All-Inclusive Price Action Guide from A-to-Z

110 min read

Dear Traders,

Have you been looking for an article which explains price action in one spot? Today’s your lucky day as Elite CurrenSea (ECS) is releasing its largest volume of work, ever. Download a full version of guide in a PDF format here.

The price action guide covers all imaginable angles (let us know if anything is missing!) from candles to candlestick patterns and from path of least resistance to price swings. It offers a full 360 degree overview of everything connected to price action.

The article has more than 10,000 words and 50 pages, but don’t let that scare you. You can easily browse the topics by using the subheadings and we added an overview of the contents at the very start so you can choose the subtopics as you please. 

Full Overview of This Price Action Guide

How did the idea for this Price Action Guide start?

Elite CurrenSea always is looking to help the trading community and its followers. So we reached out to you on Twitter via my twitter handle @ChrisSvorcik. We asked a simple question: what guide would you like to see next and offered 3 answers: Price Action, Patterns, and Fundamental Analysis. The clear winner, as the image below shows, was Price Action which received 45% of the vote!

We know that you might be excited to dive into our ultimate price action guide head first, but some followers already know parts of this guide so we decided to offer an overview of the contents first. Here below you will see all of the subheadings that you can find in this article, which should help you with finding the paragraphs that are most interesting to you. There are 14 sub paragraphs in total:

  • Building blocks of the charts 
  • Candlesticks explained 
  • Candlesticks patterns explained
  • Candlesticks basics
  • Bearish reversal candlestick patterns
  • Bearish continuation candlestick patterns
  • Bullish reversal candlestick patterns
  • Bullish continuation candlestick patterns
  • Price swings: the 4 types of price action
  • Identifying price swings
  • Identifying momentum & correction
  • Price patterns
  • Path of least resistance
  • Flow versus resistance

Alright, with that introduction behind us, let’s start!

Building Blocks of the Charts

The candlestick is the basic and smallest unit of measurement on the chart – regardless of the time frame. The candlestick is like the 1 cent coin with the Euro or US Dollar, because there is a not smaller unit of accounting. Of course, there are some traders that use bars while others use line, renko or range bar charts. Nowadays most traders choose the candlestick as the basic building block of a chart… Both Nenad and I (Chris) use candlesticks in our ecs.SWAT and ecs.CAMMACD approaches so the focus of this article will be on them.

The credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata, Japan. There is a high probability that his original ideas were modified and filtered over time, eventually evolving into candlestick trading we use today.

Candlesticks provide a wide range of visual hints and thanks to them we can understand price action trading in a much easier way. Time frame trading with Japanese candlestick charts also allows traders to grasp market sentiment. Thanks to rice trader Homma to Steve Nison (who introduced the concept to the West), candlestick charts offer a much deeper depth of information than traditional bar charts.

All of the candlesticks on any given chart represent the flow of price of a particular instrument and time frame. Each single, individual candlestick represents one building block of that larger picture. Traders can connect those building blocks to construct larger structures. For instance, traders can (sometimes) connect multiple candlesticks to build bigger entities like candlestick patterns. The same logic can be used for language. Words form sentences which again form paragraphs. Or, you can compare candles to pieces of Lego (the children’s toy), which are used to build bigger structures like a house.

With trading it works like this:

    1. Candlestick = the basic unit on the chart.

    1. Candlestick patterns = a group of 1-3 candles that form specific patterns which in turn provide information about the direction of the chart.
    1. Price swings = a group of candles, usually more than 3 or 5, that indicate a larger price movement. A price swing is when a series of candles form one larger unit or “leg”, which has (mostly) the same direction (sideways, up, down) and speed (impulsive or corrective).

    1. A price pattern = a group of swings that connect to form a pattern. The pattern either indicates bullish or bearish and continuation or reversal.

  1. Trend or range = multiple price swings that can be connected to form a larger direction. A channel would have multiple price swings in it. The overall angle of the channel could be up, down or sideways. A trend channel is either up or down whereas a range is always going sideways.

Chart Hierarchy

In the next section we will explain step by step all of the building blocks that make up the larger market structure. As mentioned above, the single candle is the smallest unit and the largest is the entire market structure of the chart. Here is the sequence for a full overview. The next paragraphs will discuss all of these building blocks.

Bottom of sequence (smallest)

  • 1x candle is smallest unit of chart
  • Candlesticks make 1x candle pattern
  • Candlesticks and candle patterns make 1x swing
  • Multiple price swings make price patterns
  • Multiple price swings and price patterns make 1x trend or range
  • Multiple trends, ranges, and price patterns make chart and market structure

Top of sequence (largest)

Candlestick Basic

The candlestick is either bullish or bearish:

    • A price closing higher than where it opened will produce a white candle by default – bullish.
  • A price closing lower than where it opened makes a black candle by default – bearish.

The candle consists of a body, nose, and the tail (wick or a shadow):

    • The boxes that are formed by price action are called “the body”.
    • The extremes of the daily price movement, represented by lines extending from the body, are called “shadow, tails or wicks”.
  • A small part of the candle that is left behind is called “the nose”.

A price closing where it opened or very close to where it opened is called a “doji”. You don’t need to memorise names and descriptions of the candlesticks because it is not needed for successful trading. Nevertheless, it is helpful for any price action trader.

Candlesticks Explained

The candlestick offers four data points per candlestick:

    1. Candle open (O): the starting price of the candlestick.
    1. Candle close (C): the closing price of the candlestick.
    1. Candle high (H): the high price of the candlestick.
  1. Candle low (L): the low price of the candlestick.

The same information is provided for each candlestick regardless of the time frame and financial instrument. All candles have the exact same composition. So a candlestick on the daily chart would show the price of the open, close, high and low for each day. The 4 hour or 15 minute chart also indicate the open, close, high and low but of the respective lower time frames.

The main difference between the time frames is how quickly a new candlestick appears on the chart. A daily chart will only get a new candle at the start of each trading day. A weekly chart will take a full week before a new candlestick is available. Lower time frames of course change quicker. A 15 minute chart will get a new candle every 15 minutes as long as the market is open.

The importance of a candlestick does depend on the time frame. The candlesticks from higher time frames offer more value than from lower time frames. A daily chart candlestick has more weight and significance than a candlestick from a 30 minute chart. The same is true for a 60 min candle, which has more importance than a 1 minute candlestick.

Correlation between the Open and the Close

The colour of the body in the candle tells us whether it is a positive or negative candle session.  In an uptrend or bullish market, the buying often happens at the open price. As the price rises, a white candle is formed. The length, or the distance, between the open and the close reflects the dominance of the bulls. But keep in mind the character of the candle is never fully known until the candle closes.

In contrast, during a bearish market, a dark body candle is created, which means sellers are entering the market on the open and selling the price lower to the close. But once again, only when the candles closes will a trader be sure if it’s a bearish or bullish candle.

Candlestick charts provide great insights into the market dynamics based on the shape and colour of the candle’s body when comparing it to previous candles.

