Price Action
October 15, 2024
⚠️ Risk Management with Bob Iaccino
*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11am ET, as our risk management educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.
Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session.
Understanding Price Action: A Trader’s Guide to Support, Resistance, and Market Movement
As traders, we constantly navigate the complexities of market movements, trying to discern patterns that can guide our trading decisions. Price action analysis remains one of the most reliable methods to decode these movements. Today, I’ll share my approach to price action and how you can leverage it to improve your trading strategy.
What is Price Action?
At its core, price action is about observing the historical movement of prices to make trading decisions. This approach excludes the use of technical indicators or trading algorithms. Instead, it relies on the analysis of price movements alone. While I do utilize a few indicators to support my conclusions, the key here is to let the price itself dictate the next move.
Understanding Support and Resistance
Support and resistance are fundamental concepts in price action. These levels represent the prices where assets repeatedly reverse direction—support acts as a floor preventing prices from falling further, and resistance acts as a ceiling stopping prices from rising. Identifying these levels can help you pinpoint entry and exit points for trades.
Finding Significant Levels
To effectively use support and resistance, it’s essential to identify significant levels. Not all levels are created equal, and I categorize these based on their importance. For instance, when looking at a chart, I prioritize levels that have shown multiple "emotional" reactions—meaning price points where the market showed strong movements, whether as a breakout or reversal. Such levels are not random; they often reveal areas where traders have acted in the past, which means they might act similarly in the future.
Price Action in Volatile Markets
In volatile markets, support and resistance levels can be more challenging to identify due to rapid price changes. But volatility also provides opportunities, especially if you’re prepared to react quickly. I recommend looking for what I call "dynamic levels," where the price reacts with significant, long candlestick wicks or bodies.
Consider a stock like Micron, for instance. If we observe that Micron hits a certain resistance level multiple times with emotional reactions (e.g., long candles or sudden reversals), then that level is worth monitoring. As traders, we should be agile enough to spot these levels, validate them with the past price action, and use them as key indicators for our next move.
Combining Price Action with Yield Curve Insights
While yield curves might seem outside the scope of price action, they can provide crucial context for understanding the broader economic sentiment. For example, a rising 10-year yield typically signals expectations of inflation, which can influence trading strategies, especially for sectors like real estate and consumer goods. By keeping an eye on the 10-year yield, you can better understand market sentiment and adjust your strategy accordingly.
The Role of Double Bottoms and Rotation Zones
Price action isn’t limited to support and resistance; patterns like double bottoms and rotation zones can also indicate potential trade setups. In a double bottom, we’re looking for two low points that occur near each other, typically signaling a potential reversal in price. However, the pattern only becomes valid once we see a close above the peak between the two lows.
Rotation zones, meanwhile, are dynamic support and resistance levels created by moving averages. I personally use them to assess the strength of a trend. For example, if the price pulls back into the rotation zone and holds, that’s a strong signal to go long. It’s crucial to remember that these zones must line up with broader price action trends to be effective.
Trading Intel: A Real-World Example
Let’s look at Intel as an example. Suppose Intel has a gap in its price action, where it has recently entered and begun to fill. Statistically, gaps are likely to fill around 70% of the time. If Intel were to pull back into a rotation zone near the gap level and hold, that would be a signal for me to go long, with a target set at the top of the gap.
By aligning price action analysis with patterns like rotation zones and double bottoms, I can make more informed trading decisions. And by monitoring broader economic indicators, like the 10-year yield, I gain insights into market sentiment that can enhance the accuracy of my trades.
In Conclusion
Understanding and trading price action involves a mix of technical analysis, pattern recognition, and economic insights. The key is to identify significant levels, validate them with historical data, and then wait for the market to show its hand. It requires patience, discipline, and the ability to adapt to changing conditions.
Stay tuned for more insights in our future sessions. Remember, trading is about strategy and process, so keep refining yours, and you’ll continue to grow as a trader.
Disclaimer
Live Sessions (hereafter referred to as the “Content”) are produced by TradeZero. The Content may include the views and opinions of TradeZero and a third-party participant, Bob Iaccino. Bob Iaccino is compensated by TradeZero for participating in the Content. Mr. Iaccino’s trading experiences and accomplishments are unique, and your trading results may vary substantially from his. TradeZero is not responsible for and neither affirms nor endorses any of Mr. Iaccino’s views or opinions expressed in the Content. TradeZero makes no representations or warranties with respect to the accuracy of the Content or information available through any referenced or linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security.
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