Greetings traders and welcome back. Thank you for joining me again
as always. Chris here bringing you another Survival Guide.
Today's subject will be price action.
We're going to talk about what price action is, and then we're
going to dive into some visual representations of price action
patterns. That way, at the end of the video
you'll be able to begin hunting for these patterns and adding
them to your trading arsenal.
I see traders passing the Gauntlet Mini with the help of price
action patterns, some of which we'll be covering today, and
I am excited to bring these to you because I myself am a
big TA trader. Without further ado, let's dive on into it.
Price action is one of the core concepts that is behind
the idea of technical analysis.
It's paying attention to the historical path of price and
using that historical information, what it did in the past,
how it responded, as a way to get an idea of what to expect in the future.
What is price action by the book? Well price action trading
brings together an interesting mix of information and different
views. These include the historic price patterns like we
discussed, as well as technical indicators, and this gives
us the ability to potentially read the market, or at least
that's what we're going for. Many investors see the stock
market, or the Forex market, or the futures market as nothing
more than an information exchange where all views and strategies
meet to try to arrive at a fair price at the end of it. Price
action trading strategies do not involve fundamental analysis, so they don't really
care so much about earnings reports and various other things in that regard.
Instead, it's focusing on the raw data of where things were.
The key to reading price action charts is to take in short term
fluctuations, as well as emerging trends, and focus on patterns
that are repeated time and time again, and this is something to really focus on here.
What we're doing with price action is paying attention to
the ebbs and flows that the market makes, and when we notice
certain patterns or certain behaviors exhibited, as well
as the response that came thereafter, we're focusing on the outcome after this
pattern has been created. The history behind how often the
outcome occurs is very important with how interested we are
in, and finding these particular patterns. If we exhibited
a bullish outcome after a particular pattern, say 72%
of the time, that would be a very valuable piece of information
for any trader to have. That way, when they notice the pattern
even though it's not guaranteed to be bullish momentum there
after, they have a 72% expectation based on historical
data as to why they may expect bullish momentum thereafter.
As traders, any type of edge over the market can be something
that can translate into a very profitable gain if done correctly.
Next, we're going to cover some of the most commonly occurring
price action patterns that other traders have already put
in the work and research for you.
These are the widely accepted patterns that many traders
use on a daily basis with accepted outcomes.
This price action pattern is called the Bullish Head and
Shoulders pattern, and this here, the Head and Shoulders concept,
is my favorite price action pattern of all time.
If there's nothing else that you take away from this video,
I hope you learn the Head and Shoulders pattern. Essentially,
what we have with the bullish variation of this pattern is
a downswing in price where there's a sell-off occurring.
There's a short term support that is built at some point
during the sell-off, leading to a temporary
retracement which then finds stiff resistance. After the resistance,
we have another push downwards where the sellers that were
already in are continuing to push lower, or the sellers that
didn't get a chance to get in up at the top are trying to
take advantage of hopefully more bearish momentum, and as
such, they push price lower.
Well what happens is, eventually we're going to find some
type of equilibrium where price is pushed too
low, and the market is viewing this as a fair price and as
such, the buyers are more interested at this point than the
sellers and price begins to go back up, where it encounters
resistance one more time at the same location, which is referred
to as the neckline. The neckline is an area in the market
once again, that these two shoulders are going to come to.
The head is always going to stick out farther than the shoulders.
After the second hit of the neckline, we're going to swing down one more time,
and finally when we return to the neckline, we're hoping for the break right here.
With this break, we are now expecting a bullish momentum.
If this pattern were to be completely inverted, there is an
exact identical variation of this called the Bearish Head and Shoulders.
If you just flip it around, it would look something akin
to this where we have our shoulder, then our head, followed
by our shoulder again, and then a break of the neckline.
This is once again one of my favorite patterns there are.
Our next pattern is another extremely common pattern, and this
one does occur quite frequently on all assets, on all charting
types. It is called the Double Bottom, and what we have here
is a situation where we are expecting price to be falling
and then finding support. After support,
we expect a retracement that is encountering resistance, and
then a fall back down to that area where we found support
the first time. After this, we have now created the term "the
double bottom" because we have one, and two. After the second find,
we're going to work our way back up,
and what we're looking for here is an entry when we break
the first area of resistance that we created after this first area of support.
The Triple Bottom is quite obviously very similar to the Double Bottom,
but the only difference is our break of this initial area
of resistance doesn't occur until we have hit bottom three
times. This essentially go on over, and over, and over
again, but these are the correct names that the trading community
will attach to this type of a pattern, but obviously we could
have a quadruple bottom, a quintuple bottom, if we so found
one, but they are less common than the double and the triple.
The Double Bottom is far more common than the triple, but
the same thing applies here. We're expecting price will be
falling, finding support, then finding resistance, returning
to the initial area of support, returning to the initial area
of resistance, then returning to the initial area support
one more time before breaking through this area of resistance.
Once again, it's the break that we're looking for here
because at this break, that's when we're looking to enter.
We don't have to get too concerned with whether we're
correctly identifying a double bottom, or a triple bottom,
or a quadruple bottom, or what have you.
It doesn't matter. The idea here is to pay attention to the
point at which the resistance that we created off of the
first show of support has broken.
Next up, we have the Rounding Bottom, and this one is a little
bit harder to identify for new traders because it's easy
to look at as I draw a curved line around this, but if I
were to remove that line, it becomes a little bit harder
to understand that we are seeing somewhat of a curve here
where our highs are getting lower, then our highs are getting
higher, and our lows are getting lower, then our lows are also getting higher.
That is the key thing to take away with the Rounding Bottom.
