A lesson in pure price action: Context of supply and demand

I want to begin dissecting how to read price action in the context of supply and demand. In my personal trading, I do not use any indicators because I know how to read pure price action. It tells you everything you need to know. It informs you when and where the buyers and sellers are stepping in and out of the market. Now, that doesn’t mean you can’t use indicators to increase your probability, but, if you can learn how to read price action it will make you less reliant on indicators and an overall better trader. Just think, if you can read the market without any indicators, you will be a much better trader when you start to add a couple of your favorite indicators that already work for you. So, let’s start to look at a couple of examples of how I read price action. Just note, that this works on all asset classes and all time frames like the 1m, 60m, 4h, daily, weekly, monthly, etc.

After price makes a significant move in either direction, there is always a pullback (or consolidation). When price pulls back to an opposing area of supply/demand, if the original direction is going to continue, you want to a see a new low or high created which you can see in the example below.

But what happens when a new low/high is not created? When price pulls back to a supply/demand level and fails to create a new low/high, that often (not always) means that price will do one of two things: price will either go deeper into the original supply/demand level or it will go through that level. Let’s take a look at an example of each.

In this 1^st example (below), we can see an area of supply was formed and made a move lower, then price pulled back into that supply. Now, if the sellers are really starting to take control, we should see price react strongly out of that supply, creating a new low as it breaks the most recently formed pivot. As you can see that did not happen, price failed to create a new low and then went higher to retest that area of supply. In this case, since that area of supply had been all used up (a wick was formed that took out the entire level) price went higher, breaking through this area of supply.

In the 2^nd example (below), price fails to make a new high (because it never broke the most recently formed pivot) after pulling back to demand. Price then pulls back deeper into the demand level and fails a 2^nd time to make a new high. On the 3^rd test of the demand level, price breaks through it.

Notice the difference between the 1^st example and the 2^nd one – in the 1^st example when price pulled back, it cleared out the area of sellers because it pulled back to the top of the supply level, leaving no sellers behind, allowing price to break cleanly through it. In the 2^nd example, price barely touches the demand level, leaving behind a lot of buyers still waiting there when price returned. When price did finally break through, it wasn’t as clean as in the first example because there were still buyers in that area, just not enough to cause a significant turn in price.

This is price action in its purest form. You do not need indicators if you know how to read price action. That doesn’t mean you can’t use indicators, but once you know how to read price action, you will use them for their more beneficial purpose, which is to increase probability, not tell you when to buy or sell. Indicators are not reliable on their own, but when combined with price action they will be much more effective. Now, price action can go a lot deeper than this. At a later time I will get more in-depth on how this type of analysis can be actionable for you.