Price Action Analysis and Day Trading

Todd Mitchell of Trading Concepts is truly dedicated to trading and educating fellow traders. This is immediately apparent if you have ever spoken with him or read one of his articles.

Todd has been trading full-time since he graduated from college in 1990 and since 1994 has been sharing his powerful and successful trading strategies with traders of all levels. Today Todd is going to cover price action and its importance in trading systems and how it relates to day trading. We would love for you to leave a comment here for him here, but you can also visit Todd at TradingConceptsInc.com.

-------------------------------------------------------------------------------------------------------------------------------

Modern day trading systems use multidisciplinary approaches to determine appropriate trading setups and to gain an overall understanding of the mood of a given days trading session. At the heart of many trading systems is price action analysis, which is interpreted in a variety of styles and approaches that best suit the particular traders methodology. Price action analysis has always been an important facet in understanding intraday trading and short-term trading trends. In some trading systems it is the primary component in determining trade selection, and in others it plays a secondary or filtering role in determining trade selection. To be sure, there are well-known trading systems that utilize only price action analysis and eschew oscillators, indicators and all the other modern day mathematically based trading tools.

Traders who utilize price action analysis generally do so by utilizing multiple time frames to determine short and intermediate term trends. Four common time frames used in these comparisons are weekly, daily, 60 minute, and 30 minute intervals. Shorter time frames generally distort the results of analysis because they over emphasize less important price action relative to the overall trend of reference needed in determining trade set-ups and overall trend analysis. It is not unusual for position traders to utilize the 30 and 60 minute charts to spot trade setups that are not readily apparent on the longer-term charts.

In its simplest form, price action analysis involves examining the open, high, low, and close of individual price bars, sometimes called vertical bars. This analysis can be either single bar analysis, duel bar analysis, or multiple bar analysis. The traders choice of time period and the number of bars is strictly a matter of choice relative to his or her trading style. Important information can be gleaned from in a examining vertical bars and a variety of typology prime systems has evolved to identify the predictive nature of single and dual bar systems. Like all trading analysis, the purpose of analyzing verticals bars is to develop predictive characteristics that can be used in determining trade selection. Most systems using price action analysis have specific nomenclature for vertical bars that are bullish, bearish, and neutral.

As a general rule, traders examine the open, high and low from a single bar and compare it to the same characteristics in a bar that follows and are able to make relatively accurate assumptions as to the direction the market may go, either up or down or sideways. Most systems have a highly developed classification or identification system to identify bar formations most likely to result in market direction of either bullish or bearish. Pure price action analysis has a surprisingly accurate record in determining market movement based upon these classifications. Terms like:

1. Bullish vertical bars
2. Bearish vertical bars
3. Neutral vertical bars
4. Reversal vertical bars
5. Expanded range vertical bars

I'm sure there are a variety of other naming conventions for price action analysis, but the important thing to remember is that each designation says something about the market. In other words, they can help the trader determine the probability of the direction of the next vertical bar. In a sense, this vertical bar nomenclature is market analysis in the purest sense. There are no mathematical formulas, or nonlinear analysis, or exponential averages; this is analysis of pure price action unfiltered or corrupted. Whether the trader chooses single bar analysis or duel bar analysis he or she is getting information directly from the market price action to analyze based upon the methodology of his or her system. For this reason alone, price action analysis has remained popular for decades, and this popularity is likely to continue.

Of course, a full discourse on price analysis would entail far more space than this short article; there are many books devoted to understanding this topic. The important point is clear though, price action has a place and use in nearly every trading system. The information gleaned from the simple observation of moving prices is among the most valuable asset a trader possesses, and learning to accurately and efficiently analyze price movement is the skill that will augment any traders skill and ultimately, any traders profit. While price action analysis may not be the centerpiece of all trading systems, there can be no doubt that its inclusion in a trading system will contribute positively.

Yours in trading success,
Todd Mitchell
Trading Concepts, Inc.
-------------------------------------------------------------------------------------------------------------------------------
See why thousands of traders have turned to Todd Mitchell to help them successfully day trade the e-mini market to increase their trading profits. These powerful trading strategies can be used in any time frame and in any market. Click to learn more about Todd's methods.