What is Price Action?


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Video Transcript:

Hello, traders. Welcome to the Advanced Technical Analysis Course. This is our first module, Technical Analysis 101. In this lesson, we’re going to learn what is price action. What is price action? Price action is the actual movement of a security’s price, the action of price.

The price of any given financial asset is never fixed. It is constantly moving because of the bids and offers on them. This means that because we live in an enormous auction where there are people that want to buy an asset and there are people that want to sell the asset, price fluctuates and is never still.

In order to be a great technician, you must understand what is price action and most importantly the information it gives you to place a trade. The thing to focus here is the relation of the current price to its historic patterns. Now price doesn’t move in a straight line. We already said that. The historic values of price action are composed of swing lows and swing highs. These swing lows and swing highs will give you all the information you need to start building your career or your system as a technical analyst.What is Price Action

Now this is an example of a price action chart. As you can see, the blue candles mean that price is going up and the red candles mean that price is going down. Now, let’s get into some candlestick analysis right here. For example, a blue candle opens at the bottom of the candle and closes at the top of the candle. And this means that price during this period went all the way up here and our red candle opens at the top and closes at the bottom. This means that during this period of time price decreased in value or the price of this asset decreased in the value. Okay?

Now, this is a little bit of information so you can better understand when price is going up and price is going down, and why we use different colors for our candles. Now, talking about swing highs and swing lows in the market, we already know that even though price goes up, it doesn’t go up in a straight line because even though there are bidders here or people that are buying aggressively as you can see here, you can see that we have people that are settling thus making a swing high right here and price to dip to the swing low.

Now, let’s understand what are swing highs. These are swing highs. You can see an aggressive buying pressure at the bottom of this swing, which is a swing low and an aggressive move to these levels right here. You can see a sell out and a new high. This is another swing high, then a sell out and another swing high, then a sell out and another swing high. Whenever price or whenever the market makes a peak and retraces a little bit, it’s called a swing high. On the next lessons, you will understand why it is important to know or to accurately determine where your swing highs are in historic values.

Now these are swing lows. As you can see, we have a selling pressure then we find buyers making a peak down here which is a swing low and then price went all the way up here and here. We have now another swing low when price went all the way to this level and then bottomed. At these levels, we have another swing high and then we found buyers of this swing high and moved all the way up here. As you can see, everything that this asset gain during all of this period of time was flushed on this heavy sell-off, making a new swing low down here near this historic swing low.

Now I know this is quite confusing at first, but you need to understand that you don’t have to place these squares on your charts. This is only so you can fully understand where I am looking for swing highs and swing lows in the market.

Now let’s see why this is important. It’s also important to understand historic price action because it gives us levels to look at. Now these swing highs and these swing lows will give you levels to look at and these levels are called historic support and resistance. We’re going to go into a lot of detail on why historic support and resistance are important and how to trade off of them in the next lesson.

What is Price Action Trading?

For the moment, let’s go to the same chart. As you can see here, this is a historic support. Why? Because we tested it once here and twice here. Remember that when a level is tested at least twice, it becomes support or resistance. Why do we pick this level as a first test? Because we have a swing high and then market corrected before continuing with the up move, giving us a peak here and a test of this level and rejection of this level giving us a swing low. We have another swing low that tested the same levels as the previous swing low and then of course we have here another swing low that tests the same levels.

Remember that support and resistance levels are not straight lines. For instance, you can see that here we have two candles… Well, one candle that close below this level of support and one candle, the blue candle, that opened below the level. This is called a fake out because price faked to break through the support level meaning that it held and it was rejected. Of course you can see that price moved all the way down here and then we had a massive sell-off. When price came here, you can see that we have some kind of a consolidation because even though we had a massive sell-off right here, price stopped for a few candles before it broke through, meaning that there were some buyers here trying to protect this historic support level but the selling pressure was so massive that we ended up breaking it.

This is why it’s important to understand what price action is and what’s the information behind it because we will be looking at historic levels or past areas of interest to start building a very advanced technical analysis. This is where it all begins and understanding price actions is at the base of everything. You can’t trade without fully understanding what’s the information behind those candles or what levels to look at. Of course you will not be able to profitably trade if you are not drawing correctly your historic levels. It doesn’t mater if you’re trading forex, if you’re trading Futures, if you’re trading stocks. Technical analysis applies to everything. Stick with those on this Advanced Technical Analysis Course because we have a long way to go.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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