WEEKLY SPOTLIGHT

Todd Mitchell

Price Action...The Reality and Truth of the Markets

By Todd Mitchell, TradingConcepts.com


As you may or may not know about me, I am a huge believer and strong advocate of Price Action – everything you use to make your trading decisions should be secondary to Price – certainly any technical indicators.  You will soon discover that Price Action alone needs to be the cornerstone and foundation from which a successful and long-lasting trading methodology is created.

You need to follow Price Action because everything known is reflected in Price. Markets are driven by human greed, fear, and panic, and all this is reflected in a chart – Pure Price Action!  Todd Mitchell

What I’m going to do in this article, is prove to you time and time again that the closest thing to a ‘holy grail’ tool for trading the markets is pure Price Action – besides, of course, what’s going on in your head.  I believe that once you read this article, you will be absolutely blown away by what you will learn, and you soon will wonder how you ever got by without using Price Action as your foundational trading tool.  But first, before I continue, let me give you…

Key Phrases and Truths that will help solidify how important PRICE ACTION is to your overall success as a trader.  Please read and learn them as if your financial future depended on it!

  • Price Action must always come first.
  • Price is never wrong – the market (Price) is right 100% of the time.
  • Price is the only reality and truth in the market.
  • The only indicator available to us that doesn’t lag is PRICE.
  • All technical indicators are derived from Price (i.e. open, high, low, and close) – so why not go straight to the source – PRICE.
  • All successful traders know how to read and how to interpret Price.
  • Pure Price Action of any market knows more than any Wall Street analyst or economist.
  • Good traders don’t have to know about what’s going on inside fundamentally of a stock, ETF, futures contract, commodity, forex currency pair – or any other market for that matter.  A chart is a chart is a chart – period.
  • Price is everything, and areas where Price has turned in the past are likely to be areas where it will turn again.
  • Price is reality and intelligence is the appearance:  We, as traders, are trading mob psychology. We’re not trading corn, soybeans, bond futures, stocks, options, or the forex market; we’re trading numbers reflected on a Price chart, and that’s all we’re doing.
     

“You don’t get any profit from fundamental analysis. You get profit from buying and selling.  So why stick with the appearance when you can go right to the reality of PRICE.” - Legendary trader Richard Dennis

Be In Sync with The Market

Alright, after reading through everything mentioned above, it’s pretty obvious I’m a huge proponent of Price Action; I can’t deny that. One thing you just can’t argue with is that the market (Price) is right 100% of the time, right?  I mean, think of it, it’s our job as traders to be in sync with the market, and when we’re not, we wind up losing money.  It’s as simple as that. You must understand completely what I’m saying here; once you do, I can assure you that not only will you become a much better trader, but also you will see your trading completely turn around; that’s 100% of this article’s focus. 

You see, too many traders get mad at the market when they’re wrong – like the market is human or something. Let me be the first to tell you, if you haven’t been told this already, the market does not care about you one bit; it does what it does, and it’s our job as traders to listen, watch, observe it’s natural ‘ebb’ and ‘flow,’ and trade it accordingly, right? 

So, by now, I hope the concept of using pure Price Action for your decision-making is clear. I urge you to stop watching TV and to stop looking at the financial news. Instead, start keeping track of the open, high, low, and close – because they are the key data you need to make (most) all of your trading decisions.

Take a look at the charts below; do you even know what these markets are by simply looking at them?  I highly doubt it.  You see, I’ve intentionally taken off the symbols and prices to prove a point; the point is; a chart is a chart is a chart – we’re doing nothing more than trading ‘mob psychology.’ The markets you decide to trade are irrelevant.  Markets can only do one of three things at any one time – move UP, DOWN, or SIDEWAYS, right?  Do you really need a bunch of indicators to tell you what they’re doing?  The answer is NO. 

Take a look at the charts below, and you’ll see exactly what I mean:

UP, DOWN, or SIDEWAYS

A Chart Is A Chart


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A Chart Is A Chart

A Chart Is A Chart Is A Chart

Tech Talk (Technical Indicators)

As you can clearly see from the above charts, price action alone should be at the core of your overall trading plan, because everything you use (indicators, moving averages, trendlines, etc.) is based on price.

Alright, let’s talk about Technical Indicators and what I personally think about them.

Before I go into anything specific, let me first start off by saying this: 

The only indicator out there that doesn’t lag is Price, and while so many traders embark on this never-ending search for the ‘Holy Grail’ of trading tools, it just does not exist.”

Now, I would like for you to read and re-read this statement until it completely sinks in before moving on, it is that important!

A picture, a chart in this case, is worth a million words:

Do you really need Technical Indicators to see what’s going on in this chart?

What I Call A “Spaghetti” Chart… Paralysis of Analysis!

