A PRACTICAL GUIDE TO PRICE ACTION TRADING

Price action trading is often touted as an elusive magic bullet for traders. But the truth is that it is neither elusive nor magical.

It is not elusive. In fact, you can grasp the essential concepts of price action trading with ease.

But it is not magical as well. Price action trading is a just one of the many trading approaches. It does not magically produce profits.

The good news here is that you do not need a magical trading method.

To succeed as a trader, what you need is a practical trading approach that suits your personality.

• Want to keep things simple?
• Want to find out if price action trading is for you?
• Want to learn how to trade with price action without all the complicated jargon?
• Want to pick up a bottom-up price action trading approach?

If you answered yes to the questions above, this is the guide you need.

GUIDE OVERVIEW

• Definition Of Price Action Trading
• How To Read Price Action
  • Price Bars
  • Price Swings & Market Context
  • Types of Price Action Trading Setups
• Essential Price Action Trading Concepts
  • Support & Resistance
  • Trend Lines
  • Price Patterns
• Advanced Price Action Trading Concepts
  • Multiple Failed Attempts
  • Confluence
  • Multiple Time Frames
• Complementary Trading Tools
  • Moving Average With Price Action
  • Volume With Price Action
  • Price-Only Charts
• Building Your Own Price Action Trading Plan
  • Entry Strategy
  • Trade Execution
  • Stop Losses
  • Profit Targets
• Advancing Your Price Action Education
  • Simulation Trading & Analysis
  • Resources For Further Studies

DEFINITION OF PRICE ACTION TRADING

Price action purists define price action trading as trading charts with no indicators. This definition holds a strict view that demonizes indicators.

This simplistic definition works well as a marketing line. It is attractive to traders who have grown disillusioned with indicators.

But this is not the best way to define price action trading.

What is the best definition for a practical trader?

Definition: Price action trading is trading with price movement as your principal focus.

A realistic trader wants to do what works, regardless of its label or classification. Hence, the exclusion of other trading tools is irrelevant.

If you find an indicator that is helpful, use it!

But remember to use it with price action as an anchor. Price action must remain the cornerstone of your trading strategy.

HOW TO READ PRICE ACTION

Price action is a continuous flow of data. To analyze price action, you must first condense the data into discrete parts.

You can do this easily with OHLC price charts. OHLC means Open-High-Low-Close.

This means that the price chart must show the open, high, low, and close price of each trading period. (E.g., 5-minute, 1 hour, 1 day)

Both traditional Western bar charts and Japanese candlestick charts fit the bill here.

In this guide, we’ll use price bars and candlesticks interchangeably.

Our lesson plan for learning to read price action:

1. Read price bars/candlesticks bar-by-bar.
2. Observe price swings to determine the market context (trending or ranging).
3. Understand the different types of price action setups suitable for each market context.

PRICE BARS

Learning how to read price charts bar-by-bar is a critical skill.

Hence, I’ve written a separate article – Beginner’s Guide To Reading Price Action.

I highly recommend that you read the article above to learn the basics of reading price action. It will bring you through a bottom-up approach to understanding price action.

After completing the Beginner’s Guide To Reading Price Action, the chart below will make sense to you.

The rest of this practical guide is not going anywhere. You can return here after picking up the basics.

PRICE SWINGS & MARKET CONTEXT

Each time the market changes direction, a new price swing is formed.

Each turning point is a swing pivot. When a rising market turns down, a swing high is formed. When a falling market turns up, a swing low is formed.

Price swings highlight the market context.

To make sense of the market, you just need to observe the swing highs and swing lows.

Are they rising or falling?

#1: THEY ARE RISING.

If the swing highs and lows are rising, the market is in a bull trend.

#2: THEY ARE FALLING.

If the swing highs and lows are falling, the market is in a bear trend.

#3: I’M NOT SURE.

If the swing highs and lows are giving you mixed signals, the market is consolidating.

Markets often consolidate before reversing its trend direction. This period is known as accumulation or distribution depending on the trend that follows.

In fact, the chart below shows the consolidation that took place before the bear trend shown in the previous chart.