Key Dynamics of Each Candlestick

That said, each candlestick provides a ton of value and information. Here are some vital questions it covers:

  • What is the direction of the candlestick: bear or bull?
      • C vs O.
      • This is answered by analysing the candle close versus candle open.
      • A candle close above the open indicates a bullish candle.
      • A candle close below the open indicates a bearish candle.
    • A candle close that is equal to the open is called a Doji candlestick pattern and indicates indecision.
  • Which side is in control of the candlestick: bear or bull?
      • C near H or L.
      • This is answered by analysing the candle close versus the high or low.
      • A candle close near the high indicates that the bulls are in control.
      • A candle close near the low indicates that the bears are in control.
      • A candle close near the middle of the candle indicates correction and indecision.
    • Here is how traders can assess the control:
          • 0-5%: extremely strong. The close is almost right at the high or low which is indicating extreme strong candlestick close. The bulls or bears have a dominant and clear control of the candle. First candle on the left.
          • 5-10%: very strong. The bulls or bears have a dominant and clear control of the candle.
          • 10-20%: strong. The candle is under control by the bears or bulls but not as dominant as the first two groups. Second candle from the left.
          • 20-25%: decent. The control is weaker but one side is still dominant. Analyse other parts of the charts to understand the overall picture. Second candle from the right.
          • 25-30%: mild. Be careful, control of one side is becoming much weaker. Context is important.
          • 30-35%: weak. There is significantly less control of one side and candle looks more indecisive.
        • 35-50%: very weak. There is no control of one side and the candlestick is corrective. First candle from the right.

  • Is there selling or buying pressure in the candlestick?
      • C and O away from H/L
      • This is answered by analysing how far the candle open and close are compared to the high or low. This is called a candle wick.
      • A candle close and open that is far away from the high indicates selling pressure.
      • A candle close and open that is far away from the low indicates buying pressure.
      • Less than 50% wick: probably no extreme selling or buying pressure in that candle.
      • Bottom/top 50% of the candle is wick: some pressure to up or down but if candle open and close are equal, then this could also mean indecision and no pressure.
      • Bottom 65% of the candle is wick: significant pressure to up. First candle on the left is an example.
      • Top 65% of the candle is wick: significant pressure to down. Second candle on the left is an example.
      • Bottom 80% of the candle is wick: significant pressure to up. Second candle on the right is an example.
    • Top 80% of the candle is wick: significant pressure to down. First candle on the right is an example.

The wick length can represent a price low and/or high when comparing it with an open or close price from the real body of the candle.  This may provide insights on the market’s rejection for a resistance or support price level.

The longer the tail, wick or shadow as they are often called, the more likely it indicates a trend reversal because demand is increasing or supply is reducing. A wick at the bottom of the candle could indicate the end of the downtrend for instance.

Conversely, tails, wicks or shadows at the top of up-trending real candle bodies, may indicate that demand is slowing or supply is increasing.  Again, a large shadow, relative to the real body, may signify a stronger reversal, with the strongest being when a pin bar is formed.

Read her more information about how to use the candlestick wick to measure true or false breakouts or see the video below.

  • What is the size of the candlestick?
      • A larger candlestick has more weight and importance than a smaller candlestick.
    • The relative size of the candlestick compared to the candlestick of the same time frame and on the same chart is the key aspect. The absolute size is not important.

    • Sequence of 2 candlesticks:
    • A trend is visible when price shows:
        • Lower lows and/or lower highs for a downtrend
        • Higher highs and/or higher lows for an uptrend
      • Especially a new candle low or high is considered to be more important than a higher low or lower high.
    • The close versus the close:
          • A close below the previous close indicates bearishness.
        • A close above the previous close indicates bullishness.

Quiz time!

Now it’s time to check your progress after finishing the first part on candlesticks.

Question 1: What does the candlestick with the purple box indicate to traders?

Which answer is correct?

A) indecision, there are no significant wicks on either side, which means indecision.

B) bullish, the candle closed bullish so an uptrend continuation is likely.

C) bearish, there is a strong wick on the top of candle with a close near the low.

Question 2: What does the candlestick with the purple box indicate to traders?

Which answer is correct?

A) indecision, there is no wick so candles provides little information.

B) bullish, the candle is a retracement of a larger uptrend.

C) bearish, the candle closed near the low, is a reasonable size and closed below the previous close.

Curious what are the answers?

See the answers below the video!

In the meantime, check out Nenad’s webinars series called Price Action Trading School (PATS) here below.

The answers to the quiz questions are:

    1. C – large wick on top indicates selling pressure and a potential reversal.
  1. C – candle close near the low indicates that bears are in control.

Candlestick Patterns Explained

Now that we covered the basics, it’s time to discuss the candlestick patterns. Candlestick patterns are one of the core methods of price action trading. In some cases one specific candlestick can also be a candlestick pattern but other times you need to see a group of candles display a certain pattern.

One of the most used candlestick patterns is the so called “Pin Bar”. Pin Bars effectively indicate current buyers and sellers. If the tail is longer than the body, then it’s a strong signal that the price might turn.

As mentioned above, candlesticks are the basic building blocks for every trader. Some candlesticks will have more “value” than other candles due to their size, wick, or strong candle close, whereas other candles will be insignificant and offer no extra insight because they could be relatively small or close as a Doji (close is equal to open).

Candlestick patterns indicate an even bigger message. Although each candlestick provides some information to traders, candlestick patterns provide more value as their meaning and impact is larger than just a single candlestick.

As you probably have noticed, traders can analyse the charts in a much deeper way when using candlesticks and candle patterns. The main benefit is that the information from candles is instant and without any lag, such as most indicators.

This section will dive into all of the candlestick patterns. It includes an explanation how to read candlesticks but also a full overview of the main candlestick patterns and how to interpret them. Candlesticks and their patterns are a main aspect of both trading systems ecs.SWAT and ecs.CAMMACD.

The next parts will explain bearish and bullish candlestick patterns. We also divided the article in reversal and continuation candlestick patterns, which means that there are 4 parts:

    • Bearish reversal candlestick patterns
    • Bearish continuation candlestick patterns
    • Bullish reversal candlestick patterns
  • Bullish continuation candlestick patterns

Let’s first start with the bearish ones.

Bearish Reversal Candlestick Patterns

3 Black Crows

The number of candles in the configuration – 3

    1. The market is characterised by an uptrend.
    1. Three consecutive normal or long black candlesticks are seen in the chart.
    1. Each candlestick opens within the body of the previous candle.
  1. Candlesticks progressively close at new lows, below the preceding candle.

3 Inside Down

The number of candles in the configuration – 3

    1. The market is characterised by a prevailing uptrend.
    1. We see a Bearish Harami (or a Harami Cross) pattern in the first two candles.
  1. After that, we see a black candlestick on the third candle with a lower close than the second candle.

Evening Star

The number of candles in the configuration – 3

    1. The market is characterised by an uptrend.
    1. We see a white candlestick as the first candle.
    1. After that, we see a short candlestick on the second candle that gaps in the direction of the uptrend.
  1. A black candlestick is spotted as the third candle.

Upside 2 Crows

The number of candles in the configuration – 3

    1. The market is characterised by a prevailing uptrend.
    1. A normal or long white candlestick appears as the first candle.
    1. The second candle is a short black candlestick that goes up.
  1. On the last candle, another black candlestick opens at or above the open and then closes below the close of the previous candle, though still above the close of the first candle.

