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Price Action Analysis
 How to Study Candlestick
 Price Act ion Analysis
Back to: Trading with Smart Money
 How to Trade with Smart Money
 Trading with Sideways Price
Action Area
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Demand Zone
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 How to Trade with Support and
Resistance

Price Action Analysis in Detail

In t his art icle, I am going to discuss Price Action Analysis in det ail. Please read our previous art icle before proceeding to
t his art icle where we discussed Candlestick in det ail. As part of t his art icle, we are going to discuss t he following point ers
in det ail.

1. What is Price Action Analysis?

2. Understanding the advance features of CANDLESTICK

The ult imat e guide you will ever need to underst and CANDLESTICK and it s charact erist ics. Once you complet e t his art icle,
t hen you will no need to recognize any CANDLESTICK pat t erns.

What is Price Action Analysis?

The Price Act ion Analysis is t he movement of price in t he chart . Candlest ick format shows clear price act ion, I mean what
buyers and sellers are doing in t hat period. Their act ivit y clearly shows in CANDLESTICK

So to learn price act ion we have to learn all t he basic and advanced feat ure of candlest ick

5 steps to candlestick analysis

Step1: The size of the body (high to low)

BODY:

1. Narrow
2. Average
3. Wide
Find t he body of your t imeframe. The candle body shows a lot of informat ion such as

A long body is showing st rengt h

A narrow-body shows weakness
When consecut ive bodies become larger and larger, it shows an increase in moment um
When consecut ive bodies become smaller and smaller, it shows slowing moment um
If up or down move wit h great er t han average body candle it shows volat ilit y high

How to compare?

1. current candlest ick wit h respect to t he previous candle

2. current candlest ick wit h respect to t he same swing
3. current candlest ick wit h respect to t he previous swing

Step2: The length of wicks

Larger wicks show t hat price has moved a lot during t he durat ion of t he candle but it got reject ed, shows t he
presence of supply or demand
At major support and resist ance levels. Candlewick becomes larger it indicat es volat ilit y. This generally happens
aft er long t rending phases before a reversal happen from support and resist ance level
One more t hing: t he longer t he shadow, t he more likely prices will move in t he opposit e direct ion of t he shadow
Long wick candles do not always signal a reversal if t he wick of reject ion candle engulf by subsequent move it fails,
it called reverse reject ion
If it appears bet ween t he t rend it shows t rend cont . ( as a small pullback in smaller t ime frame)
While a single long long wick indicat es possible of prices moving in t he opposit e direct ion of t he wick, a clust er of
mult iple wicks indicat e t hat prices are likely to move in t he same direct ion of t he wick creat ed and if t he body
closing t he direct ion of t he t rend
Step3: The ratio between wicks and bodies
Underst anding t he relat ionship bet ween t he open and close when compared to t he high and t he low of t he present bar

Open price t ells us where t he balance bet ween buyers and sellers at t he opening of t hat period
Close price t ells us where t he balance point was at t he end of t he period

Etep4: Volume contains

WYCKOFF BASIC LAW

1. THE LAW OF SUPPLY AND DEMAND: When demand is great er t han supply t hen t he price will rise to meet t his
demand and conversely when supply is great er t han demand t hen t he price will fall
2. THE LAW OF CAUSE AND EFFECT: The effect will be indirect ly proport ional to t he cause ot her words a small
amount of volume act ion will only result in a small amount of price act ion. If t he cause is large t hen t he effect will
be large vice a Versa
3. THE LAW OF EFFORT VS RESULT: Similar to newton’s t hird law. Every act ion must have an equal and opposit e
react ion, in ot her words, t he price act ion on t he chart must reflect t he volume act ion below. Effort (volume) seen as
t he result (price), where validat ed and anomaly comes to consider

Wide spared candle

Price action –

St rong BULLISH market sent iment . The price act ion has risen sharply higher and closed at or near t he high of an up candle.

