ValuePickr Forum

Simple Price Action System

Hello all, this is my first post here and looking forward to learn lot of value picking from this forum. I am a novice in fundamental analysis and investments, i was a regular trader in equity, futures, forex and commodity market for around 2 decades.I learnt quite a few systems that will work on technical analysis, but am very poor in trade psychology and whats whyI lost money and moved to value picking for long term investments.

I will try to pass on whatever i know on technical analysis while learning fundamental analysis from you. i am not an expert but will try to present whatever i know and others can chip in. You dont need to have any prior knowledge, its very simple. I wont present advanced strategies and clutter the charts with many indicators. simple system. which many of you already know. Since the motto of this forum is value picking we will try to pick only those picks where there is clear value with less risk. quality over quantity

The name of the system is called Simple Price Action System. I have devided this into several modules and I will cover them one by one as and when i get time. Its important you read all the modules and dont jump on to actual trades.

1). Introduction to Price Action

2). Money Management

3). Basic knowledge of candle stick patterns and some simple indicators (we dont use many here)

4). Price Action System entry, exit rules

5). Best practices including trade psychology

5). Practice with examples past and present

6). Identify the opportunities when they exist and discuss here. we only discuss the entry/exit rules, not trade related issues.

I believe in learning how to fish than fishing itself. so dont expect me to give all the value picks, the expectation is i will try to give you enough knoweldge so that you can identify the value picks yourself.

Many thanks to donald, hitesh-ji, rudra , prasad, raj, HG and many others for their great insight and willingness to share their knwoledge with others

1). Introduction to Price Action

Price Action is about what exactly is the price doing NOW. Its very important to understand the movement of the price NOW and go with that. There are several indicators like EMA, RSI… those are lagging indicators. they take historical data and come up with patterns and extrapolate to NOW. As we know market doesnt always follow the past. There are some leading indicators also, but no body can predict what the price is going to be in future. If you use indicators, you are either too late or too early. However if you understand what the price is doing NOW, you can try to identify the value or lack of it with some success. Again, the trading is all about achieving higher targets than stoplosses. With good money management, we can build a system that will be profitable even at 60% or 50% or even 40% success rate. This Price Action will help you achieve higher success rate

One good thing with this system is it works better at higher timeframes (less noice) and we are here for value picking, not making your broker rich by day trading. Minimum time frame is Daily. We will look at Weekly, Monthly also. We look at one higher TF to determine the trend and use current TF to identify picks. For example you want to pick on daily chart, first we look at weekly chart to determine the trend and then use daily chart for entry. Never go against the trend/flow. This is very very important. Since we are doing delivery based trading, we do only LONG. We dont do SHORT.

Since we are using higher TF , this has to be combined with fundamentals, results, news. so be careful about that. i mean to say dont take decisions around results time or major events. biggest trade is SOH (sitting on hand) – keep the cash with you. no trade is as much important than your biggest trade. we are here for value picking not peanuts. I will cover more of this in Money Management module

Using this Price Action you can monitor your long term investments also and feel comfortable or add more quantity at appropriate points. you will get better entry points with Price Action. This is not about timing the market, but more about doing it scintifically than blindly

Hi Bala,

A nice post. Suggest you give live examples with charts so novices can understand what you are deriving at. I too have begun learning technical analysis, but i do it with Point and Figure charting as taught by Tom Dorsey. If interested would love to share the little knowledge i have with you. I find it the most easiest thing in Technical Analysis.

Interesting. Would like to see how it works in stocks we cover or are likely to be interested in.

From what I have seen, the simple things tend to work the best in technical analysis like trendline support/resistances, double bottoms, long term channels etc.

Things like Elliot Waves etc are beyond me and tend to have different interpretations because it involves forecasting where nobody has suceeded till date in totality.

Hitesh-ji, thats why i keep it to simple indicators. i will cover them in module 3. i am not a great fan of complex systems, cluttering the charts with too many indicators. we are not here to prove how much we know, our intention is to device a simple system that will work. we are not writing exam or certification, we are here to make $$$$

tony-ji, i will give live examples as they develop. i will approach you to learn point and figure charting. if you dont mind, you can start a new thread so that we all can benefit

2). Money Management

The reason why i chose Money Management ahead of the system rules , it is very very important and a bad MM can ruin any good system. in fact you can make a average system look better with a very good MM. MM is important in trading, investing. It develops certain amount of discipline and avoids over buying and thus exposing to huge risk. at any time you should not expose yourself to get blown out due to one mistake or a bad week in the market.

