Getting Comfortable With Emotional Extremes
I’m happy to share with you that by my having access to institutional FX trading desk research, I can assure you that price action analysis grabs the attention is important. Because of the size of the FX market, no one truly has a complete picture of what’s happening or is about to happen.
Rather, at best, the large institutions have a better albeit non-complete understanding via a good sample size as to market expectations.
The study of candlestick wicks or specific price extremes near key levels often fills end of day trading desk reports. The purpose of these reports is to help wealthy clients or traders for the bank know the key levels on the chart. The key levels are identified by recognizing price action’s reaction near key levels. This means that with a little trading of understanding price action around key levels, you can utilize the same method of analysis as the banks.
Lighting Your Analytical Path via the Wicks
Price action and Japanese candlesticks are one in the same.
Japanese candlesticks, which were introduced most successfully in the West by Steve Nison’s, Japanese Candlestick charting and was a key component of the Market Technician’s Association, Chartered Market Technician program simply visualize price action in a helpful manner.
The four components of Candlesticks and any price record, is the open, close, high, and low.
What candlesticks do a great job of visualizing is the difference between the extremes and the open and close of the business day. These extremes are known as the upper wick and lower wick for any given time frame. The upper wick is the difference between the open or close and the price high and the lower wick is the difference between the open or close and the price low.
The price extreme is known as the top tic and the price low is known as the bottom wick. These levels show the sentiment extremes that are crucial for a price action-based analysis. In fact, it’s common to see trading desks looking to place an entry order on the break of an intraday price extreme or wick extreme or a protective stop order beyond a wick extreme. The logic here is that the wick extreme, especially on the longer-term charts, present a level that will not be easily overcome unless a news shock develops.
Either way, a trader needs to have an objective level at which they’re going to exit the trade because the view they have as been invalidated. The benefit of price action trading where you use specific price points of the current move is that your invalidation point is often closer to your entry thereby limiting your risk as long as your trade size is appropriate.
Price Action Trading Training Wheels
While price action analysis is meant to be a form of naked chart trading, there is one tool that may be of assistance. The fractal tool helps to highlight a price extreme over a 5-bar sequence. Specifically, the fractal tool will look for the middle, or third bar of a five bar span and look to see if that middle bar is the highest or lowest and if so, the fractal tool will highlight that bar and let you know the price of that extreme.
The price fractal tool can be like training wheels to a price action trader who is getting comfortable recognizing price turns. A trader who is looking to buy because price action is pushing higher can utilize lower fractals for placing stops and then updating your stops when a new lower fractal develops. A bonus point, the longer the lower wick on a down fractal, usually the more significant the pivot off that low will prove to be.