02 Sep How to Analyze Historical Price Action

In order to know how to trade futures, or any finan­cial instru­ment for that mat­ter, it’s impor­tant to know the his­to­ry. In par­tic­u­lar the his­tor­i­cal data on the behav­ior of price action. 

His­to­ry belongs to the victor

They say ‘his­to­ry belongs to the vic­tor’, well I hope that’s true about trad­ing. Many pro­fes­sion­al traders men­tion that his­to­ry in trad­ing tends to repeat itself. If we believe this to be true then it would mean we stand to ben­e­fit from ana­lyz­ing past price action. Yet, I find it hard to find any approach­es on how to ana­lyze just this. So is this, because it’s not impor­tant, or have I just found the ‘holy grail’ of trad­ing? Let’s find out.

Not Back­test­ing (yet)

I see traders talk­ing about how valu­able it is to do back­test­ing and I do agree. Once you have a strat­e­gy that is. But what if you don’t have a strat­e­gy yet. What do you do then? I know most peo­ple look to oth­ers to find answers. But what if you can go out and find them for your­self. That’s my pur­pose with ana­lyz­ing past price behav­iour. I can’t find any­thing on this on Google. The only thing that comes close to it is back­test­ing. But as I men­tioned before. If you don’t have a strat­e­gy to test it back on, why not start by just observ­ing past price action to poten­tial­ly come up with a strategy?

Past Price Action Analy­sis (PPAA)

PPAA is what I’m call­ing it for now. I know, cool name right 😉 My inten­tion is to observe past price action based on cer­tain cri­te­ria. My goal with this is to find pat­terns in how a cer­tain finan­cial instru­ment is trad­ed and ulti­mate­ly find my strat­e­gy of trad­ing them. So how do I go about this?

Set­ting the criteria

Many traders have made up their minds on what works for them. There seems to be a divi­sion between the ones that pre­fer tech­ni­cal analy­sis and the ones pre­fer­ring fun­da­men­tal analy­sis. I believe that what­ev­er works for you, is your truth. I have no right to say that one is bet­ter than the oth­er because nobody can make such a state­ment. Your trad­ing style and the time­frames you are trad­ing in define the flow of infor­ma­tion analy­sis that lead you to make a ‘pre­dic­tion’ of that par­tic­u­lar sit­u­a­tion. The way you process that infor­ma­tion is a big part of that flow. So how do we set these cri­te­ria? Well, that’s up to you real­ly. By this point you might already know some tools or indi­ca­tors on trad­ing I sug­gest you start with these. I can only tell you what I am start­ing with.

Excit­ing stuff!

Let’s get down to do some price action observ­ing! Sounds excit­ing?! Prob­a­bly not. How­ev­er, I do believe to get good at any­thing you need to first under­stand it. How can we start? Take a look first and fill your brain with lots of data. Then draw con­clu­sions from your data and then test your con­clu­sions to see if you can repli­cate them. I sim­ply cat­e­go­rize these as, Observe, Ana­lyze, Test. But before we get start­ed. It might help to know why we are doing this in the first place. I present to you… the goal.

THE GOAL

Pat­tern hunting

In order to know how some­thing behaves. In this case price action. We need to look at it. Sounds sim­ple right? Stay with me. Before we can see pat­terns we need to col­lect the data. Then we need to process this data in a way that makes sense. And only then… we get to glance upon our work and try to pick the fruits of it. At the very least, we will have a more in-depth under­stand­ing of the market.

So here it goes…

Observe

To under­stand how the tech­ni­cals and fun­da­men­tals behave in a mar­ket we need to have an approach for learn­ing these. At this point I assume that you already know what the dif­fer­ences between these two are. In short, tech­ni­cals is all about what infor­ma­tion you can find in the charts, where­as the fun­da­men­tals are things like sup­ply and demand num­bers, basi­cal­ly what they talk about in the news (not cor­rect for all finan­cial instru­ments, but go on and Google it). Fur­ther­more, I assume that you know the very basics of the following:

• can­dle­sticks
• sup­port and resis­tance areas
• chart pat­terns
• Fibonac­ci retracements

There are many oth­ers that I know but I am going to start with these. Believe me this is already a lot of data to be col­lect­ing and processing. 

So where to start looking?

In this part we are going to fill that mag­nif­i­cent brain of ours up with infor­ma­tion. In order to do that we need to first set the para­me­ters. Para­me­ters like:

1. Time peri­od to observe
2. What tools are we going to use to col­lect mea­sured data with?

Time Peri­od

I didn’t base the time peri­od I was going to observe and then ana­lyze on a cer­tain amount like 1, 2 or more years. I did this pure­ly based on visu­al infor­ma­tion of the dai­ly chart that I looked at. This is the chart I was look­ing at. 

What stands out?

Imme­di­ate­ly when look­ing at this chart I noticed some points that drew my atten­tion. Points where prices would ‘hov­er’ for a bit and points where they reversed only to go back down just as fast they went up. If they aren’t clear to you already, here is what I meant.

What’s going on?

I looked at these points and thought to myself ‘what’s going on at these points?’. What drove prices to behave in this way. So I set out to find out. But before we can reach to any con­clu­sions we need to know how we’re going to measure.

How to measure

For all these points of inter­est I con­clud­ed that I need to find a way to mea­sure them and there­fore I need to ask myself what do I want to know? This is what I came up with.

1. What can­dle­stick for­ma­tions are there?
2. How many pips did prices move after a break out?
3. What are the time dura­tions of those moves?
4. At what time did the moves occur?
5. How do the Fibonac­ci retrace­ments look like when mea­sur­ing these moves?
6. And many oth­er ques­tions we can ask but believe me when I say that this is enough data col­lect­ing for now.

Since trad­ing is a very indi­vid­u­al­is­tic endeav­our I leave to you from which points to which you would like to mea­sure. For exam­ple, some peo­ple mea­sure from the end of the can­dle­stick wicks and some from the ‘real body’. 

Choosing your tools

So how we get down to choos­ing the right tool. Let’s break it down per point as dis­cussed above.

Can­dle­sticks

In order to know what can­dle­stick for­ma­tions there are we need to know about them in the first place. Don’t know yet? Google! Alright alright… here I’ll make your life a lit­tle eas­i­er. CLICK HERE :)

Mea­sur­ing tool

Every chart­ing soft­ware has a tool with which to mea­sure moves with. In Meta­trad­er 4 it is this tool:

This tool will mea­sure the dis­tance in height (pips) dis­tance in width (time) but also tell you what times they occurred. 

Fibonac­ci Retrace­ment Tool

Every self-respect­ing chart­ing soft­ware should give you the use of the Fibonac­ci tools. With these tool we are going to mea­sure the retrace­ments of cer­tain moves to see if we can find pat­terns in these as well.

Brain overload!

Now that we have estab­lished what we are going to mea­sure and with which tools to mea­sure them with. We are going to… you guessed it… do the ‘dirty’ work and actu­al­ly do the work. In anoth­er post I will dis­cuss how to process the infor­ma­tion, if you haven’t found pat­terns your­self already that is. And I will tell you how I will test my con­clu­sions. For now I leave you with this because it can­not be empha­sized enough…….

DO THE WORK

If you have any ques­tions or com­ments or just want to call me a d*** be my guest and leave your com­ments. If I can, I’ll always help any­one reach­ing out.