IMPORTANT NOTE ON DRAWING PRICE SWINGS

For price swing analysis to be helpful, you must employ a consistent method of identifying swings. You must not mark out the swings subjectively.

You need to use an objective framework for marking out swings. The swings drawn in the charts above are the tested and valid pivots taught in my course.

TYPES OF PRICE ACTION TRADING SETUPS

There are four types of price action trading setups:

1. Retracement
2. Reversal
3. Range-Bound
4. Break-Out

The first two, retracement and reversal, are setups you look for in a trending market.

The other two, range-bound and break-out, are setups you find in a ranging/consolidating market.

#1: RETRACEMENT TRADING SETUP

A retracement trading setup is also known as a pullback or throwback trade, depending on the market trend. Regardless of the label, these trades capitalize on the tendency of a trend to resume.

When analyzing a trend, it’s useful to know the difference between an impulse swing and a corrective swing.

• Price swings in the direction of the trend are impulse swings.
• Price swings against the trend are corrective swings.

In a retracement strategy, you want to enter the market as a corrective swing ends. The aim is to profit from the subsequent impulse swing.

Hence, the crux here is to determine when a corrective swing is over.

#2: REVERSAL TRADING SETUP

It’s trickier to catch a reversal, but the rewards are great when you do.

#3: RANGE-BOUND TRADING SETUP

In a prolonged range-bound market, fading false break-outs of the range can yield excellent results.

However, as the market is trapped in a range, the profit potential is limited. Hence, it’s important to pay close attention to your reward-to-risk ratio.

#4: BREAK-OUT TRADING SETUP

A break-out trade is challenging because of the possibilities of many false break-outs.

However, if you spot the right signals, you are likely to enjoy a swift trade with an excellent risk-to-reward ratio.

In this section, you’ve learned how to read price action and judge the market context using price bars and swings.

We also took a look at the four kinds of setups in different market environments. Each setup type has a different risk profile. Hence, traders tend to gravitate towards particular type(s).

Regardless of your preference, it’s clear that we are interested in market turning points.

And in the next section, you’ll learn three vital tools to help you pinpoint these turning points.

ESSENTIAL PRICE ACTION TRADING CONCEPTS

The core concepts are:

• Support and Resistance
• Trend Lines
• Price Patterns

SUPPORT AND RESISTANCE

Support and resistance (S/R) is the most important concept in price action trading.

Think of them as price zones that tend to reject prices.

A support zone is a price area that rejects falling prices. In other words, it is a price zone that supports the market from falling.

A resistance zone is a price area that rejects rising prices. It is a price zone that resists the market from ascending.

Standard methods used to determine S/R:

• Swing Highs and Lows (as shown in the chart above)
• Psychological Numbers
• Moving Averages
• Fibonacci Levels
• Pivot Points
• High Volume Signals
• Trend Lines

When using S/R in your trading, take note of the phenomenon of S/R flipping.

If a support zone fails, it turns into a resistance zone. Likewise, if a resistance zone fails, it becomes a support level.

Make sure you comprehend the idea of support and resistance.

The existence of S/R zones, together with market inertia, form a major part of a price action trader’s edge.

TREND LINES

As covered earlier, you can derive great insights simply by observing price swings. Trend lines allow you to amplify those acumens.

Trend lines are lines that highlight trends.

A bull trend line slopes upwards. You can draw it by connecting a pair of rising swing lows.

A bear trend line slopes downwards. Connect a pair of falling swing highs to get a bear trend line.

As shown in the examples above, trend lines act as a support or resistance. Hence, you can use trend lines to help you time your market entry.

On top of that, broken trend lines hint at a market reversal, making them a prime tool for tracking trends.

PRICE PATTERNS

Specific sequences of price movement can be useful. They tell us what the market is doing now, and offer clues to what it might do in the future.

These sequences are called price patterns. They are helpful for pointing out entry points and potential stop-loss levels.

Hence, price patterns form an integral part of a price action trading strategy.

Short-term price patterns include bar patterns and candlestick patterns. The diagram below shows a typical bar pattern known as Pin Bar.

