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In its most basic form, Price Action Analysis, also referred to in this Wiki as''"Market Mechanics"'', is a trader's interpretation of the behaviour that price movements displayed on a chart.  
In its most basic form, Price Action Analysis, also referred to in this Wiki as ''"Market Mechanics"'', is a [[Trader_Types | trader's]] interpretation of the behaviour that price movements displayed on a [[Trading_Tools#Charting_Software | chart]].  


In this Wiki, we will explore several areas of Price Action including the basic cycle, trend analysis, [https://volatility.red/Support_and_Resistance support and resistance] and more.
In this Wiki, we will explore several areas of Price Action including the [[The_Basic_Cycle | basic cycle]], [[Trends | trend analysis]], [[Support_and_Resistance | support and resistance]] and more.
 
 
This Wiki is a part of our [[Essential Forex Trading Guide]]. Be sure to check that out [[Essential_Forex_Trading_Guide | HERE]].




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=='''Market Mechanic Basics'''==
=='''Market Mechanics Basics'''==


Welcome to our Introduction on Market Mechanics.  Here we will lay the foundation for a simple yet powerful approach to understanding the way all financial markets trade and move.  This section is important and lays some groundwork for many other Wikis on this site including that of [[Technical Analysis]].   
Welcome to the Introduction on Market Mechanics.  Here we will lay the foundation for a simple yet powerful approach to understanding the way all financial markets [[Trading | trade]] and move.  This section is important and lays some groundwork for many other Wikis on this site including that of [[Technical Analysis]].   
In [[trading]] and investing the simplest approach is often the best approach for both the new trader and more advanced traders.  There is a theory called Occam's Razor which has proven to be one of the most useful tools for scientific discovery since the 14th century.  This theory states that one should not make more assumptions than are needed to find an answer or solve a problem.  In simple, terms it means the most simple and least complicated approach is usually the best.  This concept can be very true in [[trading]] and investing as well.  There is simply an enormous amount of information available so it can become a difficult task to decipher it all.   
In [[trading]] and investing the simplest approach is often the best approach for both the new [[Trader_Types | trader]] and more advanced [[Trader_Types | traders]].  There is a theory called Occam's Razor which has proven to be one of the most useful [[Trading_Tools | tools]] for scientific discovery since the 14th century.  This theory states that one should not make more assumptions than are needed to find an answer or solve a problem.  In simple, terms it means the most simple and least complicated approach is usually the best.  This concept can be very true in [[trading]] and investing as well.  There is simply an enormous amount of information available so it can become a difficult task to decipher it all.   
Far too many traders start out by getting involved in complicated [[trading]] methods.  This can lead to a lot of confusion for someone who has little or no experience navigating their way through today’s volatile markets.  Whether you are a beginner or an advanced trader, understanding the basic structure of the market before you move on to complicated systems, can help bring clarity to your [[trading]].  [[Trading]] with an understanding of the market’s basic structure creates purpose.  Most people need a simple approach to get into good trades and keep them out of bad trades.
Far too many [[Trader_Types | traders]] start out by getting involved in complicated [[Fundamental_and_Sentiment_Trading_Strategies | trading methods]].  This can lead to a lot of confusion for someone who has little or no experience navigating their way through today’s volatile markets.  Whether you are a beginner or an advanced [[Trader_Types | trader]], understanding the [[The_Basic_Cycle | basic structure]] of the market before you move on to complicated systems, can help bring clarity to your [[trading]].  [[Trading]] with an understanding of the market’s [[The_Basic_Cycle | basic structure]] creates purpose.  Most people need a simple approach to get into good [[Trading | trades]] and keep them out of bad [[Trading | trades]].
A good idea for laying a foundation for [[trading]] success is to train our eyes to understand basic pictures before we can consistently identify more complex patterns.  In this section on Price Action Analysis, we will start with what we like to call a ''"crayon and finger paint approach''" to identifying patterns, cycles and trends.
A good idea for laying a foundation for [[trading]] success is to train our eyes to understand basic pictures before we can consistently identify more complex [[Chart_Patterns | patterns]].  In this section on Price Action Analysis, we will start with what we like to call a ''"crayon and finger paint approach''" to identifying [[Chart_Patterns | patterns]], [[Economic_Cycles | cycles]] and [[trends]].
Many [[trading]] losses are the result of [[trading]] on the wrong side of the market (buying in a downtrend or shorting in an uptrend).  Understanding market mechanics is one key to [[trading]] on the right side of the market no matter what timeframe or [[trading]] style you are using.  This will help to keep your expectations of the market in check by [[trading]] within identifiable trends and price patterns and not hoping to get more out of a move than the move has to offer.  Our Wikis on [[Fundamental Analysis]], [[Sentiment Analysis]] and [[Trading psychology]] can also help you understand the reasons why price moves the way it does as well.
Many [[trading]] losses are the result of [[trading]] on the wrong side of the market (buying in a [[Trends#The_Downtrend | downtrend]] or shorting in an [[Trends#The_Uptrend | uptrend]]).  Understanding market mechanics is one key to [[trading]] on the right side of the market no matter what timeframe or [[trading]] style you are using.  This will help to keep your expectations of the market in check by [[trading]] within identifiable [[trends]] and [[Chart_Patterns | price patterns]] and not hoping to get more out of a move than the move has to offer.  Our Wikis on [[Fundamental Analysis]], [[Sentiment Analysis]] and [[Trading psychology]] can also help you understand the reasons why price moves the way it does as well.


Figure 1.1 shows the Basic Cycle.  This simple picture represents the market’s basic cycle of price behaviour.  All stocks, bonds, commodities, [https://volatility.red/Currency currencies], futures, or any other financial instrument you can think of operates within this cycle.  It is the only movement possible for a financial instrument to make.  Nothing else is possible!  All movements that markets can make are found within this simplistic cycle.  
Figure 1.1 shows the [[The_Basic_Cycle | Basic Cycle]].  This simple picture represents the market’s [[The_Basic_Cycle | basic cycle]] of price behaviour.  All [[Fundamental_Analysis#Equities | stocks]], [[Fundamental_Analysis#Bonds | bonds]], [[Fundamental_Analysis#Commodities | commodities]], [[Currency | currencies]], [[Futures_Market | futures]], or any other financial instrument you can think of operates within this cycle.  It is the only movement possible for a financial instrument to make.  Nothing else is possible!  All movements that markets can make are found within this simplistic cycle.  


https://i.imgur.com/zXARJqR.png
https://i.imgur.com/zXARJqR.png


''Figure 1.1: The Basic Cycle.''
''Figure 1.1: The [[The_Basic_Cycle | Basic Cycle]].''




https://i.imgur.com/BWobkXo.png
https://i.imgur.com/BWobkXo.png


''Figure 1.2: USDCHF [https://volatility.red/Currency currency] pair performing an almost perfect Basic Cycle on the daily chart.''
''Figure 1.2: USDCHF [[currency]] pair [[Trading_psychology#7._Creating_a_Peak_Performance_Trigger | performing]] an almost perfect [[The_Basic_Cycle | Basic Cycle]] on the [[Trading_Tools#Charting_Software | daily chart]].''




Any financial instrument is destined to repeat this cycle time and time again as long as humans are the driving force behind the market’s price action.  Even though many new algorithms and [[trading]] robots have been developed in recent years, humans are still the creators of these synthetic actors and humans never change.
Any financial instrument is destined to repeat this cycle time and time again as long as humans are the driving force behind the market’s price action.  Even though many new algorithms and [[trading]] robots have been developed in recent years, humans are still the creators of these synthetic actors and humans never change.
Knowing where you are in this cycle forms the basis for you to predict future price movements based on the laws governing this cycle which are [https://volatility.red/Trading_psychology psychology] and probability.  If you know where you are in the cycle you greatly increase the odds of making successful trades and you must have many successful trades for long-term profitability.   
Knowing where you are in this cycle forms the basis for you to predict future price movements based on the laws governing this cycle which are [[Trading_psychology | psychology]] and probability.  If you know where you are in the cycle you greatly increase the odds of making successful [[Trading | trades]] and you must have many successful [[Trading | trades]] for long-term [[Sentiment_Analysis#Profit_Taking | profitability]].   




