February 2003

"What is Price Action?" is a frequently asked question by aspiring traders.  Traders who ask, feel it is a well kept secret when all they receive for an answer is: 'Swing highs, swing lows, test of top/bottom, etc., are all price action.'   The answer still leaves them in the dark. Understanding price action enables a trader to minimize questionable entries and improve exits.  Price action is the footprint of the money.

Let's start with the very basics. The bars on the following chart are labeled as traders commonly referred to them.

Up Bar:  is a bar with a higher high and higher low than the previous bar. The bars marked off are in an up trend.  Notice how the close is higher than the open until what turns out to be the last bar of the trend where the close is lower than the open.  There were more sellers then buyers on the last bar.

Down Bar:  is a bar with a lower high and lower low than the previous bar. The bars marked off are in a down trend.  Notice how the close is lower than the open until what turns out to be the last bar of the trend where the close is higher than the open.  There were more buyers then sellers on the last bar.

Inside Bar:  also called a narrow range bar, is a bar with the high that is lower than the previous bar and low that is higher than the previous bar.  Some traders do not consider an inside bar that has either an equal high or an equal low as an inside bar, others do.  Inside bars usually represent market indecision.  As on any bar, the closer the open and close are to each other shows just how undecided the market is as neither the buyers or sellers are in control.  Buyers are in control on the inside bar marked on the chart because the close is at the top of the bar.

Outside Bar:  also called a Wide Range or Engulfing Bar, is a bar with a high that is higher than the previous bar and with a low that is lower than the previous bar thereby engulfing the previous bar.  Since the open and close are close together on the marked bar, neither the buyers or the sellers are in control and the market is undecided which way to go.

When the open is in the bottom quarter/third of the bar and the close is in the top quarter/third of the bar, it is said to be bullish engulfing with the buyers in control.  When the open is in the top quarter/third of the bar and the close is in the bottom quarter/third, it is said to be bearish engulfing with the sellers in control.

Another definition used for this bar – especially if candlestick charts are used - is that the open and close have to engulf the previous bars open and close and not just the high and low of the bar. With this definition, the wide range bar or engulfing bar does not need to have a higher high or lower low to qualify.  The first definition most probably came about with bar charts where it is harder to notice the open and close.

The following chart has the swing highs and lows marked in both an up trend and a down trend.  Price on a given time frame is in an up trend if it is making a higher highs (HH) and a high lows (HL) and in a down trend if it is making lower highs (LH) and lower lows (LL).  If price is doing anything else, it is in a consolidation pattern - range, triangle, pennant, rectangle etc.

The trend is considered in place until price is no longer making higher highs and higher lows in an up trend or lower highs and lower lows in a down trend.  After a trend is broken, there is usually a period of consolidation that is easier to see on a lower time frame.  With practice, you will be able to visualize this going on without looking at the lower time frame.

When price is in a consolidation pattern that is often referred to as chop, it is usually in a range with no trend pattern to the swing highs and lows.

The above chart shows how an exact test of high or low may mean a change in trend as it failed to make a higher high on test of last swing high or a lower low on test of last swing low.

1. Price was making HHs and HLs until price tested the prior swing high at A.
2. Price made a LL and LH until price tested the prior swing low at B.
3. Price made a LH (The bar that does not touch line at C) until price tested the prior swing low at C.
4. Price was making HHs and HLs until price tested the prior swing high at D.

It is possible for one time frame to be in one trend and another time frame to be in a different trend or show consolidation.  This is where the phrase 'trend within a trend' regarding price action and the different time frames comes from.  An example would be that while price may be rising on a daily chart, the intra-day chart will show retracements, corrections of various types and consolidation periods

The true meaning of this and how it can influence your trading, eludes many.  The following exercise is an excellent way to learn what the phrase 'trend within trend' means visually.

Pull up a 15 minutes chart and mark the highs as higher high (HH) or lower high (LH) and the lows as lower low (LL) or higher low (HL). (The note tool was used in Ensign to mark these charts.)  You can also print out the chart and mark it by hand.  Use red lines if price in a down trend and green lines if price in an up trend.  Remember price is in an up trend if it is making HH - and HL and in a down trend if it is making LH and LL.  If price is doing anything else, it can be a consolidation pattern - range, triangle, pennant, rectangle etc.

Points labeled 1-4 on the example chart are in a down trend.  Points labeled 5-8 are in an up trend.

