How to Read Price Action? The Stories of Buyers Vs Sellers

Posted by tradeyouredge on September 15th, 2014

Cash might be King in the business world but, in the trading world, you’ll still got to bow down to the almighty Price Action.

Price Action is, without a doubt, the most important indicator on the charts, and that’s because it is the only Leading indicator on there. Yet, many novice traders often ignore this fact and they continue their chase, trying out one indicator after another, searching for something that does not exist.

These traders end up filling up their charts with so many indicators that they barely see Price. If you’re one of them, I definitely recommend decluttering your charts and start paying more attention to Price and Price Action alone. In fact, you should consider learning how to read Naked Price charts as a starting point.

And that leads us to today’s topic – How to Read Price Action?

Stories behind the Bars

Before we start, let’s revisit some basics.

Each bar on the chart is formed based on Open (O), High (H), Low (L) and Close (C) values of price. This is true irrespective of whether one is using the OHLC Bars or the Candlesticks.

Each bar or candlestick represents a specific duration or “Time” and within that duration, price would have moved up, down, sideways or a combination of these movements, starting from the Open until the Close.

What many novice traders do not realise is that every bar has a story. These stories that I’m talking about are stories of war - the war between the Buyers and Sellers. Without going into too much detail, the goal of each story is to identify the Winner of these wars as the winner will control the market.

The following is a simple illustration of what I mean.

Example – High Test Bar

The War Between Buyers and Sellers

The diagram besides the High Test Bar above shows the approximate path travelled by price from the Open of the bar till the Close of it. As you can see, it’s quite clear that the Buyers were winning the war initially. However, little did they know that they won’t be as victorious as they would like to be. The sellers were patient at the start but they were patient no more. As soon as the Sellers entered the market, they pretty much dominated the “war” till the close.

And that’s really it, that’s the story of a simple High Test Bar.

It probably sounds like a child’s play but that’s exactly why many novice traders overlook these matters. Learning to read Price Action is about learning who’s in control of the market place. Once you determine who’s in control, all we need to do is to follow the winner and that automatically puts us in the winning team.

The More Stories, The Better

As I briefly mentioned above, every single bar has a story. However, when there is more than one bar grouped together  you start collecting clues from different part of the bigger picture. Essentially, the more bars group together, the more complete the story will be – as opposed to having a collection of many individual stories.

Let’s take today’s discussion a notch up.

If you understand price action, you would come realised that price cycles up and down all the time. This is true for all trending, reversing or side-way moving market. Essentially, price never goes in a straight line. However, novice traders often ignore the “High”s and the “Low”s of price.

For example, in an uptrend, the “High”s and the “Low”s go higher at each swing. Or, in a down trend, the “High”s and the “Low”s go lower at each swing too. Meanwhile, in a side-way market, the “High”s and the “Low”s will be approximately flat.

If a Trader sees Higher Highs (HH) and Higher Lows (HL) in Price, clearly, the Buyers are in control in the battlefield and vice verse. Sellers keep trying to take control but they get kicked out in every attempt. In the end, the Buyers were victorious.

Again, in this example, the story is simple. In fact all stories should be as simple as this. All you really need to do is to identify one of the following:

• Buyers are winning
• Sellers are winning
• Or it’s just NOT clear

Conclusion

The above are just some examples of how one can learn to read Price Action. You may find the examples above suitable for you although some of you may not resonate with it. However, from personal experience, thinking Price Action in terms of War and battlefield has definitely helped me grow as a Price Action Reader.

If you want to further develop your Price Action reading skills, I highly recommend the book “Japanese Candlestick Charting Techniques” by Steve Nison as a starting point. If you’re based outside of UK and have no access to this book, Steve also wrote “The Candlestick Course” which is available for Kindle readers.

Thank you for reading and happy trading!!