back but by then the entry is a bit iffy and reward way too small.

Would appreciate your thoughts on such an intense P/A ...

Thank you

Pat

 

Hello Pat,

 

Thanks for the kind words - am glad you liked the article.

 

Yes, I will definitely be expanding on this subject quite soon - this was just the beginning to introduce the base concepts of how I approach price action.

 

In regards to your Q - the speed of price action can definitely be read - I use the impulsive vs. corrective methodology for reading this which is a base model for how I read and trade price action. Its the base of the pyramid of information for me. With time, practice, experience and the right tools, these can be easily read in real time and be easy to enter.

 

I actually teach a lot of tools to read the order flow, learn when it is exhausted or over-extended, when to look for a pullback, when to trade on a break and how to capture the with-trend moves. These can all be learned but if you watch the video-link on understanding price action impulsive vs. corrective moves, you'll find it much easier to trade the right edge as you have tools to anticipate the future trend, along with finding the best entries.

 

Once these rules and techniques are learned, it's no longer a matter of faith to pull the trigger, but a matter of experience.

 

Hope this helps.

 

Kind Regards,

Chris

[SunTrader 10]

But yes, there can be times where a range is the result of an imbalance, just less often for most ranges....

Disagree.

 

Market hits support multiple times then rebounds and moves higher.

 

Was there an imbalance? To me obviously not. The bears weren't strong enough to break support.

 

Next instance market hits support multiple but then finally breaks,

 

Was there an imbalance? To me anyway obviously yes. The bulls weren't strong enough to hold back the bears to maintain support and rally price.

 

The trick is to know beforehand, which I can do only part of the time.

 

But which way price moves out of a rangebound period says who was stronger, in the backround, before moving it the other direction.

 

My for what its worth.

[2ndSkiesForex 10]

Hello Sun Trader,

 

There will be times when a range is the product of an imbalance, and times when it is the product of a balance between the buyers and sellers. Depending upon the environment, it can be either.

 

For example, the NZDUSD on the daily chart was in a range for over two months just before it broke it in mid April. This was no doubt the result of a balance between buyers and sellers for it to persist this long. There is no way it could have remained in such a tight range for that long without there being a balance between the buyers and sellers. If there wasn't, and the imbalance was strong enough, it would have taken a direction. But it didn't - hence the balance between the two forces.

 

But, if we are in a strong trending environment, lets say an uptrend, and the market starts to consolidate for several hours, or a day or two, this could be the result of;

1) a redistribution between the buyers and sellers

2) profit taking on the buyers, but no real sellers entering the market

3) running into strong sellers who can equal or match the buyers strength

 

There are many reasons why this could be. The 1st example represents going from a large imbalance between the buyers and sellers to a lesser imbalance between the buyers and sellers. Although there is a greater presence of balance, on an overall basis, there is still an imbalance.

 

The 2nd example also represents still an imbalance, but a movement back towards balance from being highly imbalanced.

 

The 3rd example results in there being a balance in the forces on both sides. This could either create a range for a period of time when one side loses and it could be the bulls or the bears. This is not fixed. It could also result in a struggle between buyers to regain control, but failing to do so, and during a period of time, you'll see minor swings in control between the bulls and bears, but still an overall balance because neither can make ground.

 

Or the bears could simply take control, and this can either be done in a violent impulsive fashion, or from a series of lower highs and lower lows. But regardless, there are plenty of scenarios where ranges form from a balance between buyers and sellers, and the range will persist until one side tips the scales.

 

And, there will be times when ranges are the product of imbalances, but the result of a greater imbalance becoming a lesser imbalance.

 

So the answer is both/and, not one or the other.

 

Hopefully this makes sense but I can find plenty of price action environments where one or the other is true.

 

A good and open discussion though which I always enjoy.