Harami

The number of candles in the configuration – 1

    1. The market is characterised by a prevailing uptrend.
    1. A white body is observed as the first candle.
  1. The black body that is formed on the second candle is completely engulfed by the body of the first candle.

Bearish Abandoned Baby

The number of candles in the configuration – 3 or 4

    1. The market is characterised by an uptrend.
    1. A white candlestick is observed as the first candle.
    1. Then we see a Doji on the second candle whose shadow stretches above the upper shadow of the previous candle.
  1. Third or fourth candle’s black candlestick gaps in the opposite direction with no shadows overlapping.

Meeting Lines

The number of candles in the configuration – 3

    1. The market is characterised by an uptrend.
    1. A white candlestick is observed as the first candle.
    1. We see a black candlestick as the second candle.
  1. The closing prices are the same or almost the same on both candles.

Dark Cloud Cover

The number of candles in the configuration – 2

    1. The market is characterised by an uptrend.
    1. A white candlestick appears as the first candle.
    1. A black candlestick opens on the second candle and closes more than halfway into the body of the first candle.
  1. The second candle fails to close below the body of the first candle.

Advance Block

The number of candles in the configuration – 3

    1. The market is characterised by an uptrend.
    1. A white candlestick appears as the first candle.
  1. The next two candles are white candlesticks, with each closing above the previous candle’s close and having an opening within the range of the previous candle’s body.

Bearish Continuation Candlestick Patterns

Falling 3 Methods

Number of candles in the configuration – 3-6

    1. The first candle in the pattern is a long black candlestick within a defined downtrend.
    1. A series of ascending small-bodied candlesticks that trade within the range of the first candlestick.
  1. A long black candlestick creates a new low, which cues that the sellers are back in control of the direction.

Side By Side White Lines

Number of candles in the configuration – 3

    1. The first candle we see is a long black candle.
  1. The second candle is white candle, opening below the low of the first candle and closing barely into the body of the first candle.

Bearish 3 Line Strike

Number of candles in the configuration – 4

    1. The first three candles make up the Three Black Crows formation or similar two candlestick pattern (variant 2).
  1. The last candle is a white candle that opens below the third candle and closes above the first candle’s open or the second candle’s open (variant 2).

Marubozu Bearish

Marubozu defines strong sell off the resistance or strong buying off the support. Marubozu is also known as momentum candles.

Bullish Reversal Candlestick Patterns

Bullish 3 Inside Up

The number of candles in the configuration – 3

    1. Connected to bullish Harami Pattern.
    1. The first candle is bearish and downtrending.
    1. The second candle is bullish.
  1. The third candle has a higher close than the second candle.

Bullish 3 Outside Up

The number of candles in the configuration – 3

    1. The market is characterised by a prevailing downtrend.
    1. Followed by the engulfing candle.
  1. The third candle has a higher close price then the second candle.

3 White Soldiers

The number of candles in the configuration – 3

    1. The market is characterised by an uptrend or end of downtrend.
    1. We see a white marubozu candlestick as the first candle.
  1. Next two candles make higher highs.

Concealing Baby Swallow

The number of candles in the configuration – 4 (very rare pattern)

    1. Two falling Black Marubozu candles at the beginning confirm the downtrend.
    1. The third candle is a short black with or without a downside gap.
    1. The third candle trades into the previous candles’ body, producing a long upper shadow.
  1. The fourth black candle completely engulfs the third candle, including the shadow.

Morning Star

The number of candles in the configuration – 3

    1. The market is characterised by a downtrend or retracement in a bullish trend.
    1. Black candlestick is observed as the first candle.
    1. Followed by a doji or small candle.
  1. The third candlestick is white bullish momentum candle.

Piercing Line

The number of candles in the configuration – 2

    1. The first candle is a black momentum candle.
    1. The second candlestick opens up, goes slightly down and closes more than halfway into the body of the first candle.
  1. The second candle fails to close above the body of the first candle.

Bullish Belt Hold Lines

The number of candles in the configuration – 1

    1. After the drop in the price, we observe a White Marubozu candle at the support.
  1. Double or triple bottom support precedes the Belt Hold Lines pattern.

Harami Cross

The number of candles in the configuration – 1

  1. The candle that resembles the cross appears at support.

Harami Bullish

The number of candles in the configuration – 2

    1. The market is characterised by a prevailing downtrend.
    1. A black candlestick appears as the first candle.
  1. The next candle is characterised by the white body which is completely engulfed by the body of the first candle.

Tweezers

The number of candles in the configuration – 2

    1. The first candle is a bearish candle and it closes near the support or daily low.
  1. The second candle completely negates the first so it erases all losses of a previous candle.

Bullish Squeeze

The number of candles in the configuration – 3

    1. A black candlestick appears on the first candle.
    1. The second and the third candles each have lower highs and higher lows than the previous candle.
  1. Their color is not important; the size of the three candles does not matter.

Bullish Continuation Candlestick Patterns

Rising 3 Methods

Number of candles in the configuration – 3-6

    1. The first candle is a strong bullish candle that retraces next three candles, though the second, third and fourth candle remain within the range of the 1st candle.
    1. Those are characterised by consecutive lower highs where wicks may slightly vary.
  1. The final candle breaks resistance to the upside and makes a bullish continuation.

Side By Side White Lines

Number of candles in the configuration – 3

    1. The first candle we see is a long white candle that appears at resistance.
  1. The second candle is a white bullish candle that follows the first one, making a break through resistance.

Marubozu Bullish

Marubozu defines strong buying off the resistance or strong buying off the support. Marubozu is also known as momentum candle.

Here is a summary of all candlestick patterns:

Price Action trading has a lot to do with candlestick patterns. Nenad’s CAMMACD system uses some of these patterns for trading purposes.

Quiz time!

Question 1: What candlestick pattern is visible in the purple box?

Which answer is correct?

A) bearish engulfing twins.

B) bullish squeeze.

C) harami cross.

The answer is at the end of the next section.

Price Swings: the 4 Types of Price Action

The previous two parts showed you how to read candlesticks and how to understand candlestick patterns. Now it’s time to discuss the next step of the hierarchy, which is price swings.

Price swings are groups of candles that “belong to each other”. The candles make one swing because they share certain characteristics together. Swings are considered to be a group of candlesticks where the majority share:

  • Common direction (bearish or bullish)
  • And strength (strong or weak).

Simply said, price swings are either impulsive (strong) or corrective (weak) and they are either bullish or bearish. It is important to know that strong price movement is called impulse or momentum whereas weak price action is known as corrective or consolidation. The strength or weakness of price flow can be understood by analysing whether price is behaving impulsively or correctively.

This creates four different types of price movements, which in some ways can been seen as the “DNA” or “heart beat” of the market:

Direction / SpeedImpulsiveCorrective
BullishBullish impulseBullish correction
BearishBearish impulseBearish correction

Each of these four variations represents a seperate “price swing” or “wave”. Every price swing is either bearish or bullish and either impulsive or corrective.

It takes time and experience to recognise which price action belongs to one price swing… But the above table provides a key starting point. You will also be able to spot price swings better when using our ECS rules and guidelines.

GBP/USD 4 hour chart: blue arrows indicate bullish momentum, green arrows indicate bullish correction, red arrows indicate bearish impulse, and orange arrow indicates bearish correction.