Volume Action–

The associat ed volume should, t herefore, reflect t his st rong sent iment wit h a ‘st rong’ volume. As we can see in t he
above example is, if t he volume is above average(effort vs result ), t hen t his is what we should expect to see as it
validat es t he price. The smart money is joining t he move higher and everyt hing is as it should be.
If t he volume is below average or low, t his is a warning signal. The price is being marked higher, but wit h lit t le effort .
The move is not genuine. If we are in a posit ion, we look to exit . If we are not in a posit ion we st ay out and wait for
 t he next signal to see when and where t he smart money is now t aking t his market .

Narrow Spread Candles

Price action – weak market sent iment

Volume Action–

A narrow spread candle should have low volume – again effort vs result .
NARROW SPREAD CANDLE WITH HIGH VOLUME. If t he volume had represent ed buying, how can t he spread be
narrow? There are only t wo possible explanat ions for a narrow spread up candle on a very high volume.

1. Eit her t he professional money is selling into t he buying [see t he end of a rising market ]
2. There is a t rading range to t he left and t he professional money is prepared to absorb t he selling from t raders locked
into t his old t rading range

Step5: RELATIVE OR 2 CANDLE PRICE ACTION

DIRECTION OF CANDLE

The relationship of each bar high/low relative to the previous bar

1. An up bar st art s an upswing and confirms t he end of a downswing

2. A down bar st art s a downswing and confirms t he end of an upswing
3. The inside bar does not break t he previous high low, hence t hey do not affect t he direct ion of t he current swing
4. Out side bar breaks bot h t he previous high and low, it int roduces uncert aint y in t he market st ruct ure. Out side bar in
upswing cont t he upswing and out side bar in t he downswing cont t he downswing. Typically an out side bar not end or
st art a price swing wit hout down bar or a break below t he swing low an upswing will cont

DIRECTION OF TREND WITH RESPECT TO CANDLE POSITION

Context or Background

CANDLESTICk should not be analyzed in a vacuum. A candlest ick always must be analyzed in t he cont ext of what has
happened in t he past .

Cont ext is what current candlest ick shows wit h respect to t he previous candlest ick

The current candlest ick larger or smaller t han previous ones? Which shows moment um increases or decreases
Is t he size-changing meaningfully or not ? Buying or selling pressure
Is volat ilit y increases or decreases
Is t he change happening during an act ive t rading period or not ? For example, candlest icks in mid-period generally
dead or inact ive.
TESTING PRICE LEVELS

The concept of t est ing refers to t he market moving towards a price level to “t est ” if t he price level will accept reject t he
market ’s advances.

The high and low of each price bar are nat ural support and resist ance levels and t he wick generally act s as supply and
demand zone. The t est of t hese levels or zones show t he undercurrent s of t he market and is crit ical for reading price
act ion.

THREE PRICE BARS/expectation

Wit h a clear read of 2 BAR PRICE ACTION (DIRECTION, CONTEXT, TESTING), we are able to form an expect at ion of t he
market in t he t hird candle. We would expect t he market to move in a cert ain way in t he t hird bar wit h our read of 2 bar price
act ion. The confirmat ion or failure of our expect at ions of t he t hird bar reveals more about t he market and adds to our price
act ion analysis.
To form expect at ions, we need to make a very simple assumpt ion about how t he market should behave and should not
behave.

Essent ially, t he market has moment um and inert ia. bearishness should follow bearishness and bullishness should follow
bullishness. When it does not obey t his assumpt ion, we have to caut ious, Maybe a possible change in market direct ion.

Some more examples

In t he next art icle, I am going to discuss How to Trade with Smart Money. Here, in t his art icle, I t ry to explain Price Act ion
Analysis i.e. t he st ep by st ep process to st udy CANDLESTICK and how to find swing high and swing low and charact erist ics
to find swing high and swing low.

Please join my Telegram Channel to learn more and clear your doubts. ht t ps://t .me/t radingwit hsmart money
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2 thoughts on “Price Action Analysis”

PHILANI
JANUARY 1, 2020 AT 2:11 AM

Hi ilike this explanations is very clear

Reply

SULAIMAN
JANUARY 1, 2020 AT 4:02 AM

Waw like it

Reply
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