Price Action: Concept Notes (1)

I have been studying Price Action with Al Brooks for 2 years. Today is my 221st article. You should also learn Price Action.

How do you assess whether price is at the end of a swing? When price bounces from a trendline, if a strong bull bar appears at that point but price is already near the end of the channel, it's best to pass on the trade. The key is evaluating the distance between price and the channel's endpoint. If this distance is less than the average bar length, it's not suitable for entry, because there is almost no room for an ideal short-term profit.

All bars are either trend bars or trading range bars, but the key is to combine this with market context and direction. The influence of higher time frames is always present; the macro context imparts a directional bias on every bar. Therefore, a trend bar or consolidation bar often carries directional significance from the higher time frame. If the current time frame shows a consolidation bar, it usually means that reversals and trading range oscillations are occurring on a lower time frame, and these micro movements ultimately aggregate into this consolidation bar. This allows us to obtain a great deal of information without frequently switching to lower time frame charts.

Determining whether a bar is a trend bar requires several elements: first, the bar's range must be above average, with the average calculated from the most recent 5, 10, or 12 bars. Second, the bar's body should constitute the majority of the range—meaning the body is larger than the tails. Third, the close must be strong; for example, a bull bar should close near its high, ideally with no upper tail or an extremely short one.

The most useful tools for understanding Price Action include: trendlines and trend channel lines, prior highs and lows, breakouts and failed breakouts, the ratio of bar bodies to tails, and the relationship between the current bar and the preceding bars. Especially comparing the current bar's open, high, low, and close with those of the previous several bars can effectively forecast subsequent market direction.

So-called intuition is actually the result of years of practical experience. Knowing which signals to watch closely, knowing how counter-trend traders will operate, knowing the power of key breakout levels—these are the real keys to trading decisions.

Typically, the criteria for identifying a breakout is: when a bar, during its formation, breaks above the high of the previous bar, that price difference is the breakout. The breakout must hold above the prior high to be considered truly valid.

Reversal bar patterns also represent new breakout opportunities. A breakout has only two outcomes: it either succeeds or it fails. If you judge it will succeed, enter directly with the trend; if you expect the breakout to fail, trade in the opposite direction. There will always be people entering on breakouts; you only need to trade against them when they fail.

Remember these three key decision points: enter, reverse, or wait for a better entry opportunity. If you choose to wait, the process itself is gathering information, helping to validate or refute your original judgment. Waiting also creates "second entry opportunities," requiring more trading decisions.

Regarding trade direction, if a reversal bar appears, you must combine trend context to determine your operation. For example, when a reversal signal appears in an uptrend, choosing to sell means you're trying to catch a trend reversal. If you buy on the same bar, you're essentially betting against that bearish reversal.

When a very tight channel appears, if you see a reversal bar in a strong trend, you must wait for subsequent confirmation. But if a single-bar wedge appears—even if the pattern isn't perfect—it may still be a buy signal. Therefore, specific analysis based on context is needed.