Now take the same chart and change the time frame to a 5 minutes chart, keeping the colored notes and numbers from the 15 minute by using the padlock with the L to lock lines in Ensign.  Mark the new highs and lows with green numbers for an up trend and red numbers for a down trend.

Now we can see by the yellow HH and LL what trend is on the 15 minute at the same time we are able to see the trend on the 5 minute.

Both charts are in a down trend until the 5 minute makes a HH at the first green #1.  The down trend is broken when the LH at black #3 is exceeded.  Price then goes on to make a HL starting an up trend that continues until price makes a lower high at the red #1.  The 15 minute just made a HH at the black #5 and will not make a HL until black #6.  At this point, we are expecting a HL on the 15 minute, and are waiting for a long signal on the 5 minute.  Some traders would take the entry on the pair of reversal bars at red #2, others would wait until the last swing high at red #1 is exceeded.

The time frames are now in agreement (shown by green #1-#4) up to the black #7 HH.  After the HH at #7, the 5 minute goes into a down trend (shown by red #1-#6) to what is still a HL on the 15 minute at #8.  So, while the 15 minute price action shows only two trends, the 5 minute shows five different trends!

While you may trade the trends on the smaller time frame, waiting for price action to show it is going to move in the same direction as the larger time frame is trading with the trend.  The trend is your friend!

There are two templates available to download through Ensign's Internet Services - 2XBline-35 and 2XBLCircles.  The settings for the indicators in the study windows are the same on both templates.

MOF stands for Money on Floor.  It is just a fancy name for a pure price action trade.  The MOF takes a high percentage trend trade.

The purpose of a MOF is to:
     Catch the first lower high in an up trend.
     Catch the first higher low in a down trend.

1.  Note price is making a lower high at point 1 after making a lower low - trend has changed from up to down.
     Bar high has tagged the upper Bollinger Band. 
     Bar colors are red showing the long term Stochastic in the 2X Study Window has the %K lower than the %D.

2.  In the 2X Study Window note the following at point 2:
     The long term stochastic - two red lines - have rolled over to the downside. 
     There is still a spread between %K and %D. 
     The short term Stochastic - the red/yellow and green lines - have pulled back along with price. 
     We are looking for a short trade which is in the direction of the long term Stochastic.
     It is not necessary for the short term Stochastic to pull back into the sell zone or even cross the longer term Stochastic.

3.  In the Bline Study Window note the following at point 3:
     The Bline is the black line with the green and red colored dots.
     The other 4 lines are referred to as ribbons.
     Their relationship to the Bline and their direction is what sets up trades.
     The Bline is falling.
     The Ribbons have pulled back up to the sell zone - this is only necessary for the 5/3/3 (Cyan and Red lines) as you can have ribbon divergence which is where the 5/3/3 and 9/3/3 do not stay together.
     This setup is called the first sell signal with a falling Bline.
     We are looking for a short which is in the direction of the Bline.

4:  This is the 3rd signal - Hidden Divergence-HD at point 4.   (May also be called Reverse or Continuation Divergence)
     Price has made a lower high while the MACD histogram has made a higher high.
     Note the HD gave you plenty of warning this might be a 3 signal trade as the divergence was present on the completion of the second up bar.

Now it is just a matter of patience until the ribbons get to the sell zone.  When these three signals are present, it is a very high percentage winning trade.

When 2X and Bline signals are there, while it is still a high percentage trade, you need to be more aware of what is going on in the higher and lower time frames.  One way to trade this would be to enter a sell stop just below the last completed bar.  Generally this is called "Stalking the Retracement".  

A simple way of describing this setup would be - The first touch of the opposite Bollinger Band after the long term Stochastic has turned:
     Long term Stochastic down then touch of the upper Bollinger Band.
     Long term Stochastic up then touch of the lower Bollinger Band.

On this chart example, the long term Stochastic is down (bars red) and price tags the upper Bollinger Band.  While this setup is shown on a 343 constant tick chart, the setup is the same on any time frame.  As with all indicators, the larger moves are on the higher time frames. 

The analysis for the MOF is the evolution of a couple of ideas.  First there was Buffy's Bline.  Then there was Jimmer's 2X.  Combined they are called the 2xBline.   More information on the 2X Study Window from Jimmer's 2X system can be found at  http://www.dacharts.com/2x.php   More information on Buffy's Bline can be found at  http://www.dacharts.com/b-line.php.