Both bar and candlestick patterns are based on pure price action. Hence, unsurprisingly, they overlap a great deal. Many bar patterns have a similar candlestick counterpart.

To make the most out of your price pattern study, I encourage you to review these price patterns in the pairs listed below.

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Bar Pattern
Pin Bar
Inside Bar
NR7
Outside Bar

————-
————-
————-
————-
————-

Candlestick Pattern
Hammer
Harami
Doji
Engulfing

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Price patterns that tend to form over a longer period are known as chart patterns. The example below shows the Head and Shoulders pattern, a striking reversal pattern.

Many traders focus on finding price patterns because they signal an entry. But price patterns should not be the cornerstone of your trading strategy.

This is because price patterns work best in the correct market context. Hence, your evaluation of the market bias is crucial.

ADVANCED PRICE ACTION TRADING CONCEPTS

Armed with S/R, trend lines, and price patterns, you can already start looking out for a trading setup.

But if you want to refine your price action tactics, take a close look at the following concepts.

• Multiple Failed Attempts
• Confluence
• Multiple Time Frames

MULTIPLE FAILED ATTEMPTS

When the market tries to do something and fails more than once, it is more likely to move in the opposite direction. (Concept of trapped traders.)

Take a look at these examples.

EXAMPLE #1: TWO LEGGED PULLBACK

This example shows the M2S trading setup that Al Brooks popularized.

In the chart below, you’ll see that the market made two attempts (two upswings) to move against the trend. Both attempts failed, and the market fell to new lows.

EXAMPLE #2: DOUBLE BOTTOM PATTERN

In the chart below, the market made two attempts to push lower before reversing up. This formation is the well-established Double Bottom reversal pattern.

Many compelling price patterns are the result of multiple failed attempts.

Hence, this is a principle you can rely on when interpreting price action. It is also the basis for the re-entry equivalent setup.

CONFLUENCE

Confluence refers to confirmation from different trading tools.

There are infinite possibilities here. Examples:

• A bearish Pin Bar at a resistance zone (A better short setup)
• A Triangle pattern projected a target within an earlier congestion zone (A more reliable profit objective)
• A bullish Outside Bar breaking the neckline of a Reverse Head & Shoulder pattern (A better long setup)

The chart below from Template For A Simple Day Trading Strategy shows an example of confluence working in our favor.

A bearish Pin Bar formed as price met the resistance of the bear trend line. An excellent short setup.

MULTIPLE TIME FRAMES

Using multiple time frames is an organized method to focus your analysis.

Don’t be intimidated. “Multiple” usually means just two or three time frames.

For instance,

1. A higher time frame to analyze the market context
2. A trading time frame to identify setups
3. A lower time frame to time the entry and limit risk

When using only two time frames, the trading time frame is used to determine setups, time entries, and limit risk.

The example below used the weekly chart to determine a bullish trend. Then, a break of the resistance on the daily time frame triggered the long trade.

Multiple time frames offer a glimpse into the fractal nature of financial markets.

Multiple time frames are valuable. But they are optional.

Simply pay close attention to the different degrees of swing pivots and trend lines within a single time frame. After enough practice, you’ll be able to visualize what’s happening on the higher and lower time frames, without looking at extra charts.

You should be comfortable analyzing price action within a single time frame first. Only then, you can reap the benefits of using multiple charts without confusing yourself.

For a specialized reading on trading with multiple time frames, check out this book – Technical Analysis Using Multiple Timeframes.

COMPLEMENTARY TRADING TOOLS

Many trading tools complement price action analysis. When used correctly, these tools can be valuable to price action traders.

In this section, you will learn about three tools favored by price action traders of all stripes:

• Moving Average
• Volume
• Price-Only Chart Types

MOVING AVERAGE WITH PRICE ACTION

A moving average is an excellent complementary tool for price action traders.

It is a simple line plotted alongside price action. Hence, it offers depth to your analysis without obscuring price action.

A short-term moving average can highlight price swings.

The chart below uses a 3-period simple moving average (SMA) of the median price to track price swings. Median price refers to the mid-price of the bar range.

