Basics Trading Strategy With Price Action
The bar formation in the price action reflects the sentiment of the market participants, and may provide early hints or signal the direction of further price movements.
Basically price action is a series of price movements from time to time, and price action analysis is done by observing the formation of a candlestick bar. Here are some terms in trading with price action:
- Up Bar
Also called a ‘bullish bar’, which is a bar with a high level higher than the previous high (high) and a low that is higher than the previous high (higher low). The sequence of up bars in the picture above shows the uptrend movement. In general, the closing price of the up bar is higher than the opening price, but can also be lower as seen on the black candlestick bar on the up bar sequence of the image above. However, the bar is included in the up bar because the highest and lower levels are still higher than the previous high and lows. The series of up bars shows that at that time the buyer or ‘the bulls’ were controlling the market.
- Down Bar
Also called a ‘bearish bar’, which is a bar with a high level lower than the previous high (lower high) and a low that is also lower than the previous low (lower low). The series of down bars in the picture above shows a downtrend, and indicates that at that time the seller or ‘the bears’ were controlling the market.
- Inside Bar
Inside Bar is a bar with a high level lower than the previous high and a low level higher than the previous low. Many traders consider the bar with the same high or low level as the previous bar as the inside bar. Bar formations like this indicate market uncertainty or consolidation conditions where buyers and sellers wait for each other, if the bar breaks the highest level before then the winning buyer and vice versa if it breaks the previous low bar then the winning seller controls the market.
- Outside Bar
Outside Bar is also called the ‘ mother bar ‘, which is the bar that ‘swallows’ inside the bar, or in the engulfing bar formation is the bar that ‘swallows’ the bar before. In principle the outside bar is a bar with a high level that is higher than the previous high bar level or the bar after that, and a low level that is lower than the previous low bar level or the bar afterwards.
In terms of candlesticks, a combination of outside bar and inside bar formations is often referred to as ‘ harami ‘. In the example above the outside bar closing level is higher than its opening level indicating the buyer is controlling the market before consolidation occurs.
Trading Signals from Price Action
The bar formation in the price action reflects the sentiment of the market participants, and may provide early hints or signal the direction of further price movements. A signal or signal from price action is usually indicated by the formation of a pin bar which is a bar with a tail (axis) that is longer than its body.The longer the tail means the stronger the rejection sentiment at a given price level.
In a trending market situation, the pin bar usually implies a reversal or opposite trend, and the pin bar is often called a pin bar reversal . Here are some pin reversal bars where one of them fails or is a false signal:
Supporting Factors of Trading Signals From Price Action
To avoid possible errors as in the picture above, it is necessary to support factors that confirm the trading signal of the price action. So, a trader can choose the signal with the highest probability, which is confirmed by several supporting factors.
The confirmation or supporting factors are support and resistance levels, trend direction and technical indicators. The indicator that is often used is a moving average to confirm the direction of the trend. Here is an example of a trading signal (pin bar) with 3 supporting factors:
The appearance of the pin bar formed is confirmed by 3 factors, namely: trend direction (downtrend), rejection by horizontal line resistance (failed to break the resistance), and also resistance by dynamic resistance ie the area between the indicator curve exponential moving average (EMA) 21 and ema 8. Thus the probability of successful sell entry after the pin bar is high.
If not in a trending condition the market is consolidating. Common consolidation patterns are sideways (ranging), triangles (triangle) , pennants and others.There are times when the market moves in a narrow range with an uncertain pattern, this condition is called choppy which is difficult to predict and should be avoided. Here’s an example of a trading signal from price action for trending conditions and ranging:
Looks the price broke the lowest level outside the bar which means seller re-control the market. It is also supported by a break of the support level.