Identifying Strength and weakness for price action trading:
Why is this important for price action trader? It is simply because
price action trader is trying to trade in the direction of strength or trading
in the direction of fading the weakness.
A simple trick that we will use for identifying strength and
weakness is to draw a line from the starting of the swing to the end of the
swing. Do the same for the move in the opposite direction as well. Now observe
the slope of the line in both directions. The steeper the line stronger the
trend. Low gradient of the line indicates the weakness in price in that
direction.
One may be wondering how to find out the slope or gradient.
It is done with the naked eye and using best judgement. No specific tools are
required for this activity.
Let us consider the price action of Nifty 50 index for
14-02-2017 in HTF (30 min chart) & LTF (3 min chart) respectively:
30 min chart:
3 min chart:
I have color coded the strength using green line and
weakness using red line.
We will use the HTF for reference and TTF for trading
decisions. Based on this we will identify the trading opportunities.
How can we use this information for preparing for tomorrow?
Well we will use the currently available information to
anticipate future moves and prepare for an eventuality where
- Market moves as anticipated
- Market moves in opposite direction
In both the case we will be ready with our S/R levels.
Further during the live market we will again observe the developing strength
and weakness. Also using the S/R and swing high/low we will be ready to take
the trade.
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