Part 2: Price Action Breakdown - Advance Elements
In the first part, we discussed the components of the price action theory. We covered value area, control line, and excess price with examples, setups & guidelines (with my own observations.) Now, in this idea, we are going to cover the following topics:
I request all of you to visit our first part if you have not read it yet.
Check out the following demo chart, and try to mention each component by yourself:
Now, you can check the following chart, and see if you have denoted correctly or noted:
1) No trading zone:
No trading zone/activities is the area where trading is not happening. It shows the strength of buyers in the lower band and the strength of the sellers in the upper boundary. Its shows who is controlling, who will be controlling, and who have lost the opportunity.
What does it mean?
🔹If the length of the no-trading zone is wide at the lower band, it shows that buyers are controlling the movement and sellers are not able to form trading activities.
🔹If the length of the no-trading zone is wide at the upper band, it shows that sellers are controlling the movement and buyers are not able to form trading activities.
Observing the given formation that shows a sideways value area is enough to understand the whole story. There were actually three no-trading zones in the value area: two on the lower band and one on the upper band.
The first NTZ(No-trading zone) on the lower band was the signal of the movement controlled by buyers. NTZ-2 was the widest of the value area, where sellers snatched the control from buyers and started outnumbering the buyers. NTZ-3 was the last no-trading zone where the buyers were on the controlled buy and couldn't give a response to the sellers' initiative move. The excess was the last price point from sellers that started the supply pressure.
2) Initiative & responsive trading
As we discussed earlier, price movements are the result of the interaction between supply and demand. Buyer(demand) and seller's(supply) intuition are the main components of the price.
Value area from where buyers and sellers are satisfied with the current prices. Neither buyers want to increase, nor the seller is interested in low prices at least for some duration. It's called equilibrium between buyers and sellers.
What if it's enough?
# Now buyers don't want to keep the prices as it's too low for them. So, the buyers will make an initiative to break the upper band of the value area. It is called "initiative" by buyers.
# Sellers have to stop them from going out of the value area by making excess, which is called "response" by sellers. Anyone, either buyers or sellers, who are not satisfied can make an initiative. However, the opposite party has to respond to their initiative and settle into equilibrium again.
Case 1:
- The movement can only reach equilibrium by responding to each initiative. If a failure occurs, it signals evidence of a big move in the direction of the initiative. As per the chart, whenever buyers have made an initiative to move outside of the value area, sellers have responded with supply pressure and vice versa.
Case 2:
- Buyers have made an initiative, but sellers couldn't hold back the buyers' pressure and ended up losing movement. Here, we can say that the buyers have given a breakout of the value area, and the sellers' response was a failure.
3) Shifting of the value area
- Traders don't have to be upset after the breakout of the value area. Supply and demand will balance and unbalance again, and traders will get an opportunity to trade according to the theory. We all know of the tenet of the dow theory that "price tends to trend." Value area also shifts its value after the breakout/breakdown, often in the direction of the trend.
Uptrend: The price was in an uptrend. After the breakout of the first value area, it has formed the second, and so on.
Downtrend: The price was in a downtrend. After the breakdown of the first value area, it has formed the second, and so on.
- No trading zone
- Initiative & responsive trading
- Shifting of the value area
- Bullish Value area
- Bearish value area
- Extention of the value area
- Combining all the pieces
I request all of you to visit our first part if you have not read it yet.
Check out the following demo chart, and try to mention each component by yourself:
Now, you can check the following chart, and see if you have denoted correctly or noted:
1) No trading zone:
No trading zone/activities is the area where trading is not happening. It shows the strength of buyers in the lower band and the strength of the sellers in the upper boundary. Its shows who is controlling, who will be controlling, and who have lost the opportunity.
What does it mean?
🔹If the length of the no-trading zone is wide at the lower band, it shows that buyers are controlling the movement and sellers are not able to form trading activities.
🔹If the length of the no-trading zone is wide at the upper band, it shows that sellers are controlling the movement and buyers are not able to form trading activities.
Observing the given formation that shows a sideways value area is enough to understand the whole story. There were actually three no-trading zones in the value area: two on the lower band and one on the upper band.
The first NTZ(No-trading zone) on the lower band was the signal of the movement controlled by buyers. NTZ-2 was the widest of the value area, where sellers snatched the control from buyers and started outnumbering the buyers. NTZ-3 was the last no-trading zone where the buyers were on the controlled buy and couldn't give a response to the sellers' initiative move. The excess was the last price point from sellers that started the supply pressure.