You might be wondering: what is the benefit of knowing this information about the price swing?

Price swings provide key information about the market structure. Traders that correctly analyse and understand price swings have the following advantages:

    • Character of current price swing: ability to analyse past price swings to estimate the current price action more accurately.  
    • Length of of current price swing: ability to analyse the current price swing and thereby understand how long the price swing will last and when it could end.
  • Character of next price swing: ability to analyse past price swings to estimate the character of the next swing price swing.

Price swings are important because of these nine reasons:

    1. It allows traders to understand what type of price swing they are trading.
    1. It explains what to expect from the current swing in terms of movement and volatility (impulse versus correction).
    1. It explains what target could be expected and what stop loss works better.
    1. It indicates what the direction of the next price swing could be.
    1. It also shows whether the next price swing will be corrective or impulsive.
    1. Traders can do wave analysis and understand wave patterns based on price swings, which are the building blocks of swing.
    1. Traders can use the Fibonacci tool with more accuracy and precision.
    1. Traders are better able to estimate the time aspect and expected length of a trade setup.
  1. Traders can identify patterns quicker and easier.

Traders must have a clear and logical system of identifying one price swing because without a rules based approach, traders will misinterpret the chart and be unsure about their analysis. In fact, most traders fail in trading, analysing the waves, and trading the waves because they do not use a systematic method for understanding and reading price swings.

Based on above info, traders can make better decisions about their trades, such as skipping setups, managing open trades, and entering trade setups. Price swings are not the only factor for trading decisions, of course, but certainly play a key role in our analysis.

The next step is how can you recognise price swings, which we will explain in the next paragraph. Just by identifying price swings correctly, traders are able gain a significant edge over a larger group of traders who are not aware of price swings, price patterns, impulse and correction. After that, we will discuss how to actually use price swings.

All in all keep in mind that it is very important to use a systematic approach for spotting price swings because without it, traders will not be able to properly analyse the price charts. It would be similar to a ship sailing on open waters without compass. Recognising price swings, knowing the start and end of such swings, and analysing that information properly is.

Ps. the answer to the quiz question on candlesticks is answer A!

Identifying Price Swings

The ecs.SWAT and ecs.MACD use six distinct approaches to find and identify the correct AND best price swings:

    1. Momentum and correction concept
    1. HMA moving average
    1. Awesome Oscillator (AO) and ecs.MACD
    1. ECS fractal indicators
    1. Time patterns and zigzag indicator
  1. Wave patterns

In some cases these 6 methods will indicate the same price swing but be aware that each method could also indicate a different price swing. And that is perfectly acceptable. Price swings can vary depending on the tools and methods used and all of them can be equally logical. It is up to the trader to choose the price swing that makes the most sense but the mentioned methods will provide a solid basis.

Strong vs Weak Price Action: Momentum and Correction

Usually impulsive price action belongs to one price swing whereas corrective price action belongs to one bigger price swing as well.

Let’s examine what traders should consider as impulsive (strong) or corrective (weak) price action. Here is an an overview:

  • Impulsive: strong price action is quick and moving in one direction.
  • Corrective: weak price action is moving indecisively, slow, and sideways.
Impulsive Price

Impulsive price action is characterised by a couple of main factors:

  1. Majority of candles
    Most of the candlesticks in the group (price swing) have a close in the same direction (bullish or bearish). This can be measured as a rough estimate and does not have to very precise. Once +/- 65% or more of the candles in the group are either bullish or bearish, then the swing is more likely to be a bearish or bullish momentum.

    Most candles are bearish in this bearish momentum. Approximately 70% of the candles are bearish, not counting smaller candles that are “dojis” (open is near to candle close). Also many bearish candles have close near low.
  2. Candle close near high or low
    Many of the candlesticks show strength by closing near the high or low. Strong bullish candles close near the high whereas strong bearish candles close near the low. The close is important because it shows that the bulls or bears are in control of that time period.

    Bullish example where majority of candles are bullish candles. Most bullish candles have close near high. The larger candlesticks are bullish. Also a new high is regularly posted. All characteristics of an impulse.
  3. A new higher high or lower low
    The impulse is still strong if price has recently made a new higher high or lower low when compared to the previous candle(s). A new high or low confirms the impulse. A price swing might lose its momentum if a candle fails to make a new high or low and could start a correction. Some momentum is lost when 2 candles fail to break for a high or low whereas ECS prefers to use the rule of 5 to 6 candles (see time pattern). Impulsive price action is considered to be active when 3 bullish or bearish candles show a higher high or lower low in a row (or at least 3 candles out of a group of 6). The purple arrows indicate where price confirms the bullish impulse with a new higher high.
  4. Large candlesticks
    The impulsive candles are usually larger and more ‘dominant’. The size of the candle is measured by simply calculating the distance between the candle high and low. Impulsive price action often offers a couple of candles within the price swing that are large(r) and a few that are moderately large in comparison with the other corrective candles. There is no fixed rule of what is considered a large, medium or small candlestick. The best is to make a simple comparison on the time frame you are analysing with the most recent price action and check whether the candles are larger than the estimated average.  Simply said, visually compare the candles in question with the rest of the chart. If the candles are relatively large compared to the rest of the chart, then those could be impulsive candles. Traders can also use an ATR (Average True Range) indicator to get an idea about the price volatility in the recent history. The purple boxes indicate areas where candlesticks are relatively large compared to the opposite candles and candles from other parts of the chart.
Corrective Price

Corrective price action is characterised by factors that are mostly the opposite of impulsive candles:

    1. Mixture of candles
      No side (bullish or bearish) has a clear majority. The candles are a mixture of bull and bear candles with no particular sequence. Price action is mostly going sideways or is showing a light angle up or down.

      Price action is messy and choppy in most parts of this chart with the exception of a few parts where price was a bit faster, most notably on the left of the middle.
    1. Candle closes near the middle
      The candle close indicates indecision by not closing near the high or low but rather around or close to the middle. Of course, some of the candles might still close near the high or low but usually this occurs a lot less often than when compared with impulsive price action.

      Typical corrective price action where price is choppy, moving sideways, and has less clear sequence. There are a few larger candles which represent mini pieces of impulse but overall, price is choppy.
    1. No sequence of highs or lows
      Corrective price action is mostly price action that goes sideways. Within the corrective zone, there might be parts where price moves impulsively but overall the price action looks choppy and indecisive. Part of the reason why price action looks corrective is simply because one side is unable to control the direction, which means that there is no sequence of higher highs (for an uptrend) or lower lows (for a downtrend).

      Typical corrective price action where price is choppy, moving sideways.
  1. Smaller candlesticks
    Corrective price action is usually characterised by smaller candles. There might be an occasional candle that is bigger but a large majority of the candles should be relatively smaller. To sum it up, most candlesticks are small, indecisive, and show no particular direction either up or down. Relatively small when compared to impulsive candles is valid for both bullish and bearish candles.

    Corrective candles are usually smaller than impulsive ones.

Test: What groups of candles represent impulsive price action in this chart? Are A, B, C, and D indeed considered to be impulsive pieces of price action? Write down true or false for all four answers and check the correct answer at the end of the chapter.

