Predicting Price Action

What sets professional traders apart from amateur traders is that professional traders are able to predict price action and trade accordingly instead of continually chasing moves like amateur traders. By predicting price action, these professional traders are able to gain entries into markets before the bulk of the move occurs. In contrast, amateur traders are only drawn to the market after large price moves have occurred and they try to chase the market. By the time amateur traders gain an entry into the market, the professional traders are already unloading their position and ringing the cash register.

If you study price charts, you will start to notice that small, low volatility candles usually form before a large price move occurs. This is generally where the professionals are getting into the market as they are predicting the price to move in a certain direction. Then once the moves start to unfold, you will notice large candles forming in the predicted direction. Amateur traders see these large candles and think wow, look at that move; I have to gain an entry. They chase the market and get in after the move has already occurred. What happens then is the professionals start taking profits which forces the market to pullback, stopping out all the amateur traders who got in too late.

Looking at the chart below, we can see Oats in a nice downtrend on the weekly chart with small candles in the sell zone. This is where professional traders may be looking to gain an entry short as they are predicting that price is going to sell off.

The after shot below illustrates how price had a strong move down from where it was, resulting in a large candle. Professional traders will have profited from this move and amateur traders would have entered into this market once the move had already occurred.  

If you can take one lesson away from this article, it would be to ensure you concentrate on predicting price action instead of chasing moves. Focusing on predicting and reading the charts before the move occurs will ensure you start trading like a professional instead of getting sucked into overextended markets with large candles like a majority of amateur traders out there.

Happy trading!

The TWP Team