=='''The Only Way to Profits or Losses'''==
=='''The Only Way to Profits or Losses'''==


The only way to profit on the long side is to buy somewhere near the beginning of stage 2 and sell before stage 4 gets underway.  The only way to profit on the short side is to sell short somewhere near the start of stage 4 and buy back your short position somewhere before the start of stage 2.  Don’t worry about the names of the stages in this cycle right now; we will discuss this in great length later.  For now, just understand that they do exist.
The only way to [[Sentiment_Analysis#Profit_Taking | profit]] on the long side is to buy somewhere near the beginning of stage 2 and sell before stage 4 gets underway.  The only way to [[Sentiment_Analysis#Profit_Taking | profit]] on the short side is to sell short somewhere near the start of stage 4 and buy back your short position somewhere before the start of stage 2.  Don’t worry about the names of the stages in this cycle right now; we will discuss this in great length later.  For now, just understand that they do exist.
The only way to a [[trading]] loss is to go long or buy somewhere near the end of stage 2 and sell near the end of stage 4.  The only way to lose on the short side is to sell short somewhere near the end of stage 4 and buy back your short position somewhere near the end of stage 2.   
The only way to a [[trading]] loss is to go long or buy somewhere near the end of stage 2 and sell near the end of stage 4.  The only way to lose on the short side is to sell short somewhere near the end of stage 4 and buy back your short position somewhere near the end of stage 2.   
Traders who wait for too much trend confirmation become victims of buying tops and selling bottoms (or shorting bottoms and buying tops).  If a trader thoroughly understands the only error that leads to losing money in the markets then he will be more prone to avoiding it.  Figure 1.3 shows you the only ways to profit or loss in a basic cycle.
[[Trader_Types | Traders]] who wait for too much [[Trends | trend]] confirmation become [[Trading_psychology#Victim_Mentality | victims]] of [[Chart_Patterns#Double_Tops | buying tops]] and [[Chart_Patterns#Double_Bottoms | selling bottoms]] (or [[Chart_Patterns#Double_Bottoms | shorting bottoms]] and [[Chart_Patterns#Double_Tops | buying tops]]).  If a [[Trader_Types | trader]] thoroughly understands the only error that leads to losing money in the markets then he will be more prone to avoiding it.  Figure 1.3 shows you the only ways to [[Sentiment_Analysis#Profit_Taking | profit]] or loss in a [[The_Basic_Cycle | basic cycle]].


https://i.imgur.com/qVDhS06.png
https://i.imgur.com/qVDhS06.png


''Figure 1.3: The only ways to profit or loss.''
''Figure 1.3: The only ways to [[Sentiment_Analysis#Profit_Taking | profit]] or loss.''




https://i.imgur.com/W4WK1zD.png
https://i.imgur.com/W4WK1zD.png


''Figure 1.4: S&P 500 from 1997-2010.  The basic cycle repeats over and over in real markets.  It’s not just a concept.  The basic cycle repeats this way on all timeframes.''
''Figure 1.4: S&P 500 from 1997-2010.  The [[The_Basic_Cycle | basic cycle]] repeats over and over in real markets.  It’s not just a concept.  The [[The_Basic_Cycle | basic cycle]] repeats this way on all timeframes.''




=='''The 4 Stages of [[The Basic Cycle]]'''==
=='''The 4 Stages of [[The Basic Cycle]]'''==


The Basic Cycle is comprised of 4 stages that are dominated by 4 distinct [https://volatility.red/Trading_psychology emotions] which are:
The [[The_Basic_Cycle | Basic Cycle]] is comprised of 4 stages that are dominated by 4 distinct [[Trading_psychology | emotions]] which are:
 
# [https://volatility.red/Trading_psychology Ambivalence]
# [https://volatility.red/Trading_psychology Greed]
# [https://volatility.red/Trading_psychology Uncertainty]
# [https://volatility.red/Trading_psychology Fear]
 
 
As long as humans are the main force behind the market's price action these [https://volatility.red/Trading_psychology emotions] and how they affect market behaviour will never change.  Figure 2.1 shows the Basic Cycle and its 4 stages.
 
https://i.imgur.com/Jk8DX3h.png
 
''Figure 2.1: The 4 stages of the Basic Cycle''
 
 
From the start of stage 1 to the end of stage 4 can span as much as decades or last just a few minutes.  It all depends on the timeframe that you are [[trading]].  The cycle remains the same no matter what timeframe you are viewing.  It can and will repeat itself endlessly on any chart that you look at, but you need to know what to look for.
A market can only be in one of the four stages in any given timeframe.  However, the market can be in different stages in different timeframes.  For example, the 60 minute chart may be in a stage 4 downtrend but the 1 minute chart may be in a stage 2 uptrend (see figure 2.2) 
 
It would be wise not to place a trade without first knowing what stage the market is in all the timeframes you use in your [[trading]].  We will go into more detail about how to find [[trading]] opportunities that have a stage to sage match in different timeframes later in this Wiki. 
 
https://i.imgur.com/lfszd5F.png
 
''Figure 2.2: The EURUSD [https://volatility.red/Currency currency] pair is in a 60 minute stage 4 downtrend but the 1-minute is in a stage 2 uptrend.  The stages do not match.''
 
 
Each stage will call for specific strategies.  A strategy that works well for stage 2 may not work well at all in stage 4.  An example of a strategy that may work well in one stage but not in another is buying breakouts in stage 2 will tend to work more often than in stage 4 where breakouts will fail a large amount of the time.  Breakdowns will tend to occur far more often in stage 4 but we will cover this topic later in this Wiki.  The point is that you will need to have a few different [[trading]] strategies to be able to pull profits out of any type of market no matter what stage it is in. 
 
 
===Stage 1: Accumulation/Ambivalence===
 
Stage 1 is the bottoming period of accumulation that is driven by the [https://volatility.red/Trading_psychology ambivalence] of market participants.  It’s the stage where traders have mixed or contradictory feelings towards the market.  This is the stage that traders are largely indifferent and uninterested in participating due to the prolonged poor market conditions of the preceding stage 4 decline. 
Stage 1 is generally narrow and tight and tends to last longer than other stages in comparison.  Volume is typically low which generally leads to very low volatility.  This is in contrast to stage 3, which is also a sideways trend that tends to have high volume and is wide and whippy producing many false breakouts (more on trends later in this Wiki, just try to understand the basic concepts first).
In stage 1 the trader should focus their attention on both buying dips and shorting rallies but might want to lean their bias to the prior stage 4 until it has proven that this stage 1 is actually a stage 1 and not a pause or holding pattern in an ongoing stage 4.  Understanding the differences between a pause and a stage 1 can sometimes be hard to tell for newer traders or traders that have little experience with this concept.  A temporary consolidation in stage 4 can sometimes have a similar look and feel to stage 1.  You will have confirmation that it is a stage 1 once it has broken out to stage 2 where the trader will focus on going long the majority of the time.
All stage 1 patterns will eventually breakout into a stage 2 rally which is driven by the dominant [https://volatility.red/Trading_psychology emotion] of [https://volatility.red/Trading_psychology greed] and wanting to be in on the action.
 
https://i.imgur.com/A3t3nl8.png
 
''Figure 2.3: Gold in stage 1 that breaks out to the upside into a stage 2 uptrend.''
 
 
===Stage 2: Rally/Greed===
Stage 2 is the bullish rally period of the Basic Cycle and is driven by [https://volatility.red/Trading_psychology greed] an wanting to be in the market.  This is the stage where most traders and investors will make money except those who came in too late and those who stayed too long. 
Generally, you don’t need a lot of skill to make money in a stage 2 uptrend, especially a macro stage 2.  This is because when extreme [https://volatility.red/Trading_psychology greed] fills a market price often moves up without any major pullbacks.  See figure 2.4.
The [https://volatility.red/Trading_psychology psychology] that dominates stage 2 is one that wants to be in at any cost.  [https://volatility.red/Trading_psychology Greedy] traders can't stand missing a good gravy train and tend to jump into an uptrend late or too many times.
Traders and investors should be focusing exclusively on buying or going long in stage 2.  Pullbacks in stage 2 will be buying opportunities the majority of the time.  There are very few instances when the trader should [https://volatility.red/Speculating consider] shorting in stage 2 unless the market is clearly in a climactic top that has gone parabolic and needs to come down to establish a new equilibrium.
 
https://i.imgur.com/npEwy4t.png


''Figure 2.4: Daily gold chart in a macro stage 2 uptrend.''
# [[The_Basic_Cycle#Stage_1:_Accumulation/Ambivalence | Ambivalence]]
# [[The_Basic_Cycle#Stage_2:_Rally/Greed | Greed]]
# [[The_Basic_Cycle#Stage_3:_Distribution/Uncertainty | Uncertainty]]
# [[The_Basic_Cycle#Stage_4:_Decline/Fear | Fear]]


We have a Wiki devoted to [[The Basic Cycle]]. In this Wiki, we explore each one of the 4 stages of [[The Basic Cycle]] at length and describe the differences in what type of price action you might expect in each of the 4 stages.