HMA

The HMA moving average (setting 20) helps identify what is momentum and what is correction. A switch from bearish to bullish and vice versa often is a warning signal that a swing might be completed. The main advantage of the HMA (compared to impulse and correction) is that approach is fully automated because the HMA is an indicator. Hence it removes any need for discretionary decisions.

Candles that are moving around the HMA are often periods of correction. In a range the HMA angle will frequently switch from up to down and down to up whereas in a trend price will create a sustained HMA angle for a longer period of time.

Another perspective to consider is the candlestick close or open and low or high versus the HMA. When the candle is fully above or below the HMA, then this often indicates a decent or strong momentum.

The image below shows how price is in a range (on the left) and how it builds several swings up and down within the range before moving down lower with a strong impulse. Once price is moving lower impulsively, the HMA stays bearish until there is a small pullback before continuing lower again with a bearish HMA. Each HMA change can be considered a completed swing.

Price action at the top is corrective, the price drop is impulsive.

ECS Fractals

The fractal indicator helps traders find key support and resistance levels, which are also potential turning spots on the chart. Traders can either use the standard fractal indicator on their MetaTrader4 platform or use the ECS fractal indicator for the MT4 platform. Each fractal indicator, just like the HMA moving average, is automatically plotted on the chart.

The fractal indicator can help with determining swings. Here are the details:

    • If price is moving fast into one direction then no fractals will appear, which is an impulsive price swing.
  • If many support and resistance fractals appear, then price is (probably) building corrective price swing(s). The up and down turns are in fact creating the fractals.

A trader can use the points from one fractal to the next fractal as a price swing. The price action between a support and a resistance fractal could be considered as a separate price swing. If there are two fractals on the same side (either at support or resistance), then it is best to use the fractal that provides the longest price swing. Simply said, all price action between one support and one resistance fractal is considered a price swing.

Here below we added an image. All the purple boxes and arrows have been added to indicate the start and end of each price swing. Each arrow is one price swing. The orange box represents fractals that are not used for a price swing because there are 2x support or resistance fractals present. In these cases it is best to use a larger price swing.

For your information, normal fractal indicators would indicate the same as the ECS fractal indicator for the purposes of identifying price swings. But ECS fractal indicator provides us with deeper information about the trend, retracement, and potential for reversal. This information is explained in our ecs.Fractal guide. The video has been added here below.

Time Patterns and Zigzag Pattern

For the purpose of this article, it is too complicated to explain the ins and outs of time patterns. For the moment, its best to use automaticated tools that represent time patterns by using a fractal indicator (with value 5 rather than 2 if you can change it in your trading platform) or the zigzag indicator with settings 10-5-3 (depth-deviation-backstep) for finding intermediate price swings on the the chart that closely reflect the idea used with time patterns.

Let’s first start with a fractal indicator value of 5. What does that mean? Let’s explain:

    1. A candle will either make a higher high or lower high and lower low or higher low when you compare the current to the previous candle.
    1. A candle with a higher high or lower low confirms impulsive price action (new high confirms uptrend and new low confirms downtrend).
    1. When price shows multiple higher highs or lower lows, then impulsive price action is taking place, which is considered to be one price swing.
    1. The impulsive price swing is considered to be over once 5 to 6 candles fail to break the last high or low.
  1. Then a price swing can be marked as completed and a new price swing is starting.

All of these purple boxes indicate a high or low that is higher or lower than 5 candles to the left and 5 candles to the right. All of the purple boxes are also a fractal but as you can see from the image, there are many fractals that did not qualify when using a setting of 5 candles. All the purples arrows indicate a price swing.

The image below shows the price swings that are valid for the zigzag indicator. Some of the price swings are similar to the time pattern ones, but there are a couple or price swings that are actually excluded as well.

Awesome Oscillator or ecs.MACD

Elite CurrenSea uses the Awesome Oscillator (AO) as a swing and wave trend indicator. The AO, which is created by the Elliott Wave expert, legendary trader, and Fractal creator Bill Williams, is in our view the best oscillator for analysing the waves of the Forex, CFD, and other financial markets.

The middle line (called zero line) is key. We analyse the AO bars that move away and back to the zero line for that purpose of identifying price swings:

    • AO bars moving above the 0 line and back is one bullish price swing.
  • AO bars moving below the 0 line and back is one bearish price swing.

The trader needs to analyse whether price action is corrective or impulsive in the place where price moved away and back to the 0 line.

A good second place however is reserved for own proprietary MACD indicator called the ecs.MACD. Although there a wide range of wave trend indicators that are mentioned online, the AO and the ecs.MACD are two of the most accurate wave trend indicators. We will now explain why.

You might be wondering, can Indicators really help with identifying price swing and waves (based on Elliott Wave Theory)?

Yes, they can. But keep in mind that not everyone agrees. We believe that both price action and the oscillator indicator can be of enormous help in understanding the Elliott wave structure. But there is a “dispute” among wave analysts and some believe that indicators do not play any (significant) role.

In any case, it can’t hurt to be open to both styles and to see which one fits your own analysis and trading the most. Based on your own experience, you can then choose whether you analyse Elliott Waves fully based on price action or whether you will follow our advice and a combine price with (an) oscillator(s).

The AO and ecs.MACD are both extremely valuable for identifying the correct price swings with a rules based approach. They are also equally valuable in determining wave patterns because wave analysis is simply an analysis of price swings. Once you understand price swings, you will be able to understand wave patterns quicker too.

Benefits of Oscillator in Wave Analysis

In the field of Elliott Wave analysis, both oscillators provide key information about the exact price swing, wave count, and wave pattern outlook. Here are the three major benefits of using the AO or the ecs.MACD as a wave trend indicator:

    1. Helps identify the correct price swings.
    1. Indicates and confirms momentum and correction.
  1. Helps label the wave patterns.

If you do not use the AO or ecs.MACD, the problem is twofold when applying a discretionary approach to your wave analysis (and not a rules based method based on oscillators):

    • Analysis of beginners and intermediate traders will be less accurate: identifying a wave without a wave trend indicator is difficult and also time consuming.
        • There are many waves and waves within waves. What is one price swing or wave and can you repeat the same logic on each and every chart day in and day out? In most cases, traders cannot manage this level of consistency.
      • Most traders will not have the required experience to analysis waves without fixed rules. This is especially true for beginners but also for intermediate traders (unless you have a decade of analysing waves under your belt).
  • You will not have sufficient confidence when trading: although analysing the charts might work out fine, trading your wave analysis with actual capital always requires more confidence.
Reading the Oscillator

As you can see, the key to success in analysing and trading both price swings and the Elliott Wave Theory is by applying a systematic way of identifying one single wave, which can be done via the AO and ecs.MACD.

Here are the key factors to analyse:

    • The zero (0) line: the key point part of the oscillator is the “zero” line. Every time the AO or ecs.MACD bars cross the zero line, a new price swing is in process.
    • Blue or red bars: blue bars indicate bullishness whereas red bars indicate bearishness.
  • Bars versus zero line:
      • Blue bars above the zero line indicates bullish momentum or impulse.
      • Red bars above the zero line indicates a bullish correction.
      • Red bars below the zero line indicates bearish momentum or impulse.
    • Blue bars below the zero line indicates a bullish correction.