A medium-term moving average acts as dynamic support and resistance.

For active traders, this setup works well for timing trade entries.

A long-term moving average shows the market trend.

Use moving averages as a tool, not a crutch.

As the examples above show, moving averages add value to price analysis. However, always remember that you are not trading the moving averages. You are trading price action.

VOLUME WITH PRICE ACTION

Volume works well with price action. Seasoned price action traders can trade with just price action and volume.

One of the most reliable and easy-to-spot volume signals is climatic volume. Climatic volume points to significant support and resistance levels and might precede a trend reversal.

The chart above shows how a high volume bar set the stage for a major support zone.

Intrigued?

The best way to study the relationship between price and volume is through Volume Spread Analysis (VSA).

• Your First Guide To VSA
• Trading With Stopping Volume

PRICE-ONLY CHART TYPES

Typical price charts plot price against time.

Such charts continue to plot new price bars even when the price is unchanged. This behavior leads to the unpredictable sideways price action that traders dread.

Price-only charts remove the time element from the chart. In other words, these charts represent real market movement.

Many traders do well with conventional charts. But most price action traders will be intrigued by the option of a price-only chart.

The example below shows a type of price-only chart, Renko, which means brick.

A Renko chart forms a new brick only when the market moves beyond the previous brick by a preset price range. When the market stagnates, the Renko chart stays still.

Common Price-Only Charts:

• Range Bar
• Renko
• Point & Figure
• Heiken Ashi (This is a modified candlestick chart.)

Be careful. Due to their unique construction, these exotic chart types may defy the usual price action analysis. Observe them with an open mind and tread carefully.

BUILDING YOUR PRICE ACTION TRADING PLAN

We’ve covered an array of price action trading concepts. It’s time to create your own price action trading framework.

Minimally, you should plan for the following:

• Entry Strategy
• Trade Execution
• Stop Losses
• Profit Targets

I’m not going to lie. It takes hard work to put together a functional trading plan. But the concepts you’ve learned so far and the resources in this section will be of great help.

The following sections contain examples, advice, and resources to assist you with each aspect of your trading plan.

ENTRY STRATEGY

The most efficient way to learn is by examples.

I’ve selected three of my favorite simple price action strategies to get you started.

• Trend Bar Failure
• Trading Pullbacks with Trend Lines and Channels
• John Hill’s Trend Line Theory

TRADE EXECUTION

The moment you enter the market is critical. But how exactly should you enter into a position?

You have a choice between entering at the market, with a stop order, or with a limit order.

Make sure you understand the implications of your selected order type – How To Enter The Market As A Price Action Trader.

STOP LOSSES

You must always limit your risk. A stop loss order is one of the best ways to do so.

Learn how to set proper stop losses with these guides:

• The Logical Trader’s Guide To Setting Stop Losses
• The Ultimate Guide To Volatility Stop Losses

PROFIT TARGET

A stop loss will ensure that you get out when you’re wrong. But do you have a plan for getting out when the market goes your way?

Having a profit target will ensure consistent performance and remove emotions from your exit plan.

Click here to learn ten ways to take profits.

ADVANCING YOUR PRICE ACTION EDUCATION

SIMULATION TRADING AND ANALYSIS

You want to be able to interpret price action as the market moves. To become a proficient price action trader, you need to simulate real-time analysis.

To do this, you need a reliable charting platform. Check out:

• NinjaTrader – a popular multi-market platform free for simulation trading
• MetaTrader 4 – a free and well-supported platform popular among forex traders
• TradingView – one of the best online charting platform that works with just your browser

Read this before you start your trading simulation.

RESOURCES FOR FURTHER PRICE ACTION STUDIES

Want to go further in your price action education?

Take a look at:

• Day Trading With Price Action Course – The swings and trend lines in this guide are drawn according to the method taught in this course.
• Price Action Article Directory
• Top 10 Price Action Trading Books

THE RENKO CHART TRADING MANUAL

INTRODUCTION – WHAT IS RENKO CHART

“Renko” comes from the Japanese word “renga” which means brick.

