Price Action Theory

Discussion in 'Technical Analysis' started by BobbiDigital, Apr 20, 2013.

  1. I have been muddling around a lot lately between distinguishing optical illusions and real context I can begin to build an edge around. I would greatly appreciate any insight from consistently profitable traders that still frequent the forum and view price similarly. PM's welcome as well. Thanks! Here goes:

    1. Price behaves the same way on every timeframe. The only difference is how much you can slice it up with smaller timeframes.

    2. When price moves sideways there is high liquidity - these are ranges, bases, consolidation, congestion. Maybe not so much consolidation, but the fact is there is an agreement on price, perhaps a better way to state this.

    3. Once this stage is exhausted price can do one of 3 things - Trend, Headfake, or Expand the range (fairly symmetrically)

    4. A headfake is a failed first leg of a trend. Price reverses and trends the opposite direction.

    5. A trend that is able to put in a higher low advances to the 2nd leg (it may also require a trip back to the base). This leg can be measured relative to the 1st leg to interpret if the trend is likely to continue or fail soon.

    6. Expansion signifies there is still no 'winning side'

    7. Each of these three scenarios begin very similarly coming out of sideways price action. Patience and an understanding of the longer timeframe than the one you are trading is one way to factor in a higher probability of one thing happening over another.

    If I have this right at all, it at least gives me areas I am looking for signals to go-with or mean revert. Thoughts, ladies and gentlemen?

    BD
     
  2. Looks pretty good as a generalization . 4 depends on 7 and 5 is a maybe, again relating to 7 but also lower time frames.

    Work from your higher TF down to get context and from you lower up to get opportunity. Always have a TF below the one you're trading in view to be aware of a fast move setting up.

    But as is, that's good.
     
  3. dbphoenix

    dbphoenix

    1. By "timeframe" I assume you mean bar interval. Timeframe refers to a span of time from that time back there to that time up there, like a day. Bar interval refers to a near infinite array of options one has to "chop" the continuous movement of price into intervals that convey meaning to him, from the tick to the 5H (or greater).

    So if one is dividing a one-day timeframe into 50 different bar intervals, some will be uptrending, some will be downtrending, some will be ranging, some will be in chop. So what you see will depend in large part on what it is you're looking for. If, for example, you're looking for a downtrend, you'll have little trouble finding one. How long it will last is another matter.

    2. Yes. Sort of. From one extreme on the upside to the other extreme on the downside, there will be increasing liquidity toward and at the middle or mean of this range. But there will also be increasing chop. Which is why trading the extremes is more profitable to those who aren't implementing exotic trade strategies. If you don't have an exotic trading strategy, you may be happier by trading reversals at the extremes of the range, once you've found and plotted it.

    5. Almost. You won't know until after the fact whether that higher low suggests trend or not, and you can't trade a hindsight chart (except in backtesting). It may instead end up as a sideways congestion. If you're looking for clues, look instead at the buying and selling waves that are creating these movements in the first place. If you are for example trading a daily chart, look at it in terms of 30m bars, or even 15m. Are the upswings longer than the immediately preceding downswings? Then buyers are in the driver's seat. If not, then sellers have the upper hand. Are these waves more or less equivalent? If so then you are more likely looking at a setup for a sideways movement, perhaps a trading range that's wide enough to trade from top to bottom.
     
  4. 1. Price behaves the same way on every timeframe. The only difference is how much you can slice it up with smaller timeframes.

    TIME is the constant that behaves the same. Price does not behave the same across every timeframe. Price as you have described is merely a recognized "pattern" which may not be a pattern at all in any specific time frame.

    2. When price moves sideways there is high liquidity - these are ranges, bases, consolidation, congestion. Maybe not so much consolidation, but the fact is there is an agreement on price, perhaps a better way to state this.

    Equilibrium is not liquidity. Equilibrium is buyers AND sellers at a specific price, hence the recognized patterns. Liquidity otoh means there are buyers AND/OR sellers at a given price. Think buyers sitting on the bid with few sellers, and verse visa. That's liquidity, not equilibrium.

    3. Once this stage is exhausted price can do one of 3 things - Trend, Headfake, or Expand the range (fairly symmetrically)

    I have a semantic problem with this, but generally agree. But you did forget a simple move to the next equilibrium zone. If ES moves 3 ticks and that 3 ticks produces equilibrium, is it expansion, trend, or headfake?