With this in mind, we can make the following conclusions:

  • Price is not hitting the zero line recently:
      • Price is in momentum when the AO bars move away from the zero line.
          • Bullish: bars are above the zero line.
        • Bearish: bars are below the zero line.
    • Price is in a retracement when the AO bars are moving back to the zero line.

  • Price is near the zero line:
    When the AO bars are back at the zero line, price has completed an old price swing and is building a new price swing. This means that it has reached a decision spot:

      • Price is in a reversal if the AO bars are moving away from the zero line after recently crossing the zero line.
      • Price is in a retracement or range if the AO bars go sideways.
    • Price is in a trend continuation if the AO bars continue in the same direction.
How to Find the Price Swing

How do you recognize on the price chart what is the correct price swing when analysing the zero line of our wave trend indicator, the AO or ecs.MACD?

    1. As you now know, every time the AO bar crosses the zero line, a new price swing is valid.
    1. Once this occurs on the AO indicator, traders must analyse the price charts at the same moment as the AO bars are crossing the zero line.
    1. Then look for the most recent top or bottom which is the end of the previous price swing and the start of the new price swing.
  1. The current swing lasts until the AO bars retraces back to the zero line again.

As indicated above, the cross of the zero line is key for understanding price swings and wave patterns. Here is an example of how traders can understand the process in more detail.

The 1) indicates where the AO bar crosses 0 line. Find the same spot on the price chart (2). Find the most recent major bottom (or top) since that point (3). Swing is valid till price goes back to 0 line again (4).

The above image is an example where we zoomin to one spot of the chart. Let’s now show a chart now which shows a larger piece of the price action.

The above chart shows purple arrows, which indicate each time the AO bars cross the zero line. Each crossing of that zero line indicates the end of a price swing and wave pattern too. The purple boxes on the chart indicate the turning spot of each swing whereas the arrows show whether the price swing is a:

    • Bearish impulse: red arrow.
    • Bullish impulse: blue arrow.
    • Bearish correction: green arrow.
  • Bullish correction: orange arrow.

Compare the above chart to a naked chart that you can see here below. Would you be able to achieve the same consistency with the AO as without the AO? Would you truly be able to recognise the price swings as quick and with the same consistency?

That is possible for traders who have more experience but is much more difficult for traders that are beginning or intermediate. They are much better by using a rules based approach. All the rules connected to this and much, much more is what we fully explain in our ecs.SWAT methodology.

All in all, the AO and/or the ecs.MACD are a major asset when analysing the charts, price swings, and wave patterns because it helps you:

    1. Identify the correct price swing:
      Use the crossing of the AO bars below and above the zero line to know what is the price swing. You then know the start and end of each price swing on the chart as well (see above).
    1. Understand the direction of the price swing:
      When AO bars are above the zero line, this mean that price is either showing bullish momentum or a strong bullish correction which depends on the context of the past price swings. In both cases though, the bulls are in control of the current price swing. Same is true of course when the AO bars are below the zero line, which means that the bears are in control.
    1. To understand the behavior (impulse or correction) of the price swing:
      Traders can also understand the behavior of the price swing and estimate whether its impulsive or corrective. If price is showing a strong push (momentum / impulse) above the zero line, then a move back to and even below the zero line is often a retracement. But if the AO bars are crossing the zero line after a divergence pattern (AO bars showing a failure to make a higher high or lower low), then the chance of a reversal is increasing. A trend continuation is often impulsive, a retracement is often corrective whereas a reversal will most likely become impulsive.
    1. To determine the wave patterns of each swing:
      Once traders can find the correct price swing, can analyse whether its bullish or bearish, and can understand whether its corrective or impulsive, traders can then use that information to analyse, judge, label and evaluate the most likely wave patterns.
  1. To determine the same information (direction, behavior, wave sequence) for the next price swing and even a few price swings after the next price swing.

Analysing wave patterns is nothing more or less than understanding the sequence of price swings. It is a question of understanding the story behind the price action.

With this information, mastering wave analysis is now within your reach.

But keep in mind that knowing how to do wave analysis is absolutely not necessary if you trade our ecs.SWAT method. The beauty of SWAT (Simple Wave Analysis & Trading) is that you can:

Trade the waves without knowing the waves.

We built our SWAT methodology in such a way that you can benefit from the waves without needing to use the wave patterns themselves.

Wave Patterns

Knowing the Elliott Wave Theory helps you identify price swings too. When price is building a specific wave (1, 2, 3, 4, 5, A, B, C, D, E, W, X, Y or Z), then it will help traders understand what can be considered one full price swing. A wave 1 for instance is clearly a separate swing from a wave 2. An ABC correction too has 3 swings. We will not address Elliott Wave Theory in this article but more can be found in our EW and Fib guide.

Identifying Momentum & Correction

Now that you know which tools and concepts can be used to find, measure, and analyse the correct price swing on any chart, we wanted to provide you with more practical examples on how to identify momentum and correction.

Take a look at the chart below. It shows a currency pair with the SWAT software (MT4 indicators and template). Please examine the chart while keeping in mind all of the tools and ideas that were mentioned so far. Then see how it compares to our analysis of this chart, which is summarised below.

Here is our summary:

    1. This chart shows strong AO bars moving away from the zero line (first red arrow on the left).
    1. On the price chart you can also see the confirmation as price is moving away from the moving averages (MA) with price below the short-term MAs and the short MAs below the long-term MA.
    1. The strong impulse is likely (decent probability) to see a bearish continuation due to the lack of divergence and clear bearish impulse. The retracement zone is the short-term MAs, which occurs a little later.
    1. The AO bars go back to the zero line and complete a bullish correction and retracement.
  1. A strong breakout candle (and ecs.SWAT candle) start the downtrend again. This candle is visible at the start of the 2nd red arrow (2nd from the left). Strong AO bars again emerge as they move away from the zero line, which signals a bearish continuation as expected.

A similar scenario takes place on the next image. Take a look:

Here is a summary:

    1. A large retracement is taking place on this 1 hour chart because price did not only make a pullback to the short-term moving average (MA) but all the way to the long-term MA. This indicates a larger pullback that is also visible on the 4 hour chart.
    1. After the deep retracement, we can see early signs of a trend continuation when price is close to the zero line and then falls below it.
  1. Both price and the AO bars fall dramatically a bit later (see red arrows) with a few smaller and one larger pullback to the short-term MA. The last lower low in turn creates a divergence pattern, which is a warning that the trend is running out of steam.

Before we move on to the next section (swings becoming patterns), we owe you the answer to our quiz. The correct answer to the Quiz on impulsive price action is:

    1. False. In this box there are no 3 bearish candles in a row that have a lower low.
    1. False. Here are only 2 bullish candles, not 3.
    1. True. Yes, here are 3 bullish candles in a row with higher high.
  1. True. Yes, here are 3 bullish candles with a higher high out of a group of 6 candles.

The image below highlights the impulsive parts of price action. The red boxes indicate bearishness and the blue boxes show bullishness. This image indicates exactly where price shows impulsive price action.

Of course, eventually the entire swing up is seen as one price swing (see image below). But there are 5 parts within the price swing that are considered to be most impulsive (5x blue boxes).

