Price action is among the most popular trading concepts. A trader who knows how to use price action the right way can often improve his performance and his way of looking at charts significantly. However, there are still a lot of misunderstandings and half-truths circulating that confuse traders and set them up for failure. In this article, we explore the 8 most important price action secrets and share the best price action tips.
#1 Support and resistance zones are better than levels
Support and resistance is probably the most popular price action concept, but only very few traders can actually make money with it. The reason is often very simple, although it’s not as obvious at first glance.
Most traders just use single, horizontal levels when it comes to trading support and resistance which look great in hindsight but fail during live trading. The reason is that singles lines are no effective way of looking at price movements. Creating support and resistance zones is much more effective when it comes to understanding price.
The screenshot below shows that the trader who just uses a single line either misses trading opportunities when the price does not reach his lines. Or he gets thrown out during volatility spikes; the trader who uses zones instead can filter out the noise that exists in the zones.
I hope that this concept doesn’t have to stay one of the price action secrets much longer and more traders will start using this technique.
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While my trading is more following capital flows based on trends that I measure with key moving averages there is one chart pattern that I find very useful and that has high probabilities of success.
The cup and handle pattern is a bullish continuation formation, it is one of the newer chart formations and can be easily identified on a price chart. This chart pattern was first popularized by William J. O’Neil in the first edition of his 1988 book, How to Make Money in Stocks. In order for the cup and handle setup to have the highest odds of succeeding, it should come after a clear uptrend is in place. The chart pattern consists of two key components: (1) cup and (2) handle.
The cup part of the formation is created when profit taking sets in or the market itself is in a correction and the stock sells off and forms the left side of the cup. The cup bottom is formed when the stock finally runs out of sellers at new low prices and buyers start moving in and bidding the stock back up again as sellers demand higher prices to turn the stock over. Most of the time as the stock emerges out of the right side of the cup in an uptrend it fails and meets resistance the first time it tries to break out to new high prices and the pattern forms a handle. The second run at new highs usually works as the sellers have been worked through and the stock breaks out to new highs.
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To be a profitable trader you must overcome these ten things:
- You must beat the market benchmark you are competing against or you might was well just buy and hold that index.
- You must beat your emotions by following a trading plan.
- You must beat your ego by taking losses early when you are proven wrong.
- You must beat your greed by managing your position sizing to limit your risk exposure.
- You must beat your fears by letting a winning trade run when there is no reason to exit.
- You must beat your desire to predict the future by reacting to what price action is actually happening.
- You must beat the trader on the other side of your trade.
- You have to make enough money to beat your commission costs.
- You must not let the market beat you up with too many losses and make you quit.
- You must beat the naysayers who think active profitable trading is impossible.
The original post is authored by Steve at newtraderu.com and is available here.
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Monster stocks are those wonderful beasts that make you look like a genius trader.
Shorts think that they are way too expensive and will crash, so they go short and have to cover en-mass after another 10 point run; they create even more buying pressure. Traders that short monster stocks do not understand the momentum that earnings expectations and growth cause for a stock’s price. They do not understand supply and demand. A stock that is $300, $400, or $500 based on earnings per share, could still be fundamentally cheaper than a $10 junk stock that has billions of shares floating around with tiny earnings per share.
Sounds great, but where do we find these beasts?
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