Trading Skill#4: Recognizing Buying And Selling Pressure

Question 1

Recognizing Buying and Selling Pressure

Answer 1

• There are micro price action flows you need to detect
• Memorizing price patterns is not enough, you read to understand the psychology and rationale behind each price pattern

     - Break down each price bar
     - Study each price bar in respect to preceding bar
     - Understand what makes them work
     - Know when they work

• One Price Bar: Visual representation of price data at a given time. Common time units (30min, 1hr, daily, weekly)
• Four pieces of information to draw a price bar (candlestick)
  1. Open
  2. Close
  3. High
  4. Low
  (OHLC)

Question 2

Once Completed, Price Bar Gives 4 Pieces of Additional Info:

      1. Range
      2. Body
      3. Upper Tail (wick/shadow)
      4. Lower Tail (wick/shadow)

Answer 2

1. Range- Refers to the extent of the market’s journey within the time unit we are examining.
   - It shows how volatile the market is
   - Dead markets move little. Active markets move around more
2. Body- The body range shows us where the market has battled. Its body shows where the market has conquered
   - It indicates the strength of the bar
   - Strength is either bullish or bearish

• If the bar closes above its open, regardless of what happened in between, the market has moved up. The bar is bullish. The opposite for bearish
  - Size of the body demonstrates size of market strength
  - Entire body= strongest form of upward thrust
  - No body= market undecided
• Answer these questions by observing the candle body:
  - Has the market moved up or down?
  - How strong was the move?

3. Upper Shadow- represents the area where the market rose to (as part of its range), but was unable to conquer (as part of its body).

-It was unable to conquer that area because the market met eager sellers who were more aggressive than the buyers in the market.

-Upper shadow measures selling pressure. The longer the shadow, the more selling pressure the bar exhibits.

4. Lower Shadow- Represents area where market fell but was able to conquer

• The longer the lower shadow, the strong the buying pressure

-Two Price Bars: Gives 2 cornerstones in reading price action

        - With 2 price bars, we gain a context for the second bar. The first bar
           provides a benchmark to aid us in reading price action 

• Price Action Context- In trading, nothing works in isolation. The context is of utmost importance. The same goes for reading price action.
• Testing Price Levels: The concept of testing refers to the market moving towards a price level to “test” if the price level will reject the market’s advances.
• The high and low of each price bar are natural support and resistance levels.

-The test of these levels show the undercurrents of the market and is critical for reading price action.

• Three Price Bars: With a clear read of two-bar price action, we are able to form expectations of the market. We would expect the market to move in a certain way in the third bar

      -The confirmation or failure of our expectations reveals more about the market, and add to our price action analysis.
  
      - Essentially, the market has inertia. Bullishness should follow bullishness, and bearishness should follow bearishness. When it does not, we have to consider a possible change in market direction.

• Reading Price Action:

Reading price action is not about finding pin bars, outside bars, engulfing patterns, or any other names. It is about observing price bars as they form and understanding what the market has done and is doing