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Playing with Price Action

Some traders do not use indicators at all. Rather they watch for patterns in the market to develop to determine when and how they will enter the battlefield. Candlesticks are great for this type of analysis as they portray a visual depiction of what has recently occurred and why.

There are dozens of candlestick patterns that one should learn to be able to better assess price action. Let's go over a few of the most popular ones now.

DoJi

The above candle is called a doji candle. A doji candle occurs when price has moved up, moved down, and closes at the same price it opened. This is a sign of indecision in the market. The bulls and bears have battled it out and have ended up in the same spot. If this happens at the end of a trend, it's an excellent signal that price is going to move in the opposite direction.

Evening Star


Here is a evening star. It's another type of reversal signal that can be found in candlestick patterns. How this candle is formed is when the first bar towards the end of the trend is a bull. The second candle continued on up, however the bears took over and drove the price back down creating a nice sized wick at the top of the candle. And lastly the third candle, continued on downward. Finding this pattern at the end of an uptrend is a great signal that price will start moving down. This type of pattern can be reversed and found at the bottom of a downtrend. In this case it's called an morning star pattern.

There are a dozen great forms of candlestick patterns that can lead to high profits. While I went over a couple here, we will go into more detail on these types of patterns elsewhere on this site. And if you would like to gain an even more in depth study on these patterns, you should check out the book, "Profitable Candlestick Trading: Pinpointing Market Opportunities to Maximize Profits" by Stephen W. Bigalow.

There are most definitely more ways to pull the trigger without indicators. Just as war itself is as old as mankind, there are techniques that have been around for centuries.

Modernized Ancient Mathematics

Back when swords and spears were used to wage war, there was a man named Leonardo of Piso. He was better known as Fibonacci. Fibonacci wrote a book titled, "LIber Abbaci" that introduced to Western society a series of numbers that had origins dating back to the days before Christ. Without completely boring you to death with the details, he discovered a mathematical sequence that has proven itself to be a constant throughout the entire universe.

The sequence of numbers is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89... and they continue on.

The basic formula is to take the sum of two numbers and then add it to the larger of the two numbers being added.

For instance:

0+1 = 1

1+1 = 2

1+2 = 3

2+3 = 5

3+5 = 8

The sequence never ends.

So how does ancient mathematics play a role in modern day financial trading? Through all the various ways of attempting to predict the markets, someone came along and applied the Fibonacci sequence to price movement.

Below is an example of what they found.

Golden Ratio


Notice how price bounced off the 61.8% Fibonacci level? That particular number is considered to be the "golden ratio". Fibonacci ratios are found by dividing a number in the series by the number that follows it. In this particular example, if you divide 55/89 you will have 0.6179.

I see the confusion in your face. Don't worry solider. You do not have to be a mathematician to make use of Fibonacci. Just be sure to watch how price moves around it. To draw Fibonacci levels, you'll want to start from the high or low of price movement and draw upwards or downwards in the direction of the trend to the next high or low.

Don't forget to thank you broker. They were more than generous to give you the tools that will automatically calculate the most popular Fibonacci levels for you.

More Lessons

1. Recruit - What is Forex?
2. Private - How does Forex Work?
3. Private First Class - Selecting a Broker
4. Corporal - Pick a Chart, Any Chart
5. Sergeant - The Fundie vs The Techie
6. Lieutenant - Strategize
7. Captain - Indicators
8. Major - Playing with Price Action
9. Colonel - Developing your Plan
10. General - Putting it all Together