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PTMC team 19.08 2015

Price action in Protrader

Hey there, Protraders!

In one of the previous articles, we’ve touched on the topic of technical analysis and its applicability in the trading. In the current article, I would like to continue talking about the technical analysis and to consider one of the most popular and effective methods – Price action. Unlike other techniques of the technical analysis, Price action focuses on the price movement analysis rather than technical indicators. This does not mean that technical indicators are not used at all, the reason is that price is the basis for making the trading decision.

History of Price Action

It is believed that concept of the Price action was born in the “pits”. At the time of meaningful news release, the important price levels reaching or closing/opening of the trades, traders from the “pit” intensified, trying to get the most favorable price, so all the “pit”, literally, was set in motion. Such an active trading called as Price action. Such periods of activity of traders on the price chart looked like asset powerful impulses, defining the future direction of the trend. The areas of the most active trades carry a lot of useful information about the quantitative composition of the market participants and can give a clue about who is now dominated – bulls or bears. And the analysis of price behavior on the key price levels can predict in what ratio are now two main driving market forces – supply and demand. After all, their imbalance generates the price movement. Hereafter, the analysis methods of important price areas have been generalized and have been called Price action. Such well-known traders as Joe Ross, Phillip Nel, Sam Seiden and others use some techniques of Price action.

price action scheme

Main tools of Price Action

The most common tools that used in the analysis of Price Action are:

  • Key levels or Price pivot zone (PPZ);
  • Levels of support/resistance (double top, double bottom, etc.);
  • Figures of classic technical analysis (head and shoulders, different channels, Gartley patterns, etc.);
  • Candlestick patterns (pin-bars, inside and outside bars, complex candle combinations);
  • Elements of graphical analysis (trend lines, Fibonacci levels, wave analysis).

The first two of listed points are the basis of Price action. Proper identification of significant price levels – is the key to successful trading. Let’s consider in more detail the technique of determining these levels.

Price Pivot Zone (PPZ)

PPZ – is the level of potential price reversal, i.e. such price level that in the past was both resistance and support. In other words, this is the level from which the price bounced in the past both upwards and downwards. Herewith, the more pronounced the price reaction to this level, the more meaningful this level is. The impulsive price reaction on the level indicates a strong imbalance of supply and demand that increases the chances on a successful trade. Good PPZ level should not be “blurred”, the price should push off from it at every next call. Stronger PPZ levels must move from support to resistance (and vice versa) at least 2-3 times. Herewith, there should not be a "trampling" of price on the level. The ideal option: touch and a sharp bounce of price. Look, how on the chart of the currency pair NZD/USD below, some price levels alternately play a role of support and resistance, and how clearly the price reacts on this level in the future.

PPZ manual

To determine the really important levels, it is worth spending some time on exploring the features of the selected asset. What happens at the PPZ level? Why does price react at it? All is simple, strong price level is an area in which the imbalance of supply and demand is observed, the greater the imbalance – the stronger the reaction to the level. For example, in the absence of demand on a certain price level, the orders of sellers cannot find a counterparty that leads to a sharp drop in price. In turn, the absence of supply leads to the growth in prices up to levels at which sellers can meet the demand of buyers.

Practical use of the Price Pivot Zone levels

How to use the PPZ levels? There are several approaches to the formation of a trade signal near such levels. Two types are distinguished: touch trading and trading with confirmation.

Touch trading involves placing a limit order on the border of a predetermined level or entry by a market order when touching in PPZ.

Trading with confirmation is to wait for the formation of confirming signal on the level. Such a signal, for example, can be candlestick pattern (pin-bar, outside bar, “rails”, etc.) which should confirm the anticipated bounce of price. But in both cases, the ability to determine the strong price level is a primary task.

Touch trading is more beneficial in terms of risk/profit ratio, but such an approach is more risky, since to predict future price behavior is almost impossible. Trading with confirmation is more conservative, since it implies the expectation of the confirming signal, which, in general case, should increase the chances of success.

It should be noted that for successful trading, other tools of the technical analysis should confirm the selected by trader level of PPZ. The more confirmations, the higher the probability of a positive outcome of the trade. The major reinforcing factors in determining the levels are:

  • Matching PPZ level with significant Fibonacci levels;
  • Matching PPZ level with trend lines;
  • Matching PPZ level with round (psychological) price levels;
  • Matching PPZ level with moving averages of large period,as dynamic support and resistance levels (for example, MA 150, MA 200).

Price Pivot Zone in Protrader

Traders often use different automation tools to accelerate and facilitate their trading. One of the few terminals that can build zones of support/resistance in automated mode is Protrader. Using the drawing tools, you can build PPZ levels automatically, thereby saving precious time. Also, such a "helper" can point on a missed level and does not allow trader to miss a good trading signal. To do this, you need to select “PPZ” from the drawing toolbar and to define the chart area for analysis, using two vertical lines. Let’s consider the same chart of the currency pair NZD/USD. If we compare zones that were drawn automatically by PPZ tool and those we drew by hand, we’ll see that percentage of matches is very high.

PPZ auto

Also, it can be noted that color of built levels is different. This is because the algorithm for building not only defines the position of significant levels, but also ranks them by the number of control touch points. The strongest levels are allocated by more saturated color.

Of course, the nature of the movement of each trading instrument is individual; therefore, it is necessary to select the optimal settings to build PPZ separately. Through the settings menu of PPZ drawing tool, we can flexibly configure the automatic determination of levels.

PPZ settings

The following settings are included to the settings of automated PPZ construction:

  • PPZ height – the maximum width of the sought level. This parameter sets the maximum possible width of the level. If value of this parameter is 50, then levels with width not more than 50 points will be displayed.
  • Price response time – time of the price reaction on the level. The maximum possible time for which the price should bounce from the level and close beyond it. It is calculated in the bars of current timeframe. If value of this parameter is 2, then will be taken into account only those levels, after touching to which, the price bounced and closed beyond this level within 2 bars of the selected timeframe.
  • Price action value – the minimum value of the price bounce from the level. The parameter that defines the minimum size of price bounce from the level. Is calculated in points. If value of this parameter is 50, then will be taken into account only those levels, after touching to which, the price bounced on the value not less than 50 points.
  • Control points – the number of control points for building the level. This parameter specifies the minimum number of the price touches for the level formation. If value of this parameter is 3, then will be taken into account only those levels formed in the result of 3 or more price touches.
  • Fractal dimension. Touching of the level is defined by a well-known method of fractals. This parameter specifies the number of bars for building the fractal. For example: bottom fractal with dimension = 3 will be formed, if in the sequence of three bars, the second bar will have the lowest minimum. For the top fractal, the rules of building are mirrored.

Let’s consider the general scheme for determining the PPZ in the Protrader terminal:

PPZ scheme

Where:

  • h – width of PPZ zone;
  • 1, 2, 3… – fractals;
  • L – price action value on the level.

Proper determination of important price levels can be an excellent complement virtually to any trading system. Levels of support/resistance can be used as:

  • Zones for setting Stop loss and Take profit;
  • Filter (do not open positions against strong levels);
  • Confirmation of the trading signals.

Therefore, thanks to the automatic detection function of PPZ zones, a trader can easily find these zones.

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