===Stage 3: Distribution/Uncertainty===
The main Wiki for [[The Basic Cycle]] can be found [[The_Basic_Cycle | HERE]].
Stage 3 is the topping period or distribution that is driven by the uncertainty of traders for the market to continue moving higher.  During the period bullish of stage 2 the [https://volatility.red/Sentiment_Analysis sentiment] begins to change as a growing number of participants begin to doubt the market’s ability to continue moving higher. 
This is where the major battle between the bulls and the bears takes place.  It becomes a tug of war that neither side wants to lose because they both have money on the line.  This is part of what can make stage 3 so whippy.
Stage 3 will tend to be a wide and whippy sideways trend.  It will have a large range from the high to the low and be very volatile.  This is different from stage 1 which tends to be tight and narrow which is how you can distinguish between these two sideways trends.  If the price bars are relatively large compared to the bars in the previous stage 2 this can give you an indication that the topping phase is near or here.
There are times when stage 3's will have very aggressive and abrupt turns.  These tops can often result in severe collapses.  This reinforces the need to stay sharp and focused on times when the market is giving you clear warning signals.
Traders can focus on both buying dips and selling short rallies.  However, if you are noticing that when the market pulls back, it does it in a very aggressive and severe manner, as opposed to how it rallied higher, you might want to lean your bias to the short side. 
All stage 3's will eventually breakdown and usually quite quickly.  Once it has clearly broken the low end of the range this is when you switch to stage 4 [[trading]] strategies and focus exclusively on shorting rallies and breakdowns.
 
https://i.imgur.com/sBnR2qP.pnghttps://i.imgur.com/sBnR2qP.png
 
''Figure 2.5: EURUSD daily chart showing a stage 3 sideways trend that breaks down to a stage 4 downtrend as shown in figure 2.6.''
 
 
===Stage 4: Decline/Fear===
Stage 4 is the bearish decline portion of the basic cycle and is driven entirely by [https://volatility.red/Trading_psychology fear].  [https://volatility.red/Trading_psychology Fear] is one of those [https://volatility.red/Trading_psychology emotions] that cause even the most rational of traders and investors to act irrationally. 
[https://volatility.red/Trading_psychology Fear] typically escalates into a climax near the bottom of a price move.  There may still be more downside but the worst price destruction is more than likely over.  Those who have held on too long begin to exit in an attempt to keep any of their gains if any are left.  Combine this with the many traders that were buying in stage 3 with the [https://volatility.red/Trading_psychology hope] that the market was going to continue higher, they sell their shares adding fuel to the decline, making it more rapid.  New short sellers also step in with the [https://volatility.red/Trading_psychology hopes] of taking the market down further.
Those who have entered stage 2 late typically exit late.  These traders tend to exit all at once with the herd, creating the climactic part of the decline.
Most traders will lose money during stage 4 unless they understand how to short and take advantage of declining prices.  Traders and investors should exit their long positions and concentrate on going short on any rallies or breakdowns until the market tells them that the downward momentum is over.
 
https://i.imgur.com/Nr5fWu3.png
 
''Figure 2.6: EURUSD stage 4 downtrend.''




=='''[[Trends]]'''==
=='''[[Trends]]'''==
Understanding how to properly define a trend is an essential element for successful and profitable [[trading]].  Without a deep understanding of trends and how to define them, traders may find themselves on the wrong side of the market.  We estimate that being on the wrong side of the market, or [[trading]] against the trend, is possibly the cause of about 60-70% of all losing trades.  We will discuss the different types of trends and how they can be useful in your [[trading]] and investing to help keep you [[trading]] on the right side of the professional market.   
Understanding how to properly define a [[Trends | trend]] is an essential element for successful and [[Sentiment_Analysis#Profit_Taking | profitable]] [[trading]].  Without a deep understanding of [[trends]] and how to define them, [[Trader_Types | traders]] may find themselves on the wrong side of the market.  We estimate that being on the wrong side of the market, or [[trading]] against the [[Trends | trend]], is possibly the cause of about 60-70% of all losing [[Trading | trades]].  We will discuss the different types of [[trends]] and how they can be useful in your [[trading]] and investing to help keep you [[trading]] on the right side of the professional market.   
There are only three things that any financial instrument can do:   
There are only three things that any financial instrument can do:   


# [https://volatility.red/Trends#The_Uptrend Go up]
# [[Trends#The_Uptrend | Go up]]
# [https://volatility.red/Trends#The_Downtrend Go down]
# [[Trends#The_Downtrend | Go down]]
# [https://volatility.red/Trends#The_Sideways_Trend Go sideways]
# [[Trends#The_Sideways_Trend | Go sideways]]


You can access the main Wiki for [[Trends]] [https://volatility.red/Trends HERE].
You can access the main Wiki for [[Trends]] [[Trends | HERE]].




=='''Stage to Stage Transitions the Breakout and Breakdown'''==
=='''Stage to Stage Transitions, [[Breakouts and Breakdowns]]'''==


Once you have identified what stage the market or [[trading]] asset is in you should be focusing your [[trading]] on the strategies that will work best for that stage.  But what about the times when you're not sure what stage you are in?  This is where knowing how a market transitions from one stage to another comes in handy and can be very profitable at the same time.  Knowing when a market is about to transition will help get you into trends very early on and this may lead to better profitability.
Once you have identified what stage the market is in you should be [[Trading_psychology#10._Regaining_Focus | focusing]] your [[trading]] on the strategies that will work best for that stage.  But what about the times when you're not sure what stage you are in?  This is where knowing how a market transitions from one stage to another comes in handy and can be very [[Sentiment_Analysis#Profit_Taking | profitable]] at the same time.  Knowing when a market is about to transition will help get you into [[trends]] very early on and this may lead to better [[Sentiment_Analysis#Profit_Taking | profitability]].


The 4 stages are divided by or linked by 2 transitional phases.  These transitions help to tie the whole basic cycle and market structure together. The transitional phases tend to be difficult times or areas to trade.  They can be wild, whippy, choppy and very volatile.  These characteristics lie in the fact that a struggle between the bulls and bears is taking place as the market tries to transition from one trend to another.  Neither the bulls nor the bears want to lose the battle and they will put up a good fight that may cause a lot of volatility.  However, with volatility comes opportunity. 
In the following Wiki, we will explore how markets transition from one stage to another through:


The transitions are called the Breakout and the Breakdown.  A truly well-rounded trader knows these transitions intimately and has strategies in place to exploit them for profits.
* [[Breakouts_and_Breakdowns#Stage_to_Stage_Transitions,_Breakouts_and_Breakdowns | Stage to Stage Transitions]]
* [[Breakouts_and_Breakdowns#The_Breakout | The Breakout]]
* [[Breakouts_and_Breakdowns#The_Breakout | The Breakdown]]
* [[Breakouts_and_Breakdowns#The_Sideways_Time_Correction Sideways | Time Correction]]




===The Breakout===
The main Wiki for [[Breakouts and Breakdowns]] can be found [[Breakouts_and_Breakdowns | HERE]].


The breakout occurs when a stage 1 sideways trend attempts to transition into a stage 2 uptrend (see figure 4.1). 


https://i.imgur.com/fvr90Hk.png
=='''[[Support and Resistance]]'''==


''Figure 4.1: The Breakout.''
[[Support and Resistance]] is one of the most important concepts that a [[Trader_Types | trader]] of any [[Trader_Types | type]] can learn to improve their [[trading]] and investing. There are very few concepts that are so powerful.  In fact, many [[Trader_Types | traders]] have used the concepts of [[Support and Resistance]] as their only [[trading]] strategy to [[Sentiment_Analysis#Profit_Taking | pull profits]] out of the market on a daily basis.


[[Support_and_Resistance | Resistance]] once broken becomes [[Support_and_Resistance | support]]. This means that the [[Supply_and_Demand | former supply becomes new demand]].  The sellers that were wrong become buyers as they attempt to [[Risk_Management#How_will_you_Enter_and_Exit_your_Trades? | exit]] their positions with as small a loss as possible.  [[Support_and_Resistance | Support]] once broken becomes [[Support_and_Resistance | resistance]]. This means that the former [[Supply_and_Demand | demand becomes supply]].  The buyers that were wrong become sellers as they attempt to [[Risk_Management#How_will_you_Enter_and_Exit_your_Trades? | exit]] their positions with as small a loss as possible.


There are three parts to the breakout (see figure 4.2):  The initial breakout, first pullback and secondary breakout:
A move to major [[Support_and_Resistance | support]] in an [[Trends#The_Uptrend | uptrend]], or major [[Support_and_Resistance | resistance]] in a [[Trends#The_Downtrend | downtrend]], is a [[Fundamental_and_Sentiment_Trading_Strategies#How_to_Trade_Risk_Events | negative event]] and can put the [[Trends | trend]] in [[Trading_psychology#8._Ask_yourself_Resourceful_Questions | question]] as this will represent a [[Retracements#100%_or_Greater_Retracement_Levels | 100% retracement]] of the last move.