Once you look at a Renko chart, you will understand why. The chart looks like a series of bricks placed at a 45-degree angle to each other.

The two charts below show the striking differences between a regular candlestick chart and a Renko chart.

Traditional candlestick charts plot new bars as time passes. For instance, a five-minute chart will plot a new bar every five minutes.

On the other hand, a Renko chart:

• Does not depend on time
• Plots a new bar only when the market moves beyond a certain amount

Being independent of time is the defining characteristic of a Renko chart. Due to this attribute, it depends only on price action, creating a smoothed chart with less noise.

In this manual, you will learn about the benefits (and pitfalls) of this unique price action chart type.

Important: You must have a clear understanding of standard candlestick charts before proceeding. If not, click here to learn.

RENKO CHART CONSTRUCTION

Each brick on a Renko chart is a candlestick with no shadows. Think of them as Marubozus with the same range.

You need only one key parameter for Renko charts – brick size.

The brick size is the price range that the market must cover before a new brick is plotted. You can set the brick size in pips, ticks, or cents, depending on the market.

However, for a Renko chart to reverse, price action must reverse by at least two brick sizes.

Refer to the example below for clarification.

RENKO CHART CONSTRUCTION EXAMPLE

Brick Size = 5 pips

1. Each brick covers five pips.
2. The low of this brick is 1.1846. But this does not mean that the market did not fall below 1.1846. This is because a Renko chart will not form a new brick unless the preceding brick is exceeded by at least a brick size. (i.e. 1.1841)
3. For a Renko chart to reverse, the market must move in the opposite direction by at least two brick sizes, which is ten pips in this case.

SETTING THE BRICK SIZE

Since the brick size is the only parameter, the efficacy of your Renko chart is highly dependent on it.

Hence, you should pay attention to the three methods used to set this parameter.

1. Fixed Amount
2. Fixed Percentage
3. Average True Range

#1: FIXED AMOUNT

Using a set number of ticks/pips/cents as the brick size is the simplest method.

But unless you are already familiar with the market, it’s challenging to arrive at a suitable figure. You need some trial and error here.

Be careful not to use a brick size that’s too small. If your brick size is too small, the Renko chart will be volatile. As a result, it loses its intended effect of smoothing price action.

#2: FIXED PERCENTAGE OF PRICE

This is a straightforward yet dynamic method. It is simple to set up and is based on the price of the stock (or forex or futures).

Swing traders often use 1% of the stock price to set up their Renko charts.

#3: AVERAGE TRUE RANGE (ATR)

You can also use the ATR as your brick size. The advantage of this method is that it factors in changes in price volatility.

A typical value is the 14-period ATR.

The main drawback of this approach is that it’s harder to set up. If your charting platform does not allow a dynamic input for brick size, you might need to code it up yourself.

HOW TO HARNESS THE POWER OF RENKO CHARTS

If you are new to Renko, you should observe both normal candlestick and Renko charts together.

This side-by-side study will highlight the pros and cons of a Renko chart.

Due to its smoothed nature, Renko charts are useful for:

1. Identifying demand and supply zones
2. Letting your profits run
3. Confirming breaks of support and resistance

The examples below demonstrate these properties.

RENKO CHART TRADING EXAMPLES

EXAMPLE 1: IDENTIFYING DEMAND AND SUPPLY ZONES

With the bricks on a Renko chart, you can spot price clusters quickly. These clusters are great demand and supply zones.

A simple guideline is to look for boxes formed by alternating bricks within a price range.

The example above shows how a Renko chart highlighted an effective supply zone.

EXAMPLE 2: LETTING YOUR PROFITS RUN

Taking profits is often stressful due to market noise. You will find the smoothness of a Renko chart helpful here.

EXAMPLE 3: CONFIRMING BREAKS OF S/R

When the market breaks an S/R, you need to decide if the break is valid (i.e. the S/R has failed) or if it is just a test of the S/R.

This decision is tricky.

But as a Renko chart eliminates noise from the chart, it’s easier to evaluate a break of an S/R. A rule of thumb is to look for an entire brick beyond the S/R.

