The Market is Speaking, But Are You Listening?
Are
you listening to what the market is telling you or are you only
listening to yourself? The market ‘speaks’ its own language, that
language is price action, and not only do you need to be fluent in the
language of price action, you also must be able to apply what the price
action is telling you in an objective and neutral manner.How to ‘listen’ to what the market is telling you and apply it
Each day, at the close of the market you should check your favorite charts, it’s like reading a page of the market’s story for that day. You can see what happened, who won the battle between the bulls and bears and whether any price action signals formed as a result. It’s important to make this a daily routine so that you don’t forget what has happened and what the market is doing, otherwise, it will take you some time to get back into sync with the market’s rhythm.When you look at a zoomed out daily price chart or a weekly chart of any market, it’s not hard to quickly see the primary direction that market is headed. This is going to be the ‘right’ direction to trade in, 90% of the time. Yet, time and time again, traders over-complicate this. Rather than zooming out, and getting a feel for the overall dominant direction of a market, many traders want to zoom in, further and further, down to minute charts, where they are basically seeing nothing but noise.
- The most obvious direction is usually the right direction
Look at the weekly EURUSD chart below, we are looking back at about 4 years of price data here. This is how you quickly determine what the ‘story’ of a market is. On this chart, what I see is a large downtrend that unfolded, followed by a large period of consolidation within a large trading range, and most recently we can see price broke up through that trading range and is now trending higher. So, the current most obvious direction of this chart is up. You see how simple this is?
Next, let’s move down one-time frame, to the daily chart time frame (my favorite). Here, we can see the market found a lot of support at 1.0400 and has recently taken out the highs at 1.1100 – 1.1300 and more importantly, the highs of the previous trading range up near 1.1615.
This is how you read the market from left to right. It’s not hard, it’s just like reading a book, you need to understand where the market has been and where the key levels are to understand what is happening now and what it may do next…
- Path of least resistance
- It only pays to be contrarian sometimes, not always. Don’t let your ego take over.
It’s important to not become so contrarian that you are no longer listening to what the market is telling you. For example, if you get long on a breakout that ends up becoming a failed breakout, do not simply stay in the trade because you feel so strongly about it. If you do, you are no longer listening to the market, you’re listening to only yourself. A false break is a like a big warning signal and you need to listen and take heed of that signal, not ignore it.
In this way, price action can help you exit bad trades just as it can help you enter a trade. A massive bearish or bullish tailed bar against your position or false breakout as just mentioned, can often be a signal that the market is going to reverse, so if you arrogantly stay in a trade even considering such a reversal signal, you are not listening to or trading in-tune with the market, which is a very good way to lose a lot of money, fast.
Remember, trade what you see, not just what you think, and don’t get emotionally attached to any one trade. Trade in harmony with the market, not against it.
- The importance of price action signals
Perhaps the most important thing about price action signals, especially those on the daily charts, is to not be the proverbial deer in the headlights when you see one. In other words, don’t freeze up and (or) panic when you see an obvious price action signal, don’t over-think. An obvious daily chart price action signal can act as either an entry signal or an exit signal and is something you should always take note of either way. They are important clues in the ‘story’ the chart is trying to tell you and they can often help you figure out what the market is likely to do in the near-term.
- Confluence – when you see price action signals at event areas or key levels, the market is telling you something.
Conclusion
As a beginning trader or as any trader looking to learn to trade with price action, it’s critical you understand how to read and interpret the ‘story’ a chart is trying to tell you. You do this by first learning to read the chart from left to right and then learning to interpret individual price bars. This gets easier the more you do it, but it is important you check in with your favorite charts almost every day so that you stay connected and in-tune with the market.Eventually, you will begin to develop a trader’s intuition and when you see certain market conditions or patterns, you will simply ‘know’ what the market is trying to tell you, like a flashing light saying, “I’ve seen this before”. The journey of trading never truly ends, but if you are passionate about it, you will look forward to learning how to read the price action and learning to ‘hear’ what the market is telling you.
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