The fundamental principle in investing is not to lose money and if possible make some profits. The main focus of MM is this. Whenever you identify a pick, you need to derive 3 figures. entry price, stoploss (SL) and quantity. the 4th figure take profit (TP) is optional. The system will tell you where your entry is, stoploss is and first TP is. using these we will calculate the quantity. identify what is the maximum % of your account that you can lose. this is very important. this will keep you in the business without getting blown out too quickly. If this number is 5%, that means you need 20 consiquitive losing trades. you can reduce the maximum drawdown with patience and value picking.

I will give an example on how to calculate this trade quantity. Lets assume your account is 100000 rs. 5% of this 5000 rs. now calculate the difference between entry price and stoploss. lets say entry is 110 and stoploss is 100, then the difference is 10 rs. so to lose 5000 rs you need 500 shares. so you buy 500 shares at 110 rs with SL 100. simple. but you need 500x110 = 55000 rs to buy 500 shares. your capital is only 1 lakh. so you can make one more trade simultaneously.

This is where leverage comes into picture. how nice it would be if you can take 5 lakhs exposure with 1 lakh capital. with leverage comes other costs like interest etc. so we will not think of leverage.

with 1 lakh and 5% risk you can only take 2 positions simultaneously. so either icrease capital to 2 lakhs or reduce the quantity by half.

so it is very important you have enough capital to have max 3-5 positions at any time. or reduce qty by half. I am comfortable with 5% risk. but you can increase it to 10% if you have high conviction of the trade and tightly manage the trade by moving the stoploss to break even ( i will cover that later).

how about TP ? there are several options for TP. One is have a fixed risk-reward ratio and take profit when you hit that figure. Lets say you want RRR as 2, then in this example you need profit of 20 rs for a stoploss 10 rs. so when the stock reaches 130, close the trade. Alternatively, you can close out half quanity at some profit and move stoploss to break even for the rest which is a free trade. But the ideal TP figure is what the system tells you. the system identifies possible areas where you might hit the road blocks, so take profits there.

After you enter the trade it is very important to place the stoploss order in the system. not in the mind. if your broker allows GTC orders use that or else place the order daily. dont forget. friend of mine forgot to place the SL order and in his area there was a power breakdown for 10 days and he didnt have the broker phone number. after 10 days his account is liquidated as the stock crashed.

On profits, dont set any fixed annual targets. treat each trade on its merit and you take what market gives. think for a while how many boarders here got 10 baggers. if they had monthly/yearly targets they would have cut short the position long back. one of the main principles of MM is to let the winners run and cut the losers quickly. if you can do this successfully you will make lot of money. its not important how many trades you did in a year. whats important is how much profit you got with less drawdown

In short, its very important you buy only that much quantity that you can lose max 5% (whatever comfortable to you) of the capital. dont over buy however ‘attractive’/‘tempting’ the signal is. there is always another day, market does crazy things so be careful

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**3). Candle stick patterns and simple indicators **

It is very important to understand some simple patterns and indicators that i will be using in this system. The more you understand and analyse these patterns and their behaviour easier would be the system. so spend time, google and learn more.

I will cover only very few basic stuff. not a great fan of advanced system

1). Candle stick patterns

2). Supply and Resistence (SR)

3). Trend Lines (TL)

4). Fibonacci retracement

5). Moving Averages (SMA, EMA)

thats all. so easy right ?

Candle stick charts and patterns

Let me start with charts. There are 3 types of charts. line , bar, candle stick. i will use candle stick as it has more info (open, close, high, low) and more popular. candle stick tells so many things that other charts cant. What is candle stick ? look at this picture. it has high, low, open, close. if close is above open then its a green bar. profitable one. otherway is black bar and losing bar.

http://imageshack.us/photo/my-images/824/candlestick.png/

http://img824.imageshack.us/img824/6374/candlestick.png

can someone help me how to upload images to the post ? not as attachment

http://imageshack.us/photo/my-images/824/candlestick.png/

probably the current posting settings dont allow it…

Thanks HG. Its going to be difficult to corelate the image and text from different pages. we will live with that

Pin Bar

This is THE most important candle stick pattern that we will be using in this system. This looks like a pin with head and a long tail. If the head is on top and has a long tail, thats Bullish Pin. If the head is at bottom and tail is at top (its actually wick) then its Bearish Pin.

