“What is price action?”, quipped my friend Anna the other day. “Someone told me about swing highs, swing lows, test of top/bottom and the likes”. “But I don’t understand. I’m completely clueless about this price action thingy,” she added.
I told her: “Price action is simply the footprint of the money.”
And I went on to explain:
First, take note of these three things. One, the market is going up when price is making higher highs and higher lows. Two, the market is going down when price is making lower highs and lower lows. And three, the market is going sideways when price is not making higher highs and higher lows or lower highs lower lows. These are simple facts, but most traders forget them.
Consider also the timing of a trade. By timing, I mean, searching for a shorting opening as the general pattern is down but price on your entry time frame is still going up. At this stage, it is futile to try to short a rising market until price action begins to point down.
Be wary of short or bearish bias change that occurs when a HH>HL>LH>LL>LH sequence develops. This sequence is affirmed when price moves below the last lower low. A long or bullish bias change arise when an LL>LH>HL>HH>HL sequence expands. The bias change is affirmed when price moves above the last higher high.
The next phase the market can then take is to begin trending up or down based on the bias change. Now using price action counting of the swing highs and lows, start observing the price range bound activity. That is, price is not making new highs or new lows. Three ranging rule definitions are: one, price doesn’t make a new high or low on the move; two, price will remain range bound until it makes news move high or low and third, a range when price is a lower high or a higher low within the previous swing high and low confirms the price range. Range is commonly defined as a double touch of support and resistance. Consider that a pull back or bias change can be created by the price as the chart unfolds a new high or low.
With this price action method, a trader such as yourself, can pinpoint the possibility of a range expanding very early without having to worry if price will or will not give you a double touch.