To read price action, one should not just memorize some bars formation (such as outside bar, double high lower close etc)… Rather, one needs to analyse the situation and figure out whether the bulls/bears are winning the race… In addition, look for traps where traders are likely to be tricked into a position on the wrong side….
Reading Price Action - The Analytical Approach
In the chart above, one can figure out that price will collapse after candle B, for the following reasons:
- Prior to candle B, price showed weak attempts to rally above the upper channel line (red). Previous bull candles all have relatively long upper wicks.
- Imagine how candle B looks like when price is at the high of the candle… At that moment, price probably looked very bullish… Unsuspecting bulls may jump onto the trade, believing that price is due to rally.
- In fact, candle B is a nice bull trap… Its high is slightly above the high of candle A, and will thus trap bulls who buy on breakout.
- Candle C is another confirmation that price is weak. A nice price to sell will be one pip below the low of candle C.
