Price Action

*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11:15am 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. If you’d like to save your seat to watch and participate in the next session, register here.

At its core, price action involves observing the historical movement of prices to inform trading decisions. This approach excludes the use of technical indicators or trading algorithms. Instead, it relies solely on the analysis of price movements. While I do utilize a few indicators to support my conclusions, the key here is to let the price itself dictate the next move.

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. I’ll share my approach to price action and how you can leverage it to improve your trading strategy.

It’s important to recognize that certain price action patterns can offer early clues about market behavior. From reversal signals to continuation setups, observing how price behaves around key levels can give traders a tactical edge. By training your eye to spot these patterns in real time, especially when they align with the broader market context, you can develop a more disciplined and responsive trading approach.

• 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.

• Pin Bars

Pin bars are one of the clearest visual cues of price rejection. They appear as candlesticks with a long wick and a small body near one end, signaling that the market tested a level but ultimately rejected it. A bullish pin bar forms when the price dips below support and then quickly reverses, closing near the top of the range. This suggests buyers stepped in aggressively. A bearish pin bar, on the other hand, indicates rejection at the resistance level. These patterns are most effective when they appear near established support or resistance levels, reinforcing the idea that those levels are meaningful.

• Inside Bars

An inside bar forms when the entire range of a candlestick is contained within the high and low of the previous candle. This pattern typically reflects a period of consolidation or indecision in the market. However, once the price breaks out of that range, it often results in a strong directional move. Inside bars near support or resistance can be especially powerful. For instance, if price consolidates just below resistance with multiple inside bars, a breakout above that zone may indicate a potential trend continuation. The key is to wait for confirmation before entering a trade based on this setup.

• Engulfing Candles

Engulfing candles signal a potential reversal in market sentiment. A bullish engulfing pattern occurs when a small bearish candle is followed by a larger bullish candle that completely covers the body of the previous one. This suggests that buyers have regained control. The opposite is true for a bearish engulfing pattern, which signals potential downward momentum. When these patterns form at or near significant support or resistance levels, they offer strong signals that a change in direction may be underway. They are especially valuable when paired with increased volume or broader market catalysts.

• 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 signalling 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.

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.

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.

Many professional traders rely heavily on price action as a core component of their trading strategies. While institutional desks may have access to advanced analytics and proprietary algorithms, experienced traders often start with the same foundational elements including key levels, candlestick formations, and pattern recognition. Price action provides immediate, real-time feedback on market sentiment, eliminating the lag of indicators, which is crucial when managing prominent positions or trading in fast-moving markets. Even when pros incorporate indicators or quantitative models, price behavior often serves as the final confirmation before executing a trade.

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.

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.

This content (the “Content”) is produced by Bob Iaccino. The Content represents the views and opinions of Mr. Iaccino. Bob Iaccino is compensated by TradeZero for participating in Live Sessions and for broadcasting, displaying, and/or presenting marketing and sponsorship materials that promote TradeZero. 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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