Price action trading is a popular term floating around, but, unless we know how to turn raw data into actionable information, building price action reading skills remains elusive. Real life, real time examples can help us develop the necessary skills, so let’s see how we can “read the tape”, in 2023, in real time!
There are several valuable lessons on this 240min ES chart, but this time we’re focusing on the sideways consolidation of the past few days. Here are the notable events, as we have been following this market in Remek! Premium.
Nov 29, marked a), we had a failed breakout: price fell back into the range. If you took this breakout trade, you probably had to manage yourself out of a potential loser (another example of pattern failure). It happens, no big deal, we move on.
at b), things become interesting again: after a failed breakout from a range, markets often make an attempt to test the other end of the range. (See the selling pressure in the form of that red bar on the 240m chart.) At that point, the question became: will the selling pressure get absorbed by the bulls? A “yes” would be a very bullish sign! And in this case, it did get absorbed.
So after that big green reversal candle that followed b), it was reasonable to expect (see the extreme volatility compression at c) that a second attempt at a break to the upside may be next. Which is what we got today, and which resulted in a long trade now in progress, targeting 4650 plus change, the high of last August.
NQ 2023 12 01
Since the above sequence of events happens, in one form or another, over and over again, it pays to cement it into memory. If you’d like to add one more ingredient to your thinking process, consider correlation: checking what is happening on correlated markets (one index to the others, GC to SI, HO to RB and CL etc). In this case, a quick look at NQ (see chart) and YM (and even RTY) show similar bullishness, which is good to know as we plan a long trade on the ES.
Also note: every trade consists of two phases:
identifying the opportunity
structuring (designing) a trade based on that opportunity.
The thought process described above is all about the first step, identifying the opportunity. That done, we can move to Step 2, structuring our own specific trade based on that opportunity.
You will also notice that Step 1 is largely independent of the timeframe a trader might be trading, while Step 2 is totally timeframe-dependent, and specific to the trader! This means that no matter what timeframe you trade, a 500 tick chart or a 60 minute chart, a volume chart or a range chart, your first job is to recognize the opportunity, which is, in this case, the expected breakout at c). Once you’ve done that, the job become to structure (design) your own trade that would best allow you to profit from the opportunity. In other words, Step 1 is the same for everybody, and is something we usually do on the standard contracts of the futures markets, while Step 2 is individual, and can involve micros, ETFs, even options, depending on your particular risk management rules and general trading plan.
It also follows from the above, that Step 1 can be done by simply looking at a chart (preferably our charts), while Step 2 is best done with software (preferably ours), either PRO STR and/or BT, depending on your carefully-crafted trade process.
In our experience, the ability to understand and differentiate between Step 1 (identifying the opportunity) and Step 2 (structuring a trade around that opportunity) is a major success factor in this business. As is having a robust, disciplined, repeatable trading process, but that’s probably a topic for another post.
Let us know how you incorporate actionable information from price data into your own trading!