    4. A headfake is a failed first leg of a trend. Price reverses and trends the opposite direction.

    I wouldn't put my money on this idea.

    5. A trend that is able to put in a higher low advances to the 2nd leg (it may also require a trip back to the base). This leg can be measured relative to the 1st leg to interpret if the trend is likely to continue or fail soon.

    Just what is your definition of "trend"? This example could just as well be expansion or headfake.

    6. Expansion signifies there is still no 'winning side'

    Ummm... How can there be expansion without a "winning side"?

    7. Each of these three scenarios begin very similarly coming out of sideways price action. Patience and an understanding of the longer timeframe than the one you are trading is one way to factor in a higher probability of one thing happening over another.

    Whatever works for your style, techniques, and instruments. But there is no one size fits all in trading.

    Trade On!
     
  5. What I still fail to understand, and this is most likely the one I'm supposed to 'look in the mirror' to answer, is if trading is anticipating or reacting to circumstances or both but in which order?

    For example:

    If I am using a signal bar, I must risk it to play. The signal bar means something already happened, you are reacting. The way I see it then is that this only makes sense if you are anticipating other traders being wrong and squeezed out. Otherwise I'm just another asshole customer thinking I know where price is headed, 50/50 not a positive expectancy right?

    So to risk a small amount one would have to get in DURING the bar's formation and risk its extreme, the high or low, in anticipation of a specifc reaction from the next bar participants.

    I know it seems as if I'm splitting hairs here. At the very least its a good mental exercise. In short, would you rather anticipate a reaction or react in anticipation? :D
     
  6. Part of the answer is it comes down to how you conceptualize trading which gives birth to your trading methodology. I have great trading friends who are very successful and we all differ on our views re. anticipation, reaction and prediction because we all differ on our style and theory.

    You think a trader is wrong and is getting squeezed out but I think a trader is correct and taking over. That might be the same thing - or not. What if it looks exactly the same as the last one and it didn't work but this one does - then what?

    Now it goes back to your 1st post.

    Re. getting in before the bars completion, you are using a trigger point. But you can't always use a trigger. Sometimes you have to wait on the close and once again that goes back to your 1st post.

    Trading a single time frame is like having a keyhole view of the market and if you crack the multiple time frame view then it will help to determine when to take the trigger point and when to wait for the close.

    But there is more to it that that, much more. You're on the right track.
     

  7. I don't know if we each have a destiny, or if we're all just floating around accidental-like on a breeze,
    but I, I think maybe it's both. Maybe both is happening at the same time.

    --- From the movie Forrest Gump


    Hey, Coleman.
    What about lunch?

    The lobster or the cracked crab?
    What do you think?
    Can't we have both?

    Why not?
    Dimitri!
    Sir?

    Lobster and cracked crab for everyone.
    Extra prima good, Mr Coleman, sir.

    --- From the movie Trading Places
     
  8. I think PA by definition assumes that there are times when the context, setup and signal bar come together in a fashion that gives you and edge. That edge might be a 40% trade that wins 4 in 10 times but pays out 2.5x your risk or a 70% trade that pays out 1x your risk.

    Unless you figure out how to arb something you are always anticipating. You are always, at the moment you incur risk, anticipating what the future will bring a certain percentage of the time. I think that is what trading is and I think PA is one of the tools (a good tool but a hard practice) that people use to make those judgments.

     
  9. Is trading anticipating or reacting or both?
    It's picking up and jumping the wagon,to me.
     
  10. dbphoenix

    dbphoenix

    Depends on your trading plan, if you have one, and the testing you did, if any, to develop it. If you have developed a trading plan and you have done the proper testing to trade it, then you know the probabilities that price will move one way or another depending on what has led up to what you have defined as a trading opportunity. If you haven't done any of that, then whatever you do is mostly a guess.

    Consider also that price does not move in bars. Price is continuous. If you're going to enter and exit at the right times in the right places, you're going to have to become attuned to this continuous movement so that you become sensitive to whatever strength or weakness each side is exhibiting by the transactions they complete. You will then know whether to go long or short, or remain long or short, or stand aside until the market shows its hand.
     
    #10     Apr 20, 2013