We were watching bearish momentum come into this, and remember,
when our highs are continuously getting lower, that is a sign
of bearish activity, and the same is true
when our lows are continuously getting lower, but this transition
that occurs where our highs are now getting higher and our
lows are now getting higher is the change that we're looking
for. At this point, we're usually interested in looking
for a buy when the first peak has broken, which would be somewhere
right around there, and we're looking for that long opportunity on the way back up.
The Bullish Island Reversal is another pattern that is difficult
to spot for newer traders, but it does occur more frequently
than you might think. There is a weird caveat with the
Bullish Island Reversal, which is where the name "island" is
coming from. The name "island" is coming from the fact that
there's a gap down and a gap up, as this creates a little bit of a price island.
What we need is price to be coming downwards for this
bullish variation, and once it's fallen to a point where it all
of a sudden picks up a ton of momentum, it may gap. When
it gaps, it is now down in an area that has some space in
between the last located price, and we are going to travel
around in this location and almost give ourself a bit of
a Rounding Bottom scenario where we're seeing a transition
from the bearish momentum to the bullish momentum.
Now, the key here is on our way out
we want to see another gap. Just like we gapped into the island, we want a gap
out of the island. After gapping out of the island,
the pattern is complete, and at this point, we'd be looking for an entry to go long.
The Bullish Wedge is a relatively frequently occurring pattern
that is beginner-friendly because it is quite easy to spot.
It has some characteristics about it that we should talk
about, such as the fact that once we form our first peak of
resistance during a bullish market, we're going to expect
a downfall. Once we have this downfall, we're not overly
concerned until we set another peak that is lower than the
first peak. After we set this second peak, we want to set
another low that is going to be lower than the first low.
What this does is, it kind of encases the trajectory of
price. It seems to be getting tighter, just like a wedge.
It is coming to a point at this point in time.
It never actually reaches a point because we anticipate
a break to occur before it actually comes to a point, so when
it breaks, which usually we want to see it break to the upside,
we'd be looking for a long opportunity thereafter.
The Bullish Flag is traded very similar to the Bullish Wedge,
but the big difference here is the fact that with the Bullish
Flag, we don't see it tightening in on itself. With the Bullish
Wedge, we were watching price come in on itself just like
this, the lows were getting lower but the highs were also
getting lower at a rate that was causing it to squeeze in. With the Bullish Flag,
we still watch the highs get lower, and we'll watch the lows
get lower, but the big difference here is that it's doing it at an equidistant rate.
With the Flag, we expect to see price kind of working
its way in a slightly downward sloping range bound market
if that's the way you want to think about it. The concept
here is, strong bullish momentum went into the creation of the Flag,
so we're anticipating a break of the top trend line of the
Flag, and looking for that as an entry opportunity to rise,
just like we're doing with the Bullish Wedge.
The only difference is, this pattern forms itself slightly differently.
Next up, we have the Bullish Rectangle, and
this one is going to be another situation where we're paying
attention to the highs and the lows creating a centralized
area of support and resistance, and then ultimately breaking
out and returning the direction of the overall trend.
This means that if we were traveling upwards before finding
resistance and then we found support after we got knocked
downwards for a correction, and then we just kept pinging
back and forth between these two rough areas of support and
resistance. We're looking for the brake to the top side, preferably
speaking, because at that point, this is the time where we're
anticipating that the market has been filled up with enough
buyers, and the buyers had become aggressive enough that they
are breaking away from this stagnation point, almost a period
of consolidation, and have gained the volume
they need to maintain and continue on with the overall bullish consensus.
The Ascending Triangle is another pattern that
is once again going to be a continuation pattern in the sense
that we are looking and hoping for a break to the side of
the direction that we were going in before the pattern was
created. Once again, this is another pattern that can
be completely inverted. Every single pattern
we've shown thus far can be inverted for the bearish variation
and is traded exactly the same way. It's just an upside down version.
With the Ascending Triangle, we want the bullish
momentum going in encountering resistance.
The interesting thing with the Ascending Triangle is
that the resistance area is meant to be the same. That means
our first hit of resistance should be roughly where our second
hit of resistance is, after we have come down and found some
degree of support sending us back towards that resistance.
We want to see this initial area of resistance hold for at least two tests.
We have our first test here, we have our second test here.
After this point, once we see the lower area of support followed
by the higher area of support giving ourselves a bullish
trend line, climbing its way upwards, tightening in on this
area of resistance at the top,
we're waiting for the break in this area of resistance and
looking for that long opportunity.
Price action patterns are a ton of fun to trade and can be
very profitable tools to utilize when you become proficient
with them, but it isn't the only aspect of price action trading.
It should be noted that resistance and support are both just
generalized uses in the price action world.
We want to be good at identifying areas of resistance, as
well as areas of support, because at any given moment there
could be a valuable trade to be had just based on support and resistance alone.
We always encourage that you use outside knowledge or other
confirming factors when making trades, but if we look at
the e-mini S&P 500 today for example, we can see that we
noted an area of resistance right over here where we essentially formed a triple top.
If we were to inverse our triple bottom,
we now have the triple top, and what happened as we reapproach
this area, if we look all the way over here to the left?
Well, when we reapproach this area we found more resistance, but it wasn't so strong.
We can take that as an indication with this prior
bullish momentum going into it that we are ultimately looking
to break through, and we can be ready for that break when
it finally happens. When we're finally breaking through and
finally trading abroad above that area,
we can then utilize that as information to potentially go long. In this scenario,
the market has gone up from that point
so we would have been able to scalp some gains from it, but
then the market kind of range sideways, but there are support
and resistance areas all over any given chart at any given time,
and it isn't something that we want to neglect. Price action
patterns themselves are awesome,
but remember price action trading also includes just generalized
areas of resistance and support. Until next time folks,
I hope you have a great time taking your Gauntlet Mini challenge.
Best of luck to all of you, and I will see you all very soon,
but wait, please before you go,
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