Most successful traders use candlestick charts to make their money, and they trade primarily or exclusively using price action. Although there is no universally accepted definition of price action, I use the broadest one and say that it is simply any move up or down on any chart for any market. The smallest move that any market makes is one tick (one pip for the Forex markets, although pips are now often subdivided into tenths, which most traders ignore). If a market moves up one tick, it is because there are not enough sellers at the current price to fill all of the buy orders, and the market has to go higher to find more sellers. If it falls one tick, it means that it is in search of a price low enough so that there will be enough buyers to take the other side of the bears.
As a day trader, I don’t have the ability to spend time thinking about anything other than whether the market will go up far enough for me to make a profit if I buy, or fall far enough to make a profit if I short. I make several assumptions that allow me to not worry about anything other than the price action on the chart that I am trading. It is impossible for me to know if my assumptions are true, but they are consistent with the price action, and if I later conclude that I am wrong, I will then change my assumptions.
Although I watch and day trade a 5 minute candle chart during 99% of every day and have for 27 years, I also make some trades based on the 60 minute, daily, weekly, and monthly charts. I use options most of the time when I trade those higher time frames, but I use the same price action techniques that I do when I trade 5 minute charts.
The lure of candlestick chart patterns
When you look at websites that offer advice on trading, they are filled with candlestick patterns and all kinds of rules based on candles. However, when you watch professional traders on television, you will notice something entirely different…they virtually totally ignore candlestick patterns and often buy at the bottom of a strong bear candle or candle pattern and sell at the top of a very bullish candle pattern. Why is that? Because they want to make money. If candlestick patterns were anywhere near as good as many trading websites make them appear, they would quickly stop working because the institutional would no longer take the other side of the trade. If a pattern is good for you, then it is bad for the guy taking the other side, and institutions cannot stay in business if they consistently lose. The only logical conclusion is that most of what you read about candlestick patterns is nonsense because the institutions control the market and they ignore all of what is on those helpful “Trading Made Simple” candlestick websites.
Setups and Signals
There is a lot written about candle bar signals that might lead a reader to believe that knowing a collection of candlestick patterns is 90% of what is required to learn how to trade online. It is not. A setup is composed of two things, a signal and context, and without both, you should not take a trade. By context, I mean all of the bars to the left have to be supportive of your trade. A perfect candle pattern in the middle of a tight trading range will consistently lose money. You need other reasons for taking the trade, like the market being at a confluence of support or resistance, and I discuss this in detail in the course.
Thank you for reading my How To Trade Price Action manual.
The next article is The market and the market cycle.
Complete list of links for all How to Trade Price Action Manual chapters.