PRICE ACTION
the origins of charting
If you are anything except a beginner, you have heard of Edwards and Magee, the first technical trading gurus to explain chart patterns with stock trading. In 1948 these two men published a book that is considered the technical trader's bible. These men credit some of their insights to what Charles Dow wrote 60 years prior.
One of Charles Dow’s major insights was that most stocks traded the same way the overall market traded. If the market was going up, then the price of large, established companies also went up. If the market overall was falling, most of these stocks would also fall. In a time where fundamental analysis was king, Edwards and Magee wrote that investors could profit by only paying attention to how the price of a major company moved, rather than to the company’s products and business model.
On page 15 in chapter 1, Edwards and Magee describe the basis of Price Action Theory.
“A shore dweller who had no tide-table might set about determining the direction of the tide by driving a stake in the beach at the highest point reached by an incoming wave. Then if the next wave pushed the water up beyond his stake, he would know the price was rising. If he shifted his stake with the peak mark of each wave, a time would come when one wave would stop and start to recede short of his previous mark; then he would know that the tide had turned and started to ebb.”
The description above is basically a description of price action. The basic tenet of price action is that traders should only pay attention to everything that happens with prices, and draw their conclusions on what might happen next from these price movements.
In 2007, I was at a trading seminar with Jim Dalton and Terry Lieberman. Jim, a former UBS managing trader and proponent of Market Profile trading, has a proven track record. I vividly remember a question asked him about a short term price movement and Jim’s response that this was “just noise”. Jim does not subscribe to price action and certainly not on small time frames.
Al Brooks and Ali Moin Shafari are successful traders like Jim. However, they very much believe in price action, and use it to trade. To them there is no “noise” in the market and every bar, every close, is important and has implications on what may happen next.
Just like Edwards and Magee describing plotting the tide on a beach, price action traders plot every price movement. They believe that the size of each charted bar, the relation of each bar to the prior bars, the body characteristics of each candlestick, and most of every close, all suggest which price may come next. Price action trading is based on watching each and every bar meticulously. However, all those bars must be viewed in the context of what has happened previously, with more weight placed on more recent bars, as well as the overall environment (trend or trading range, strong or weak, recent trend line breaks or not, weekly, monthly, etc.) These traders place entry, limit exit, and stop, based on the action of the most recently closed bar, in context of the enviroment.
Al Brooks is a dedicated price action trader who has written encyclopedic books on the topic. These books are packed with information, enormously informative, but can be difficult to read and absorb.
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Trading price action trends
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Trading price action trading ranges
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Trading price action reversals
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Reading price action charts bar by bar
Though these writings are not the easiest read, they describe in detail ideas of trading based on price action. Price action is one of many options in developing a trading approach.
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