PRICE ACTION TRADING: 6 THINGS TO LOOK FOR BEFORE YOU PLACE A TRADE PART 1 (2021)
I’m sure you can agree: Price action trading helps you to better time your entries & exits—without relying on indicators, news, or opinions. Awesome! But the problem is, there’s so much information out there (like candlestick patterns, chart patterns, trend lines, support & resistance, etc.) which makes it difficult to piece the puzzle together. Where do you start? What should you look for? How you make sense out of everything? Well, the good news is… When it comes to price action trading, less is more. And after years of trading and experimenting, it turns out there are only 6 things that matter when it comes to price action trading—and you can ignore 90% of everything else.
Do you want to know more? Then let’s start with #1…
#1: Market structure
The first thing a price action trader must learn is, market structure. Because if you don’t understand it, then a chart won’t make any sense to you—and you won’t know when to buy, sell, or stay out of the markets. But if you do understand market structure, then a world of opportunities unfolds before your eyes. So, what is market structure? It’s a framework to categorize the stages of the market so you know what to do in different market conditions. In other words, market structure tells you what to do, whether you should be buying, selling, or staying out of the markets.
Moving on… Market structure can be broken down into 4 stages:
- Accumulation stage
- Advancing stage
- Distribution stage
- Declining stage Let me explain… Accumulation stage The accumulation stage looks like a range market—in a downtrend. Here’s what I mean:
Now, there are 2 reasons which contribute to the accumulation stage. Bullish traders As the price moves lower, bullish traders will buy as the price is “too low”—which puts buying pressure in the market.
At the same time, there are still bearish traders entering the market hoping the trend will continue. Now… When you combine both buying and selling pressure, you get in equilibrium in the market (otherwise known as a range market). Just because the market is in an accumulation stage doesn’t mean it will breakout higher—there’s also a possibility it could break down lower. So, if you’re bearish in an accumulation stage, then you can look for selling opportunities at resistance. Or if you’re bullish, then you can look for buying opportunities at support or when the price breaks above resistance. When that happens, that’s when we move onto the next stage… Advancing stage The advancing stage is an uptrend—with a series of higher highs and lows. At this stage, most traders can recognize the trend and are looking for buying opportunities. Here’s an example:
However, no market goes up all the time. Eventually, it’ll start to show signs of weakness and that’s when we move onto the next stage…
The distribution stage looks like a range market—in an uptrend. Here’s what I mean…
Now, there are 2 reasons which contribute to the distribution stage. Bearish traders As the price moves higher, bearish traders will short the market as the price is “too high”—which puts selling pressure in the market. Bullish traders At the same time, there are still bullish traders entering the market hoping the trend will continue. Now… When you combine both buying and selling pressure, you get in equilibrium in the market (otherwise known as a range market). However, if the price breaks below the lows of the range, that’s when we enter the last stage…
The declining stage is a downtrend—with a series of lower highs and lows. At this stage, most traders can recognize the trend and are looking for selling opportunities. Here’s an example:
However, no market goes down all the time. Eventually, it starts to show signs of strength and that’s when we move back to stage 1 (the accumulation stage). Moving on…