# '''The Initial Breakout:'''  The market moves above the major [https://volatility.red/Support_and_Resistance resistance] created in the sideways stage 1.  This is an excellent buy point for day traders and scalp traders who won’t be holding too long.
Since [[Support and Resistance]] is such an in-depth and important concept we will dedicate an entire Wiki to it. Please [[Support_and_Resistance | CLICK HERE]] or on any of the other [[Support and Resistance]] buttons. In this Wiki you will learn key concepts such as:
# '''The First Pullback:'''  The market corrects and pulls back to or near the original breakout point.  This is the safest point to buy and is also a second chance to jump on board a market that is accelerating.
# '''The Secondary Breakout:'''  The market moves above the high made on the initial breakout.  Buying at this point is not the safest place to buy but it does confirm the strength in the breakout and is a confirmation that the market is likely going to continue the transition into a stage 2 uptrend. If you got on board with this initial breakout you might [https://volatility.red/Speculating consider] selling part of your position at this point to lock in some profits.
 


https://i.imgur.com/wkkGs0a.png
* [[Support_and_Resistance#Support_and_Resistance_Concepts | Support and Resistance Concepts]]
* [[Support_and_Resistance#What_is_Support_and_Resistance? | What is Support and Resistance?]]
* [[Support_and_Resistance#Support_and_Resistance_Analysis | Support and Resistance Analysis]]
* [[Support_and_Resistance#Minor_Price_Support | Minor Price Support]]
* [[Support_and_Resistance#Minor_Price_Resistance | Minor Price Resistance]]
* [[Support_and_Resistance#Introduction_to_Major_Support_and_Major_Resistance | Introduction to Major Support and Major Resistance]]
* [[Support_and_Resistance#Major_Price_Support | Major Price Support]]
* [[Support_and_Resistance#Major_Price_Resistance | Major Price Resistance]]
* [[Support_and_Resistance#Supply_and_Demand | Supply and Demand]]
* [[Support_and_Resistance#Forex_Support_and_Resistance | Forex Support and Resistance]]


''Figure 4.2: 3 parts to the Breakout.''


You can access the main Wiki for [[Support and Resistance]] [[Support and Resistance | HERE]].


Day traders will typically look to buy the initial breakout and first pullback while selling their positions at or near the secondary breakout.  Swing and core traders (longer term) will typically hold past the secondary breakout.


=='''[[Macro Trend Analysis]]'''==


===The Breakdown===
Now that you have learned all about the [[The_Basic_Cycle | Basic Cycle]] and the 3 [[trends]] it is important that you understand that there are always [[trends]] within [[trends]].  That’s right, [[trends]] within [[trends]].  If you are using different timeframes, understanding the difference between [[Macro_Trend_Analysis | macro trend]] and [[Macro_Trend_Analysis#Analysis_of_a_Macro_Stage_2_Uptrend | micro trend analysis]] is essential for timing your [[Trading | trade]] [[Risk_Management#How_will_you_Enter_and_Exit_your_Trades? | entries and exits]].
The breakdown occurs when a stage 3 sideways trend attempts to transition into a stage 4 downtrend.


https://i.imgur.com/f9xXvxy.png
These [[Macro_Trend_Analysis#Analysis_of_a_Macro_Stage_2_Uptrend | micro trends]] within [[Macro_Trend_Analysis | macro trends]] are broken up into the 4 stages just the same as with [[Macro_Trend_Analysis | macro trends]].  This Wiki is devoted to discussing [[trends]] within [[trends]] including:  


''Figure 4.3: The Breakdown.''
* [[Macro_Trend_Analysis#Analysis_of_a_Macro_Stage_2_Uptrend | Analysis of a Macro Stage 2 Uptrend]]
* [[Macro_Trend_Analysis#Analysis_of_a_Macro_Stage_4_Downtrend | Analysis of a Macro Stage 4 Downtrend]]
* [[Macro_Trend_Analysis#Analysis_of_a_Macro_stage_1_and_3_Sideways_Trend | Analysis of a Macro Stage 1 and 3 Sideways Trends]]




There are three parts to the breakdown:  The initial breakdown, first retracement and secondary breakdown (see figure 4.4): 
You can access the main Wiki for [[Macro Trend Analysis]] [[Macro_Trend_Analysis | HERE]].


# '''The Initial Breakdown:'''  The market breaks below a major [https://volatility.red/Support_and_Resistance support] area.  This is an excellent time to sell short, especially for day traders and scalp traders who will not be holding their positions for too long. 
# '''The First Retracement:'''  The market corrects and rallies back up toward the initial breakdown point.  This is the safest place to enter short trades and is a second chance for traders to jump on a market with downside momentum.   
# '''The Secondary Breakdown:'''  The market falls below the prior low it made after the initial breakdown.  Shorting at this point is not the safest place to short but it does confirm the weakness in the breakdown and provides confirmation that the sideways trend has transitioned into a stage 4 downtrend.  If a trader entered at the initial breakdown they might [https://volatility.red/Speculating consider] buying back part of or all of their position to lock in profits. 


=='''[[Retracements]]'''==


https://i.imgur.com/TEkeXyS.png
The concept of [[Retracements]] is an important key to predicting where price movements are likely to end. [[Retracements]] can also serve as low [[risk]] [[Risk_Management#How_will_you_Enter_and_Exit_your_Trades? | entry points]] when combined with buy or sell [[Chart_Patterns | patterns]] and [[Support_and_Resistance | support or resistance]].


''Figure 4.4: 3 parts of the breakdown.''
[[Retracements]] allow [[Trader_Types | traders]] to know where a turn in price might occur. They also serve as a way to know how strong the preceding trend was and just how strong the next move is likely to be.


In the following Wiki on [[Retracements]], we will explore:


Day and scalp traders will typically look to short the initial breakdown and first retracement while buying back at or near the secondary breakdown.  Swing and core traders (longer term) will typically hold past the secondary breakdown.


* [[Retracements#Retracement_Analysis | Retracement Analysis]]
* [[Retracements#40%_Retracement_Level | 40% Retracement Level]]
* [[Retracements#50%_Retracement_Level | 50% Retracement Level]]
* [[Retracements#60%_Retracement_Level | 60% Retracement Level]]
* [[Retracements#80-100%_Retracement_Levels | 80-100% Retracement Levels]]
* [[Retracements#100%_or_Greater_Retracement_Levels | 100% or Greater Retracement Levels]]
* [[Retracements#M_Formations | M Formations]]
* [[Retracements#W_Formations | W Formations]]
* [[Retracements#40-60%_Retracement | 40-60% Retracement]]




===The Sideways Time Correction===
You can access the main [[Retracements | Wiki]] on [[Retracements]] [[Retracements | HERE]].
 
At this point, it is important to distinguish the difference between a base and a sideways trend because they can both have very similar characteristics at times.  It can be confusing how to determine whether a sideways price pattern is a topping stage 3, which will eventually breakdown into a stage 4 downtrend, or a base (sometimes called time correction, pause or consolidation) in the context of an ongoing stage 2 uptrend (see figure 4.5).
 
https://i.imgur.com/4UvEeuv.png
 
''Figure 4.5: A base or sideways correction in a trend.''
 
 
Bases are narrow in price and have relatively small [https://volatility.red/Japanese_Candlesticks candlesticks] within them.  They often have very light volume (volatility is low) which is why bases are narrow. 
 
Bases tend to obey their moving averages and don't cross them often.  Sometimes a base will just wait for the moving averages to catch up with it before it goes for another extended run in the direction of the trend.  If the moving averages don't push the market in the direction of the trend it could mean that the prior trend is coming to an end and an early warning sign of a change in price behaviour.
 
A base or time correction after an extended move could be creating a large area of [https://volatility.red/Supply_and_Demand supply or demand]] as traders start to expect the move to continue.  People are placing real money in the market in the direction of the preceding trend and if that trend does not continue as they expected it can sometimes cause a very severe move in the opposite direction of the preceding trend.
 
Often times a stock or market will rest and blow off some steam by correcting sideways instead of having a counter-trend move.  This sideways pause or base is a healthy occurrence and it can help prepare the stock or market for another extended run in the direction of the prior trend.
 
The main characteristics of a base or pause that could lead to a breakout (or breakdown in the case of a downtrend) are narrow thin bases, not wide and whippy like that of a stage 3.  Volume is usually light during a base and is heavy and erratic in stage 3.  Bases tend to not cross their moving averages whereas a stage 3 will cross above and below its moving averages frequently.
 
 
=='''Support and Resistance'''==
 
[[Support and Resistance]] is one of the most important concepts that a trader of any type can learn to improve their [[trading]] and investing.  There are very few concepts that are so powerful.  In fact, many traders have used the concepts of [[Support and Resistance]] as their only [[trading]] strategy to pull profits out of the market on a daily basis.
 
[https://volatility.red/Support_and_Resistance Resistance] once broken becomes [https://volatility.red/Support_and_Resistance support]. This means that the [https://volatility.red/Supply_and_Demand former supply becomes new demand].  The sellers that were wrong become buyers as they attempt to exit their positions with as small a loss as possible.  [https://volatility.red/Support_and_Resistance Support] once broken becomes [https://volatility.red/Support_and_Resistance resistance]. This means that the former [https://volatility.red/Supply_and_Demand demand becomes supply].  The buyers that were wrong become sellers as they attempt to exit their positions with as small a loss as possible.
 
A move to major [https://volatility.red/Support_and_Resistance support] in an uptrend, or major [https://volatility.red/Support_and_Resistance resistance] in a downtrend, is a negative event and can put the trend in question as this will represent a 100% retracement of the last move.
 
