Getting closer to the entry!
Price Action Lesson #7
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So, support and resistance won’t help us much in finding the higher low or lower high? Then what will?
Let’s go back to a picture from the previous lesson #6.
To find the higher short-term low, we need to find where this correction will end. This is where indicators like CCI, Williams %R, RSI or volume will be useful. But since this is a price action course let’s see can we find the size of the correction by using the chart only.
Before we do that we have to modify this chart to suit our needs. Here is the new one.
So basically what we want to find is point C from where to catch the move toward D.
Sounds easy but this is trading and the market has many ways to surprise us. For example how big will be that BC correction? How many candlesticks it will include? It can be 1, 2, 3, 4, 5,… etc. How it will look like?
Too many questions! Too many possible combinations.
But let’s think for a moment. To see BC, first, we need to have B fixed, right? Since this is a bullish example point B will be formed after a down candlestick which breaks below the last candlestick’s low.
OK, but only one down candlestick, is it enough? No, because the move might easily continue down after it.
And here is the first rule we’ll have to see at least two down candlesticks (or two up if we were looking at the downtrend example) before the signal. Those two down candlesticks will mean that B is set in stone. But they also mean that the correction has some size already, some stretch down.
This size is important because B will naturally become our first target after the signal. And to open a position we need to be sure that there the trade has some potential. That is why it is important to compare our stop-loss with our first target (point B)
So, we wait for at least two candlesticks then a signal.
Now to the signal.
After two or more down candlestick, we could expect point C to be formed. Since we are looking for a higher short-term low, point C has to be higher than A. The signal is a price action pattern. Like the one we’ve discussed in price action lesson #4
Ideally on the way down you should start seeing signs that the down move doesn’t have potential and it will soon end. How would those signs look? Most probably you’ll see specific candlesticks shapes, like a No Nose for example, which speak that there won’t be a continuation down and that the bottom is near.
Those signs of ending down move will transform into signs of an upcoming rise, a price action buy pattern. Remember, we have already seen first buying wave on the previous (first low) and now on the higher short-term low, we need to see buying again. That means the appearance of candlesticks which suggest buying like Long Tail, for example.
That buy pattern might take 1000 different forms. It can be a complex signal or a simple one. It might happen as a form of Bullish engulfing or other. This is where the ability to read a chart is necessary.
- tops and bottoms can happen in various ways but there are some rules which to follow
- We need a higher short-term low (lower short-term high) to take action
- We wait for at least two candlestick correction This correction must have some size so we can justify opening a position.
- After two down (up) candlesticks we start reading the chart looking for clues where the correction will end and is there buying (selling) on higher (lower) prices
But what if there is no correction.? What if there is a consolidation? Is there a target after B? Did we miss something in the first bottom (top)?
The answers are coming in the next lessons!
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