How to do the "Price Action Analysis "of Stock/Commodity for Trading ?

Price Action/Stock/Commodity/Support/Resistance/Breakout

One of the Interesting Subject if you are trader or investor in market is "Price Action". What is price action? How to do it? Why it is important? Today i will share importance of all such questions with practical examples on chart. If you are using any Technical Indicator then the base of that indicator is nothing but the "Price Action". Hence, before using any technical indicator it is important to understand concept of Price action.

Let's understand with simple example of our day to day life. When we go to market for buying vegetable, cloths,etc. What we do? First we check the product and if it is fine then we ask for price of the item and if we are not satisfy then we move to another seller. Again if not satisfy then another seller and so on. Lastly we start bargaining where both  buyer and seller decide to deal at one fix price to complete the transaction. And in future we use this price as base price for new deal. After few months price of that item started trading above your base price because of increase in demand and at that time we also have to accept that increased price because seller will not sell that product below current market price. And this is how price action works. In this example we have understand that there is increase in price and reason is "Demand".

Continue with same example, suppose after few months price of that product is drop at that time you may get same item at lower price than previous deal price. This time due to decrease in "Demand" price started trading down. Hence, it is clear that "Price Increase due to Increase in Demand and Decrease due to Decrease in Demand".

Now we have to apply same principle on Stock but methodology change. Price action analysis begins with identification of "Support" &  "Resistance". We have to check from where price reversed after fall that is what is known as "Support". And from where price reversed after rise that is known as "Resistance". The moment price break either Support or Resistance known as "Breakout" and directional trade can be taken here. See below image for Support, Resistance, Breakout.

(Above is Daily Chart of Nifty-50 where we can see support and resistance levels with each Higher High and Higher Low pattern formation in trending market.)


(Above is Daily Chart of Bank Nifty  where we can see there is strong support around 21000 and resistance around 22400 & 23000. In case of Nifty above it has formed Higher High and Higher Low price formation because nifty is in uptrend, where in case of Bank Nifty support and resistance level remain the same because it is in range bound market or we can say it is in consolidation phase.) 

(Above is Recent chart of Bharti Airtel where we have seen breakdown after long period of consolidation. From resistance level of 600 Bharti reversed several times and from Support of 550-540 it reversed back towards 580-600. And finally broke the support of 540. Now we can see distribution phase with lower low and lower high.)

From above example we can notice that near support level there is demand hence price start moving up and around resistance level there is supply hence price start moving down. Now question is why there is selling from Resistance level? There are two main reason first is no fresh buyer around resistance level, and second is profit booking by existing buyer. As a trader we have to track is there any breakout with new buyer entry and if so then we may go long. And is there any breakdown with new seller then we may go short. 

In case of Bharti Airtel above there is breakdown below 540 so those who already hold Bharti they start selling and those who wants to take fresh short they may also enter below 540, and therefore selling pressure start increasing. Generally price movement is high once there is breakdown or breakout and reason is unwinding or short covering by existing investor/trader plus fresh entry by new investor/trader.

Above is beautiful example of Consolidation and Distribution. It is Apollo Hospital recent daily chart. Price traded between 200 point range from 1460-1260 for almost 3 months and after breakout it moved 300 points in just 30 days. Who would have earned more ? Obviously those investor/trader who took position after breakout above 1460. Because in just 30 days price moved for 22% that is not bad at all. But to gain this what is required is patience and observation. And that is what a trader has to do. And the moment you get the opportunity of trade then take it without asking any one.  

Let's understand why Apollo Hospital moved so much in less period of time. From April'20 to July'20 it was trading in range of 1460-1260 means those who were buying around 1260 they might have booked profit near 1460 and those who shorted around 1460 they might have booked profit around 1260. They were under impression that Apollo Hospital will not break 1260 on lower side and 1460 on higher side. According to their trading set up they have decided to buy around support and sell around resistance. But the moment it has given breakout above 1460 the view changed and here new fresh buyer will enter along with those who were under impression that it will not move above 1460 they also join new upward rally and therefore buying pressure increased.

