A price Action analysis is a part of the routine swing traders have to face. This kind of analysis can indicate which side is losing control and assist in pinpointing potential reversals. It is also the art of determining the direction of stock without the usage of technical indicators. Today we are going to give you 5 tips on the usage of Price Action that will make you a better swing trader!
Don’t know what swing trading is? Then catch up by reading this article!
Search for the Support and Resistance Levels
One of the first things a trader has to learn in technical analysis is to identify support and resistance levels. These are the main indicators for a trader. These levels are a certain area on a stock chart. Here is how they look like on a chart:
Remember, support and resistance are areas, not specific prices!
Read more on the topic: Swing Trading vs Day Trading: What is the difference.
Examine the Swing Points
The areas were short term reversals take place are called swing points. In the picture below, it is possible to see an easy example of what they look like.
A trader must be aware that when an area at a high is composed of a cluster of candles, the chances for the stock to break through are very low. Buying here is too risky. When there is an area that is composed of one or two candles, the trader can still give it a shot. However, the more candles, the higher the risks.
Consecutive up and down days
When there is a consecutive movement in one direction, the trader must be sure that there will be a reversal in the nearest future. If you want to buy a stock, keep that in mind.
After a few up days in a row, a trader must consider shorting a stock and vice versa. Beginning traders usually think that when a stock goes down, they must sell because it is bad. When it goes up, they must buy it because it is good. In reality, this is often just the opposite!
Still do not know which stocks to choose? Read more about it in the How to pick stocks for swing trading article!
Look After Narrow Range Candles
The narrow range of candles in swing trading can often predict a reversal. When there is low volatility, there are very high chances for bursting moves.
As you can see in the charts above, after the narrow range of candles, there has been an extreme growth in price. Such candles warn the trader about the slowing down of the momentum. Both sides of the market are on an equal level, but someone will take the lead in the shortest time.
Measure the Depth of a Swing
The future movement of a stock in swing trading can be determined by measuring the depth of a swing. Just like in the example below, the price action has gone almost 50% down till the prior swing. In this case, this is a good sign.
However, if the stock goes lower than that, you might want to be cautious. In a strong trend, stocks should not go down more than halfway. The buying pressure must be encountered before the 50% mark is reached. Be careful with your trade whenever a stock does not reverse after reaching this point.We hope this article was useful to you. Now that you know what is Price Action and its importance, read our other articles to learn more about swing trading!