Price action is the movement of price over time. This movement leaves a “footprint”, the footprint of money. This footprint, once understood correctly, shows us the story on the map …
The price action analysis analyzes and understands the footprint of the money on the chart. If we understand this footprint, we can begin to put together a “story” of the market bar by bar. These footprints are price bars and show us the behavior of all market participants. the "big boys", smart money, hedge fund managers and even that not so smart money.
By analyzing and tracking the footprint that remains over time as price movements develop, we can read what is happening on a chart, what has happened, and what could happen next. Reading a diagram is not just about "technical analysis", but also about understanding and using the psychology of the market that is "hidden" in the price bars. In this lesson, you will learn what it means for your trade to read the charts bar by bar and then use them to get a bird's eye view.
The psychology of price bars and reading the market like a book
For those who are new here, price movements are essentially the "footprint" that remains as the price moves over time. This price action footprint is visible from a price chart of a market or trading instrument. You can find an extended definition of the price campaign here in my introduction to the price campaign.
Each individual price bar essentially reflects the collective psychology of all market participants for the period that the bar represents. For example, in a daily chart timeframe, each price bar shows whether bulls or bears won the fight that day. We can drill another down and analyze each price bar for length or short tail / wick / shadow, as well as the total length of the bar and some other features.
The psychology of individual price bars has been studied for hundreds of years since Munehisa Homma, the first trader of price promotions, started using candlestick charts in the 18th century. Homma discovered that by tracking the price movement of a market over time (price movement / money footprint), he could actually recognize the psychological behavior of other market participants and use this data to develop a trading strategy.
If we go beyond indicators, trading systems and all the online trading hype and just read a "bare" price chart, we can read the market like a series of chapters in a book. The story reveals itself from left to right over time.
What are the main focuses when reading a diagram from left to right?
- Reading the price action and technical analysis of charts will reveal a lot of data and it is much more than just bars and lines, it is psychology, market sentiment and everything together to form a feasible attack plan.
- We can interpret the story by reading the diagrams like a book from left to right. What happened earlier in the spreadsheet / book usually affects what is currently happening and what might happen next.
- Each individual price bar has something to say and plays a role in the story that the diagram tells you.
- The most obvious data that we see when we look at a chart is the direction of the market or the trend. We will also easily find out whether the market is making large changes in direction or smaller / flatter fluctuations. Note: Many markets are currently experiencing large / deep changes in direction.
- We would also like to point out whether a market consistently maintains the technical level (support / resistance, moving averages, etc.). By analyzing the footprint of money and reading the history in the charts, we can see if a market respects the key technical levels, and if so, this is a good time to look for trades. We are currently in a structured market that respects key levels, is developing well and is creating signals, with the price often moving in the direction of the signal.
- We would like to take note of how the price behaves at key levels. If he doesn't respect them, what does he do? Does it shoot past them without a thought? If so, it tells us a lot too, it tells us that the direction of level breaking has a lot of momentum, so try to act in that direction.
Each of the above items are things we want to look for as we read the table from left to right. They all help us understand the psychology of the diagram and give us the opportunity to "paint" a picture of what might happen next. Imagine the story the market tells you as a “window into the future”. You don't always know what the future will look like, but if you study past events and how they relate to current events, you can make a very good guess.
Our goal as price action analysts is to see and read the market using the model of price action analysis. Bars, levels, trends, interpretation of price action signals, etc. The daily cash flow and daily price strength compared to weakness are shown by individual daily and weekly price bars (I use candle bars).
For example, the price action analysis enables us to identify potential "traps" in the market, such as wrong breakouts and wrong patterns. These patterns show where the market is manipulated by the "smart money players" and in which direction it can turn. In this way, the price action, the footprint of money, enables us to look into the heads of smart money. to actually see what they're thinking based on what they're doing. So let's read the psychology of the bar by bar market. We'll look at some diagram examples of this that will follow …
How to read the "footprint" of money …
Let us now go into the essentials, go through 4 different diagrams and analyze the price development from left to right. These charts are going from just too difficult, so all newer traders reading this get a better feel for how I am following the footprint of the price action to develop a story in the charts so I can make an educated guess where to look my next trade …
Diagram 1. – Read the diagram from left to right
In the following table we read the story in the timeframe of the AUDUSD daily chart:
Illustration 1. – The first thing we notice from the right side of the chart is that the general trend of the daily chart has been declining, lower highs and lower lows have been printed. This gives us our bias – bearish, we want to sell.
Figure 2. – Next, we want to identify obvious horizontal support or resistance levels that are pulled at key market fluctuations / turning points. At these levels, we will focus our attention on potential price promotions in the future.
Figure 3. – Note that a small bearish pin bar has formed at the existing pivot point (previous swing, which is now resistance), which also coincides with the downward trend. So we have a T.L.S. Setup or trend, level, signal, and when you get all three, it's like a golden hen that often provides setups for trading golden eggs.
Figure 4. – After the strong downward move that followed the previous pin bar signal, the price rose again in the next few weeks to test the previous swing low / resistance level again. We can see that after a short pause at this resistance, the price was again heavily sold out, giving traders who missed the first step a potential entry into this downtrend market with a second chance.
Figure 2. – Analysis of individual price bar psychology
In the following graphic we follow the Smart Money Price Footprint on the daily gold chart:
Illustration 1. – Notice the wrong breakout above the level near 1360. There was an existing resistance level near 1360 from 2017. The upper tail on the bar shows the psychology of the market – buyers ran out and were exhausted, the amateurs bought into the Breakout just to see how the bigger players get in and lower the price.