Since [[Support and Resistance]] is such an in-depth and important concept we will dedicate an entire Wiki to it. Please [https://volatility.red/Support_and_Resistance CLICK HERE] or on any of the other [[Support and Resistance]] buttons. In this Wiki you will learn key concepts such as:
 
* What is [[Support and Resistance]]?
* [[Support and Resistance]] Analysis
* Minor Price [[Support and Resistance]]
* Major Support and Major Resistance
* [[Supply and Demand]] Guidelines
* Movements of Price between [[Supply and Demand]]
* Forex [[Support and Resistance]] and the Many things it can be!
 
 
='''Advanced Price Action Analysis'''=
 
 
=='''Macro Trend Analysis'''==
 
Now that you have learned all about the Basic Cycle and the 3 trends it is important that you understand that there are always trends within trends.  That’s right, trends within trends.  If you are using different timeframes, understanding the difference between macro trend and micro trend analysis is essential for timing your trade entries and exits.
 
These micro trends within macro trends are broken up into the 4 stages just the same as with macro trends.  This section of this Wiki is devoted to discussing trends within trends and it will become clear by the time you are finished with this section.  This is a very exciting section that will unlock many mysteries about the market's movements.
 
 
===Analysis of a Macro Stage 2 Uptrend===
 
A macro uptrend is made up of a series of repetitive micro cycles.  While higher highs and higher lows signify that the market is in a macro stage 2 uptrend, you will notice that the macro stage 2 has micro stages 1, 2, 3 and 4 as well (see figure 6.1).
 
https://i.imgur.com/h3OXlkG.png
 
''Figure 6.1: Macro Stage 2 with Micro Stages 1, 2, 3 and 4.''
 
 
In a macro stage 2 uptrend, traders should look to buy dips/pullbacks and breakouts.  The question is not if to buy but when to buy the dip/pullback or breakout.  The answer is to buy whenever there is a micro stage to macro stage match!
 
Traders should be looking to buy when the micro trend is in sync with the macro trend.  This is a profound concept and a significant key to profitable [[trading]] success on the buy side.  A buy will be triggered whenever there is a macro stage 2 with a micro stage 2 match! 
 
* Macro Stage 2 with a Micro Stage 3.....Not yet
* Macro Stage 2 with a Micro Stage 4.....Hold on
* Macro Stage 2 with a Micro Stage 1.....Get ready
* Macro Stage 2 with a Micro Stage 2.....Buy Buy Buy!
 
 
===Analysis of a Macro Stage 4 Downtrend===
 
A macro stage 4 downtrend is made up of a series of repetitive micro cycles.  While lower highs and lower lows signify that the market is in a macro stage 4, you will notice that the macro stage 4 has micro stages 1, 2, 3 and 4 as well (see figure 6.2).
 
https://i.imgur.com/sYiU4u9.png
 
''Figure 6.2: Macro Stage 4 with Micro Stages 1, 2, 3 and 4.''
 
 
In a stage 4 downtrend traders should look to sell short rallies or breakdowns.  The question is not if to sell/short but when to sell/short the rally or breakdown.  The answer is to sell short whenever there is a micro stage to macro stage match!
 
Traders should be looking to sell short when the micro trend is in sync with the macro trend.  This is a profound concept and a significant key to [[trading]] success on the short side.  A short will be triggered whenever there is a macro stage 4 to micro stage 4 match! 
 
* Macro Stage 4 with a Micro Stage 1.....Not yet
* Macro Stage 4 with a Micro Stage 2.....Hold on
* Macro Stage 4 with a Micro Stage 3.....Get ready
* Macro Stage 4 with a Micro Stage 4.....Sell Sell Sell!
 
 
===Analysis of a Macro stage 1 and 3 Sideways Trend===
 
A macro stage 1 or 3 sideways trends are made up of a series of repetitive micro cycles.  While relatively equal highs and lows signify that the market is in a macro stage 1 or 3, you will notice that the macro stage 1 or 3 has micro stages 1, 2, 3 and for (see figure 6.3).
 
https://i.imgur.com/nP2slWU.png
 
''Figure 6.3: Macro Stages 1 or 3 with Micro Stages 1, 2, 3 and 4.''
 
 
In Stages 1 and 3 traders should be looking to buy the dips and sell the rallies.  Always be alert to the fact that all sideways ranges will eventually breakout or breakdown.  Traders who master making profits in these stages are well on their way to a very successful career in the markets.
 
 
=='''[[Retracements]]'''==
 
The concept of [[Retracements]] is an important key to predicting where price movements are likely to end.  [[Retracements]] can also serve as low [https://volatility.red/Risk risk] entry points when combined with buy or sell patterns and [https://volatility.red/Support_and_Resistance support or resistance].
 
[[Retracements]] allow traders to know where a turn in price might occur.  They also serve as a way to know how strong the preceding trend was and just how strong the next move is likely to be.
 
In the following Wiki on [[Retracements]], we will explore all the various retracement levels, the [https://volatility.red/Retracements#M_Formations M] and [https://volatility.red/Retracements#W_Formations W Formations] and the most commonly used retracements amongst financial market traders.
 
You can access the main [https://volatility.red/Retracements Wiki] on [[Retracements]] [https://volatility.red/Retracements HERE].




=='''[[Trend Lines]]'''==
=='''[[Trend Lines]]'''==


Trend lines help traders to monitor the flow of funds into and out of a financial instrument such as stocks, bonds, [[Forex]] or futures. They are easily recognizable lines that traders draw on charts to connect a series of prices together. The resulting line is then used to give the trader an idea of the direction in which the trading product might potentially move in the future.  
[[Trend_Lines | Trend lines]] help [[Trader_Types | traders]] to monitor the [[Technical_Analysis#Market_Flow | flow]] of funds into and out of a financial instrument such as [[Fundamental_Analysis#Equities | stocks]], [[Fundamental_Analysis#Bonds | bonds]], [[Forex]] or [[Futures_Market | futures]]. They are easily recognizable [[Trend_Lines | lines]] that [[Trader_Types | traders]] draw on [[Trading_Tools#Charting_Software | charts]] to connect a series of prices together. The resulting line is then used to give the [[Trader_Types | trader]] an idea of the direction in which the trading product might potentially move in the future.  
 
A trendline is a line drawn over [https://volatility.red/Pivots pivot highs] or under [https://volatility.red/Pivots pivot lows] to show the prevailing direction of price. Trendlines are sometimes used as a visual representation of [[Support and Resistance]] and the direction and speed of price in any time frame.
 
In the following Wiki we will explore [https://volatility.red/Trend_Lines#Drawing_the_Uptrend_Line Drawing the Uptrend Line], [https://volatility.red/Trend_Lines#Uptrend_Line_Break Uptrend Line Breaks], [https://volatility.red/Trend_Lines#Determining_When_an_Uptrend_Line_Break_is_Valid Determining when an Uptrend Line Break is Valid], as well as all the same concepts for [https://volatility.red/Trend_Lines#Drawing_the_Downtrend_Line Downtrend Lines].
 
You can access the main Wiki for [[Trend Lines]] [https://volatility.red/Trend_Lines HERE].
 
 
=='''The 7 Market Movements'''==
 
In general there are only 7 different movements a market can do.  Today's traders must master each type of market movement to be able to take full advantage of all different types of markets.  Knowing the 7 market movements ensures that the trader will rarely find themselves lost by anything the market does. 
 
The 7 market movements are the building blocks to understanding and mastering Market Mechanics.  We have already discussed the 7 market movements in detail in previous sections of this Wiki.  Here we will review them with the understanding that there is nothing more the market can do. 
 
There are no other types of movements to understand.  Learn to master them and your [[trading]] results will prosper especially when you combine them with things like [[Fundamental Analysis]] or [[Sentiment Analysis]].
 
 
'''The Uptrend: Defined by higher highs and higher lows'''
 
https://i.imgur.com/emvqPp9.png
 
''The Uptrend.''
 
 
'''The Downtrend: Defined by lower highs and lower lows.'''


https://i.imgur.com/HqAH1pZ.png
A [[Trend_Lines | trendline]] is a line drawn over [[Pivots | pivot highs]] or under [[Pivots | pivot lows]] to show the prevailing direction of price. [[Trend_Lines | Trendlines]] are sometimes used as a visual representation of [[Support and Resistance]] and the direction and speed of price in any time frame.


''The Downtrend.''
In the following Wiki, we will explore:


* [[Trend_Lines#Drawing_the_Uptrend_Line | Drawing the Uptrend Line]]
* [[Trend_Lines#Uptrend_Line_Break | Uptrend Line Breaks]]
* [[Trend_Lines#Determining_When_an_Uptrend_Line_Break_is_Valid | Determining when an Uptrend Line Break is Valid]]
* [[Trend_Lines#Drawing_the_Downtrend_Line | Downtrend Lines]].
* [[Trend_Lines#Downtrend_Line_Break | Downtrend Line Break]]
* [[Trend_Lines#Determining_When_a_Downtrend_Line_Break_is_Valid | Determining When a Downtrend Line Break is Valid]]


'''The Sideways Trend: Defined by relatively equal highs and lows.'''


https://i.imgur.com/94TMIKn.png
You can access the main Wiki for [[Trend Lines]] [[Trend_Lines | HERE]].


