Hello traders, I always write at the end of all my blog post : “READ price momentum context – RECOGNIZE the pattern going on – TRADE the pattern till it ends” – what does it all mean ? In today’s article, i’ll try to explain how i do it all in charts. Though it will not be possible to explain here “THE ENTIRE PRICE ACTION STORY” i read on chart but i’ll share some important aspects of reading price action movement.
Before the rain starts, mostly you’ll see good amount of clouds in the sky as well as lightning in there. Same way, when you start reading & communicating with price action behaviors on chart, you’ll see some signals before something major happens like a change or reversal of trend,continuation of trend,breakouts,sign of exhaustion etc. Today i’ll share one of the major signs i see to predict upcoming “END OF A RUNNING TREND(up/down)” & this analysis helps you to exit all your accumulated positions or investments at the right time as well as trading reversals of existing trend.To explain the entire concept, i’ve chosen our favorite index “NIFTY SPOT” as we all see it daily.I started analyzing nifty data since 2008 here & used weekly chart for explanation.
OK – before we start with the article, let me clarify a few basic concepts which are required to understand the article contents better. I’m expecting that we all know – “what is an uptrend & downtrend and we know how to draw trend swings on charts.In case, you do not know this basic concept of drawing trend swings, then check-out the article where i shared “How to draw swing lines on chart”.
In next few charts below, we’ll see how an existing trend ends it’s journey & how a trend reversal takes place most of the time.Understanding “CHANGE OF TREND” is a very important aspect of price action analysis as this part of analysis guides you to trade with the right direction which is the key component of successful trading.If your trading direction is wrong, all further analysis will go wrong with it. So, HOW shall we confirm “the break of an on-going trend pattern” or “the trend is ending” ???
NOTE : We must see price trading above the LAST LOWER-HIGH SWING level(for a downtrend) or below the LAST HIGHER-LOW SWING level(for an uptrend) as a first hint of this break of an existing trend(down/up) pattern & possibility of starting a reverse trend or a flat market.
In below chart (till end of 2008 since april-2008), i marked 1,2,3,4,5 as higher-low swing since price was moving in an uptrend making higher-highs & higher-lows.I didn’t show higher-highs below as that part is not important to explain my topic here.so, till we are continuing making this pattern of higher-highs & lows , we’re in an uptrend only & looking for buy signals on every possible support areas to trade in-line with the trend. Now, as per the above NOTE ,in what condition we can say this uptrend is over & start seeing a possibility of a downtrend ? Answer is “when you see the last higher-low which is swing point-5 here, is hit & price starts trading below the level & in below pic, the same thing happened which is marked with BLUE.You can see, when price broke swing-5 layer of support, the uptrend move has broken it’s prior higher-low for the first time since the trend started which is a hint of “end of uptrend” & later we can see a strong moving downtrend took place after the break.
You can assume the importance of prior swing point looking at the red circled point-3 also in above chart. After a move up from point-3, price attacked back that level of support but was able to hold the level.In case, if price could manage to move down below higher-low swing point-3,we would have seen the same thing happening what happened after a break of swing point-5.
SUMMARY : Prior higher-low swing level is a key support level for an uptrend where we should look for strong buy signals to join back the existing uptrend & in-case the level doesn’t hold, we need to start looking for trend reversal trade setup & trade the other way of existing uptrend.So start watching this level closely every-time price attacks this layer of support as either you’ll see a trend-continuation or trend-reversal happening from there.
Below is a continuation of the above chart between 2008-2010, which shows what happened after the uptrend move got broken after a break below higher-low swing 5 there.We see price moving down here with lower-lows & highs which is a sign of downtrend.Lower-lows are marked as 1,2,3 here in chart.So, as we trade with the trend, we’re looking for sell signals on every possible resistance to trade in-line with the trend. Now, as per the NOTE ,in what condition we can say this downtrend is over & start seeing a possibility of an uptrend ? Answer is “when you see the last lower-high which is swing point-3 here, is hit & price starts trading above the level & in below pic, the same thing happened which is marked with BLUE.You can see,Price broke above swing-3 prior lower-high layer of resistance for the first time since the trend started which is a hint of “end of downtrend” & later we can see a strongly moving uptrend took place after the break.
SUMMARY : Prior lower-high swing level is a key resistance level for a downtrend where we should look for strong sell signals to join back the existing downtrend & in-case the level doesn’t hold, we need to start looking for trend reversal trade setup & trade the other way of existing downtrend.So start watching this level closely every-time price attacks this layer of resistance as either you’ll see a trend-continuation or trend-reversal happening from there.
I’ve explained a chart with uptrend & a chart in downtrend in above two pictures that how we’re finding the “end of trend” areas with “reversal of trend” possibilities.If you understood my taught concept of price action above, you’ll easily recognize price action happenings in below charts too without my help.Below are the continuation charts in the index & i’ve shown swing points & it’s area of reversal in charts :
Below Charting period : 2009 to april-2011
Below is continuation of above chart.After a break above lower-high swing point-3 in last discussed chart above, we see price moving in a strong uptrend with higher-highs & lows in below chart & again a “CHANGE OF TREND” took place after a break below higher-low swing point-5(marked BLUE) here which ended the ongoing uptrend move.
Below Charting period : 2011 to 2013
Below is continuation of above chart.After a break below higher-low swing point-5 in last chart above, we see price moving in a strong downtrend with lower-highs & lows in chart below & again a “CHANGE OF TREND” took place after a break of lower-high swing point-4(marked BLUE) here which ended the ongoing downtrend move.
Below Charting period : 2013 to may-2014
Below is continuation of above chart.After a break above lower-high swing point-4 in last discussed chart above, we see price moving in a strong uptrend with higher-highs & lows in below chart.Here you can see price taking strong support from prior higher-low swing level of 2 & same thing happened in swing point-3. We see a powerful PIN formation buy signal took place on higher-low swing-3 level which was a nice buy signal to trade in-line with the trend.
Below Charting period : may-2014 to april-2015
Below is continuation of above chart.we see price moving in a strong uptrend with higher-highs & lows in below chart & again a “CHANGE OF TREND” took place after a break below higher-low swing point-7(marked BLUE) here which ended the ongoing uptrend move.
Below Charting period : 2015
Below is the current market updated chart where we see price moving down with lower-lows(marked as red) & highs. Last time , price faced resistance sell-off on it’s prior lower-high swing level-2 which could also be traded if you’re tracking “change of trend” conditions & trading a “reversal of trend” as we discussed.
Finally, isn’t it amazing that since 2008 , we’ve been able to trade “every reversal of trend” happened & it’s not magic but purely PRICE ACTION ANALYSIS !!! You can do a lot more than this using price action analysis once you start reading & communicating with price momentums on chart. Now, next part of this analysis is – “HOW TO TRADE THESE REVERSALS & HOW TO MANAGE THE EXISTING POSITIONS WHEN REVERSAL HAPPENS????”also “HOW TO CATCH THESE MOMENTUMS IN LOWER-TIMEFRAMES FOR EARLY ENTRY OPPORTUNITIES & HOW TO BUILD-UP NEW POSITIONS AS THE TREND PROGRESS?? ” and many more !!!! To know these answers & trade these setups directly with me & to enhance your price action analysis to the next level, i welcome you to my “ADVANCE PRICE ACTION COURSE” which covers live trade examples of catching up a trend,reversals & sideways market.
Finally as i believe, READ price momentum context – RECOGNIZE the pattern going on – TRADE the pattern till it ends and to learn it all join me in my MEMBER FORUM & trade with me realtime using higher & lower timeframe charts.