Swings Become Patterns

The next step after price swings is price patterns. Price swings can be connected with each other to identify larger price patterns. By combining multiple price swings together, traders analyse larger price patterns which are also known as a chart patterns. Keep in mind, however, that not all price swings form a larger price pattern. It’s a possibility, not a must.

Chart patterns provides traders with deeper information about the chart dynamics and indicate more information about the anticipated direction (up/down/sideways), character (impulse/correction), and sentiment (continuation/reversal). All of these patterns can be grouped together into four groups:

    1. Bullish continuation chart patterns.
    1. Bearish continuation chart patterns.
    1. Bullish reversal chart patterns.
  1. Bearish reversal chart patterns.

Chart patterns provide traders with another layer of chart, technical, and wave analysis.

Chart Patterns

Bullish and Bearish Continuation Patterns

Continuation patterns are basically the same pattern for both an uptrend and downtrend. The main difference is of course the direction.

The main continuation patterns are summarised here:

  • Flag pattern: price action shows momentum which is then followed by a slow grind to the opposite direction. The retracement usually goes to the 26.6% or 38.2% Fibonacci level (when placing the Fib on the impulsive part) and certainly not deeper than 50% Fib otherwise the flag pattern is invalidated.The corrective price action with a shallow angle is called a flag.
      • A bear flag indicates more downtrend. It is a bearish impulse, followed by a shallow angled bullish channel, and then completed or confirmed with another bearish continuation below the flag. A break above the resistance of the flag or above the 50% Fib invalidates the bear flag pattern.
    • Bull flag indicates more uptrend. It is a bullish impulse, followed by a shallow angled bearish channel, and then completed or confirmed with another bullish continuation above the flag. A break below the support of the flag or below the 50% Fib invalidates the bull flag pattern.

  • Contracting triangle pattern (also called a pennant): price action is unable to break the tops and bottoms and keeps moving sideways. Often follows after a strong momentum up or down. The triangle then indicates pause. Wave C should not break beyond wave A, wave D should not break wave B and wave E should not break Wave C. If it does, then the triangle is invalidated.
      • Bullish break above the resistance of the pattern indicates potential triangle confirmation and uptrend.
    • bearish break below the support of the pattern indicates potential triangle confirmation and downtrend.

  • Sideways range or consolidation zone: price is going flat and sideways, often after a strong impulse but not always. A range can sometimes be best seen if zooming out to a higher time frame or zooming in to a lower time frame. The support and resistance levels of the box indicating breaking / confirmation points.
    • The break below or above support or resistance is key, just as the triangle pattern.

  • Ascending and descending triangle (also called wedge): in this pattern, price is building a flat top or bottom but the other side is approaching closely. A flat bottom with a descending resistance line indicates a descending wedge whereas a a flat top with an ascending support indicates an ascending wedge. The wedges can break to both directions but an ascending wedge is usually bullish and a descending wedge is usually bearish. That said, there are plenty of examples where price breaks to the opposite direction, especially if price is showing bullish momentum before a descending wedge (rather than bearish momentum) or bearish momentum before an ascending wedge (rather than bullish momentum.
    • The break below or above support or resistance is key, just as the triangle pattern.
Bullish and Bearish Reversal Patterns

Reversal patterns are basically the same pattern, one indicates bullishness and other bearishness. The main difference is again the direction.

  • Double bottom or top. A double bottom indicates the end of the downtrend and the potential for a bullish reversal. A double top indicates the end of the uptrend and the potential for a bearish reversal. An early confirmation of a double top or bottom could be a price action candlestick pattern that show a reaction at support or resistance. A stronger confirmation takes places if price is able to break and show a higher higher (after a downtrend) or a lower low (after an uptrend).
      1. Double bottom indicates a potential bullish reversal.
    1. Double top indicates a potential bearish reversal.

  • Triple bottom or top. This pattern is the same as double top or bottom. The only difference is that there are three bounces in a row, rather than 2.
      1. Triple bottom indicates a potential bullish reversal.
    1. Triple top indicates a potential bearish reversal.

  • (Inverted) head and shoulders (H&S) pattern: price is running out of steam and a trend reversal could take place. A head and shoulders is when an uptrend is vulnerable to a bearish reversal whereas an inverted head and shoulders is when a downtrend is vulnerable to a bullish reversal. The neckline connects the starting point of the left shoulder and head. A break beyond this level indicates the confirmation of the reversal whereas a break beyond the top (level of the head) invalidates such a reversal.
      1. H&S indicates potential bearish reversal.
    1. Inverted H&S indicates potential bullish reversal.

  • Falling or rising wedge: this pattern indicates that the trend is running out of speed and losing momentum. In an uptrend, there will be a higher high but the break above the previous top is shallow. In a downtrend, there will be a lower low but the break below the previous bottom is shallow. A rising wedge and falling wedge should indicate reversal but sometimes price continues strongly with the trend despite the pattern. It is therefore wise to keep an eye on both support and resistance trend lines.
      1. Falling wedge indicates potential bullish reversal.
    1. Rising wedge indicates potential bearish reversal.

Learning to recognise patterns takes time. You need to see the pattern, recognise it, know what to expect from it, and understand how to measure a pattern continuation, pattern failure (false breakouts (fakeouts)), and even false fakeouts. This does not happen overnight and takes time and effort to build up the experience and skill set needed to implement pattern trading in a proficient manner. The ecs.SWAT and ecs.CAMMACD methods, however, shrink that learning time and allows traders to master the skills needed in a much quicker time frame.

Seeing and Recognising Patterns

The best way to gain experience is by looking at hundreds of price patterns so that your brain becomes trained in spotting them on the chart. Pattern recognition skills are trainable and the more patterns you see, the easier it is for the brain to instantly see and recognise them. Experience with patterns is a big help in trading these formations too.

The best way to practice and build up experience is by analysing charts in the past. Look for price patterns on the price charts and see how the patterns behaved. Repeat this exercise dozens, even hundreds of times. The best way to train your brain for pattern recognition skills is by doing

Path of Least Resistance

Traders use a wide range of techniques to understand the price chart and find profitable entry points, ranging from technical analysis to wave analysis and from price action and candlestick patterns to indicators. All of these methods are based on “historical price”.

Nenad, Chris, and technical traders analyse these price charts with historical price to study how price moved in the past, which in turn, offers information about how it could move in the (near) future.

This technique is not only used in trading and charting but is equally valid for a wide range of topics such as weather, geology shifts (movements of continents), changes in the universe (change in planets, stars and universes), consumer patterns and much more. Historical data is also used for instance to understand, improve and forecast traffic jams, political changes, economic trends and a whole range of fields. Historical data is always a key component of any analysis.

Analysis of price via technical analysis is not different in this regard. Generally speaking, analysing the past helps us predict the future. The same is true for charts: analysing past price helps us predict the future of price movement. But traders must realise that the accuracy rate goes down when looking further into the future, which is why it’s more accurate to say: analysing the past helps us predict the immediate future.

Why do we emphasize the “immediate” future? Because forecasts are most reliable in the short-term and become more difficult when applied to the more distant future.

