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8 Price Action
8 Price Action
Corrections
Corrections are short price movements against the prevailing trend direction.
During an upward trend, corrections are short-term phases in which the price
falls. As we will see, the price does not always move in a straight line in one
direction during trend phases, but constantly moves up and down in so-called
price waves.
Consolidations
Consolidations are sideways phases. During a sideways phase, the price
moves sideways in a usually clearly defined price corridor and there are no
impulses to start a trend.
Breakouts
The buyers and the sellers are in equilibrium during a sideways phase. If the
strength ratio between the buyers and the sellers changes during
consolidations and one side of the market players wins the majority, a
breakout occurs from such a sideways phase. The price then starts a new
trend. Breakouts are, therefore, a link between consolidations and new trends.
Trend reversal
If a correction continues for a long time and if its intensity increases, a
correction can also lead to a complete trend reversal and initiate a new trend.
Like breakouts, trend reversal scenarios, thus, signal a transition in prices
from one market phase to the next.
The chart phases can be universally observed since they represent the battle
between the buyers and the sellers. This concept is timeless and it describes
the mechanism that causes all price movements. The trend phase pushes the
price upwards, indicating the buyer overhang. The consolidations mark
temporary trend pauses; however, a trend is continued until the price does not
reach a new high during an upward trend. Corrections show the short-term
increase of the opposition. If these are fended off, the trend continues its
movement. On the other hand, long correction phases eventually develop into
new trends when the strength ratio shifts completely.
Although the sequence and strength of individual chart phases can vary
greatly, any chart contains only these phases. If we understand them
comprehensively, price analysis becomes relatively simple.
The rate with which the price rises during a trend is also of great importance.
In general terms, moderate trends have a longer life span and a sudden
increase in price usually indicates a less sustainable trend. We can often
observe this phenomenon during so-called (price) bubbles, wherein the price
falls again just as quickly after an explosive rise.
The development of the steepness of trends and price waves, compared to
the overall chart context, is also important: Accelerating or weakening price
waves might show that a trend is picking up speed or is slowly coming to a
standstill.
Interesting correlations can be made together with the concept of length: A
trend is intact if we find long trend waves or trend waves that become longer
with a moderate or increasing angle. On the other hand, a trend with trend
waves that become increasingly shorter, and which is simultaneously losing its
steepness, indicates a possible imminent end. The screenshot below shows
such a situation where the length and the steepness changed during the
uptrend. The complete reversal soon followed.
More: Trend strength with indicators
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4) The body
Candles with a large body and small wicks usually indicate a lot of strength
whereas candles with a small body and large wicks signal indecision.