Editor's Note:  The template for this setup can be downloaded from the Ensign web site using the Internet Services tool in Ensign Windows.  The template name is 2xBline-35.

The Sling Shot is a high percentage trend trade.  It is work to catch the bottoms and tops.  It is fun to trade the middle of a trend.

Like MOF,  it is just a fancy name for a pure price action trade.  The differences in the setup are:
     The LT Stochastic in the 2X Study Window are flat usually with no or very little space between %K and %D.
     The Bline will be flat usually above 80 or below 20 and the ribbons will create the sling often clearer than the 2X signal.

The purpose of a slingshot is to:
     Catch a continuation trade off a retracements/flags/consolidation in an up trend.
     Catch a continuation trade off a retracements/flags/consolidation in a down trend.

1.  In price window - (Circles 1 and 2):
     Price is making a lower high after making a lower low - trend is still down.
     Bars have tagged the upper Bollinger Band. 
     Bar colors are changing back and forth between red and green. 
     This is common when the long term Stochastic in the 2X Study Window and the Bline in the Bline Study Window are flat, 
       either above 80 or below 20.

2.  In the 2X Study Window note the following (A and D):
     The long term stochastic - two red/green lines - are flat and very little or no space between %K and %D.
     The short term stochastic - the red/yellow and green line - have pulled back along with price. 
     We are looking for a short continuation trade which is in the direction of the trend.
     It is not necessary for the short term stochastic to pull back into the sell zone.

3.  In the Bline Study Window (B-E):
     The Bline is the black line with the colored circles.
     The other 4 lines are referred to as ribbons.
     The relationship of the ribbons to the Bline and their direction is what sets up trades.
     The Bline is flat and below 20 .
     The Ribbons have pulled back up to the sell zone here, although this is not necessary for slingshots.  
     Often the 5/3/3 (Cyan and Red lines)  do tag the sell zone. 
     It is common to have a ribbon divergence to occur with Bline slings, which is when the 5/3/3 and 9/3/3 do not stay together.
     We are looking for a short continuation trade which is in the direction of the trend.

4:  MACD Study Window (C and F):
     This is the 3rd signal - Hidden Divergence - HD (May also be called Reverse or Continuation Divergence).
     Price has made a lower high while the MACD histogram has made a higher or equal high. 
     Note the HD on C gave you plenty of warning this might be a 3 signal trade as the divergence was present on the completion
       of the fourth retracement bar.
     You also want the MACD histogram falling if you are going short and rising if you are going long.
     Now it is just a matter of patience until confirmed by price taking out the low of previous bar. 
     Note that F does not have HD.  The first trade is referred to as a 3 signal trade and the second one as a 2 signal trade.

When these three signals are present, it is a very high percentage winning trade.  With 2X and Bline signals only, it is still a high percentage trade but you need to be more aware of what is going on in the higher and lower time frames.  One way to trade this would be to enter a sell stop below the low of the bar two bars ago.  Generally this is called "Stalking the Retracement".

Ask yourself - What does price have to do to make these indicators confirm this trade for me and that is where you want your sell stop.

The most common places for the long term (LT) Stochastic in the 2x window to go flat is as follows:
     1. Above 80 and below 20
     2. Close to the midpoint of the Stochastic.  This often results in a measured move also referred to as an equal length continuation trade.

While the example is showing a 550 constant tick chart, the setup is the same on any time frame.  As with all indicators, the larger moves are on the higher time frames. 

The following is an excerpt from Jimmer's Bollinger Band (BB) Discussion when teaching 2X complete and might help you if you have never used BB before.  The entire discussion can be found at this link:

  http://www.dacharts.org/archives/Jimmer_SMAX/Bollinger_Band_Chat/Jimmer_on_BB_transcript.htm

Examples:
1. If price touches a rising lower BB (long) or a falling upper BB (short) in the traded time frame, that is a safe entry point.
2. If price touches a lateral (flat) BB and is also touching (or nearly touching) a lateral BB in a higher time frame, 
      that is safe entry for trade in opposite direction.
3. If price touches lateral lower BB (for long) and lower BB on higher TF is distinctly rising, that is a safe long entry (reverse for short).
4. If price touches lower BB and macd and/or stochastic on higher time frame (TF) is showing long, that is safe long entry.

