Price Action – The Footprint of the Money “What is Price Action?” is a frequently asked question by aspiring traders. Traders who ask, feel it is a well kept secret when all they receive for an answer is: ‘Swing highs, swing lows, test of top/bottom, etc., are all price action.’ The answer still leaves them in the dark. Understanding price action enables a trader to minimize questionable entries and improve exits. Price action is the footprint of the money.
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Up Bar: is a bar with a higher high and higher low than the previous bar. The bars marked off are in an up trend. Notice how the close is higher than the open until what turns out to be the last bar of the trend where the close is lower than the open. There were more sellers then buyers on the last bar.
Down Bar: is a bar with a lower high and lower low than the previous bar. The bars marked off are in a down trend. Notice how the close is lower than the open until what turns out to be the last bar of the trend where the close is higher than the open. There were more buyers then sellers on the last bar.
Inside Bar: also called a narrow range bar, is a bar with the high that is lower than the previous bar and low that is higher than the previous bar. Some traders do not consider an inside bar that has either an equal high or an equal low as an inside bar, others do.
Inside bars usually represent market indecision. As on any bar, the closer the open and close are to each other shows just how undecided the market is as neither the buyers or sellers are in control. Buyers are in control on the inside bar marked on the chart because the close is at the top of the bar
Outside Bar: also called a Wide Range or Engulfing Bar, is a bar with a high that is higher than the previous bar and with a low that is lower than the previous bar thereby engulfing the previous bar. Since the open and close are close together on the marked bar, neither the buyers or the sellers are in control and the market is undecided which way to go.
When the open is in the bottom quarter/third of the bar and the close is in the top quarter/third of the bar, it is said to be bullish engulfing with the buyers in control. When the open is in the top quarter/third of the bar and the close is in the bottom quarter/third, it is said to be bearish engulfing with the sellers in control.
Another definition used for this bar – especially if candlestick charts are used – is that the open and close have to engulf the previous bars open and close and not just the high and low of the bar. With this definition, the wide range bar or engulfing bar does not need to have a higher high or lower low to qualify. The first definition most probably came about with bar charts where it is harder to notice the open and close.
The following chart has the swing highs and lows marked in both an up trend and a down trend. Price on a given time frame is in an up trend if it is making a higher highs (HH) and a high lows (HL) and in a down trend if it is making lower highs (LH) and lower lows (LL). If price is doing anything else, it is in a consolidation pattern – range, triangle, pennant, rectangle etc.