The reason is simple: the further we look into the future, the more difficult it becomes to analyse all aspects – including current, hidden, and unknown factors – because there are more variables along the way that can impact the future.

The path of the future can run in many different directions and so it is much easier to make a forecast when analysing events close(r) to now. This is also valid for the markets and the charts.

When analysing the charts now, traders can make a decent assessment about the next few hours or days ahead. But the longer a trader looks into the future, then there is an increasing chance that unknown variables might appear and impact the price in an unexpected way.This in turn makes it more difficult to predict long-term price movements. The further a trader tries to forecast into the future, the more difficult it becomes to forecast with a higher degree of accuracy. Of course, making an incorrect forecast would not lose you any money unless you make a bet. However, entering a trade setup that is aiming for a target 2 years from now is just simply more difficult because the market can undergo many changes.

Nenad, Chris and the entire ECS team use technical and wave analysis to understand how price moved in the past. We use this analysis to make estimates about how price is expected to move in the immediate future and then we look for potential trade setups. Sometimes we find setups and sometimes we don’t, which depends on how probable a certain trade setup is. Some charts are easier to analyse and hence, more reliable to predict in the near future, and more potential to find a high probability trade setup, whereas other charts can be enormously tricky and difficult.

Studying price is basically studying the “path of least resistance”. Let’s explain.

Path of Least Resistance Explained

Price chooses the path of least resistance whether that is up, down, or sideways. If there is more supply than demand, price will move down. If there is more demand than supply, price will move up. Basically, the price chart shows the historical path of least resistance up to now. The chart shows how price has moved so far till now.

The shortcut for analysing price’s next step or movement is technical and wave analysis. Traders use this analysis to make a judgment about the future movement of price and the future path of least resistance.

Another way of understanding price and the path of least resistance is by comparing it to a stream of water like a river running down the hill. The water will find its path to a larger river, a lake, or sea by choosing its path of least resistance around bigger rocks and setting aside smaller rocks. Price does not make a left, right or straight motion of course but otherwise it is comparable to a river as price moves up, down, or sideways.

Let us take a look at an example such as the weather. Many people believe that meteorologists are bad at predicting the weather but studies show that nowadays the weather can actually be predicted with great accuracy (see Superforecasting: the Art and Science of Prediction” by Philip E. Tetlock and Dan Gardner.)

Although the weather forecasting is not seen as a field of study with high levels of accuracy, it is in fact surprisingly correct. When the weather team indicates that there is a 30% chance of rain, then three out of ten times it will rain and seven times it will not (when you analyse 10 situations with a 30% chance of rain).

There is just one limit and one exception (see Superforecasting: the Art and Science of Prediction” by Philip E. Tetlock and Dan Gardner.):

    1. The time limitation: the accuracy is valid for up to seven days in advance. After day seven the ability to forecast correctly diminishes quickly and people are usually better off with the average climate data. This is one of the reasons why ECS uses a time pattern rule of 5-6 days.
  1. The exception: accuracy levels drop when rain chances decrease to an expected 0 to 5-10%. Why? Meteorologists tend to overstate the chance of rain taking place because they do not want viewers to think that rain is impossible. They overestimate the rain chance slightly to help the viewers, who often have problems with grasping probabilities.

Although probability is an important aspect in life when taking all kind of decisions, humans unfortunately tend to be weak when trying to understand probability. A 10% chance of rain does not mean that there is no chance of rain. It just means that out of 10 days, it will rain only once. But in the mind of most people, a 10% chance of rain is equal to 0%. For most people, there is probably not much difference when the weatherman says that there is 5% or 30% chance, in both cases it shouldn’t rain.

Probability is important for understanding price charts and the path of least resistance. The path of least resistance is not fixed in stone but rather something more flexible.

Flow versus Resistance

The strength of the resistance versus the strength of the flow will determine the path of least resistance for rivers and price.

This means that traders can assess each situation on the chart and then determine the probability that price will continue higher, lower or sideways by analysing the flow and resistance.

What is flow and resistance for price charts? Let’s explain:

    • Strength of the flow:
        • River: flow is the strength of the water current.
      • Trading: flow is the strength of price action such as candlesticks.
  • Strength of resistance:
      • River: how massive and large is the object blocking the flow.
    • Trading: how strong is a key support or resistance level on the price chart.

The decisive factor is whether the flow or the resistance is stronger. This will determine whether price will move with the trend or reverse and whether it will move up, down or sideways.

Let’s again examine a river (or creek) to simplify the concept: at points with resistance, the water will move around or away from the object. When the power of the water flow picks up, it will be easier for the water stream to push aside stronger points of resistance.

The most important factor is to compare flow versus resistance:

    • If the flow of the water is slow, then a rock could be strong and big enough to not get knocked aside and water could change its path to the left or right.
  • If the flow of the water is strong (its mass and or speed), then a rock might be too weak to stand on its spot and it could be pushed aside. In this case, the path of the water did not change (or hardly changed) as the rock was moved.

The same principle that is used for a river (flow versus rocks) can be used for price. With price charts, the flow and resistance can be understood by analysing these two aspects:

    1. Flow: the strength or indecision of the bars or candlesticks.
  1. Resistance: the strength or weakness of the support or resistance levels on the chart.

Like with a river, the interaction between flow and resistance determines the path of least resistance for the object, which is a river or price:

    • Strong(er) price action breaks through weaker) support or resistance level.
  • Weak(er) price action fails to break through strong(er) support or resistance level.

Let us take a look at a practical example – see the image above. Let’s examine it – starting from left to right:

    1. Price was in an uptrend as price was moving away from the moving averages.
    1. Price broke below the support of the 21 ema zone which started bearish momentum.
    1. The breakout was a key factor for the start of the downtrend.
    1. The strong bearish candlesticks broke through any of the support areas that were there.
    1. The bearish momentum weakened and eventually price made a retracement above the 21 ema zone and back to the 144 ema long-term moving average.
    1. The 144 ema was a bearish bouncing spot because the trend was down as the alignment of the MA’s showed.
    1. The break below support created a new bearish breakout and channel.
    1. There is divergence between the price bottoms and the bottoms of the oscillators (purple line), which could indicate that momentum is becoming weaker. Also a support level at 1.13 could stop price from moving lower. A bullish breakout (thick green arrow) above the channel would confirm the reversal.
  1. A break below the support and bottom could still indicate that the downtrend will make one more lower low (thick orange arrow).

The above logic might seem complex to you at first but the most important aspect to understand is that:

    • Stronger price flow will beat weaker support or resistance.
  • Weaker price flow will lose versus stronger support or resistance.

As long as the flow is strong, momentum is likely to last unless a massive confluence of support or resistance is nearby. As long as the flow is weak, support or resistance is likely to stop price unless a significant breakout occur.

The next step is to further explain the character of price flow and support and resistance. With today’s guide we hope that you fully understand the role of price action. If you are seeking more guidance on S&R, then we also have full guide on support and resistance.

Make sure to stayed tuned in to our blog for all of the latest updates!

Join ecs.LIVE for our latest and daily trade setups and live analysis.

Good trading,
Chris Svorcik
And the entire Elite CurrenSea team

Leave a Reply

avatar

This site uses Akismet to reduce spam. Learn how your comment data is processed.

  Subscribe  
Notify of