5 Essentials of Price Action Trading

A fellow trader, TraderCisco (his Twitter handle), suggested I write a post on price action trading – also known as “tape reading”.

The term “tape reading” comes from the old ticker tape containing real-time stock prices that used to stream endlessly onto the floor of physical stock exchanges in the early days. This was before the electronic ticker that you now see everywhere from the one hanging above the Big Board’s floor, to television and the mighty NASDAQ market site in Times Square. Traders back in the day used to read this strip of paper streaming out of a ticker tape machine (as pictured in this post’s feature image on my blog’s homepage). Ticker tape now is used to throw around during big VIP parades in New York City along the Canyon of Heroes…dealing with the mess afterwards is a different story.

Obviously, the days of reading stock prices on a narrow piece of paper being spit out by a machine is over. But reading prices, tape reading, lives on in its modern form via Level II screens and/or charts. For the purpose of my post, I will focus on chart reading since true Level II doesn’t exist in the FX market (FX is a decentralized market with no single order book) and FX is what I trade. Here are what I would consider the five essentials of tape reading with charts:

• Cross-analyze multiple time frames of the instrument(s) you’re trading
• Learn how to recognize when support and resistance levels form on a chart
• Learn to interpret buying/selling pressure of price action at and around support/resistance levels
• Identify acceptable risk to reward trades based on these levels and associated price behavior
• Don’t get out until a level is broken with market going against you – this will allow you to hang on for monster moves

Believe it or not, I don’t care about trendlines and I don’t use technical indicators (which are just derivatives of price action). I’m basically a pure price action/level trader. Only price levels matter to me since at the end of the day price (and profits/losses relative to price) is purely what banks and other big players in the market care about.

Here is an interesting article by re-known trader Linda Bradford Raschke whose trading style I admire/appreciate. Though she is a screen trader like me, she has roots from floor trading and trades futures so she has a slightly different spin on tape reading:

Tape Reading by Linda Bradford Raschke

Comment on and share pure price action trading tips/tricks you use.

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