Importance of Volume:-

Volume is the key for perfect price action analysis. Volume decides everything. Those who are new trader in market they never look at the volume bar. One of the high performing indicator is "Volume". For any up coming breakout or breakdown volume is the first indicator that warns you before any technical indicator. Volume is Leading indicator. See below chart of Britannia Industries.

How to interpret above price action?. On daily chart there is double top kind of pattern is formed. First top on 21-7-2020 and second on 10-08-2020. And reason for not sustaining above 4010 is negative price action during 17th to 21st July'20. During these period selling volume was high that you can see in chart above. On 20th July'20 bullish candle formed with some positive volume but next day 21st July'20 fail to sustain above previous day and selling volume noticed. Means around 3760-4000 there is selling pressure and therefore on next top on 10th Aug'20 price fail to cross 4010 because on that  day volume was very low. Hence, unless we see positive high volume above 4010 then only we can see upward rally in Britannia. 

So from where Britannia start falling if double top pattern confirmed?. And that level is 3765. Accordingly to Double Top Pattern price start falling once it break low of double top pattern. And as per above chart low of pattern is around 3765-3750. So once it start trading below 3750 we may see increase in selling pressure. Now the question is who will sell?. Because already in this period sellers took position more than buyer. Then see candle of 20th July'20 here some buyers have took entry with positive volume. They are safe as long as price remain between 4000-3765 and they will start selling below 3765-3750 because their position will be in loss below 3765. And with them new sellers may join downside rally. Once it start trading above 4000 with positive volume then it start upward rally with short covering and fresh buying.

Volume played a important role in above chart. Those who were aware about volume analysis they would have not entered long on 10th Aug'20. And those who went long they might be trapped.


One more recent chart of "Muthoot Finance Ltd" here also same price action seen like Britannia. On 6th August heavy selling volume with bearish candle and therefore price fail to sustain above 1300 on 19th Aug'20. On 19th Aug'20 again selling pressure observed. Below 1080 we may see downward rally because there was huge buying between 1080 to 1409 during the period of 16-07-20 to 28-07-20 and currently trading at 1182. Above 1300 fresh upward rally may start because from here short covering starts with new fresh buying.

This is how price action analysis done with volume analysis. And why volume is so important? To know that we first have to understand who moves market?. Definitely big market players like FII/DII only. Only they people can move the market with positive or negative fund flow. And we have to just learn to identify where they are looking for opportunity. And then we have to take position according to their price action. They decide the tend of the market and we have to follow that trend. That is why "Trend Is Friend". Our role is identification of trend, support, resistance & breakout. And when you see this things on chart then confirm the same with volume that's all. 

The way i have explained above you can also do price analysis on any chart. When you look at the chart then don't look it as you want to see, that is the wrong way of chart reading. Look at the chart the way it is showing. Because there are many people in market who look at the chart according to their open position. If they are long then they only focus on upside movement and if short then downside. But that is wrong way whether you are long or short you should be ready for both gain or loss. If you look at the chart in correct way you may control your loss and protect from wrong entry.

Concept of "Demand  & Supply"  remain intact in every market whether it is Equity, Derivative or Commodity. See below recent chart of "Natural Gas" & "Aluminium". 

Above is 2Hr chat of Aluminium Future traded on MCX. Just yesterday price fail to sustain above 147.75 and went back to support area of 145-144.50. 


Above is 2hr Natural Gas Future Traded on MCX. Yesterday there was fighting with Buyers and Sellers because initially price moved from 181 to 172 with selling pressure and again from 172 to 181 with fast move. That shows buyers are more stronger than sellers. Seller took 5 hours to bring price from 181 to 172 and buyers just took 2 hours to bring price back to 181 from 172.

I hope you understand what price action is?. How to interpret it?. And why it is important?. 

Then start doing price action analysis from today itself and after sometime you notice that there will be no indicator on your chart except Volume. And when this happens you will finally ready to become master of trading.

All the best.๐Ÿ‘

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(Disclaimer: Above is my personal way of observation and analysis. This is neither Paid service not tip. Take your own decision before any transaction.)

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