The chart above example shows the break of a bear trend line.

TWO UNIQUE CHARACTERISTICS OF RENKO CHARTS & THEIR IMPLICATIONS

#1: NOT BASED ON TIME BUT PRICE ACTION

Candlestick charts are updated at fixed intervals. So you know when to check your charts to update your analysis.

However, for Renko charts, you need to check on the chart constantly. If not, consider setting audio alerts to remind you to review the chart when a new brick forms.

#2: DOES NOT SHOW THE ACTUAL MARKET PRICE

Since a Renko chart shows smoothed price action, it’s not reliable for placing trades. You should always refer to a regular price chart for actual trading.

A Renko chart does not display OHLC information. Hence, you cannot make use of short-term price patterns (bar and candlestick patterns).

However, Renko charts work well with chart patterns.

In a nutshell, Renko charts are suitable for big picture analysis. But fine tuning entries is not its strength. For that, traditional candlestick charts are superior.

TRADING PLATFORMS WITH RENKO CHARTS

Renko chart is not a standard feature on most charting platforms.

But don’t worry if your platform cannot plot Renko charts. You can check out the following platforms.

Ninjatrader 7 and 8 – The charts in this article are created by NinjaTrader 7 which is free for simulation trading. NinjaTrader 8 is the latest version. (You need access to tick data to plot Renko charts.)

TradeStation – A popular trading platform that offers reliable Renko charting.

Stockcharts.com – Free with paid options. Click here and select SharpCharts. Then follow Chart Attributes >> Type >> Renko.

TradingView – My favorite online charting platform. User-friendly with Renko charting ability.

RENKO AND BEYOND

• 10 Chart Types You Must Know – covers ten chart types including five price-based chart typeslike Renko
• Renko with Moving Average
• Renko with MACD and CCI
• Steve Nison’s Beyond Candlesticks – a candlestick expert’s guide to exotic Japanese trading methods including Renko charts

Finally, remember that you must master regular candlestick analysis before exploring Renko charts.

If you’re looking for a structured price action education, check out my course here.

HOW TO FIND THE INTRADAY MARKET BIAS WITH PRICE ACTION

The one thing that intraday traders hate is to get on the wrong side of the market. Fighting against the market bias is a drain on both your financial and emotional capital.

Hence, setting the stage for the price action of the next trading session is a critical step. For a minimalist method, start with a simple price action trading tool – the price channel.

A step-by-step guide to determining the market bias:

1. Draw the most recent trend line channel based on the last session.
2. Use the same trend line channel as a tentative structure for the price action of this session.
3. Focus on the interaction between the channel and the price action to work out the market bias.

It’s much easier to show you what I mean than to explain further.

Let’s go on to the examples.

INTRADAY MARKET BIAS EXAMPLES

The examples below come from four consecutive trading sessions of the S&P E-mini (ES) futures.

Each example shows two trading sessions. (Sessions are divided by orange vertical lines.)

• Example #1 – Session 1 and Session 2
• Example #2 – Session 2 and Session 3
• Example #3 – Session 3 and Session 4

In each example, the earlier trading session displays the origin of the price channel. The later session explains the utility of the price channel in judging the market bias.

100% lines refer to channel trend lines. 200% lines refer to a channel trend lines projected with 200% of the original channel width.

The swings, trend lines, and channels are drawn with an objective framework taught in my trading course.

NOTE: These examples are selective at random. They are meant to explain a general process of analyzing the market bias with price action. The aim of these examples is not to point out specific trading setups.

EXAMPLE #1: BREAK OF BEAR TREND LINE (BULLISH)

This example shows an opening gap that rose above the bear trend line from the previous session. It pointed to a bullish bias.

1. Using the price action in Session 1, you could draw a bearish price channel. Then, use this channel to analyze the market bias of Session 2.

2. Hitting the 200% line is a typical sign of exhaustion. The powerful bounce off the line implies bullishness.

3. This opening gap above the bear trendline dictated a technical bullish bias. Note that the entire opening price bar was above the bear trend line.

