What Price Tells You About the Market
Learning Objectives:
Understand how price reveals market psychology
Identify support and resistance levels
Recognize trend directions and strength
Read basic chart patterns
Interpret candlestick formations
Time: 60-90 minutes | Prerequisites: None | Difficulty: Beginner
What is Price Action?
Price action is the movement of a security's price over time, displayed visually on charts. It's the foundation of all technical analysis because price reflects everything news, earnings, sentiment, supply/demand, fear, greed.
Every indicator you'll ever use is derived from price. Understanding price action first gives you the ability to evaluate any tool or strategy.
Why Price Matters Most
Price is truth. Everything else is interpretation.
Volume shows participation, but price shows result
Indicators show momentum, but price shows actual movement
News creates sentiment, but price shows how traders actually respond
Key principle: Learn to read price first. Then add other tools for confirmation.
Support and Resistance: Where Price Reacts
What They Are
Support: A price level where buying pressure is strong enough to stop or reverse a decline. Resistance: A price level where selling pressure is strong enough to stop or reverse an advance.
Think of them as psychological barriers where traders remember past price behavior and act accordingly.
[DIAGRAM: Chart showing support and resistance levels with price bouncing]
Why They Work
Market memory: Traders remember where they bought/sold before.
Example:
Stock drops to $50, bounces to $60
Later returns to $50 � Traders who missed the first bounce buy again
Creates support at $50
Resistance works the same way but with selling pressure.
How to Identify Support/Resistance
Look for:
Price touches: 2+ touches = confirmed level
Round numbers: $50, $100, $150 (psychological significance)
Previous highs/lows: Price often returns to these levels
High volume areas: Where lots of trading occurred
Moving averages: 50-day, 200-day act as dynamic support/resistance
[CHART EXAMPLE: SPY with multiple support/resistance levels marked]
Support Becomes Resistance (and Vice Versa)
Critical concept: When price breaks through support, that level often becomes resistance.
Why: Traders who bought at support now want to "get out at breakeven" when price returns.
[CHART EXAMPLE: Support breaking and becoming resistance]
Strength of Levels
Not all levels are equal:
Factor
Strong Level
Weak Level
Number of touches
3+ times
1-2 times
Timeframe
Daily/Weekly
5-min/15-min
Volume at level
High volume
Low volume
Round number
Yes ($100, $50)
Random ($47.23)
TradeDots application: Our Chart Pattern indicator automatically identifies key support/resistance levels across timeframes.
Trends: The Direction of Price Movement
The Three Trend Directions
1. Uptrend: Series of higher highs (HH) and higher lows (HL) 2. Downtrend: Series of lower highs (LH) and lower lows (LL) 3. Sideways/Range: Price bounces between support and resistance
[DIAGRAM: Three charts showing each trend type]
Why "The Trend is Your Friend"
Statistics favor trading with the trend:
Uptrend: Higher probability of bullish setups working
Downtrend: Higher probability of bearish setups working
Sideways: Mean reversion strategies work better
Key mistake: Fighting the trend. Trying to pick bottoms in downtrends or tops in uptrends = low probability.
Identifying Trend Strength
Strong trend:
Clean higher highs/lows (or lower highs/lows)
Pullbacks are shallow (10-20%)
Volume increases on moves with trend
Price stays above/below key moving averages
Weak trend:
Choppy price action
Deep pullbacks (30-40%+)
Volume decreases on trend moves
Price crosses moving averages frequently
[CHART EXAMPLE: Strong uptrend vs weak uptrend comparison]
Trendlines
How to draw:
Uptrend: Connect 2+ higher lows
Downtrend: Connect 2+ lower highs
Validation: 3rd touch confirms the trendline
What they show: The rate of price change and support/resistance along the trend.
Breaks: When price breaks a trendline with volume, it often signals trend exhaustion.
[CHART EXAMPLE: Trendline draw and break]
TradeDots application: Buy Sell Signals V2 includes automatic trendline detection and break signals.
