As a trader your goal is to profit from price movements. To do this you have to buy and sell at the right time. But it’s also very important to know when you should not trade and stay out of the market.
In this article you will learn what the 3 phases of price movement are and how to spot them.
I’m talking about the:
- Trending phase
- Ranging phase
- Transition phase
The price of an asset, like a stock or a Forex pair, goes through these three phases over and over. When you look at price in this way and learn how to recognize the different phases, you will get a much better understanding of what price action is.
Let’s have a look at each of these phases.
A trend will form when buyers or sellers are clearly in control over price. Or vice versa. Candles in a trend often have the same color and move in the same direction.
In the example of a trending phase above, we see a series of green candles that move in the same direction. In addition, they have small wicks at the top, indicating that the buyers are in control and the sellers currently have no power.
We are dealing with an uptrend here. Exactly the opposite applies to a down trend.
Trends are generally pretty easy to spot, but what about ranges?
A range is created when neither buyers nor sellers can give enough pressure to push price to continue in a certain direction. Neither of them is strong enough and price is basically trapped within two boundaries.
When the buyers try to push price up too far, they lose the battle to the sellers and vice versa.
Making profitable trades within in a tight range is very difficult. There is just not enough movement to benefit from. If the range is large enough there are possibilities, but I will come back to that later.
As you can see, ranges can be recognized by a lot of small candles. These are often indecision candles. Indicating that the market itself is indecisive.
Finally we have the transition phase. In other words, the transition in which a change of power takes place. This phase is much rarer than trends and ranges and they usually don’t last very long
Transitions occur at the end of the life cycle of a trend. If a trend stops you get a transition in power. Bulls win over the bears or vice versa.
In the example above, I have marked some clear transitions on the chart of the AEX (the Dutch stock market index). As you can see, this phase only lasts a short time and is often characterized by 1 or more indecision candles. This makes it easy to confuse transitions with ranges.
Fortunately, there are a number of criteria that you can use to distinguish between a range or and a transition. I will come back to that extensively later, because that is my specialty! 😉
For now I advise you to dive into your charts and then try to spot these three phases of price action.
If you have questions or the different phases of price movement, ask them in the comments.