You wouldn’t believe how many traders have come to me over the years and their charts look like the one directly above – what I like to call a ‘spaghetti chart’ (i.e. tons of indicators).  They’re all over the place, and not surprisingly, so are their trading results. What they think will give them more clarity in their trading, actually multiplies their confusion.  If the charts you are using right now even remotely resembles this, I highly recommend getting rid of this junk.  Clear the slate. Clear your head and start over.

I have yet to meet a trader that was consistently profitable for a significant amount of time by trading a barrel full on indicators thrown on a chart.

Indicators by themselves are merely tools… they will not make you a good trader.  There’s a lot more to successful trading than merely using technical indicators.  Believe it or not the simplest trading methods work the best and are the most robust – meaning that they work in ALL markets (i.e. Up, Down & Sideways). 

Too many traders, especially beginners, feel that by using more indicators will help make them more successful. Or stated another way, the more complex the trading strategy, the better they will do.  That is simply NOT true.  In fact, I would say it’s exactly the opposite.

Don’t get me wrong, there is nothing wrong with using technical indicators as long as you understand and accept that Price Action should come first. Therefore, the perfect blend is to be able to synthesize the natural ‘ebb and flow’ of the market (i.e. Price Action) with the use of a few carefully selected technical indicators, while knowing in which market environment to use them are absolutely crucial.

Alright, that’s the end to my rant and rave on using technical indicators… take what you will from it and let’s move on.

Crowd Psychology

Let’s talk briefly on Crowd Psychology and how that fits in here.

Crowd psychology is what drives markets, and that’s all it really is. It’s herd mentality (crowd psychology) that drives price change, not fundamentals.  It’s people’s belief of what’s going to happen in the future.  And fortunately, all these movements (up, down and sideways) are all reflected on a price chart.

The Economy

Let’s talk about the Economy and how you need to rationalize and think about it when it comes to your trading.

Whenever you try to justify or correlate the economy with the market, it’s never a good thing, because it never makes any sense.  You oftentimes see articles in the Wall Street Journal or Investor’s Business Daily saying, “Can this rally really be trusted?”  You see, that makes absolutely no sense to me whatsoever.

A rally is a rally – either the market is going up, or it is going down (or sideways of course) … it’s as simple as that.  Just because it’s happening within a crappy overall economy doesn’t mean it’s not happening.  Therefore, you really can’t successfully trade the markets by using this type of mentality.  And of course, the same statements are true in a big down trending market (i.e. the markets getting killed in an overall good economy). 

Remember, Price is never wrong – the market (Price) is right 100% of the time.  Price is the only reality and truth in the market.

Trading Is All About PRICE ACTION

Alright, I think you understand by now what my thoughts and feelings are about Price Action – and how very important it is to a successful long-term trading approach – so let’s move on.

So, at the end of the day, no matter what financial market you ultimately decide to trade, trading is all about PRICE ACTION. 

It doesn’t matter if you’re trading wheat, oil, gold, e-mini futures, stocks, ETFs, options, or the forex market… it’s all about Price Action.  You don’t have to look at volume, indicators, supply and demand, or fundamentals – the PRICE is what tells us what the fundamentals are.  Remember that PRICE IS KING.  Many successful traders believe price is the only thing that truly matters.  News, complicated technical analysis, and depth of market screens (and much more) only serve to distract us from the only thing that truly matters to the markets:  Price Action.

Remember, a chart is a chart is a chart!

Let Me Quickly Wrap this up by Repeating What I Said Earlier Since it IS So VERY IMPORTANT…

I have yet to meet a trader that was consistently profitable for a significant amount of time by trading a barrel full on indicators thrown on a chart.

Indicators by themselves are merely tools… they will not make you a good trader.  There is a lot more to successful trading than merely using technical indicators.  Believe it or not the simplest trading methods work the best and are the most robust – meaning that they work in ALL markets (i.e. Up, Down & Sideways). 

Too many traders, especially beginners, feel that by using more indicators will help make them more successful. Or stated another way, the more complex the trading strategy, the better they will do.  That is simply NOT true.  In fact I would say it’s exactly the opposite.

Don’t get me wrong, there is nothing wrong with using technical indicators as long as you understand and accept that Price Action should come first. Therefore, the perfect blend is to be able to synthesize the natural ‘ebb and flow’ of the market (i.e. Price Action) with the use of a few carefully selected technical indicators, while knowing in which market environment to use them are absolutely crucial.

I hope this article has been helpful and I truly hope it will make you think twice about making technical indicators your primary source of your trading decisions.

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ABOUT THE AUTHOR

Todd Mitchell

Author: Todd Mitchell, Founder
Company: Trading Concepts
Website: TradingConceptsInc.com
Services Offered: Trading Courses, Daily Trade Videos
Markets Covered: Stocks, ETFs, Futures, Forex

Combining powerful futures and stock trading strategies with sound trade and money management techniques, I have been able to help Individual at-home retail traders gain the power knowledge base that had previously only been available to professional institutional traders.