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A useful exercise to improve price action analysis skills

This is an example of an exercise that I do to help reinforce the sorts of things that I look for during the day to understand what’s happening on the chart in front of me. This exercise is done in retrospect on a static chart so the analysis will obviously fit that, however I use the same sorts of methods in real time to help understand what’s going on. I come from a competitive athletic background and view analysis of a static chart (and chart replays) to be akin to watching game footage, real-time SIM trading to be similar to scrimmaging, and live trading to be actual competition.

I don’t note down everything I see since things wind up getting way too cluttered, but I aim to point out important recurrent behaviors so that I continually reinforce the habit of looking for these sorts of features in the live market. You may notice that I noted numerous formations that repeat themselves on this chart. I also use lots of acronyms to help reduce the clutter. A lot of the terminology I use comes from Al Brooks. I generally start by drawing in lines that immediately jump out at me and then look to get more detailed. I also have a 20, 50, and 220 EMA on the chart that are used as reference lines. During the session I just draw in lines (channels, trend lines, horizontal S/R, measured moves, etc.) and typically talk to myself since it takes more time to type things out. I aim to understand things from both the bullish and bearish perspective of the activity. Better understanding leads to better trading.

I wasn’t at my trading desk (I use Sierra Chart on that computer) so this was done in ThinkorSwim with a 5 minute chart on my laptop rather than the usual constant volume bar (CVB) charts I normally use, however the process is the same and I felt like posting an example. I find CVB charts to be a bit easier to read and trade price action, but the principles are the same whether I’m looking at a minute-based, tick-based, or CVB chart. I don’t use range, renko, point and figure, or other similar charts since I like seeing the formation of the individual bars in relation to one another and that can’t really be done with those chart types. I view each bar as a consensus of activity over the designated periodicity and find it very effective to study and trade charts by analyzing bar by bar.

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Thank you for sharing this.

In trading, this visualization exercise could lead to pattern recognition and exercising your mind on what to do when such patterns occur, whether to take action to initiate a trade or get out of a trade. Above all, it is a good old-fashioned technical analysis learning the skill of patterns. I see more, and people look for visualization and pattern recognition, so I appreciate you putting that seed for many new traders.

For those who are new to recognizing patterns, we highly recommend looking at Market Replay. We wrote an article about it here; we have this feature on Optimus Flow.

Thank you again for sharing this. We hope to see more of this significant input.

Matt Z

Optimus Futures

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Glad it’s helpful!

Thank you for the feedback! Something I should mention is that even though I note patterns I am still predominantly trying to think about the price on a vertical axis rather than focusing too much on chart patterns from left to right. Though the horizontal axis does provide insight into the strength of a move.

For example, the triangle is a pattern (a type of trading range) that jumps out on this chart when looking from left to right, but I’m thinking of it more as the market becoming more and more two sided with a greater degree of agreement of where value is at the moment (becoming more tightly balanced and constricted on the vertical axis - if one side was more dominant, then the price would be moving directionally). In the case of a triangle, I’m also anticipating that the market will likely try to break out in one direction or the other and I want to see whether the directional conviction is sustained or whether it fails and is drawn back to where there was prior consensus of value. I’m trying to think of price in relation to value to get a better sense of trade location and to develop potential trade ideas. Things like Market Profile and VWAP can help with this determination as well, but there’s plenty that can be discerned from the price action on a regular chart. For traders who are just starting out I think it’s highly valuable to become proficient at using one tool at a time before trying to bring them together.

I’m not trying to enter simply because I see some sort of traditional technical analysis pattern. I realize that in some ways this post may sound contradictory to the exercise that I suggested, but it’s not, this is primarily a way to get better at chunking information so that it can be used to better understand the behavior of both sides in relation to the price. So while we are looking at the price action from left to right, make sure to also consider what that it is telling you in terms of what is happening on the vertical axis since the market is actually one dimensional.

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Thanks @Trader , do you also look at order flow and the Footprint chart in relation to your detailed chart analysis?

If so, I’d be interested to see how that corresponds with the patterns you are pointing out.

I noticed that the chart you posted is a 5-minute chart, typically how long do you aim to be in trades?

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This actually does not sound contradictory, because you are placing the price movement in context. I always say that with every pattern created, you need to ask “where did it come from?”.
In the example you used above, a triangle, I look at it the price was bearish or bullish, and I would like to place buy odds if the breakout is to the above if it came from a rising left to right, or a short, if it came from a high to low decline. Again, a context that I feel comfortable with, and I respect that you are not just throwing odds because of a pattern only.

Thank you for starting such interesting and thoughtful threads. Much appreciated!
Hope to see many more.

Matt Z
Optimus Futures

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Thanks @Ben_M, I’ve been enjoying reading your insights and watching your videos on order flow trading. I’ve experimented a lot with bringing the two together but I generally tend to do better when I’m either just trading price action or just trading with the footprint chart. I gravitate more towards price action since I have a tendency to overthink and overtrade if I watch order flow too incessantly. Even though I don’t always look at footprint chart anymore I do still typically watch the DOM to see how the market is transacting after I use the price action to enter.

I have spent some time looking at bars where I’d enter using the price action on an equivalent footprint chart and haven’t found the confluence of behavior consistent enough to have a very defined set of parameters that I want to see in the price action and order flow together before entry. That is something that I need to spend much more time doing though so it’s possible that my sample size wasn’t large enough.

During the session I’m pretty much always trading off of a constant volume bar chart rather than a minute-based chart. I generally aim to have the bars take about 3 minutes to form and usually the 10000 constant volume bar chart fits that well. I find reading price action on equally weighted bars to be more reliable than using a time based chart where the volume of all the bars differs. Since I’m viewing the bars to be a consensus of activity I want that consensus to account for the same number of contracts. Holding time depends on whether I’m aiming to scalp for a few points or trying to swing for a wider target. The more two-sided the activity the quicker I aim to be with taking profits. Scalp setups are much more common than good swing setups so my holding time isn’t usually that long. Generally my trades last less than 15 minutes or so with many being done in less than 5 minutes.

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@Trader you bring up a good point that I find myself doing a lot, that is over trading just watching order flow.

The way I’ve gotten around this is by having a plan for the day that I develop pre trade. I set my levels and key areas then note those down.

Then I watch the market as it approaches those levels to hone in on order flow. That way I know where my key trades are and if the market backs up my core idea it’s easier to find higher probability trades.

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