TradingBlog

Trade price analysis involves monitoring price action, in order to gain an insight into the short term sentiment of the market. Determining who is in control at that time – the bulls or the bears. And assessing how they’re likely to respond to changes in the market. Price analysis is much more than just watching for your favorite candlestick patterns.

Trade price analysis is essentially a top down approach, working from the macro level of Market Structure such that we analyze the big picture first and then go down to the current trend within that structure. Finally take a look at the current price pattern through candlestick analysis or other method that works.

Market structure

The higher timeframe chart is opened and any areas of major support or resistance are identified. Support & Resistance are areas of past price congestion. Trade is a higher probability of price stalling or reversing at these areas of major support or resistance. Then narrow focus to the shorter trading timeframe and add to the market structure framework, by identifying areas of minor support or resistance. Thus Market Structure is simply identifying a support and resistance framework within which price moves.

Having defined the market structure an analysis on the trend to identify its strength is conducted. If the trend moves strongly, anticipate it being more likely to break through the next support or resistance levels. If it is weakening, a greater probability of the support or resistance levels forming a barrier to further price movement can be declared. We determine the strength of the trend by looking at its closeness to the support and resistance barriers within the framework.

Conduct further price analysis regarding the trend and how it moves within the support and resistance framework. The price may have just meandered slowly up to a major resistance level. The current price swing may clearly show less momentum than both the previous upswing and downswing. And the price bar range may be narrowing. This gives a reduced likelihood of the commitment required from the bulls to break through the area of increased supply. The shooting star pattern provides evidence of a clear rejection of prices at that resistance level. This provides a lower risk or higher probability trade in the short direction.

Instead of entering long on a cross reversal pattern, just because it matches the cross on candlestick patterns, conduct further analysis to see where this pattern occurs within the bigger picture of market structure. The trend may show a strong and accelerating move downward, on greatly increased volume, extending price rapidly to great distances below its average. This is an area where I expect increased demand. The cross shows a clear halting of the rapid move down, and allows me an opportunity to enter a low risk trade close to an area of major price support.

The end result might be the same. Over a lifetime of trading this approach will produce more favorable results than just entering because the pattern matched.

The market structure defines where we trade. The trigger, whether a candlestick pattern or some other form of entry trigger, tells you when to get in, only when you’ve first met the requirements of the market structure rule.

Think about where the current price movement is within a structure of support and resistance. Think about the changing strength of the current trend, or price swing, as it approaches this area of support or resistance. Watch for signs of strength or weakness in the trend, through the clues obvious in changes of drive and instability.

And don’t forget – always use stops, because there are no guarantees. This is a game of chance.