Understanding Price Action On Your Charts:
Price action takes patterns from your charts that are seemingly random, and uses easy methods to break them down. We break down what are key points in the market, and base trades off of these. Understanding price action is not complicated since it it simply analyzing previous information. You are using previous patterns to trade the current market. In this video, we focus on the highs and lows pattern. This pattern monitors the swings with higher highs and higher lows to determine market direction and potential entries and stops. Whenever we get swings in the market, we mark them down. This gives us a clear path of the trade as well as potential resistance and support levels. We monitor these swings in the market (highs and lows), and base future trade outcomes off of them.
Understanding price action with highs and lows
Our main way to decipher price action on a chart is identifying the highs and lows in the market. We mark off the highs, and the lows on every chart as per our rules for trading highs and lows. Additionally we rule out any false highs and lows by only selecting ones that are relevant. These Relevant highs and lows are ones that broke previous levels.
Highs in the market:
Higher highs, and higher lows in the market outline an uptrend in the market. When we get successive higher highs combined with higher lows, we can determine key areas in understanding price action. Each time the market reverses from a high point, that is an incredibly important piece of information. At that point, every person trading was in agreement that that specific price was too high. This may be temporary. What we are looking for is if that high is easily broken by a new higher high.
Lows in the market:
Similarly, lows in the market define areas where the market is considered to be too good of a deal. These lows define where buyers and sellers are in agreement that the market is undervalued. When we get a low in the market, we want to look for if it is easily broken by a successive low.
Support and Resistance Outlined with Price Action:
Each area of support and resistance, minor and major, can signal trades/stops. Therefore we can look at higher time frames to determine key areas of resistance and support. Combined with these, we can trade the lower time frames to find entries for our trades. There are often conflicting bits of information between higher time frames and lower time frames using this same method. All we must do is remember the golden rule, “the higher time frame is always dominant“.
Dominant Time Frame:
Highs and lows price action can be applied to any time frame, but a level of R&S on a hourly chart is more dominant than a different level of R&S on a 5 minute chart. Both of these levels can, at the same time, be valid, but we must always respect the higher time frame’s value. This is due to the volume, and type of traders on the higher time frames. We go into detail about these traders in a different video here.
Bruce Banks