Understanding a Powerful Price Action Strategy By Laurentiu Damir

Price action trading strategy is a popular technique used by traders and investors around the world. Those who believe in this strategy blindly follow it and don’t use any indicator.

For them, the price is Good. Their only focus is on how price behaves near a certain level and their trades are based only on that. Before discussing this price action breakdown strategy, let’s understand first the fundamentals of price action.

What is Price Action Trading Strategy?

Price action is nothing but graphical plotting of the movement of price over time. Technical analysis is the derivative of price action since its calculations are used to make trading decisions.

Traders use different types of formations to predict what can happen next. Whether the price will breakout, a breakdown or a reversal may take place.

Various candlestick patterns like Doji, Hammer, shooting star, engulfing pattern and three white soldiers are formed again and again because of greed and fear of market participants. The formation of these candles set up a certain kind of expectation among traders.

In this blog, we will learn about an exclusive Price Action Breakdown Strategy by Laurentiu Damir. To understand this clearly, we need to learn certain strategies:

Fair Value Area

The fair value area of any financial asset is an area where price remains most of the time during trading. This is the place where both buyers and sellers agree fully and trade happens quickly. A buyer is happy buying at this level and the seller is happy selling at this level.

Price Action chart

In the above chart, you can see that the price is confined between the two horizontal parallel lines. This can be called as fair value area or simply put: a value area. It does not matter what you call it, more important is how you identify them and use it effectively in your trading.

Also Read: Price Action Trading- Listen What Mr. Market Wants to Tell You

Here it is important not to think of them as solid hard-core boundaries as upper and lower limits, think of them more as a price zone where price resides. When you finding value, look carefully at the price movements in question and notice the area where the vast majority of trading took place.

 

See the lower lines where the bulk of trading took place. You can clearly see how price rotates in the value area.

Buyers become active when it comes close to the lower part, and sellers become active when it touches the upper boundary.  See any chart, price only moves from one value area to another value area.

Also Read: Is Market Near Correction: Chetan Panchamia’s Data-Driven Insights Offers a Good Clue

The market only acts as a facilitator between buyers and sellers. Whenever supply exceeds demand, price moves lower to find a new equilibrium between buyers and sellers which further creates a new value area.

The size of the value areas can be different. And the bigger is the value area, the more significant it is. The time spends in the value area should also be construed as consolidation or accumulation. The breakout and breakdown happen only when the combined perception of the Value Area changes.

 

A smaller value area may be formed on top of a lower value area. In this case, the upper boundary of the earlier value area acts as a Support zone.

Conversely, a small value may be developed below an existing value area. The lower limit of the big value area is acting as resistance for the price. This is the area where is not enough demand for the asset which further pushes the price inside the new Value area.

Please remember this. The less time price spends at a certain price level, the more effective that price level will be in providing support or resistance for future price action. Why? Because less time spent shows greater rejection. At the three green arrows, whenever price comes, traders lap it up as they consider it as excess zones.

Often price moves quickly in the value area. The rejection of price is very fast. You can see the price rection of the #Reliance industry chart by green and red arrows. Often you will find unusual volume whenever price deviates from the value area.

Control Price

By now you have seen how the market gives value to certain price areas and how it moves up and down in the sideways motion.

The price level where the market reflects the greatest trading activity is the control area. It is also known as pivotal support and resistance.

Reliance Industries Chart

In the above chart, you can observe the control price encircled on the green line in the Reliance Industries chart on hourly time frame.

The best way to think of this control price is to imagine it as having gravity. It is attracting price inside the value area to it. It is exerting a gravitational pull on all prices inside the value area.

Using Value Area to Take Trade

Always try to buy in excess below value or in the bottom value area, which is between the value area low and the control. Seek to sell in the excess territory above value or in the top value area, between the value high and the control.

The vice-versa is also true. Never buy when the price is in above value or excess area and do not sell when it is in excess below value. We must sell where the greatest supply is which is at the top of the value area or in the excess above it.

In a downtrend, when price rotations become small and they happen in the upper part of the value area, the trend is most likely to end. The narrower the rotations, the bigger the break of value will be.

This is the price of Tata Motors. You can see how the concept works beautifully.  This is a replica of the image of above graphical image.  The yellow line channel width signifies a value area that eventually becomes smaller.

The price drops to below excess value area but eventually retraces to the horizontal parallel channel value zone which is narrower. In this situation, the control price and value area almost converge or the gap is very narrow. When the price moves down below the value area low, the bigger the possibility that the current value or trend will be broken. But why this happens.

The reason is it brings in more demand. The lower that price goes in excess territory the greater attraction from buyers it has.If it goes much below, the demand will increase significantly. The big excess price is another clear indication that the value or trend is about to be broken. Now when the breakout happens, it is very sharp and ferocious.

In a nutshell, any move away from value creates a trading opportunity. Our goal is to speculate the market imbalance between supply and demand.

Visualize some charts and identify some value areas and apply the concepts discussed in it. We took the example of #TATAMotors to show you how it works. The strategy works 7-8 out of 10 times.

In our YouTube Channel Dhan Ki Baat, we will describe how to take a trade on the basis of this strategy in detail. Stay tuned to it.

Vikash Kumar

An investor with more than 15 years of experience in the market. I m deeply interested in positional and momentum-based trading strategies and love learning strategies and backtesting.

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