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Identify market direction using raw price action

Today’s article is about the basic key concept of classical technical analysis called “Finding direction on charts” means finding out the price direction in a stock regarding which way the stock is moving.
It does not matter what strategy you follow, if your strategy cannot read price direction,it shows your strategy will not be profitable in long run as high probability trades are only found when you trade inline with the direction of the price only.
I’ll be explaining today, how raw price movement will show you clear price action direction & you just need to follow those directions to keep on trading high probability trades.In my daily trading , analysis starts with finding a stock’s direction first & rest of the analysis tools come in later.So if i am wrong finding the right direction ,rest of my trading tools will not perform properly.Hopefully we can all understand by now that how important  finding the right direction in a stock to trade.Finding the right direction is like “planning a map before starting a journey”,so if you make any mistake in that map regarding direction,you’ll end up reaching in a wrong destination. Lets start then,

There can be three possible price direction scenarios :

1) UPTREND : When the price is moving UP

2) DOWNTREND : When the price is moving DOWN

3) FLAT / SIDEWAYS / range-bound : Price is neither moving UP or DOWN & moving only in a range.

So, it’s simple . When you see an uptrend in progress on your chart, try to find buy signals only & do not short the market.When you see a downtrend in progress on your chart, try to find sell signals only & do not long the market.When you see flat market in progress on you chart,either stay out of the market till it becomes trendy again or trade the tops or bottoms of flat market channel.Lets make these theories easier for better understanding with chart examples :

UPTREND: HOW to find an UPTREND ????????????

When you see price rising more & falling less than previous rise , is a sign of uptrend.In below chart, all red lines are the price rise & blue lines are price fall. Isn’t it easy to figure out on your chart ?

Lets use another different way on the same chart to find an UPTREND. You’ll see a formation of higher high & higher low on chart in an uptrend like below chart. In an uptrend, price always breaks the previous made high & creates a new high as well as price never falls back upto the previous low it has made and this is how price keeps on making higher-high & higher-low formation.Till the time this formation is intact,uptrend is protected.Once you find this uptrend,look for support areas(learn : support-resistance strategy) & price action buy signals like PIN BARS (learn : PIN BAR strategy) or INSIDE BAR (learn : INSIDE BAR strategy)to trade inline with uptrend.

 DOWNTREND                      : HOW to find an UPTREND ????????????

When you see price falling more & rising less than previous fall , is a sign of downtrend.In below chart, all red lines are the price fall & green lines are price rise. Isn’t it easy to figure out on chart ?

Lets use another different way on the same chart to find a DOWNTREND. You’ll see a formation of lower high & lower low on chart in a downtrend like below chart. In a downtrend, price always breaks the previous made low & creates a new low as well as price never rises back upto the previous high it made and this is how price keeps on making lower-high & lower-low formation.Till the time this formation is intact,downtrend is protected.Once you find this downtrend,look for resistance areas(learn : support-resistance strategy) & price action sell signals like PIN BARS (learn : PIN BAR strategy) or INSIDE BAR (learn : INSIDE BAR strategy) or TRENDCHANNELS  (learn – Trendlines & Trendchannels strategy)t0 trade inline with downtrend.

 SIDEWAYS / FLAT / RANGEBOUND: HOW to find out ???????????

In a flat or sideways market, you will not find a trendy condition on charts where price is either shooting up or down.In a flat market, price will remain consolidating within a range it creates over time.In below chart, you can see price rises up(marked by red) & when price falls(marked by green),it falls upto the same length of it’s rise hence it creates a flat market.When you see flat market in progress on you chart,either stay out of the market till it becomes trendy again or trade the tops or bottoms of flat market channel(learn : support-resistance strategy).

DIRECTION TRANSITION:

DIRECTION TRANSITION is a part of the price action movement as no uptrend,downtrend or flat condition can continue forever in a stock or commodity.So when transition takes place in a price chart, we need to shift our analysis direction accordingly & trade with new direction.

Lets see how the price direction transition takes place on charts over time.In below chart, i’m showing a price direction transition from “UPTREND to DOWNTREND” . The blue box area is an uptrend movement of price which shifted into a downtrend later marked by red box.While trending up,price was making higher high & higher low (marked by 1-2,3-4,5-6) & for the first time price broke the uptrendy pattern(at point 7) & started making a pattern of downtrend with lower low lower high(marked by 6-7,8-9,10-11,12-13,14-15).So the transition took place on POINT 7.

 Below chart shows price direction transition happening for HEROHONDA stock from DOWTREND to UPTREND. Red box marked area is in downtrend & price turned up into an uptrend later on which is marked by green box area.Blue arrow on chart marked the layer from where price started making uptrendy pattern & transition took place.

Below is a transition of price direction from “UPTREND to FLAT MARKET” where price was making higher high,higher low first(green arrow marked) & then started making similar high(rise) & lows(fall) creating a flat market condition(marked by blue box)

 Below is a transition of price direction from “DOWNTREND to FLAT MARKET”. where price was making lower low,lower high first(red arrow marked) & then started making similar high(rise) & lows(fall) creating a flat market condition.

Below  is chart showing three form of market direction in a chart.Green box-arrow shows a strong uptrend which turned into a downtrend(red box-arrows) & then market took a pause in it’s momentum & started moving flat or sideways(marked by blue).

 Look at below chart which shows you how price was trending down first (shown in red arrow), then goes flat for couple of days(highlighted by blue circle). Again the downtrend continues after a breakout move down after coming out of the range-bound market condition & again price started consolidating for few days.But this time,instead of continuing the downtrend pressure down,price moved up with a higher high,higher low formation & ended up a with a huge uptrend.So this below charts shows an example of how price enters into a consolidation phase from a trendy phase & again how it starts a new trend after coming out of a consolidation or flat market condition.

 

On this article here , i tried to explain how to find a trend & i did not discuss about how to trade that trend or price direction once you find it, as those concepts are already discussed with my other articles like:

   (learn : PIN BAR strategy)    (learn : INSIDE BAR strategy)  (learn : support-resistance strategy)

  (learn : FLIP level strategy)  (learn : 20ema strategy)     (learn – Trendlines & Trendchannels strategy)

I hope that you found this article useful for your daily market trading as once you trade inline with price direction, your probability of trade success or winning a trade is much more higher than a trader who is trading against the price direction. So find the price direction first & then trade your strategy towards it. Price action analysis helps you to find the price direction on charts more easily than any other form of tools you may know in the world of technical analysis. Apart from the basic ideas discussed here,there are a lot more informations are required regarding finding & trading the price direction to have quality trades like :

= multi-timeframe analysis for finding out price direction ( my favorite topic )

= How to find a counter-trend trade

= when not to trade a trend

= quality check of a strong trend setup as well as flat market condition setup

= trading sideways market inline with trend

= Combination of trendy markets using different timeframes

= How to increase your probability of winning using price direction in place………… & more

December 24, 2014

2 responses on "Identify market direction using raw price action"

  1. sir simply you have completed phd in stock market

  2. very nice rajib ji ,you describe valuable things in very manner.

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