2) Initiative & responsive trading
As we discussed earlier, price movements are the result of the interaction between supply and demand. Buyer(demand) and seller's(supply) intuition are the main components of the price.
Value area from where buyers and sellers are satisfied with the current prices. Neither buyers want to increase, nor the seller is interested in low prices at least for some duration. It's called equilibrium between buyers and sellers.
What if it's enough?
# Now buyers don't want to keep the prices as it's too low for them. So, the buyers will make an initiative to break the upper band of the value area. It is called "initiative" by buyers.
# Sellers have to stop them from going out of the value area by making excess, which is called "response" by sellers. Anyone, either buyers or sellers, who are not satisfied can make an initiative. However, the opposite party has to respond to their initiative and settle into equilibrium again.
Case 1:
- The movement can only reach equilibrium by responding to each initiative. If a failure occurs, it signals evidence of a big move in the direction of the initiative. As per the chart, whenever buyers have made an initiative to move outside of the value area, sellers have responded with supply pressure and vice versa.
Case 2:
3) Shifting of the value area
- Traders don't have to be upset after the breakout of the value area. Supply and demand will balance and unbalance again, and traders will get an opportunity to trade according to the theory. We all know of the tenet of the dow theory that "price tends to trend." Value area also shifts its value after the breakout/breakdown, often in the direction of the trend.
Comment:
Traders can use the following methods to validate breakout: (we will cover these points in depth soon.)
1. Percentage filter:
The most commonly used percentage filter is the 1 to 3% rule. Breakout confirms after reaching a certain percentage from the level.
2. Close the filter:
If the closing price is through the breakout level, the odds are higher that the breakout is real.
3. High Volume method: Increasing volume often occurs with a breakout. Heavy volume indicates big players are also interested in breakout, and the move is sufficient to breakout/down the level.
4. Pivot point method:
Pivot point provides support and resistance to price movement. A series of reversal points from buyers are sellers is called pivot points.
1. Percentage filter:
The most commonly used percentage filter is the 1 to 3% rule. Breakout confirms after reaching a certain percentage from the level.
2. Close the filter:
If the closing price is through the breakout level, the odds are higher that the breakout is real.
3. High Volume method: Increasing volume often occurs with a breakout. Heavy volume indicates big players are also interested in breakout, and the move is sufficient to breakout/down the level.
4. Pivot point method:
Pivot point provides support and resistance to price movement. A series of reversal points from buyers are sellers is called pivot points.
Comment:
4) Extension of value area
Many times value develops on the top/bottom of the value area. Price forms a smaller value area the above/below the dominant value area.
At that time value:
- If the value forms on the top, the upper limit of the dominant area acts as a support.
- If the value forms on the bottom, the upper limit of the dominant area acts as a resistance.
Example 1: Small value area below the dominant value area
Example 2: Small value area above the dominant value area
Many times value develops on the top/bottom of the value area. Price forms a smaller value area the above/below the dominant value area.
At that time value:
- If the value forms on the top, the upper limit of the dominant area acts as a support.
- If the value forms on the bottom, the upper limit of the dominant area acts as a resistance.
Example 1: Small value area below the dominant value area
Example 2: Small value area above the dominant value area
Comment:
Having learned how values are formed, marked, broken out of value areas, shifted, and extended, it is now time to learn how value areas can be marked as per the trend.
We already discussed the sideways or trendless mod. Let's discuss the other two mods:
1. Value area in an uptrend
2. value area in the downtrend
Traders can make trending value areas using value shifting. Of course, small value areas merge and construct a big value area.
There are the following steps to draw value area in an uptrend:
Step 1:
Step 2:
Step 3:
Step 4:
We already discussed the sideways or trendless mod. Let's discuss the other two mods:
1. Value area in an uptrend
2. value area in the downtrend
Traders can make trending value areas using value shifting. Of course, small value areas merge and construct a big value area.
There are the following steps to draw value area in an uptrend:
Step 1:
Step 2:
Step 3:
Step 4:
Comment:
Trap???
Comment:
New Idea!!
Comment:
Example 1: DJI
Example 2: QQQ
Example 3: TSLA
Example 4: TSLA
Example 5: EURUSD
Example 6: BTCUSD
Example 7: NKE
Example 8: AMZN
Example 9: SPY