 

Kind Regards,

Chris

[joshdance 10]

2ndskies (Chris), I will break precedent and say "job well done" on your site, videos, and post. Sure, there are a few things in your post that are not quite correct, like when you equate orders and transactions, but overall you seem a bit different from other vendors. I watched one of your videos, the 5/21 one where you post a real time aussie trade, which wound up not really working out. I respect much more a vendor who can post a losing trade, than those who never want to be on the record as being wrong. Also, if your bio is accurate, you have lots of experience which I respect. Kudos and welcome to TL.

 

Regarding "balance" which you two are discussing-- if the market, which is always two prices, moves, then it's accurate to say that this movement is caused by an imbalance of buyers and sellers at the market. Thus, it is also accurate to say that there is an imbalance at the low end of a range (more buying pressure), and at the high end of a range (more selling pressure). But if we extrapolate this principle, and consider "the market" to be the low and high of the range, instead of two individual prices, then conceptually the market, in this case, is balanced.

[2ndSkiesForex 10]

2ndskies (Chris), I will break precedent and say "job well done" on your site, videos, and post. Sure, there are a few things in your post that are not quite correct, like when you equate orders and transactions, but overall you seem a bit different from other vendors. I watched one of your videos, the 5/21 one where you post a real time aussie trade, which wound up not really working out. I respect much more a vendor who can post a losing trade, than those who never want to be on the record as being wrong. Also, if your bio is accurate, you have lots of experience which I respect. Kudos and welcome to TL.

 

Regarding "balance" which you two are discussing-- if the market, which is always two prices, moves, then it's accurate to say that this movement is caused by an imbalance of buyers and sellers at the market. Thus, it is also accurate to say that there is an imbalance at the low end of a range (more buying pressure), and at the high end of a range (more selling pressure). But if we extrapolate this principle, and consider "the market" to be the low and high of the range, instead of two individual prices, then conceptually the market, in this case, is balanced.

 

Hello Josh,

 

Thanks for the kind words. I'm not intimidated about a loss or being wrong which is part of trading. It would be like Michael Jordan being upset about missing one basketball shot. Forget lamenting about it - grab the rebound and follow it up with a dunk!

 

It's important to present both aspects of trading - the good and bad experiences as they are part of the process all of us go through and have gone through.

 

In regards to the range, sure, in the micro aspects of the low and high end, there will be those temporary imbalances between the buyers and sellers which drives price inside the range.

 

But I consider the overall dominant structure at that time to be 'gestalt' of the market. Thus, the low and high end of the range that are being sustained - which as you and I both commented would be a 'balanced' market.

 

Its really an ebb and flow like the waves of the ocean between stronger levels of balance and imbalance, along with location (i.e. price) of those transactions which determine price movement, structure, speed of buying and selling, etc., and thus present opportunities to trade them via the price action. Yes, there are other factors, but these are some basic components.

 

This can definitely be learned to read with time, practice and effective tools, of which I will be writing about in the near future here.

 

Kind Regards,

Chris

[TheRumpledOne 14]

ALL YOU NEED TO KNOW ABOUT TRADING

 

* Price either goes up or down.

* No one knows what will happen next.

* Keep losses small and let winners run.

* POSITION SIZE = RISK / STOP LOSS.

* The reason you entered has no bearing on the outcome of your trade.

* You can control the size of your loss (skill) but you can't control the size of your win (luck).

* You need to know when to pick up your chips and cash them in.

 

Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

 

You cannot control the probabilities of wining or losing.

 

You cannot control your average win size.

 

The only part of the equation that you can control is your average loss size.

 

PRICE ACTION

 

“Now, 2 patterns of market behavior happen on a regular basis:

 

1) the price breaks to new high's (or low's)

 

2) the price reverses from new high's (or low's)

 

They happen regardless of time frame .

 

They are phenomena that can be exploited without the fear if found out by others, that they might cease to exist.” - H. Rearden

 

1) Price will either breakout of the high, low or both of the previous bar

 

2) Price will not breakout of the previous bar.

 

You cannot reduce it any further. Anything else complicates the issue.

