The Three Levels: What Truly Moves a Stock
This playbook is here to help. If you’re new or still finding your feet, you’ll get real, practical value from it. If you’re experienced, you’ll recognize a lot, but you may still catch a fresh angle, a small tweak, or a subtle shift that makes a difference.
The heart of it is simple: take what speaks to you and make it your own. Trading is personal. We all see the market differently. We move on different timeframes. We carry different risks, routines, strengths, and flaws.
There is no single right way. There is only your way.
Use what follows to sharpen your process, not to replace it.
Keep what resonates.
Let go of what doesn’t.
Build a style that fits who you are.
That is the most important thing.
Introduction: The Signal in the Noise
Embarking on the journey of becoming a modern investor, you are inundated with information. The digital storm is relentless with tickers, 24-hour news cycles, and an army of self-styled authorities screaming from the social media rooftops with their secrets, shortcuts, and can’t-miss opportunities. They will reference the economic reports, geopolitical conflicts, the latest tweet from the company CEO, or a new sophisticated indicator they “discovered.” For the newbie investor, and even for many experienced traders, it constitutes an environment of extreme information overload. In this complaint, it’s easy to conclude that the answer to the holy grail of market profit lies somewhere in that frenzy; that if you could just acquire more information, or have one more subscription, or a new obscure indicator, you would have the formula that would unlock the market.
That is the holy grail of the market. The idea that complexity equals sophistication is a seduction that many novice traders have fallen victim to.
At the end of the day, the market is expressing something more primordial, more broad-based than important news or economic release. It is speaking the universal language of human emotion, in its raw form—the undistilled, drunken expression of collective greed and fear from millions of players. And, every scream, every holler, every affirmation of this language is not being recorded in an analyst report but instead directly inscribed on the price chart.
The price chart is the only ultimate truth.
A price chart is the battleground where the fight between buyers (bulls) and sellers (bears) is being conducted in real time. As almost all professional traders say, price action is the “footprint of money.” Every transaction involves individuals, from a small retail trader to the hedge fund’s billion-dollar transaction, leaving footprints. These footprints create a path we can follow.
This is how you move from being a gambler tossed by the waves to a captain who harnesses the wind.
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Price Action: Deciphering the Market’s Narrative
Price action trading is a methodology of pure simplicity.
Essentially, it is the practice of constructing your trading decisions from a “naked” price chart. This means disposing of the clutter (the lagging indicators such as RSI, Stochastics, and MACD) that too many traders incorrectly depend on to dictate their trading decisions.
These indicators are derivatives of price; they are telling you something that has happened already. Price action has a vantage point, as it is 100% current price reading: it is like reading the story for yourself. You read the current market sentiment and then make your guess on whether the price will continue in either direction with greater accuracy, sitting right on top of the price structure.
To be successful in price action, we need to read the market in three critical areas: learning to read the chart in an individual signal, reading the chart in market structure, and seeing when those two components motivate you at a point of confluence.
Level 1: The High-Probability Signals
While all candlestick patterns tell a story, a few of them carry more weight than others. These patterns are high-probability signals that act as triggers for entry. Think of them as not bullet-proof prediction points, but rather as a common plot twist in the market story with a consistent outcome. Below are three of the strongest.
The Pin Bar: The Pin Bar can be seen as the most powerful single-candle signal. It features a very long upper or lower wick (the “tail” or “nose”) and a small body. The story is one of an intense and violent rejection of a price level.
A bullish Pin Bar has a long lower tail. The story: Sellers took charge early and slammed the price down, but at the lowest point, a big wave of buying came in and did not only stop the move down, but slammed the price back up to close near the open. A failed bear attack and a very strong signal that the bulls can now be in charge.
A bearish Pin Bar has a long upper tail. The story: Buyers confidently ripped through the market, only to find an invisible wall of supply. The sellers absorbed all the buying pressure and slammed the price back down to where it started. A bull trap, and the signal that the path of least resistance is down.
Bullish Pin Bar (Left) & Bearish Pin Bar (Right)
The Inside Bar: An Inside Bar is defined as a candle (or candles) that is fully encompassed in the high-to-low range of the previous candle (the “mother bar”). The basic message is consolidation, indecision, and declining volatility. The market is resting. This is not weakness, but energy is being built up. Just as a spring coils, we find compression of price action tends to precede a strong expansion. An Inside Bar strategy is to wait for the price to break the mother bar’s range, and then use that breakout to follow the movement afterwards. Most low-risk swing strategies are built on this core concept. Furthermore, a particularly low-risk entry point can often be identified when a series of consecutive inside bars forms. This creates a very tight consolidation pattern, sometimes resembling a small flag on the chart. This coiling of price action signifies an even greater buildup of energy, suggesting that the eventual breakout from the mother bar’s range is likely to be powerful and decisive, offering a higher probability trade.
Undercut & Rally vs. The Fakeout: This set of patterns is highly advanced and even more powerful because they identify the raw element of market manipulation. The market is a zero-sum game in the short term, and large institutions (the “smart money”) often create liquidity by engineering moves designed to trick the majority of traders. They feign in one direction to trigger a cascade of stop losses and attract emotional breakout traders, only to reverse the price violently, leaving those traders trapped. Learning to identify these patterns is like learning to spot the trap before it’s sprung, allowing you to trade with the manipulators, not against them.
The Undercut and Rally (The Bear Trap): Imagine a market that has been consolidating, building tension like a coiling spring near a well-defined support level that everyone is watching. The trap is sprung when the price suddenly breaks below this floor. This move is designed to look like a catastrophic failure of support, creating a moment of panic. It triggers the stop-loss orders of traders who were holding long positions, and simultaneously, it entices aggressive breakout sellers to jump in and short the market, anticipating a much deeper slide. Just as these sellers feel confident in their new position, the selling pressure evaporates. The move was a feint. The price then reverses with shocking speed, surging back above the very support level it just violated. The sellers are now instantly trapped in a losing trade. What follows is an explosive rally, fueled by a powerful dual-engine: the aggressive buying from the “smart money” that engineered the undercut, and the frantic panic-buying from the trapped short-sellers who are now desperate to cover their positions, adding more fuel to the fire.
The Fakeout (The Bull Trap): This scenario unfolds as a stock presses up against a clear and obvious resistance level. Anticipation builds among traders waiting to buy the breakout. The trap is set when the price bursts through this ceiling in a surge of buying activity. It looks like the start of a powerful new trend, and it acts as a siren’s call to breakout buyers who pile in, chasing the momentum. At the same time, any short traders are forced to capitulate and buy back their positions, adding to the upward momentum. But the advance is hollow. Just as the new buyers feel the thrill of a winning trade, the buying momentum vanishes and the move stalls. The price then slices back down below the resistance level, which has now become a ceiling once again. The breakout was a sham. All the traders who bought the move are now trapped above the market, holding a losing position. The subsequent decline is often swift and severe, propelled by the heavy selling from the large institutions that happily distributed their shares to the eager crowd at the peak, and compounded by the panic-selling from the trapped bulls who are now scrambling to get out.
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Level 2: Reading Market Structure
A high-probability price action trigger, such as a Pin Bar or Undercut and Rally, is like a perfectly crafted key. However, a key is worthless if you don’t know what door you are trying to open. The market’s underlying structure is the blueprint that tells you what doors are locked, what doors are traps, and what doors are waiting to swing open. A trigger is a momentary occurrence; the structure is the context that trigger is occurring in. Traders fail because they trigger a strong buy signal in a market that structurally is collapsing. Traders succeed when they get the same buy signal exactly when the market is coming out of a long term base to a new uptrend.
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