Price Action Strategies
Lets now start with Price Action Strategies before moving to VOLUME PROFILE.
Table of Contents
Price Action Strategies
- Strategy 1: Support becoming resistance (and vice versa)
- Strategy 2: Open-drive
- Strategy 3: AB = CD
- Strategy 4: Daily/weekly high and low
- Strong or weak highs/lows
Strategy 1: Support becoming resistance (& vice versa)
- We can usually spot this setup in the charts almost every day, so there are quite a lot of trading opportunities with this one.
- The setup works both ways – support becoming a resistance and also resistance becoming support.
- Here is how to spot it and how to trade it:
- To identify this setup, you first need to see the price strongly reacting or jumping away from some area in the chart. This strong reaction indicates that there was strong support or resistance in the area.
- One big reaction is enough but two or more strong reactions are even better. This way you can be sure there was a really strong support or resistance area.
- After spotting such a strong area, you need to wait for the price to go past it. You want to see this strong support or resistance breached.
- Even though the support/resistance was breached, it is still significant and strong. The reason is that breaching such a level requires a lot of effort and volumes of strong buyers or sellers. This area will be “defended” again. This is how support becomes resistance and how resistance becomes support.
- When you identify support becoming resistance (or resistance becoming support) level, you wait for the price to come back to this area and enter your trade from there.
- This setup works for all time-frames. I personally like to look for it on daily and on 30-minute charts.
Resistance becoming Support
Support becoming Resistance
Strategy 2: Open-drive
Strategy 3: AB = CD
Strategy 4: Daily/weekly high and low
Highs and lows of previous days or weeks are pretty significant areas.
They mark places where the price failed to go upper or lower.
A daily high shows us the place where buyers stopped their buying activity, and sellers took over.
A daily low shows the place, where sellers who were driving the price lower didn’t have enough strength or will to push the price lower anymore and where buyers took over.
Market participants remember daily/weekly highs and lows very well, and such places often work as strong support/resistance zones.
When the price returns to the area where the previous day’s/week’s high or low was, everybody is watching, and they are interested whether this area is going to be breached or not.
It is not so easy to break through such a strong support/resistance zone. There is usually a lot of strength (= a lot of volumes) needed to push through it.
The reason is that a lot of people are “defending” such a place.
It is defended by those who created the daily/weekly high/low the previous day/week (or a few days/weeks back). They are defending their positions and their interests.
The obvious strategy would be going long from the previous day’s low and
going short from the previous day’s high.
We personally don’t recommend to trade like that.
The reason is that there are a lot of false breakouts through these S/R zones and it just doesn’t work so well.
However, there is another way how to trade daily (weekly) highs and lows. It is the way we prefer.
It goes like this:
- First, we wait for the high or low of the previous day/week (or from any day/week before that) to get breached.
- This gives us information that strong force pushed through strong support/resistance.
- Strong force = strong buyers or strong sellers.
- If you remember the Strategy 1: Support becoming a resistance (and vice versa), then you probably know what to do next.
- Broken support becomes resistance and broken resistance becomes support.
Daily High – Long trade scenario
Strong or weak highs/lows
- Distinguishing a strong high from a weak high or
- Distinguishing a strong low from a weak low
- Isn’t a standalone trading strategy.
- However, being able to tell the difference is quite crucial.
- In fact, in every trade that is based on our main volume-based strategies,
- We consider whether our levels are close to strong or weak highs or lows.
Strong high/low
- Forming of highs and lows are closely connected to aggression.
- The most simple and widely known are the Rejection candles
- (From Vol 3) that shows reactive aggression.
- The common thing for all of them is long tails and fast change of direction.
- The long tail means that there was a strong and aggressive reaction activity.
- This is exactly how you tell strong high/low from weak high/low.
Strong Low
- If there is a swing low where you can see a strong and quick rejection of lower prices followed by aggressive up-move you are looking at strong low.
- It doesn’t have to be rejection candles or pin bar with similar candle formation.
- There just needs to be an area with an apparent and fast change of direction.
Strong High
- Remember that you are looking for aggression at highs/lows and not for any particular candle formations.
- Aggressive change of direction is what matters, not candle formation.
- The reason is that candle formations are different on every time-frame, but strong highs/lows formed by aggressive players are usually visible from more than one time-frame.
Weak high/low
- Weak highs or lows are the exact opposite of the strong ones.
- Such swing points were formed slowly, reluctantly and there wasn’t any apparent aggressive activity.
- Weak swing points can be identified by many knots of many candles that are “testing“ into some area,
- but there isn’t a candle that would test way beyond all the other candles (if there was, it would be a sign of a strong swing point).
- If there is no such a candle, just many candles testing the same area, then it is a weak high/low.
Weak High
- In the left picture, you can see the price going upwards and then turning very slowly and reluctantly.
- There is no aggression apparent at the swing point of this area.
- There simply weren‘t aggressive sellers to reject higher prices aggressively.
- This is a weak high.
- Reverse for weak low.
How to implement this into trading:
- Now, you know the difference between strong and weak highs and lows.
- Strong highs/lows are strong support/resist zones because they mark places in the chart where aggressive buyers/sellers were present.
- Weak highs/lows are places with no aggressive market participants present.
- We don’t suggest that you trade every strong high/low you see but should be aware of them in your trading and that you adapt your strategy accordingly to the strength and aggressiveness of how the swing highs/lows were formed.
Strong High = Quit Long Position
- Imagine you are in a long position and that you see that the price is approaching an area in which aggressive sellers were (strong high).
- Being aware of this strong high, you quit your position before it reaches this area.
- This is how you use knowledge of strong high to protect your profit and exit the trade before the position runs into a “danger zone“ (resistance zone created by strong high).
Weak High = Don’t Quit
- A common mistake would be going short from this weak high or quitting your long position early.
- The price usually retests weak areas, and it tends to make strong highs/lows eventually.
- Weak highs/lows are places the price is likely to shoot through.
- There is no reason to quit your trade if it is heading into a weak high/low area.
- If the area is really weak, the price is most likely to test it and shoot past it.
That’s all for pure price action strategies in next article will dive into Volume Profile.