This article is a collection of useful information that I am commonly asked about in the B-Line chat room in Ensign.

E-mail Charts:

When you are doing a playback on your own, feel free to e-mail me the chart using Ctrl-E in Ensign.  Check the Other box and enter unicorn@ctel.net in the window to the right of  Other.  After you have typed your question in the Message text window, including the day you are playing back, click the send button.  It will say when finished.  Click on OK to close the e-mail window.  Remember the only 'stupid' question is the unasked one.

Also playback uses your current computer clock so please make sure it is accurate.  At www.dacharts.com under links "Trader's Tools" are links to good Internet clocks.  I personally run the Dimension 4 clock in the morning and then close it so it is not conflicting with my eSignal data feed.

Sim-Broker:

Use Sim-Broker will keep track of your trades by marking them on the chart.  This feature can be opened two ways.  Use the icon in the control tool bar - circle that is half blue and half red - or right mouse click and click on Sim-Broker in the pop-up menu.  Whatever chart that is active when you open Sim-Broker is the chart that will be marked with your trades.  If  you are practicing with multiple contracts, Sim-Broker will also note your open position on the chart.

If you discover Sim-Broker is not working, it is usually because it is confused by having been left open in the demo workspace and "lost" the chart that it is trying to mark..  If you click the Reset Summary button and the Clear Log button, close the Sim-Broker window using the X in the top right corner and then reopen it with the chart in focus you want your trades logged on.  Then, it should be working well.

If you wish to have a printout of your trades, just click on the printer icon with Sim-Broker window active.  The file created for the day will be located in the \Ensign\Broker folder.  If you do more than one playback in a day, it is overwritten with the last playback done when the Sim-Broker window is closed.

Please note there is no refresh available in playback.  If you wish to change a chart from day session to all sessions, uncheck day session, save the workspace and then restart playback to fill in the bars for all sessions.

To simulate real-time trading where fills aren't so fast, you may want to increase the commission size in Sim-Broker to double what your commissions really are.

Direct Feedback for how well you trade:

The following method was shared by Pam Danielson - Google- and I have recommended it to many traders.  It forces you to focus on discipline and consistency versus points.

Trade with Sim-Broker marking the charts with your entries and exits.  At the end of the day, print the chart out.  Obtain a base number by going over the chart and seeing how many setups that followed your rules were presented that you were at the machine to take.

Now go over your trades.  Give yourself one point for each setup that followed your rules that you took.  Subtract a point for each setup that followed your rules that you didn't take.  Subtract a point for each trade that you took that did not follow your rules.  The closer the result is to your base number, the better you did regarding discipline and consistency.

Other ways of measuring your performance are discussed in  the two Trading Plan discussions - http://dacharts.org/archives/Trading_Plan/

Trading Room Lingo:

MOF - Money on Floor - First Study Window - 2X Window
     Long term Stochastic has just rolled over.
     Usually there is a spread between the %K and %D.
     It is the first touch of the opposite BB - Bollinger Band

SLING - in the first study window - 2X window
     Long term Stochastic is relatively flat.
     Short term Stochastic pulls away.
     While you are in the trade, the Short term Stochastic sling back to the Long term Stochastic

TMAR - Take the money and run

HH-LH-HL-LL - higher high, lower high, higher low, lower low

HD - Hidden Divergence - also called Reverse Divergence and Continuation Divergence.  When I speak of HD I am referring to the MACD Histogram.   You might want to read the following link on it:     http://www.ensignsoftware.com/tips/tradingtips31.htm

RD - Regular Divergence - per the article - again referring to the MACD Histogram

Ribbons - these are the 4 colored lines in the bottom study window - Bline Window.
     Their relationship to the Bline - the white/black line with the dots - is what makes the patterns for setups,

While all of the discussions at http://www.dacharts.com/discussions.php  are well worth reading, the following ones may be referred to
     "Stops and Exits"
     "Steps to Success"  part 1 and part 2
     "Seven Deadly Sins of Trading"

Playback:

A new pause button has been added in the January 17th version.  When you are running playback, it will appear to the right of Help on the main menu.  The button will only show when doing a playback.  If the button is SHOWING, that is your indication playback is still running and that it is wasting CPU power during market time.  So, it will be a visual help or indication as well that you would benefit to return to playback window and uncheck the Enable box to turn playback OFF.  Uncheck the Playback Enabled box on the SetUp | Playback form when markets are open.