''The Sideways Trend.''


=='''[[The 7 Market Movements]]'''==


'''The Breakout: Price breaks out above major resistance.'''
In general, there are only 7 different movements a market can do.  Today's [[Trader_Types | traders]] must master each type of market movement to be able to take full advantage of all different types of markets.  Knowing the 7 market movements ensures that the [[Trader_Types | trader]] will rarely find themselves lost by anything the market does.


https://i.imgur.com/fvr90Hk.png
In the following Wiki on [[The 7 Market Movements]] we will highlight:


''The Breakout.''
* [[The_7_Market_Movements#The_uptrend | The uptrend]]
* [[The_7_Market_Movements#The_Downtrend | The Downtrend]]
* [[The_7_Market_Movements#The_Sideways_Trend | The Sideways Trend]]
* [[The_7_Market_Movements#The_Breakout | The Breakout]]
* [[The_7_Market_Movements#The_Breakdown | The Breakdown]]
* [[The_7_Market_Movements#The_Uptrend_Line_Break | The Uptrend Line Break]]
* [[The_7_Market_Movements#The_Downtrend_Line_Break | The Downtrend Line Break]]




'''The Breakdown: Price breaks down below major support.'''
You can access the main Wiki for [[The 7 Market Movements]] [[The 7 Market Movements | HERE]].


https://i.imgur.com/f9xXvxy.png


''The Breakdown.''
=='''[[Pivots | Pivot Point Analysis]]'''==


 
[[Pivots]] are a reference point where there was a shift between the forces of [[Supply_and_Demand | supply and demand]].  This is sometimes referred to as peak and trough [[Trading_Routine | analysis]].  It is a very objective way to [[Risk_Management | manage]] your positions within an ongoing trend.  [[Pivots]] tell you where there are potential buyers (demand) and sellers (supply).
'''The Uptrend Line Break: The uptrend line is broken by price and fails to break the prior high.'''
 
https://i.imgur.com/bhPQJB9.png
 
''The Uptrend Line Break.''
 
 
'''The Downtrend Line Break: The downtrend line is broken and price fails to break the prior low.'''
 
https://i.imgur.com/IrbyXey.png
 
''The Downtrend Line Break.''
 
 
=='''Pivot Point Analysis'''==
 
[[Pivots]] are a reference point where there was a shift between the forces of [https://volatility.red/Supply_and_Demand supply and demand].  This is sometimes referred to as peak and trough analysis.  It is a very objective way to [https://volatility.red/Risk_Management manage] your positions within an ongoing trend.  [[Pivots]] tell you where there are potential buyers (demand) and sellers (supply).


In the following Wiki on [[Pivots]] we will explore topics such as:
In the following Wiki on [[Pivots]] we will explore topics such as:


* Technical Characteristics of [[Pivots]]
* [[Pivots#Technical_Characteristics_of_Pivots | Technical Characteristics of Pivots]]
* Level 1 Minor [[Pivots]]
* [[Pivots#Level_1_Minor_Pivots | Level 1 Minor Pivots]]
* Level 2 Minor [[Pivots]]
* [[Pivots#Level_2_Minor_Pivots | Level 2 Minor Pivots]]
* Level 3 Major [[Pivots]]
* [[Pivots#Level_3_Major_Pivots | Level 3 Major Pivots]]
* Level 4 Major [[Pivots]]
* [[Pivots#Level_4_Major_Pivots | Level 4 Major Pivots]]
* Using [[Pivots]]
* [[Pivots#Using_Pivots | Using Pivots]]
* [[Pivots]] for Exits
* [[Pivots#Pivots_for_Exits | Pivots for Exits]]
* [[Pivot]] Turning Point Types
* [[Pivots#Pivot_Turning_Point_Types | Pivot Turning Point Types]]




[https://volatility.red/Pivots CLICK HERE] to access the Wiki on [[Pivots]].
[[Pivots | CLICK HERE]] to access the Wiki on [[Pivots]].




=='''Trend Quality'''==
=='''[[Trend Quality]]'''==


[[Trading]] against, without a trend, or just [[trading]] poor quality trends is one of the most common reasons for [[trading]] losses.   
[[Trading]] against, without a trend, or just [[trading]] poor quality [[trends]] is one of the most common reasons for [[trading]] losses.   


Quality or tight trends have a higher degree of predictability than poor quality or choppy trends.  The certainty of a trend lies in a controlled arrangement of [https://volatility.red/Japanese_Candlesticks candlesticks] with controlled pullbacks that reverse at [https://volatility.red/Supply_and_Demand supply or demand]. 
In the following Wiki on [[Trend Quality]] we will explore:


Poor quality or choppy trends have a much lower level of predictability.  The uncertainty of a trend can be seen easily through an uncontrolled arrangement of [https://volatility.red/Japanese_Candlesticks candlesticks] and uncontrolled pullbacks into [https://volatility.red/Supply_and_Demand supply or demand].
* [[Trend_Quality#Tight_Trends | Tight Trends]]
* [[Trend_Quality#Choppy_Trends | Choppy Trends]]


Changes in trend quality are a warning sign that no trader should ever ignore.  Any time the quality of a trend starts to change it can be viewed as an opportunity to take profitable action.  This profitable action can be anything from moving your stop loss orders closer to the market to lock in profits to capitalizing on early trend changes.


A change in the angle of ascent/descent or correction is often another warning sign that the market may change direction.  When markets have a normal 45-degree angle of ascent/descent and then the angle becomes very steep this often ends that trend and there may be a [[trading]] opportunity.  This kind of parabolic move often results in very sharp corrections due to increased volatility.  [https://volatility.red/Trading_psychology Greed or fear] has become extreme.
You can access the main Wiki for [[Trend Quality]] [[Trend Quality | HERE]].


Traders need to be able to define the differences in tight or choppy trends so that they can develop the discipline to trade only the best quality trends that have a higher level of predictability.


=='''Trend Summary Points'''==


===Tight Trends===
Items to [[Speculating | Consider]] for Strength of the [[Trends | Trend]]:


Tight trends will have the majority of opening prices in the area of the prior [https://volatility.red/Japanese_Candlesticks candlesticks] closing prices creating a smooth transition from one candlestick to the next.  The candlesticks will move in the same direction as the ones that preceded them and will have few tails.  This pattern of opens and closes produces few gaps, tails, engulfing bars, and piercing or outside bars in a tight trend.
* Angle of the [[Trends | trend]].
* Angle of corrections within the [[Trends | trend]].
* [[Trends | Trend]] quality (tight or choppy).
* Distance between major [[Pivots | pivots]] (is there a price void?).
* Bearish [[Japanese_Candlesticks | candles]] should produce insignificant price moves in an [[Trends#The_Uptrend | uptrend]]. 
* [[Japanese_Candlesticks#Bullish_Candlesticks | Bullish candles]] should produce insignificant price moves in a [[Trends#The_Downtrend | downtrend]].   
* [[Best_and_Worst_Times_to_Trade | Time]] the [[Trends | trend]] has been travelling versus the [[Best_and_Worst_Times_to_Trade | time]] of price corrections.  How quickly are corrections happening in the [[Trends | trend]]?


Very tight trends can have large moves without experiencing any form of pullback.  A reversal after a pullback has high odds of trend continuation. 


In tight uptrends, bearish [https://volatility.red/Japanese_Candlesticks candles] will have little effect and pullbacks should stop at the nearest [https://volatility.red/Support_and_Resistance support] point (demand).  As the certainty of traders increases, [https://volatility.red/Supply_and_Demand demand] points will rise with the trend and pullbacks will generally be shallow. 
'''Trend Summary Notes'''
 
In tight downtrends, bullish [https://volatility.red/Japanese_Candlesticks candles] will have little effect and rallies should stop at prior [https://volatility.red/Support_and_Resistance resistance] (supply).  As the certainty of traders increases, [https://volatility.red/Supply_and_Demand supply] points will drop and rallies will be shallow and short-lived.
 
Figure 11.1 shows a picture of a quality tight trend.  Traders are certain and the majority are in agreement.  Pullbacks against this uptrend have little effect and reverse at demand (support) areas.  This is the type of trend that traders should be focusing their [[trading]] on.  If you can’t define a quality trend on the market you are watching then move on to another product to trade, there are thousands to choose from all over the world.  Many [https://volatility.red/The_Best_and_Most_Popular_Forex_Platforms_for_Demo brokers] offer 24 hour [[trading]] on many different global markets all from one [https://volatility.red/The_Best_and_Most_Popular_Forex_Platforms_for_Demo account]. 
 
https://i.imgur.com/Q5J0Aa9.png
 
''Figure 11.1 – Tight Quality Trend.''
 