Chart Patterns: Visual Representations of Psychology
Why Patterns Matter
Chart patterns represent recurring behaviors in market psychology. They're not magic they work because traders recognize them and act similarly.
Key Continuation Patterns
1. Flags and Pennants (trend continuation)
Setup: Strong move (flagpole) � consolidation (flag) � breakout continuation
Psychology: Brief pause as early buyers take profits, then trend resumes
Reliability: High (70-80%) in strong trends
[CHART EXAMPLE: Bull flag formation]
2. Triangles (consolidation before continuation)
Types: Ascending (bullish), Descending (bearish), Symmetrical (neutral)
Psychology: Indecision narrowing to a breakout
Reliability: Moderate (60-65%)
[CHART EXAMPLE: Ascending triangle]
Key Reversal Patterns
1. Double Top/Bottom
Setup: Price tests resistance/support twice, fails, reverses
Psychology: Failed breakout � trapped traders exit � momentum reversal
Reliability: Moderate (60-65%)
Confirmation: Break of neckline with volume
[CHART EXAMPLE: Double top formation]
2. Head and Shoulders
Setup: Left shoulder � higher high (head) � lower high (right shoulder)
Psychology: Weakening momentum, buyers losing control
Reliability: High (70-75%) with volume confirmation
Target: Neckline to head distance projected down
[CHART EXAMPLE: Head and shoulders pattern]
3. Wedges (rising/falling)
Rising wedge: Higher highs but narrowing range � bearish reversal
Falling wedge: Lower lows but narrowing range � bullish reversal
Psychology: Momentum exhaustion despite price movement
[CHART EXAMPLE: Rising wedge breakdown]
Pattern Trading Rules
1. Wait for confirmation: Pattern is complete only after breakout 2. Volume matters: Breakouts need volume increase 3. Measure targets: Use pattern height to project move 4. Set stops: Below/above pattern structure 5. Context counts: Patterns in trends > patterns in ranges
TradeDots application: Chart Pattern & Market Structure indicator automatically detects and alerts on pattern formations.
Candlestick Basics
Understanding Candlestick Anatomy
Copy
High (wick) | ------- � Close (if green/white) | | � Body ------- � Open | Low (wick)
Green/White candle: Close > Open (bullish) Red/Black candle: Close < Open (bearish)
Body size: Shows strength of move (large body = strong, small body = weak) Wick size: Shows rejection (long upper wick = sellers rejected highs)
Key Single Candlestick Patterns
1. Doji (indecision)
Open = Close (tiny or no body)
Meaning: Balance between buyers/sellers
Context: At trend extremes � potential reversal
2. Hammer / Inverted Hammer (bullish reversal)
Small body, long lower wick (hammer) or upper wick (inverted)
Meaning: Sellers pushed down, buyers pushed back
Context: After downtrend = bullish signal
3. Shooting Star (bearish reversal)
Small body, long upper wick
Meaning: Buyers pushed up, sellers pushed back
Context: After uptrend = bearish signal
4. Engulfing (strong reversal)
Bullish: Green candle fully engulfs previous red candle
Bearish: Red candle fully engulfs previous green candle
Meaning: Complete sentiment shift
[DIAGRAM: Visual of each candlestick pattern]
Multi-Candlestick Patterns
Morning Star (bullish reversal):
Large red candle
Small-bodied candle (any color)
Large green candle
Evening Star (bearish reversal):
Opposite of morning star
Three White Soldiers / Three Black Crows:
3 consecutive strong candles in one direction
Meaning: Strong trend momentum
[CHART EXAMPLE: Morning star and evening star patterns]
Candlestick Trading Rules
1. Context is everything: Hammer in uptrend ` bullish signal 2. Confirmation required: Next candle should confirm the pattern 3. Volume helps: Patterns with volume are more reliable 4. Combine with support/resistance: Hammer at support > hammer mid-trend 5. Don't trade patterns alone: Use as confirmation with other tools
Price Action Psychology: What Moves Really Mean
Fear and Greed in Price
Fear dominates declines:
Sharp, fast moves down
Panic selling
High volume
Long red candles
Greed dominates advances:
Steady grinding moves up
FOMO buying
Increasing volume
Consecutive green candles
