Changes in Price Action and How To Adapt To Them

Changes in Price Action and How To Adapt To Them

A very interesting situation was presented by a member of the Talking Chart's Facebook page.

He decided to put into practice the patterns he learned from the book. The chosen instrument for this exercise was the Philippine Stock Exchange Index (PSEI).

He sent me a screenshot and asked how he was doing. He was right in his conclusions but something in his chart attracted my attention. 

There is a useful lesson here that is why I decided to share it with you.

Take a look at the next charts

The first one (a daily chart) is showing how the PSE index looks now.

PSE index

The second one is displaying the same period but a year ago. Again it is a daily chart. Both charts are made with TradingView

PSE index

Do you see the difference?

In the current chart, there is more white space - more gaps and small candlesticks. Those many gaps mean a lot of emotions are in play right now. That makes it easier for the market to swing in one or another direction and to break previous highs or lows.

Is this wrong?

Not wrong. The market can't be wrong. It is different and if we want to continue to trade this instrument (we can always search for more liquid markets) we need to adapt to those changes.

Let's focus on some changes:

  • In such an environment, simple price action signals won't be effective. We need to wait for a combination of a few candlesticks which point in the same direction. Like a big candlestick followed by a few small ones which are inside that big one or a gap, which acts as a catalyst (see the checklist)
  • For price action trading it is very important to see the actual penetration of the signal level (previous high or low). This is also crucial for those of you who trade intraday. As you can see from the first image, now the market is just gapping above or below those levels. Since gaps are more than the actual breakouts we can wait only for those signals when we can see how the prices are behaving around the daily high or lows.
  • The situation might be so bad that it wouldn't be wise (or even possible) to read a chart, candlestick by candlestick. In this case, it is wise to look for other, more setup markets. But if we have a good reason to trade this particular instrument we can use something which combines the price action from many candlesticks. Yes, you got that right. In this case, we can use an indicator.

One thing is certain in trading and it is that everything is changing. When this happens don't be scared, find the changes and adapt.

I hope you enjoyed this lesson. Expect more to come.

Stay safe!
Now, let's find your missing piece!

Vassil Banov,

Founder of Piece of Trading


Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer

TAGS: Price Action Trading, How to Trade, Trading Lesson

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