 
===Choppy Trends===
 
Choppy trends will not have many opening prices in the area of the prior [https://volatility.red/Japanese_Candlesticks candlestick's] closing price.  The opens and closes will tend to be all over the place.  Each new candlestick may or may not move in the direction of the prior candlestick.  This pattern of all over the place opens and closes creates many tails of various lengths, engulfing bars, outside bars and gaps creating a low odds trade scenario with very little predictability. 
 
Pullbacks against the trend will often break through minor areas of [https://volatility.red/Supply_and_Demand demand] (support) or [https://volatility.red/Supply_and_Demand supply] (resistance).  Traders are not in agreement and this creates an internal struggle between the bulls and the bears over the direction.  A choppy trend is not a picture of quality or certainty and creates a very difficult environment to trade in.  Traders would be better off sticking to quality tight trends.  If you can’t find anything good on the chart move on to something that has better trending characteristics.
 
Figure 11.2 shows a picture of uncertainty, traders are not in agreement.  Tails are very long, there are engulfing bars all over the place and no progress has been made in one direction or the other.  This is a very choppy trend that would be extremely difficult to trade and would likely result in [[trading]] losses.  If you can’t define a nice tight trend then move on to something else that has a higher level of predictability.
 
https://i.imgur.com/7vMB7DN.png
 
''Figure 11.2: Choppy Trend with Low Predictability''
 
 
=='''Trend Summary Points'''==


Items to [https://volatility.red/Speculating Consider] for Strength of the Trend:
* [[Pivots]] give us the market’s reference points where the shifts between [[Supply_and_Demand | supply and demand]] took place.
* [[Trading | Trades]] should not be taken unless there is a clear price void between the closest areas of [[Supply_and_Demand | supply and demand]].
* The deeper the move into [[Supply_and_Demand | supply or demand]], the greater the odds become of price moving through that area on subsequent tests.
* Every deep move into [[Supply_and_Demand | supply or demand]] will create an opposing void that should be [[Speculating | considered]] before placing a [[Trading | trade]].
* The way that [[Japanese_Candlesticks | candles]] have been created will tell you the level of certainty or lack of certainty within the [[Trends | trend]].
* Breaking a major [[Pivots | pivot]] will also tell you that a [[Trend_Lines | trend line]] has been broken since [[Trend_Lines | trend lines]] track the [[Pivots | pivot lows or pivot highs]].
* Understanding how to read and analyze a [[Trends | trend]] is essential to [[trading]] on the right side of the professional market.
* When you start seeing that [[Retracements#100%_or_Greater_Retracement_Levels | pullbacks]] are getting deeper this is a warning sign that something has changed in the market.  Things are not [[Trading_psychology#7._Creating_a_Peak_Performance_Trigger | performing]] the same way they were before the deep [[Retracements#100%_or_Greater_Retracement_Levels | pullbacks]]. If the [[Fundamental_Analysis#Equities | stock]] or market doesn’t make a higher high, in an [[Trends#The_Uptrend | uptrend]], after having a deep [[Retracements#100%_or_Greater_Retracement_Levels | pullback]] then this is a bigger warning that the [[Fundamental_Analysis#Equities | stock]] may be poised for a reversal. 
* If a market fails to make a higher high in an [[Trends#The_Uptrend | uptrend]] then the odds are high that it will make a lower low soon.
* If a market fails to make a lower low in a [[Trends#The_Downtrend | downtrend]] then the odds are high that it will make a higher high soon.
* A deep [[Retracements#100%_or_Greater_Retracement_Levels | pullback]] on a smaller timeframe may not be too significant on the longer timeframe but if the longer timeframe starts to pull back deeper and takes out a prior [[Pivots | pivot]] then this serves as a serious warning that the market is changing and your expectations should be changing with it.
* [[Trading | Trade]] in the direction of the [[Trends | trend]].  [[Risk_Management | Manage]] the position as if it will hit the prior [[Pivots | pivot]] high (for longs) or low (for shorts).  If the market can’t do this then you may need to [[Trading_psychology#8._Ask_yourself_Resourceful_Questions | question]] if the [[Trends | trend]] has enough momentum behind it to continue.
* If a [[Fundamental_Analysis#Equities | stock]] or market can’t make a new high then it will likely make a new low.  If [[Trader_Types | traders]] have the expectation that the market will make a new high and their expectations are not met, these are the times when the market can really move.


* Angle of the trend.
* Angle of corrections within the trend.
* Trend quality (tight or choppy).
* Distance between major [https://volatility.red/Pivots pivots] (is there a price void?).
* Bearish [https://volatility.red/Japanese_Candlesticks candles] should produce insignificant price moves in an uptrend. 
* Bullish candles should produce insignificant price moves in a downtrend. 
* Time the trend has been travelling versus the time of price corrections.  How quickly are corrections happening in the trend?


==Related Wikis==


===Trend Summary Notes===
Readers of '''Price Action Analysis''' also viewed:


* [[Pivots]] give us the market’s reference points where the shifts between [https://volatility.red/Supply_and_Demand supply and demand] took place.
* [[Technical Trading Strategies]]
* Trades should not be taken unless there is a clear price void between the closest areas of [https://volatility.red/Supply_and_Demand supply and demand].
* [[Developing_your_Trading_Process]]
* The deeper the move into [https://volatility.red/Supply_and_Demand supply or demand], the greater the odds become of price moving through that area on subsequent tests.
* [[How to Create the Optimal State for Peak Trading Performance]]
* Every deep move into [https://volatility.red/Supply_and_Demand supply or demand] will create an opposing void that should be [https://volatility.red/Speculating considered] before placing a trade.
* [[Best_and_Worst_Times_to_Trade]]
* The way that [https://volatility.red/Japanese_Candlesticks candles] have been created will tell you the level of certainty or lack of certainty within the trend.
* [[Pre-Trade_Considerations]]
* Breaking a major [https://volatility.red/Pivots pivot] will also tell you that a trend line has been broken since trend lines track the [https://volatility.red/Pivots pivot lows or pivot highs].
* Understanding how to read and analyze a trend is essential to [[trading]] on the right side of the professional market.
* When you start seeing that pullbacks are getting deeper this is a warning sign that something has changed in the market.  Things are not performing the same way they were before the deep pullbacks.  If the stock or market doesn’t make a higher high, in an uptrend, after having a deep pullback then this is a bigger warning that the stock may be poised for a reversal. 
* If a market fails to make a higher high in an uptrend then the odds are high that it will make a lower low soon.
* If a market fails to make a lower low in a downtrend then the odds are high that it will make a higher high soon.
* A deep pullback on a smaller timeframe may not be too significant on the longer timeframe but if the longer timeframe starts to pull back deeper and takes out a prior [https://volatility.red/Pivots pivot] then this serves as a serious warning that the market is changing and your expectations should be changing with it.
* Trade in the direction of the trend.  [https://volatility.red/Risk_Management Manage] the position as if it will hit the prior [https://volatility.red/Pivots pivot] high (for longs) or low (for shorts).  If the market can’t do this then you may need to question if the trend has enough momentum behind it to continue.
* If a stock or market can’t make a new high then it will likely make a new low.  If traders have the expectation that the market will make a new high and their expectations are not met, these are the times when the market can really move.

Latest revision as of 16:29, 2 November 2023

In its most basic form, Price Action Analysis, also referred to in this Wiki as "Market Mechanics", is a trader's interpretation of the behaviour that price movements displayed on a chart.

In this Wiki, we will explore several areas of Price Action including the basic cycle, trend analysis, support and resistance and more.


This Wiki is a part of our Essential Forex Trading Guide. Be sure to check that out HERE.



Introduction to Price Action Analysis

Market Mechanics Basics

Welcome to the Introduction on Market Mechanics. Here we will lay the foundation for a simple yet powerful approach to understanding the way all financial markets trade and move. This section is important and lays some groundwork for many other Wikis on this site including that of Technical Analysis.

In trading and investing the simplest approach is often the best approach for both the new trader and more advanced traders. There is a theory called Occam's Razor which has proven to be one of the most useful tools for scientific discovery since the 14th century. This theory states that one should not make more assumptions than are needed to find an answer or solve a problem. In simple, terms it means the most simple and least complicated approach is usually the best. This concept can be very true in trading and investing as well. There is simply an enormous amount of information available so it can become a difficult task to decipher it all.

Far too many traders start out by getting involved in complicated trading methods. This can lead to a lot of confusion for someone who has little or no experience navigating their way through today’s volatile markets. Whether you are a beginner or an advanced trader, understanding the basic structure of the market before you move on to complicated systems, can help bring clarity to your trading. Trading with an understanding of the market’s basic structure creates purpose. Most people need a simple approach to get into good trades and keep them out of bad trades.

A good idea for laying a foundation for trading success is to train our eyes to understand basic pictures before we can consistently identify more complex patterns. In this section on Price Action Analysis, we will start with what we like to call a "crayon and finger paint approach" to identifying patterns, cycles and trends.

