PRICE ACTION by
This Article originally transmitted in January Issue
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Price Action - The Footprint of the Money
Judy MacKeigan - Buffy
"What is Price Action?" is a frequently asked question by aspiring
traders. Traders who ask, feel it is a well kept secret when all they
receive for an answer is: 'Swing highs, swing lows, test of top/bottom, etc.,
are all price action.' The answer still leaves them in the dark.
Understanding price action enables a trader to minimize questionable entries and
improve exits. Price action is the footprint of the money.
Let's start with the very basics. The bars on the following chart are labeled
as traders commonly referred to them.
Up Bar: is a bar with a higher high and higher low than the
previous bar. The bars marked off are in an up trend. Notice how the close
is higher than the open until what turns out to be the last bar of the trend
where the close is lower than the open. There were more sellers then
buyers on the last bar.
Down Bar: is a bar with a lower high and lower low than the
previous bar. The bars marked off are in a down trend. Notice how the
close is lower than the open until what turns out to be the last bar of the
trend where the close is higher than the open. There were more buyers then
sellers on the last bar.
Inside Bar: also called a narrow range bar, is a bar with the
high that is lower than the previous bar and low that is higher than the
previous bar. Some traders do not consider an inside bar that has either
an equal high or an equal low as an inside bar, others do. Inside bars
usually represent market indecision. As on any bar, the closer the open
and close are to each other shows just how undecided the market is as neither
the buyers or sellers are in control. Buyers are in control on the inside
bar marked on the chart because the close is at the top of the bar.
Outside Bar: also called a Wide Range or Engulfing Bar, is a
bar with a high that is higher than the previous bar and with a low that is
lower than the previous bar thereby engulfing the previous bar. Since the
open and close are close together on the marked bar, neither the buyers or the
sellers are in control and the market is undecided which way to go.
When the open is in the bottom quarter/third of the bar and the close is in
the top quarter/third of the bar, it is said to be bullish engulfing with the
buyers in control. When the open is in the top quarter/third of the bar
and the close is in the bottom quarter/third, it is said to be bearish engulfing
with the sellers in control.
Another definition used for this bar – especially if candlestick charts are
used - is that the open and close have to engulf the previous bars open and
close and not just the high and low of the bar. With this definition, the wide
range bar or engulfing bar does not need to have a higher high or lower low to
qualify. The first definition most probably came about with bar charts
where it is harder to notice the open and close.
The following chart has the swing highs and lows marked in both an up trend
and a down trend. Price on a given time frame is in an up trend if it is
making a higher highs (HH) and a high lows (HL) and in a downtrend if it is
making lower highs (LH) and lower lows (LL). If price is doing anything
else, it is in a consolidation pattern - range, triangle, pennant, rectangle
The trend is considered in place until price is no longer making higher highs
and higher lows in an up trend or lower highs and lower lows in a down trend.
After a trend is broken, there is usually a period of consolidation that is
easier to see on a lower time frame. With practice, you will be able to
visualize this going on without looking at the lower time frame.
When price is in a consolidation pattern that is often referred to as chop,
it is usually in a range with no trend pattern to the swing highs and lows.
The above chart shows how an exact test of high or low may mean a change in
trend as it failed to make a higher high on test of last swing high or a lower
low on test of last swing low.
- Price was making HHs and HLs until price tested the prior swing high at A.
- Price made a LL and LH until price tested the prior swing low at B.
- Price made a LH (The bar that does not touch line at C) until price tested
the prior swing low at C.
- Price was making HHs and HLs until price tested the prior swing high at D.
It is possible for one time frame to be in one trend and another time frame
to be in a different trend or show consolidation. This is where the phrase
'trend within a trend' regarding price action and the different time frames
comes from. An example would be that while price may be rising on a daily
chart, the intra-day chart will show retracements, corrections of various types
and consolidation periods
The true meaning of this and how it can influence your trading, eludes many.
The following exercise is an excellent way to learn what the phrase 'trend
within trend' means visually.
Pull up a 15 minutes chart and mark the highs as higher high (HH) or lower
high (LH) and the lows as lower low (LL) or higher low (HL). (The note tool was
used in Ensign to mark these charts.) You can also print out the chart and
mark it by hand. Use red lines if price in a down trend and green lines if
price in an up trend. Remember price is in an up trend if it is making HH
- and HL and in a downtrend if it is making LH and LL. If price is doing
anything else, it can be a consolidation pattern - range, triangle, pennant,
Points labeled 1-4 on the example chart are in a downtrend. Points
labeled 5-8 are in an up trend.
Now take the same chart and change the time frame to a 5 minutes chart,
keeping the colored notes and numbers from the 15 minute by using the padlock
with the L to lock lines in Ensign. Mark the new highs and lows with green
numbers for an up trend and red numbers for a down trend.
Now we can see by the yellow HH and LL what trend is on the 15 minute at the
same time we are able to see the trend on the 5 minute.
Both charts are in a down trend until the 5 minute makes a HH at the first
green #1. The down trend is broken when the LH at black #3 is exceeded.
Price then goes on to make a HL starting an up trend that continues until price
makes a lower high at the red #1. The 15 minute just made a HH at the
black #5 and will not make a HL until black #6. At this point, we are
expecting a HL on the 15 minute, and are waiting for a long signal on the 5
minute. Some traders would take the entry on the pair of reversal bars at
red #2, others would wait until the last swing high at red #1 is exceeded.
The time frames are now in agreement (shown by green #1-#4) up to the black
#7 HH. After the HH at #7, the 5 minute goes into a down trend (shown by
red #1-#6) to what is still a HL on the 15 minute at #8. So, while the 15
minute price action shows only two trends, the 5 minute shows five different
While you may trade the trends on the smaller time frame, waiting for price
action to show it is going to move in the same direction as the larger time
frame is trading with the trend. The trend is your friend!
The following two setups are from the 2XBline system. The system is a
combination of Buffy's BLine and Jimmer's 2X. (See
for more information.) 2XBline concentrates on the higher percentage with
the trend trades by taking the middle out of the trend. It is fun to trade
the middle of a trend. It is work to try to catch the tops and
There are two templates available to download through Ensign's Internet
Services - 2XBline-35 and 2XBLCircles. The settings for the
indicators in the study windows are the same on both templates.
Copyright © 2003 - Judy MacKeigan