Price Action Basics III

As you might notice, I'm not suggesting to simply FOLLOW PRICE, but I suggest you to rely on MARKET LOGICS.

Why not to simply follow price action?

Price is simply the advertising mechanism and in most cases it can be misleading. "Should you accept this breakout", "should you fade this market" and so on and so forth. Price itself will not give you clues for that. You have to analyse fragile equilibrium between price and value to get answers on these questions.

What is Value?

It can be called area of aсceptance - area that market will more likely revisit or stay near that area for some time. Trading markets, you should rely on fundamental market principles.

And of of them claims: "The goal of the marketplace is to faciliate trading"

If you think about this principle, you will understand that market needs liquidity to facilitate trading. By "liquidity" I don't mean single buyer that steps in and kicks the price.

By liquidity I mean plenty of players with different perspectives, participating near given price level. If you have that pluralism in opinions, you have value area.

If liquidity is not enough, market auctions higher or lower to find it. Guess, how it attracts liquidity? Of course, it offers higher or lower price - nothing is new. That's how market auction works.

There are 2 basic types of price action if we look at it from "price-value" perspective.

I will use the simpliest way to vizualize value on market - moving average. Of course, it's not that simple in reality, but it would be enough to show you how it works.

1. Value is leading, price is following.

For example, it occurs when value is lower. Market accepts lower prices and rejects higher prices, yet it has scanned higher prices for liquidity.

You might notice that value is going sideways.

In this case market has no reasons to immediately leave this value area. You may expect some rotation before something happens.

2. Price is leading, value is following In this case you may notice, that price runs away from value, there's often a gap between price and value, and this is an indication of strong imbalance - sellers are in control and it's better to trade in sync with them.