4. The broken bear trendline flipped into a support area. These bounces are possible long setups. At least, they served to confirm the bullish bias of Session 2.

Session 2 did not turn out to be a strongly bullish session. Nonetheless, if you intended to enter in the first half of the session, and to exit in the second half, being bullish had a slight advantage.

EXAMPLE #2: BREAK OF BULL TREND LINE (BEARISH)

This example shows Session 3 opening with a bullish stance. However, the tide changes swiftly as the bearish bias became evident.

1. The anchor of this recent bull trend line was found two trading sessions ago in Session 1. Hence, it has greater significance.

2. Session 3 opened above the high of Session 2 and appeared to continue the bullish bias.

3. There was no reason to suspect a bearish bias until this break of the bull trend line. It was premature to conclude a bearish bias. But the bullish bias was certainly being challenged.

4. These three tests of the broken bullish trend line confirmed its role as resistance.

5. This substantial downswing confirmed that the market has turned bearish.

The example demonstrates the fluidity of market bias. Market bias is not fixed to a trading session. It changes within a session and may do so rapidly.

In the above example, the market proceeded to shoot up sharply after plunging.

EXAMPLE #3: TRAPPED WITHIN BEARISH CHANNEL

This example shows Session 4 adhering to a muted bearish bias.

1. A bear trend line was drawn with two swing highs from Session 3.

2. Price bounced up sharply from the 200% line.

3. If the market had broken the bear trend line, it would have confirmed a technical bullish bias. However, it fell short of breaking the trend line. This led to bearish expectations for Session 4.

4. Session 4 opened lower within the bear channel and confirmed a bearish bias.

5. The minor double bottom at the 200% line was a sign of market support.

6. The market seemed trapped within this expanded price channel.

BONUS EXAMPLE #4: THE LARGER PICTURE

This example shows Session 1 to 4, plus an extra two sessions. Here, you will also find the three price channels we went through earlier.

This big picture example seeks to show how these channels add value beyond the next session. These trend channels also work together to give you a more reliable market bias analysis.

1. The most violent upswing in these examples was foreshadowed by a confluence of two major support: the 200% line of Session 3 and the flipped trend line from Session 1.

2. The 200% line from Session 3 proved to be a critical market support.

3. The market could not rise to the trend line. The 100% line halted it. This display of resistance was a bearish detail.

4. The market fell sharply, as it punches through a significant support.

5. The flipped trend line from Session 1 continued to be useful as a target area for short setups.

CONCLUSION – HOW TO DETERMINE THE INTRADAY MARKET BIAS WITH PRICE ACTION

A simple trend line channel drawn with the price action of the last trading session.

This is all you need to set critical support and resistance levels for the next trading session.

It is an objective tool for setting the stage and determining the market bias in the next trading session.

As you can see from Example #4, the analysis can get a little complex as you consider more price channels.

Hence, it’s important to focus on the most recent price channel as your primary tool. This is especially critical when you’re just getting started. As you gain experience, you can integrate channels from several sessions ago for more insights.

The method described here is just a starting point for determining the intraday bias.

It may not be the only tool you use to set the stage for the next trading session. But with practice, you will find that it’s an immensely helpful tool.

5 WAYS TO FIND SUPPORT AND RESISTANCE WITH PRICE ACTION AND VOLUME

Want to succeed at trading the markets? Good trading tactics start with finding reliable support and resistance. These critical zones are helpful for entering new trades and for taking profits.

Finding reliable support and resistance is a crucial ability of a professional trader. Support and resistance are supply and demand manifested by price action.

Learn to ignore the market noise on your charts. Focus on finding the support and resistance zones that matter for your trading plan.

There are many ways to find support and resistance. But for the best results, you should concentrate on price action and volume.

Hence, the five methods here are mainly derived from price action and volume.

#1: SWING HIGHS AND LOWS

When you track market swings, you are following the turning points of price action. Each turning point is the result of the market being supported or resisted.

Hence, observing market swings is fundamental to identifying support and resistance levels.

The example below shows how swing pivots acted as support before flipping into a resistance level.

