How Price Action Tells The “Story” On The Charts

Each week, I get hundreds of emails from traders asking things like “Nial, what do you think of this signal?”, or “Nial, is this a good setup?” What questions like these tell me is that many people are looking at the market the wrong way; they’re looking at one price bar or signal and working from there, when they really should be looking at the overall story the market is trying to tell them and the “emotion” of price.

When I say the “story” of the market and the “emotion” of price, I mean that price literally does reflect market participants’ emotional actions in the market, but also that price action almost takes on a “personality” of its own and tells a “story”. Just like a human personality, price action has both consistency to it as well as volatility and randomness, it also has little idiosyncrasies that can vary between markets. As a trader, you need to get in-tune with the “personality” of each market that you trade by reading the story told by its price action.

Price action tells the “story” of the market

The market is like a book; to understand what is happening in it you have to read it on a regular basis and keep it fresh in your mind, otherwise you’ll fall out of touch with what’s happening in the story. The price action of a market tells the market’s “story”, and by learning to read it you can begin to anticipate the next series of events, just as you can in some books. The best traders are essentially “in the zone” because they keep daily tabs on what the market is doing and they understand the “story” being told by the market’s price action.

Don’t get me wrong, you don’t have to be “obsessive” about watching the charts, but there is a fine balance you need to find between analyzing the markets too much and not analyzing them enough. The only way to truly master your trading strategy is to “read” the market on a regular basis, even if it’s only 10 or 20 minutes a day, you need to stay in touch with what is happening in the market if you want to really increase your chances of making money over the long-run.

Mapping the market’s story

Keeping up with what is happening in the market will help you to understand the story the market is trying to tell you and will help keep you stay in-tune with it. Having an on-going journal or dairy is the best way to “map” the market’s story each day and will help you to understand the market’s story from “cover to cover”, it will also help you build your market intuition. Intuition and gut feel will develop in a huge way from this exercise of diarizing your thoughts on the market each day– consider it an exercise that will allow you to “feel” the market on a daily basis.

The best way to go about doing this is just to keep your own daily journal of the market by making notes about each pair you trade. You would include things like daily chart trend direction, key chart levels, key signals that have formed recently, etc. It’s not hard to get started with this; go to the supermarket and buy a pad of paper and a pencil and each day you should write the date, which pair or market you’re analyzing and then make a few notes like we just discussed. The point is that you’re making the process of keeping up with the market’s “story” a daily habit.

Essentially, by doing this you’re getting in-touch with what’s happening in the market and you’re preempting a potential entry signal. What I mean by that is, after you’ve made your notes about the market and you are in-touch with what it’s doing and where the key levels are at etc., it then really should just be a waiting game. You want to be prepared, and you get prepared by following the market each day and staying in-touch with the story the price action is telling you…by keeping this daily journal you are essentially writing a daily “guide-book” to the market. I personally noticed a huge improvement in my trading when I started writing a market commentary each day starting about 5 years ago, you don’t have to put in an as many hours as I do taking care of a big audience, you just need to diarize the major events in the markets that you follow each day. Realistically, this shouldn’t take more than 10 to 20 minutes per day after you know what you’re doing.

Anticipating trades

Once you’ve started writing your own daily market commentary and journaling about your favorite markets, you can use this information to be more anticipatory. When you make a daily journal or commentary of the markets, you are really creating a dialogue in your head about what has happened in the market recently, what is happening now, and what MIGHT happen next. Creating this inner-dialogue about the market is essential to developing your trading intuition and “gut” trading feel…these are the intangible things that really allow humans to excel over computers at trading.

For example, in your daily notes about the market you’ve recorded what’s happened; found the trend, found the key levels, etc…and then you’re just anticipating a price action trading signal to enter the market from. To use the sniper analogy that I use in many of my articles; anticipating a signal is sort of like the sniper picking the spot he will snipe from and what he will rest his gun on, then after finding the prime spot, he gets into position and waits for his target to enter the crosshairs of his gun. This is basically what you are doing when you make a daily diary of what’s happening in the market; you’re getting familiar with the market’s price action and current conditions and then once you have this bias and “story” down, you can simply wait in anticipation of an entry signal that makes sense with your market bias. I can promise you that if you do this you will be FAR ahead of most other traders out there who are bleeding money every week because they are unprepared and undisciplined.

One of my good trading friends is always saying that “trading is an anticipatory game”, and I tend to agree with him 100%. For example, imagine you’re looking at the EURUSD and you notice it’s having a lot of trouble breaking through a certain level, you record what’s happening in your trading diary and you form a view and a bias on the market, then you can begin to anticipate an entry signal that agrees with your bias. Once you have your view and bias and then a signal forms that makes sense with it…you should have 100% confidence that the signal is valid because you’ve pre-empted it…this takes all of the potential second-guessing out of your entry strategy and it’s really HOW you master your trading strategy.

You may have heard of traders being “in the zone”…well diarizing your favorite markets and learning to anticipate signals from the story the market is telling you is HOW you get in the zone. By keeping a daily diary of the markets you trade you will essentially be “immersing” yourself in them, like getting a stuck in a good book, this will help you to understand the emotion of price and get in the “trading zone”.

See the “forest for the trees”

A lot of people pay too much attention to one bar or one price action signal. What you need to do is take into account not just the price action setup you’re considering trading, but the overall market context that it has formed in. As we said above, if you keep an on-going diary or journal of your favorite markets, you will already have this context and you’ll just be waiting for a signal to form. Unfortunately, most traders do the opposite; they don’t really have any structure or routine behind their trading analysis and so they have no real informed market bias, instead they are solely focused on finding a signal with very little regard to what the surrounding market is doing.

Also, it’s easy for a trader to overlook the bars that aren’t specific entry signals, but you still need to note these bars…each price bar is important, especially on a 4 hour or daily chart (higher time frames). Tails on bars are important for example, any bar with a large tail is obviously important because the tail signals exhaustion and a possible move in the opposite direction…even if it’s not a pin bar, a bar with a long tail is important.

The point is that we don’t only use price action signals to trade from, we also use the surrounding price action to read the chart and figure out where it’s likely to go next.

Closing

Following the market on a daily basis is important if you are serious about making money as a trader. It’s very similar to reading a book; if you put the book down for a week or two you will probably forget where you left off and what was happening. When it comes to trading, this can mean losing money because you are less prepared than you otherwise would be if you were following the market every day and diarizing what the price action is telling you, like we discussed above. Thus, if you do need to take a break from the market for a week or two, like we all do sometimes, give yourself another week or two to get back into the “groove” of what is happening before you go placing any live trades. Let’s be honest, most traders do not turn the market into an on-going story that they stay in-tune with, instead they just randomly enter trades on a whim with no logical supporting process behind their trading decisions.

Once you get into the habit of diarizing your favorite markets, you will essentially be setting yourself up like a “sniper” and then all you have to do is just wait each day for your “prey” to walk in between your sights. By reading the market each day and recording what you see, you will begin to anticipate signals…this is called developing your “gut” trading feel, “intuition” or “discretionary” trading sense…whatever you want to call it, it’s what passionate traders do and any professional trader has an internal on-going storyline of what their favorite markets are doing at any given time…they don’t just “wing it”. If you want to learn how I trade with price action and read my daily members’ trading commentary which is essentially my daily diary of what the markets are doing, then checkout my price action trading course for more information and insight.