Many trading losses are the result of trading on the wrong side of the market (buying in a downtrend or shorting in an uptrend). Understanding market mechanics is one key to trading on the right side of the market no matter what timeframe or trading style you are using. This will help to keep your expectations of the market in check by trading within identifiable trends and price patterns and not hoping to get more out of a move than the move has to offer. Our Wikis on Fundamental Analysis, Sentiment Analysis and Trading psychology can also help you understand the reasons why price moves the way it does as well.

Figure 1.1 shows the Basic Cycle. This simple picture represents the market’s basic cycle of price behaviour. All stocks, bonds, commodities, currencies, futures, or any other financial instrument you can think of operates within this cycle. It is the only movement possible for a financial instrument to make. Nothing else is possible! All movements that markets can make are found within this simplistic cycle.

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Figure 1.1: The Basic Cycle.


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Figure 1.2: USDCHF currency pair performing an almost perfect Basic Cycle on the daily chart.


Any financial instrument is destined to repeat this cycle time and time again as long as humans are the driving force behind the market’s price action. Even though many new algorithms and trading robots have been developed in recent years, humans are still the creators of these synthetic actors and humans never change.

Knowing where you are in this cycle forms the basis for you to predict future price movements based on the laws governing this cycle which are psychology and probability. If you know where you are in the cycle you greatly increase the odds of making successful trades and you must have many successful trades for long-term profitability.


The Only Way to Profits or Losses

The only way to profit on the long side is to buy somewhere near the beginning of stage 2 and sell before stage 4 gets underway. The only way to profit on the short side is to sell short somewhere near the start of stage 4 and buy back your short position somewhere before the start of stage 2. Don’t worry about the names of the stages in this cycle right now; we will discuss this in great length later. For now, just understand that they do exist.

The only way to a trading loss is to go long or buy somewhere near the end of stage 2 and sell near the end of stage 4. The only way to lose on the short side is to sell short somewhere near the end of stage 4 and buy back your short position somewhere near the end of stage 2.

Traders who wait for too much trend confirmation become victims of buying tops and selling bottoms (or shorting bottoms and buying tops). If a trader thoroughly understands the only error that leads to losing money in the markets then he will be more prone to avoiding it. Figure 1.3 shows you the only ways to profit or loss in a basic cycle.

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Figure 1.3: The only ways to profit or loss.


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Figure 1.4: S&P 500 from 1997-2010. The basic cycle repeats over and over in real markets. It’s not just a concept. The basic cycle repeats this way on all timeframes.


The 4 Stages of The Basic Cycle

The Basic Cycle is comprised of 4 stages that are dominated by 4 distinct emotions which are:

  1. Ambivalence
  2. Greed
  3. Uncertainty
  4. Fear

We have a Wiki devoted to The Basic Cycle. In this Wiki, we explore each one of the 4 stages of The Basic Cycle at length and describe the differences in what type of price action you might expect in each of the 4 stages.

The main Wiki for The Basic Cycle can be found HERE.


Trends

Understanding how to properly define a trend is an essential element for successful and profitable trading. Without a deep understanding of trends and how to define them, traders may find themselves on the wrong side of the market. We estimate that being on the wrong side of the market, or trading against the trend, is possibly the cause of about 60-70% of all losing trades. We will discuss the different types of trends and how they can be useful in your trading and investing to help keep you trading on the right side of the professional market.

There are only three things that any financial instrument can do:

  1. Go up
  2. Go down
  3. Go sideways

You can access the main Wiki for Trends HERE.


Stage to Stage Transitions, Breakouts and Breakdowns

Once you have identified what stage the market is in you should be focusing your trading on the strategies that will work best for that stage. But what about the times when you're not sure what stage you are in? This is where knowing how a market transitions from one stage to another comes in handy and can be very profitable at the same time. Knowing when a market is about to transition will help get you into trends very early on and this may lead to better profitability.

In the following Wiki, we will explore how markets transition from one stage to another through:


The main Wiki for Breakouts and Breakdowns can be found HERE.


Support and Resistance

Support and Resistance is one of the most important concepts that a trader of any type can learn to improve their trading and investing. There are very few concepts that are so powerful. In fact, many traders have used the concepts of Support and Resistance as their only trading strategy to pull profits out of the market on a daily basis.

Resistance once broken becomes support. This means that the former supply becomes new demand. The sellers that were wrong become buyers as they attempt to exit their positions with as small a loss as possible. Support once broken becomes resistance. This means that the former demand becomes supply. The buyers that were wrong become sellers as they attempt to exit their positions with as small a loss as possible.

A move to major support in an uptrend, or major resistance in a downtrend, is a negative event and can put the trend in question as this will represent a 100% retracement of the last move.

Since Support and Resistance is such an in-depth and important concept we will dedicate an entire Wiki to it. Please CLICK HERE or on any of the other Support and Resistance buttons. In this Wiki you will learn key concepts such as:


You can access the main Wiki for Support and Resistance HERE.


Macro Trend Analysis

Now that you have learned all about the Basic Cycle and the 3 trends it is important that you understand that there are always trends within trends. That’s right, trends within trends. If you are using different timeframes, understanding the difference between macro trend and micro trend analysis is essential for timing your trade entries and exits.

These micro trends within macro trends are broken up into the 4 stages just the same as with macro trends. This Wiki is devoted to discussing trends within trends including:


You can access the main Wiki for Macro Trend Analysis HERE.


Retracements

The concept of Retracements is an important key to predicting where price movements are likely to end. Retracements can also serve as low risk entry points when combined with buy or sell patterns and support or resistance.

Retracements allow traders to know where a turn in price might occur. They also serve as a way to know how strong the preceding trend was and just how strong the next move is likely to be.

In the following Wiki on Retracements, we will explore:



You can access the main Wiki on Retracements HERE.


Trend Lines

Trend lines help traders to monitor the flow of funds into and out of a financial instrument such as stocks, bonds, Forex or futures. They are easily recognizable lines that traders draw on charts to connect a series of prices together. The resulting line is then used to give the trader an idea of the direction in which the trading product might potentially move in the future.

A trendline is a line drawn over pivot highs or under pivot lows to show the prevailing direction of price. Trendlines are sometimes used as a visual representation of Support and Resistance and the direction and speed of price in any time frame.

In the following Wiki, we will explore:


You can access the main Wiki for Trend Lines HERE.


The 7 Market Movements

In general, there are only 7 different movements a market can do. Today's traders must master each type of market movement to be able to take full advantage of all different types of markets. Knowing the 7 market movements ensures that the trader will rarely find themselves lost by anything the market does.

In the following Wiki on The 7 Market Movements we will highlight:


You can access the main Wiki for The 7 Market Movements HERE.


Pivot Point Analysis

Pivots are a reference point where there was a shift between the forces of supply and demand. This is sometimes referred to as peak and trough analysis. It is a very objective way to manage your positions within an ongoing trend. Pivots tell you where there are potential buyers (demand) and sellers (supply).

In the following Wiki on Pivots we will explore topics such as:


CLICK HERE to access the Wiki on Pivots.


Trend Quality

Trading against, without a trend, or just trading poor quality trends is one of the most common reasons for trading losses.

In the following Wiki on Trend Quality we will explore:


You can access the main Wiki for Trend Quality HERE.


Trend Summary Points

Items to Consider for Strength of the Trend:


Trend Summary Notes

  • Pivots give us the market’s reference points where the shifts between supply and demand took place.
  • Trades should not be taken unless there is a clear price void between the closest areas of supply and demand.
  • The deeper the move into supply or demand, the greater the odds become of price moving through that area on subsequent tests.
  • Every deep move into supply or demand will create an opposing void that should be considered before placing a trade.
  • The way that candles have been created will tell you the level of certainty or lack of certainty within the trend.
  • Breaking a major pivot will also tell you that a trend line has been broken since trend lines track the pivot lows or pivot highs.
  • Understanding how to read and analyze a trend is essential to trading on the right side of the professional market.
  • When you start seeing that pullbacks are getting deeper this is a warning sign that something has changed in the market. Things are not performing the same way they were before the deep pullbacks. If the stock or market doesn’t make a higher high, in an uptrend, after having a deep pullback then this is a bigger warning that the stock may be poised for a reversal.
  • If a market fails to make a higher high in an uptrend then the odds are high that it will make a lower low soon.
  • If a market fails to make a lower low in a downtrend then the odds are high that it will make a higher high soon.
  • A deep pullback on a smaller timeframe may not be too significant on the longer timeframe but if the longer timeframe starts to pull back deeper and takes out a prior pivot then this serves as a serious warning that the market is changing and your expectations should be changing with it.
  • Trade in the direction of the trend. Manage the position as if it will hit the prior pivot high (for longs) or low (for shorts). If the market can’t do this then you may need to question if the trend has enough momentum behind it to continue.
  • If a stock or market can’t make a new high then it will likely make a new low. If traders have the expectation that the market will make a new high and their expectations are not met, these are the times when the market can really move.


Related Wikis

Readers of Price Action Analysis also viewed:

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This page was last edited on 2 November 2023, at 16:29.
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