In a continuous down trend, when you get a Bullish Pin, that means possible reversal of trend. the price pulled back and closed at almost top of the candle, that means more buyers than sellers. perfect pin is without wick, but small wick is fine.

Similarly Bearish Pin in a continuous up trend signals sell.

Remember these pin bars must be visible clearly and from a distance. if you open daily chart and zoom to last 1 year, the pins must be visible clearly and obvious. not every tiny pin is of importance to us. we are interested in pins that are of bigger size compared to previous bars. and these pins must be at the swing high or low. not in the middle of a channel. we will cover more on the LOCATION part later

for now understand pins must be big and obvious and at swing high, low

http://img94.imageshack.us/img94/6002/pinqz.jpg

Bullish Outside Bar, Bearish Outside Bar (BUOB, BEOB)

These are also called Bullish Engulfing Bar and Bearish Engulfing Bar. Outside bar means the high, low of this bar engulfs the previous hi, lo of the bar. its high is higher than prev high, low is lowers than prev low and is a bullish bar. it would be good if the body also engulfs prev bar body. if this bar is bullish then its bullish outside bar, similarly bearish outside bar.

this is also reversal signal just like pin but not much powerful. again the size matters. the bigger the better and should be at swing high,low.

http://img41.imageshack.us/img41/2084/outsidep.png

Doji

Doji is a indecision bar. the open and close are almost same and in the middle. that means there are equal buyers and sellers. we dont know who will win and change the direction. this is more of a indecision. however if there are 2 or 3 dojis continously and the next bar breaks out in one direction with great size, then thats a continuation of the trend. some times doji at swing high , low followed by a reversal bar is a good sign for break out

http://img802.imageshack.us/img802/38/dojibar.jpg

Big Round Number

This is a psychological barrier at big round number like 100, 1000, 500 etc. price action around BRN will tell you the direction. if price is rejected by BRN, then it could be a reversal. lets say we are in continuous down trend, price is falling from 130, 120, 110 and comes near 100 and doesnt break 100 convincingly, then we could get a uptrend or atleast reversal. not every round number is big round number. market respects big round numbers. more as psyche level. for 2 digit stock, i consider 50, 100 as BRN . not every multiple of 10. similarly for 3 digit stock.

Support Resistence Zone (SRZ)

By now you must be aware of support, resistence lines and identify swing high, lows. price action is not linear , it moves up and down. identify where the up move started and where it ended. the low, high of the move are called support , resistence lines. market finds bottom at the support and finds resistence at the resistence point.

you should take a 1 year chart and draw all the major SR lines. this is important. if you can identify SR lines properly, half the job is done. we are interested in major swings. not tiny, intermittent swings.

SR Line is about exact line of support, resistence. but price action never works so much precisesly, so we take a band and call it zone. we will feel more comfortable with a band than exact line. some times we get false signals, if we use zone, then we can eliminate the noice to some extent.

in a up trend, resistence forms next support. lets say price started moving up from 100 and went up to resistence zone around 120 and breaks convincingly and goes to 130. now 12o becomes support. because we broke that resistence point (120 level), we won that battle. now the battle is shifted to next resistence zone aound 140. so ppl dont want to sell at 120. so it forms a base or support.

not every bottom is a support line for us. the more number of times its ‘tested’ , ‘visited’ the more strong it becomes. same thing with resistence. if price is rejected at 140 several times (atleast 2-3 times), then 140 becomes a strong resistence. between each rejection price should retrace atleast 30% (we will talk about fibonacci retracements later) and try to break again.

SRZ is the most important entry rule of this system, so we need to spend more time understanding, identifying this zone. pay attention to major SRZ than every minor SRZ.

just because SRZ is broken, it doesnt mean the signal has arrived. some times market gives false signals. if you are a conservative investor, dont immediately buy, try to buy little bit above the support level, let price action convince you its not a false breakout. always add a buffer. also the candle should close above/below SRZ. it should pirce through SRZ but close above/below SRZ.

normally price action gives you a second chance to enter. i always enter on second chance. to avoid false break outs. lets say price is going down and comes near SRZ 100. price pierces 100 level, goes up to 103 and comes back again to 100 and starts going up again, now i will catch it at 102-14 area. with this i feel more comfortable its not a false break out. ofcourse in some strong reversals it wont give you second chance, in that case you can buy at little higher rate.

http://img651.imageshack.us/img651/944/supportbeforethumbnail.png

http://img819.imageshack.us/img819/3940/supportresistancebasics.png

simple support resistence lines