Indecision creates ranges:
Small candles
Low volume
Choppy back-and-forth
Doji candles
Reading Order Flow from Price
Strong buying pressure:
Closes near highs of the day
Small lower wicks
Gaps up on opens
Strong selling pressure:
Closes near lows of the day
Small upper wicks
Gaps down on opens
Balanced pressure:
Closes mid-range
Long wicks both sides
Overlapping candles
[CHART EXAMPLE: Annotated candles showing buying/selling pressure]
Institutional vs Retail Price Behavior
Institutional accumulation (smart money buying):
Quiet, gradual price increase
Low volatility
Volume increasing on up days
Higher lows forming
Retail FOMO (dumb money late):
Parabolic price surge
High volatility
Volume spiking after move
Everyone talking about it
Distribution (smart money selling):
Price stalling at highs
Volume on down days
Failed breakout attempts
Practical Application
Price Action Analysis Checklist
Before any trade, ask:
Trend: What's the overall direction? (with or against?) Support/Resistance: Am I near a key level? Pattern: Is there a recognizable setup forming? Candlesticks: What do recent candles tell me? Psychology: Is this fear, greed, or indecision?
Example Analysis
[CHART EXAMPLE: Full price action analysis on real stock]
Setup:
Trend: Uptrend (higher highs/lows)
Support: Price at rising trendline
Pattern: Bull flag forming
Candlestick: Hammer at support
Psychology: Shallow pullback in strong trend (healthy)
Conclusion: High-probability long setup. Multiple confirmations align.
Common Price Action Mistakes
Mistake #1: Ignoring Context
Error: Trading patterns without considering trend/structure Fix: Always evaluate "where are we in the bigger picture?"
Mistake #2: Overcomplicating
Error: Drawing 20 support/resistance lines on every chart Fix: Focus on obvious, well-tested levels only
Mistake #3: Pattern Hunting
Error: Seeing patterns that aren't really there Fix: Patterns must be clear and confirmed with breakout
Mistake #4: Single Timeframe Analysis
Error: Only looking at one timeframe Fix: Check higher timeframe for context, lower for entry
Mistake #5: No Confirmation
Error: Trading price action alone without volume/momentum confirmation Fix: Combine price action with at least one confirmation tool
Practice Exercises
Exercise 1: Support/Resistance Identification
Open TradingView � Pick 3 random stocks � Identify 2 support and 2 resistance levels on each.
Questions:
Why did you choose these levels?
How many times did price touch them?
Did any support become resistance?
Exercise 2: Trend Classification
Find 5 stocks: 2 uptrends, 2 downtrends, 1 sideways.
Mark:
Higher highs/lows (or lower highs/lows)
Draw trendlines
Identify trend strength (strong/weak)
Exercise 3: Pattern Recognition
Scroll back 6 months on any chart.
Find:
1 continuation pattern (flag, triangle)
1 reversal pattern (double top, head & shoulders)
Note: Did it work? Why or why not?
Exercise 4: Candlestick Reading
Analyze last 20 candles on a daily chart.
Identify:
Dojis (indecision)
Hammers/shooting stars (reversal attempts)
Engulfing patterns
Where they appeared (support, resistance, mid-trend?)
Key Takeaways
Price is the foundation of all technical analysis Support/resistance are psychological levels where price reacts Trends define the path of least resistance Patterns represent recurring market psychology Candlesticks show the battle between buyers and sellers Context always matters same pattern, different context = different probability Confirmation required price action works best combined with volume/momentum
Next Steps
Continue to: Volume Analysis to learn how participation confirms price moves.
Or jump to: Market Structure to see how price action organizes into larger trends and phases.
Ready for tools: After completing all Foundations, explore TradingView Indicators to see how our tools apply these concepts automatically.
Remember: Price action is a skill built through observation, not memorization. Spend time watching charts, identifying patterns, and understanding the psychology behind moves. The more charts you analyze, the better you'll become at reading price.