​Here's Why I Trust Price Action More Than Technicals

March 05, 2017 05:15

Momentum breaks support.png

Dear Traders,

Do you often see price breaking (strongly) through the area of your trade setup?

The bad news is, taking trades at support or resistance requires a lot more experience than traders realise. But I have good news too: price action signals substantially help beginning and intermediate traders to catch proper bounces and breakouts.

This article not only explains the advantages of candlestick patterns at critical bounce or break spots but also helps you become a better discretionary trader.

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Why Is Trading S&R Tough?

Beginning and intermediate traders will often struggle with trading at key support and resistance (S&R) levels. The tactic of entering at key support or resistance (S&R) levels often backfires for many traders, especially beginning, intermediate, and starting traders. For instance, they enter a long trade setup at a support level, only to see price break it (push below).

There are a couple reasons for this:

  1. They lack the experience to understand which levels are in fact critical.
  2. They misread the importance of momentum and correction.

The Battle Between Momentum and S&R

The interaction between momentum and support and resistance is critical.

Support and resistance (S&R) becomes more important when there is a confluence of key levels in the same area or zone. This increases the likelihood that price will react, bounce or reverse around that level.

Experienced traders will be able to:

  1. Accurately judge where those zones are located.
  2. Use pending orders in their MT4 Supreme Edition or WebTrader platform to enter such a trade setup.

Momentum breaks support 2.png

Momentum is more important when there are large sized candles pushing into one direction with candle closes near the high (bullish) or low (bearish).

Here is how the dynamics of S&R versus momentum work:

  1. If S&R is stronger than momentum, S&R will stop momentum/price.
  2. If momentum is stronger than S&R, momentum will break through S&R.

Simply said, the interaction and strength between the two will determine the course of price action and its path of least resistance.

For most traders, this task is quite difficult which is why I offer a different solution.

Letting the market decide: candlestick patterns

Although some traders take wonderful trade setups simply based on S&R, I noticed that for many traders it often leads to painful trades as price lacks respect for their zone.

My recommendation is simple – wait for candlestick patterns to confirm a reaction or bounce at the S&R level of your interest.

Instead of anticipating a price reaction at a S&R zone (often hoping for the best), let the market decide first and then follow its lead.

How can traders follow the market's lead?

  1. By waiting for candlestick patterns to become visible in their key support or resistance (S&R) zone.
  2. Wait for a bounce: candlestick patterns such as engulfing twins, doji's, pinbars and many more show traders that price is responding to that particular S&R level.
  3. Wait for a breakout: larger sized candles with a close near the high (uptrend) or low (downtrend) indicate that a bounce (point 2) is not occurring and that a break seems more likely.

Be aware that any particular price reaction does not provide an ironclad guarantee (nothing does in the market). Price could bounce but then fail to continue in the new direction or break but then turn into a failed breakout. Keep an eye on how the candlesticks develop both during and after a bounce or breakout.

How can traders manage their trades better?

Here are 4 of my best tips:

  1. Find and only choose strong confluence of S&R levels
  2. Try to see momentum running out of steam with smaller candles
  3. Look for the presence of divergence (oscillator does not confirm higher high or lower low shown by price)
  4. Choose the right timeframe

For the time frame part, it's a question of finding a chart that has value for your type of trading. If you are looking for a bounce at the 50% Fibonacci level on a daily chart, then seeing a bullish engulfing twin on the 5 minute chart would not mean much.

The best timeframe is 1 or perhaps 2 timeframes below your timeframe of analysis. Here the pattern will be relevant for the price reaction at your designated S&R confluence zone.

These tips will help traders skip zones where price will not stop and focus on zones where a price bounce becomes more likely, but do keep in mind that all concepts are imperfect. Most important is to use our analysis and best judgment.

All in all, I love using technical analysis for analysing and setting up my trading plan but I equally value whether price action actually confirms my view or not.

Hence the title of the article – "Why I trust price action more than technicals". I want price action to confirm my analysis before trading it.

Cheers and safe trading,

Chris Svorcik

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