 

ENTERING A TRADE

 

You either decide to:

 

1) Wait and do not enter a trade

 

2) Trade a breakout

 

3) Trade a reversal.

 

Those are your ONLY 3 options.

 

That is all you need to know about trading.

[4EverMaAT 10]

ALL YOU NEED TO KNOW ABOUT TRADING

 

* Price either goes up or down.

* No one knows what will happen next.

* Keep losses small and let winners run.

* POSITION SIZE = RISK / STOP LOSS.

* The reason you entered has no bearing on the outcome of your trade.

* You can control the size of your loss (skill) but you can't control the size of your win (luck).

* You need to know when to pick up your chips and cash them in.

 

Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

 

You cannot control the probabilities of wining or losing.

 

You cannot control your average win size.

 

The only part of the equation that you can control is your average loss size.

 

PRICE ACTION

 

“Now, 2 patterns of market behavior happen on a regular basis:

 

1) the price breaks to new high's (or low's)

 

2) the price reverses from new high's (or low's)

 

They happen regardless of time frame .

 

They are phenomena that can be exploited without the fear if found out by others, that they might cease to exist.” - H. Rearden

 

1) Price will either breakout of the high, low or both of the previous bar

 

2) Price will not breakout of the previous bar.

 

You cannot reduce it any further. Anything else complicates the issue.

 

ENTERING A TRADE

 

You either decide to:

 

1) Wait and do not enter a trade

 

2) Trade a breakout

 

3) Trade a reversal.

 

Those are your ONLY 3 options.

 

That is all you need to know about trading.

 

Very well put. I was amazed at how people really go all out to interpret all these wonderful chart patterns and other visual "special effects," yet the most basic, linear part of price per unit volume totally escapes the majority of traders. I suppose the best place to hide something is in plain sight.

 

This is why my APAMI move indicator will be such a breath of fresh air. The focus is solely on qualifying just what is price action in a way that allows a trader to clearly define a trend (higher high or lower low) and then make a choice.

[pat15 10]

Great post by the Therumpled ...Thank you

 

4ever Could you pl throw some light on your indicator that you refered to in your post!

 

Pat

[2ndSkiesForex 10]

Very well put. I was amazed at how people really go all out to interpret all these wonderful chart patterns and other visual "special effects," yet the most basic, linear part of price per unit volume totally escapes the majority of traders. I suppose the best place to hide something is in plain sight.

 

This is why my APAMI move indicator will be such a breath of fresh air. The focus is solely on qualifying just what is price action in a way that allows a trader to clearly define a trend (higher high or lower low) and then make a choice.

 

Hello 4EverMaAT,

 

I think it would be more appropriate to start your own thread on the APAMI indicator,n as opposed to starting a conversation of it here where the discussion is about this article and contents in particular.

 

If you have something you want to promote or discuss - no problem, just start your own thread instead of jumping into anothers where the intention is to discuss the contents of this article.

 

Kind Regards,

Chris

[SunTrader 10]

I was amazed at how people ......

talk price action and add an indicator anyway.

[karelk 10]

ALL YOU NEED TO KNOW ABOUT TRADING

...

 

PRICE ACTION

 

“Now, 2 patterns of market behavior happen on a regular basis:

 

1) the price breaks to new high's (or low's)

2) the price reverses from new high's (or low's)

...

1) Price will either breakout of the high, low or both of the previous bar

2) Price will not breakout of the previous bar.

 

You cannot reduce it any further. Anything else complicates the issue.

 

ENTERING A TRADE

 

You either decide to:

 

1) Wait and do not enter a trade

2) Trade a breakout

3) Trade a reversal.

 

Those are your ONLY 3 options.

That is all you need to know about trading.

 

This seems incomplete. Within PA are patterns that can be used to predict future price movement with a probablity greater than chance - how else would rats get their cheese?

[bakrob99 11]

That is all you need to know about trading.

 

It might be nice to know what the trend is in the timeframe you're trading. Why? Better probability of a winning trade and a greater profit. simple.