Many novice traders had only a vague introduction to drawing swing highs and lows. As a result, they lack precise rules for marking out swing highs and lows.

This subjectivity is a huge problem. On historical charts, you can mark out swings that perform well as support and resistance. But you will find it tough to replicate the same results on a real-time chart.

To ensure consistency, you must learn an objective method for marking market swings. One standard method for marking out swings is the percentage method. In my course, I cover another swing analysis method based on bar highs and lows.

#2: CONGESTION AREAS

Congestion areas are one of my favorite ways to find support and resistance zones.

When the market congests within a price range, it means that the market is interested in that price range.

And market interest is not quickly forgotten. Thus, past congestion areas become significant support and resistance.

The blue zones below are Congestion Zones as defined in Day Trading With Price Action.

Note the three Congestion Zones within a tight price range. This observation implied its potential as a support (resistance) area.

Learn more about trading with congestion areas with this article.

#3: EXTREMELY HIGH VOLUME

Remember, support and resistance is merely market interest manifested as price action.

You are looking for the interest of the market. Hence, you must not overlook trading volume.

If you are interested in the market, you trade it, contributing to its trading volume. The same goes for everyone else. Hence, trading volume is a powerful indicator of market interest.

In practice, you should look for price bars (candlesticks) with extremely high volume. Then, use them to project support and resistance.

What is extremely high volume?

My definition:

Volume that exceeds the long-term average volume by at least three standard deviations

Tip: Use the Upper Band of a Bollinger Band applied on volume to identify these extreme signals.

If you look closely at the price action before the high volume bar, you will notice sideways trading. Both congestion areas and high volume bars are signs of market interest. Hence, it’s common for them to occur together.

For more examples, see this article – Reliable Support and Resistance Zones With High Volume Signals.

#4: PRICE GAPS

Price gaps are also effective support and resistance zones. Why?

Gaps create a vacuum. Although the market has moved past them, no actual trading has taken place within the gap zone.

Hence, traders who intended to buy or sell within the gap range missed their chance to do so. And they are now waiting for the market to give them a second chance.

When the market returns to the gap, they will seize that second chance and send in their trading orders. This behavior creates the potential for support or resistance zone.

In the example below, you will see how a bearish gap acted as an effective market resistance.

Using price gaps as a support and resistance zone is a rewarding strategy for the patient trader.

Many traders get excited after an opening gap and are eager to get into the market. You might be better off waiting for a chance to trade the support (or resistance) that the gap implies.

#5: PSYCHOLOGICAL NUMBERS

Take a look at these headlines:

• Wall Street points to lower open as investors eye Dow 20,000
• S&P 500 Closes Above 2000 for First Time
• Nasdaq Breaks Through 6,000 Barrier, But Should We Party Like It’s 1999?

They are just a small sample of headlines that show interest in specific round numbers.

In the line chart below, you will see how the $50 and $100 levels acted as support and resistance for QQQ (NASDAQ 100 ETF).

It’s clear that certain price levels have a psychological impact on investors and traders. These levels attract the market’s attention.

Again, it’s all about market interest. And round numbers are the prime example.

The Natural Number Trading Method is a trading strategy that tries to capitalize on this psychology.

CONCLUSION

For finding support and resistance, the most important concept is market interest.

You want to find out the price zones that the market is interested in.

You can indeed combine the tools above for a more compelling location of market supply and demand.

However, it’s good to stick with one primary technique to find support and resistance. Use other tactics to supplement it. This way, you will not dilute your attention by trying to watch out for too many features.

Another point to note is this. Finding support and resistance is not enough for a trading strategy.

To create a trading framework, observe how price behaves around support and resistance. Consider the volatility and price action around the support and resistance.

Then, form a plan to determine an entry trigger, stop-loss point, and profit-taking point.

Finally, identifying support and resistance is an art.

There is no guarantee that the support and resistance you find will hold up each time. In fact, it’s guaranteed that they will fail you sooner or later.

Nonetheless, support and resistance is a crucial concept that you cannot ignore. Knowing how to identify support and resistance will definitely upgrade your trading performance.

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