Price Action Trading Explained

Price Action Trading Explained

One of the most asked questions I am asked is "How do you know when to enter and exit trades?"

The biggest part of my strategy is priced action trading which I will explain in this video! Aka reading patterns, disruptors and manipulations.

Price Action trading usually happens in patterns in the market. There's an overall pattern for the market, but there are also patterns for individual stocks as well as sectors and industries. Watch to learn more!

Price Action Patterns 

The pattern I watch for most is at support and resistance areas. You'll find that the price action tends to reverse as it hits those areas. If the price is going up and there's historical resistance, the price, nine times out of 10, isn't going to reverse.

The same is true as the price is going down towards a support area. The price will tend to reverse and go up at that support area.

Is there magic in the support and resistance areas?

I wish there were but the answer is a big sounding NO. The magic is because everybody sees them and says to themselves, "I better trade there because the price is about to reverse."

And because everybody's trading there. That's what causes the magic. The price does reverse there. Remember, it is volumes of shares traded that move prices up and down.

Moving averages are also areas where you're going to see higher volume and price reversal.

Now on my charting I use the 50 day moving average 100 Day and the 200 day moving average. I see price movement the same way I see a herd of cattle. If you were raised on a ranch or a dairy farm, you're going to get this analogy right off the bat. The herd is usually a very cohesive unit moving together. One steer may be on the left for a while, but he's gonna move eventually and be on the right for a while an hour later. There's a lot of milling around by individuals. But the herd itself looks pretty much the same. The point is, if the herd looks cohesive in its movement, look for patterns and reversal areas to place your trades and your exits.

Price Disruptors In The Market

Which brings me to the next point disruptors a disruptor happens when there's trading and all of the sudden a pattern is broken. You'll see gaps up and gaps down. So what disrupts trading patterns? Well, how about an earnings announcement, which is where the company is announcing their quarterly financial results and their future outlook and the trading herd reacts strongly one way or the other either positively or negatively. And the stock breaks out of its established pattern. There are all kinds of announcements besides earnings of a company that can affect prices. Think of announcement about mergers and acquisitions. How about drug trial results? Lawsuits and even the settling of lawsuits can all be disruptors of price action and their directors that affect the whole market not just one stock or industry. Government announcements CPI report that's the consumer price index. jobs report, Prime Minister's adjustments, even news events that are catastrophic like 9/11 all affect the price action on the market.

As a smart trader you should always ask yourself some questions. Will this disruptor affect only the stock or will it affect the whole market. Another question? How long is the effect of this disrupter.

And the final great question to ask yourself is how can i benefit from this disrupter? How can I place a trade to take advantage of the price action change?

Price Action Effects

Price action trading and their effects are easy to spot with volume spikes. I do a search every day after the markets been open up about an hour to an hour and a half. Looking for these disruptors and their high volume spikes. I'm going to share how I do it. There's a free website out called finviz.com. Once you open that up, select screener from the top menu bar, and then all from the next bit menu bar on the various search filters, go to price and select over $15. Why $15? That's because that's where big money trades. They buy stocks that are greater than $15 average volume. I like to see over 2 million shares traded a day. As for industry, I want to look at stocks only. I don't want to look at bonds or any other kinds of ETFs. And of course, you want them to be optionable so choose optionable.

Picking A Stock To Trade Using Price Action Trading

I usually only look at the stocks that are US companies. And then below that selection screen there's a list of stocks that meet all the filtering criteria area on the right hand column. You can sort by volume, and I sorted high to low and then I look at the first 20 stocks listed on the front page with high volume. What I'm looking for are either companies that are never on that list, but all of a sudden have extreme high volumes. That's what BBBY was. Or I look for a company that's always on the list, but trading at a much higher price.

For instance, Apple - it's always on the list and it normally trades around 70 million shares a day. All of a sudden, let's say it trades 200 million shares in a day and I want to know why. I look through the news next to get the answers to my why question and then I decide if there is a trade in there.

Stock Market Manipulators

That brings me to the final point - market manipulators.

To this day, I trust people to act honorably and with integrity, but I've learned through some very hard lessons that not everybody follows the same code. My big lesson? It came in 2011 on a stock called Jammin' Java Corp, JAMN.  Email blasts came out - "College Student Is Making A Fortune On New Opportunity". And then it listed all the reasons to invest in Jammin'.

The price went up and then it crashed.

Well, I now understand there was a group of people who had bought the stock cheap, and then went out and hyped it on the internet. The fools, and I'm pointing the finger at me, bought into that hype. And as soon as his price soared up those original investors they made a bundle and they left the rest of us holding the bag.

More recently that same manipulation has happened on GameStop and AMC and BBBY. My warning is not everybody acts with integrity in the stock market world. I have no respect for those manipulators and really hate to see people harmed and taken advantage of.

But, I've found a way to benefit from their actions and I've shared those trading techniques with my Investing Buddies. You can join the conversation at www.investingbuddies.com/2weektrial!

Thank you for watching all about price action trading explained! See you next week!