Price Action

A feature often overlooked when concentrating on calculated indicators etc. is price action itself. For the purpose of this discussion, assume we are using correct ‘Angle of Repose’ . By and large, when analysing price action we are mainly interested in 3 events:

· Trends (i.e. UP or DN);

· Sideways Movement, and;

· Turning Points.

Point 2 can be deduced from Point 1. Point 3 can be calculated from MM Lines, Fibonacci levels, Price Volume Bars, Pivot points etc. Point 2 can also be occurring at one level while Point 1 is in place at a higher level, but if we get the Angle of Repose correct, then there should be little room for error.

Essentially, there are 4 types of bars that need to be identified in order to perform the analysis correctly:

Up Bar is a bar with a higher high and higher low than the previous bar. In this mode we are interested in movement until what turns out to be the last bar of the trend where the close is lower than the open. Indicates there were more sellers then buyers on the last bar.

Down Bar is a bar with a lower high and lower low than the previous bar. In this mode we are interested in movement until what turns out to be the last bar of the trend where the close is higher than the open. Indicates there were more buyers then sellers on the last bar.

Inside Bar, also called a narrow range bar, is a bar with the high that is lower than the previous bar and low that is higher than the previous bar. Some traders do not consider an inside bar that has either an equal high or an equal low as an inside bar, others do. Inside bars usually represent market indecision. As on any bar, the closer the open and close are to each other shows just how undecided the market is as neither the buyers or sellers are in control. Buyers would be considered to be still in control on an inside bar if the close is at the top of the bar.

Outside Bar, also called a Wide Range or Engulfing Bar, is a bar with a high that is higher than the previous bar and with a low that is lower than the previous bar thereby engulfing the previous bar. In cases where the open and close are close together we can assume neither the buyers or the sellers are in control and the market is undecided which way to go. When the open is in the bottom quarter/third of the bar and the close is in the top quarter/third of the bar, it is said to be bullish engulfing with the buyers in control. When the open is in the top quarter/third of the bar and the close is in the bottom quarter/third, it is said to be bearish engulfing with the sellers in control.

Another definition used for this bar – especially if candlestick charts are used - is that the open and close have to engulf the previous bars open and close and not just the high and low of the bar. With this definition, the wide range bar or engulfing bar does not need to have a higher high or lower low to qualify. The first definition most probably came about with bar charts where it is harder to notice the open and close.

Price on a given time frame is in an uptrend if it is making higher highs (HH) and higher lows (HL) and in a downtrend if it is making lower highs (LH) and lower lows (LL). If price is doing anything else, it is in a consolidation pattern - range, triangle, pennant, rectangle etc.

After a trend is broken, there is usually a period of consolidation that is easier to see on a lower time frame. With practice, you will be able to visualize this going on without looking at the lower time frame. When price is in a consolidation pattern that is often referred to as chop, it is usually in a range with no trend pattern to the swing highs and lows.

All changes in patterns often start at the lower TFs which in turn impact the higher TFs (this is not always the case though). So when a swing occurs at the lower TF, we need to get a change in price action sufficiently large to impact the higher TF in order to resume a continuation or reversal otherwise we simply get sideways action. We will always keep our full attention on the dominant time frame where levels and patterns are clearer. It is indeed essential to gather as much unambiguous information as possible.

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