Price action basics. Part 1
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  1. #1
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    Price action basics. Part 1

    Hi, traders.

    In series of posts, I will try to uncover underlying reasons that drive the market.

    Trading the market, you want to see something beyond candlestick charts, and you want to see - guess what? You want to see people, traders with their interests, fears and desires. Like one wise man said, "discover what makes people tick, and you will know what makes market tick"



    1. Where are you trading?



    First of all, there is a significant difference between stock market and markets that trade with leverage. Forex is one on those markets (but not the only one - there are futures, options, OTC derivatives and so on).

    Nature of retail Forex market is that real currency rarely trades here. We trade obligations (for example, we take responsibility to buy some currency after the trade, and deposite some money fot that. If we are mistaken, we give some money to the market, if we are right - we take some money from the market).

    Numerous obligations (traders from retail traders) meet together and form a huge whole position, that liquidity provider must cover using other liquidity provider. That's how it works.


    ! The process of exchanging obligations is somewhat different from exchanging real goods.


    Imagine you're trading a stock. Quantity of stocks is limited, and to go short you must borrow some stocks from its' owner. If you want to close your long position, you expect somebody to sell it (real stock). And that's why we have "short interest" on the stock market, it usually doesn't exceed 5% of the whole volume.

    stock_market.jpg

    Things are different on Forex and futures. You can sell almost unlimited number of contracts, so you don't need to borrow something from somebody. That circumstance makes analysis of supply and demand on Forex pretty different than on stock market.

    We can see big supply, but suddenly market reverses and all those short sellers start covering. Why? Because they need to do it - they have small pockets and should exit quickly otherwise they can blow up their accounts.

    The same is with long positions - there are lots of weak holders, that have very close "pain point" - they go long, place very close stop and if they have no defense from "strong holders", market will probaly go after their stops, because there is always strong counterparty that can hold the level and prevent price from further rising (remember - they can place as many "sell limit" orders as they want)

    forex_market.jpg



    ! Trading on Forex market is really the Art of analysing underlying inventory.



    To start successfully find good trades, we should answer these questions from small check-list:



    1. Who is responsible for price action? Strong holders or weak holders? (price will go in the favor of strong holder)

    2. Is market oversold or overbought on the way up? (in the first case we have weak short sellers, in the second - weak long bueyrs)

    3. Is market oversold or overbought on the way down? (in the first case we have weak short sellers, in the second - weak long buyers)



    Remember, there are not only situations when we have "win-lose" situation and "strong-weak" market configuration, we can also have "strong-strong" market configuration, when market is careless about retail traders and their positions (this is when we have elongated trends).

    As a trader, you should know how to read inventory and to play on the strong side.


    to be continued....
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    Last edited by Value trader; 08-10-2013 at 10:12 AM.

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    When we are talking about trading, there are some popular ideas that you may have heard.

    One of them:


    Behavior of market participants is irrational. Market is driven by greed and fear and trader can benefit from that.


    Let’s analyse this message. How do you think – when trader sets stop-loss, is it because he is blind and driven by fear? I don’t think so. More often than not, he has calculated his stop-loss lever before and knows his «pain point».

    By «pain point» I mean price, that, being achieved generates loss for a trader that he’s not able to hold. He starts searching for counterparty to liquidate his position. This is sort of normal behavior, yet position size that trader has accepted is not rational.

    So, when we are talking about retail traders with close «pain point», we can call them «weak holders».
    Guess, who plays the other side of their positions? Of course, other weak holders can do it, but more often than not all weak holders usually tend to act similarly, and some stronger player absorbs their positions.
    More often than not, positions of weak holders create exceeding inventory on the market, that should be corrected first before market is ready to act upon its dominating trend.


    Weak holders


    We need to spot weak holders activity first to avoid rapid price movement against us, then to place our stop-losses correctly, and finally – to know where strong money is headed.
    We can use several ways to spot weak holders – using «reference points», urgency in price action and «informational risk» concept

    Let’s go through each idea:


    Reference points:


    To spot «weak holders» activity, let’s think – what levels will be not interesting for big money buyers/sellers?
    They are – sessional highs/lows, previous days highs/lows.

    Look at this chart:

    weak.jpg

    We see some participation from level above and price freezes near level below. If it reverses from this point, probably it will be a sign of daytraders purchasing there. Big money players are not interested in that levels – they don’t attract enough volume for them. Big money buyer will rather act inside of consolidation, because he needs volume to execute his position.

    Now if you have two attempts from daytraders to play long and to play short, you may want to see – what group is going to earn money. If sellers will have good prices to exit (prices will breakout to the downside quicky), then probably market is driven more by strong (professional) supply there, if daytrading buyers will win, then some strong (professional) demand is there and helps them.

    to be continued...

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    Thanks for the explanation I am the first time we touch on this explanation, I relied on trading on the news and technical analysis only

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    Yeah, technical analysis is what we do when we follow price action.

    But before we decide to follow it, we need to know our destination and reason beyond our entry.

    Things we are talking here are a bit more complicated than conventional trading with all those MACDs but it will reward you over time if you put enough effort to figure it out.

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    Last edited by Value trader; 08-28-2013 at 11:24 AM.

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    I like using price action in the trading, the psychology of the trader in the market we can read through candlestick

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    I want to say thanks for this thread it's really useful and very helpful for me. Many newbeis and low experience trader i think should focus price action because nothing other strategy can compete this strategy and it's best one strategy of forex.

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    Quote Originally Posted by nyonik View Post
    I like using price action in the trading, the psychology of the trader in the market we can read through candlestick
    To know psychology of traders, you need to know - what they do and when they do it?

    This is really the key, not candlesticks or bars.

    There are some things that mostly daytraders do and rarely (if not never) other timeframe traders do. As an example - reaction on short-term reference points.

    Price action indicates - what market does right now, but we need to know not only that, but - what to expect from the market? What can we anticipate?

    For example - if short-term inventory is net long, then probably risk of liquidation is high, if some big money players aer in the market, then probably they will support this market or create resistance for it in some points.

    So, this is all about what to expect from the market, charts are only tools to organize data

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    Last edited by Value trader; 08-20-2013 at 09:41 PM.

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    Rookie mohamed reda's Avatar
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    i think trading with the price action will be the best and the most simple way to make profits for any beginner trader . so i prefer to trade with the price action with the biggest time frame because it is easy to predict the price with this big time fame unlike all small time frame .

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    I have to say thanks due to this place this really is beneficial and also great for me personally. Several newbeis and lower knowledge broker i think must target selling price activity since practically nothing some other technique can easily be competitive this course and it's very best one technique involving forex.

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    Quote Originally Posted by shihab View Post
    I think price action the best trading tools for every new trader. I do trade with price action theory and it works very well. I don't do believe in any fancy indicator..i do believe in price action.
    yes it's right that price action strategies are the best trading strategies in forex market and new traders can become pro traders by adopting these strategies and becoming master in these strategies..

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