Price Action

In this new Module 2 : PRICE ACTION & S/R first we gonna take a look at Price Action which is the foundation of trading analysis first step into understanding the charts so lets get into it.

Table of Contents

• Price Action
• Why Does the Price Move ?
  • Example of Why Does the Price Move ?
  • Key Points to Remember
• Who Moves the Price ?
• How to Be Profitable ?

Price Action

Price Action is the art of understanding the naked charts without any indicators. It is the first thing we recommend to learn before jumping into anything else. The thing is that we don’t look for candlestick formations.

If we compared Price Action to reading, then candlestick formations would be only single letters or single words. However, price charts and markets speak in sentences; not single separate letters or words.

For that reason, we perceive the price movement as a continuous flow and the main thing we are interested in is the price dynamics.

Why Does the Price Move ?

As we already learnt in previous Volume 1: INTRODUCTION that prices move up or down due to market orders. So in context of Price Action what truly moves the price is AGGRESSION.

1. If the price goes up,
   • then the buyers are more aggressive.
2. If it goes down,
   • then sellers are more aggressive.
3. If you are aggressive,
   • you want to buy or sell NOW.
4. If you want something NOW and you want to be 100 % sure you will get it,
   • you need to use MARKET ORDER.

This type of order means that whatever the price is, your order will get filled. In other words: you place a MARKET ORDER to buy or sell immediately at the best available current price.

Example of Why Does the Price Move ?

Imagine a situation when there is a piece of news that implies that IDFC FIRST BANK will go up. You are a hedge fund trader, and you want to enter a long position with 1,00,000 shares at 43.25 (that equals to INR 4,325,000).

Unfortunately, everybody else sees this piece of news, and they also see the opportunity.

The price is starting to go up rapidly. You want to be part of this, and you really want to enter your position. However, this is happening too fast.

To make sure you will be able to jump into the new trend, you need to enter the trade with MARKET ORDER. You need to be aggressive.

Because your position is pretty big, it won’t be filled all at once. It will get filled fast, you will
be able to enter the whole position, but the position will get split as the price moves upward
quickly.

As you can see in the above image the first 10,000 shares were distributed from ₹ 43.30 to ₹ 43.55 then next 20,000 shares were distributed from ₹ 43.55 to ₹ 43.65. The 40,000 shares made a huge long upper wick spreading shares from ₹ 43.65 to ₹ 43.80. Next 20,000 shares were also in that same vicinity and the last 10,000 shares ₹ 43.75 to ₹ 43.80.

So when all the orders were going through Market Order you can see a trend started in upward direction and after orders completed it came down putting the position in risk.

Key Points to Remember

• It is the aggressive market participants, who drive the price aggressively up or down with their market orders.
• This is the true reason why the price moves.
• Remember: it is the aggressive buyers/sellers with their aggressive market orders who drive the price up or down.

Who Moves the Price ?

• The table above shows that roughly 83.4% of all the equity volume is transacted by the big financial institutions.
• They have the absolute majority, they move and manipulate the price. It is their game!
• On the other hand at the bottom of the picture, you can see a small share of 8% that the retail traders own (that’s us).
• It is not just the Equity market. It is the same for all trading instruments.
• If you look for example at the forex market, you can see that it is identical.

• The table above shows that roughly 63.66% of all the currency volume is transacted by the big financial institutions as of 2020.
• The Market is always moved, dominated, and manipulated by a few big institutions or financial groups.
• As you can see, you and I are pretty small.
• We can’t move the price, we can’t manipulate the markets, BUT we can be profitable!

How to Be Profitable ?

• So to be profitable! We only need to accept our role in this game, i.e. we need to keep an eye on the big guys – the institutions.

• How do we do that? How do we track institutions?

• We track them through PRICE ACTION and VOLUMES.

• PRICE ACTION & VOLUMES provide us with clues on:

  • what the institutions were doing ?
  • what they are doing right now ? &
  • what they most likely will be doing in the future ?

That’s it for this article in next one we explore How to Spot Institutional Activity With PRICE ACTION ?