Figure 2. – We can see two obvious bullish pin headers that have formed near a key support in area 1307. We would leave both this 1307 support and the 1360 resistance in our charts to monitor price developments at these levels in the future. At this point, a clear trading range has been set, and the story on the chart says the price fluctuates between these levels and the weaker hands are washed out at the limits of the range, trying to anticipate a breakout before it actually occurs.
Figure 3. – Another false outbreak of resistance, you can see how repetitive people are and how they don't learn – they will always do the same thing, the good thing is you can benefit from their ignorance! Watch out for these long tails at key levels, especially in trading areas, and fade or trade back in the area.
Figure 4. – Note that after several days of consolidation near the support of the trading range after a moderate higher pop price formed a bearish bar, it was a clear warning signal that the price would not cause a further rise to the top of the trading range . After this warning signal we can see that the price surrenders, finally collapses and finally comes out of the trading range. If you see a strong close out of range, followed by several more days of consolidation / out of range as we see here, you can assume the outbreak is real.
Figure 5. – After the outbreak is confirmed, we can try to act in that direction (down). Note that after a few weeks of consolidation below the range support, the price tried to move above it again just to be pushed down by the bears and form a small pin bar sell signal before another big sellout.
Figure 3. Price bars show contrary possibilities
In the following graphic we analyze how price bars can show contrary trading opportunities.
Illustration 1. – After a very aggressive and some maybe "scary" sell-off, the S & P500 reversed dramatically and inserted two long-tailed bullish bars, indicating to the professional that an upward trend was imminent. Most amateurs were still experiencing an intense sell-off and were not yet ready to buy at this point. Again, pay more attention to what the price offer tells you than what your feelings tell you. At the time, this would have been a very contrary feeling – everyone had just liquidated shorts and was afraid to buy. Remember, if everyone is afraid, you want to buy, if nobody is afraid, you should be afraid and try to sell!
Figure 2. – After a nice rise from the bullish-tail bars above, the price pulled back to the same support area and formed a few more obvious bullish-tails that showed a false break in this support, indicating that an upward trend is likely to occur.
Figure 3. – If the previous two options weren't obvious enough, we got a third, a very nice looking pin bar buy signal at the same support level as the last two options. Note how the development of such trades can take weeks or months, but if so, you have to trade. If you had followed this story in the table down to the last pin bar, you would have known what to do at the time – BUY!
Diagram. 4. What can we learn from failed price action signals?
In the graphic below we look at what failed price action signals can tell us.
illustration 1. – Looking from left to right, we can see that there was a significant upward trend as the price recovered from the $ 99.00 support for crude oil. So we would have tried to buy this market on bullish signals.
Figure 2. – After a modest withdrawal, a bullish pin header was formed, the price of which, as expected, rose higher and brought a nice profit to everyone who traded this pin header.
Figure 3. – When the price withdrew again and formed a pin header similar to that in Fig. 2, we saw little to no follow-up. Instead, the price only consolidated a few days after the formation of this pin header and even formed a few bearish tails within that consolidation. When we saw the price close below the bottom of the pin header, we knew the pin was likely to fail. We can see what happened next. A failed price action signal like this can often be a signal in itself and prompt us to look at the other side of the market now.
I hope that from the pictures above you can understand how I analyze the history in the charts and how important individual price bars can be. The best way to familiarize yourself with the process of interpreting the story the market is telling you is to analyze the footprint that the price action leaves in the charts.
I recommend that you keep track of this in a trade journal by keeping a daily diary of your favorite markets and jotting down the things described above. Trend, key levels, all signals that have formed and what happened afterwards. Doing this five days a week, as I do in my daily member market comments, is an excellent way and really the only way to maintain the close connection to the market that you need to understand exactly what the market is Tells you.
Start tomorrow …
When you open your charts tomorrow, I want you to go back to that lesson and get out a pen and paper. Start analyzing the market from left to right like I did for you here. Keep your trade journal / diary in a notebook and you will understand what I mean by the "story" that the market tells. You will start to feel connected to the market, and if you do this long enough, you will develop your trading intuition, which is almost like a "sixth sense" and will help you to identify trading opportunities with high probability, quickly and in real time .
The key points to take out of today's lesson are:
- Price promotions are literally the “footprint” of money on a chart so that we can see the behavior of all market participants.
- We can learn how to interpret this price action and the market psychology it represents to put together the "story" told on the chart.
- Individual price bars each play a role in market history, so it is important to learn to interpret their meaning.
- Start analyzing your favorite markets every day and keep track of your notes in a trading diary. This will help you better understand the story the market is telling and the possible events in the next chapter.
Mastering the art of reading price promotions has cost me over 16 years, thousands of hours of study, and thousands more hours of real live trading screen time. This blog and the over 500 lessons I've written, as well as my Professional Price Action Trading course, are designed to help you dramatically accelerate your knowledge and achieve trading success faster. All of the trading tutorials I've been creating for my students since 2008 are exactly the kind of real educational resources I would like to have access to when I started my trading trip all these years ago. If you apply yourself and stick to the core philosophy of reading bar-for-bar price promotions and keeping your general trading method simple, your chances of being successful in the world of professional trading will increase significantly.
Cheers to your future trading success, Nial.
What do you think about this lesson? Please leave your comments and feedback below!
If you have any questions, please send me an email.