Last week we looked at what can influence price action , specifically zones of historical support and resistance across various time frames. We also discussed moving averages as a form of dynamic support and resistance.
This week we'll look at the basic definitions of price action. This may seem simplistic yet you'd be shocked how often traders attempt to trade the wrong type of price action.
Here at The Chartist we're big proponents of Elliott Wave Theory, to our minds the best and earliest identifier of trends.
In our Chart Research services we often discuss impulsive and corrective price action.
Impulsive price action is the extended smoother leg on a chart. Strong and steady. The one that points in the direction of the prevailing trend. It reflects motive and drive.
Corrective price action is choppy. Overlapping. Directionless. Generally shorter in length, more unpredictable, and runs against the prevailing trend.
Which type of price action do we prefer to trade?
Impulsive. It's where the 'easy' money is made.
That doesn't mean we ignore stocks or markets that are in corrective phases.
Many of my more aggressive trade recommendations come to the surface right at the end of corrective price moves.
They may be aggressive yet they are also low risk and offer higher rewards.
For the more conservative look for momentum or breakout trades. These occur when impulsive price action becomes more established.
Define the market type correctly and you are halfway towards becoming profitable.
Price action doesn't lie.
Get involved when the corrections are near completion then ride the easy waves.
Stay tuned for more on the dynamics of price action in Part 3 of our series next week.