Price action forms the basis of technical analysis and
helps you in timing entries and exits better without relying on news or
opinions. Price action can be analyzed using charts that plot prices over time.
Support and Resistance
If the market is in an advancing phase, one can initiate long positions. If the market is in a downtrend phase, one can initiate short positions. After making this decision, one needs to analyze the support and resistance levels, i.e. the potential buying or selling pressure zones.
Support is a zone of potential buying pressure where buyers could
step in and push the price higher, whereas resistance is a zone where sellers
could step in and push the price lower.
The support and resistance zone tells us where to buy and
sell. If the prices reverse back from the resistance level, one can short the
stock.
And
if the prices reverse back from the support level, one can buy the stock.
Entry Level
When the prices breakout from any price pattern, candlesticks,
support or resistance levels, the price action trader can take a long/short
position at that point.
Like in Candlestick pattern, if you see a Bullish Harami candlestick pattern after the downtrend, you should enter a long position if the prices open higher the next day.
Stop Loss
This helps you protect your position so that you don’t incur losses if the trade goes against your expectations.
Like, if you spot a Bullish Harami candlestick pattern, then you can place a stop loss at the support or low of the previous day’s candlestick.
Higher-Timeframe
If you trade by using daily
charts, you should also look at the weekly charts to determine whether the
trend is in uptrend or downtrend.
Volume
If there is no rise in the volume when the breakout happens, then the price action trader should be doubtful in taking that position. A trend reversal should always be supported by an increase in volume. There are many volume indicators with the help of which you can analyze volume in the stock.
Exit Level
You should also determine the exit level before even entering the position, this is also called target. The exit level can be determined by a certain percentage, support/resistance level, or the price target in the case of chart patterns. After determining all these things, you are now ready to place your trading order, whether long or short.
Happy Trading and Happy Investing
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