By Brian Shannon, written with Kyna Kosling (@KayKlingson).

First published on September 13, 2025.

 

New traders often make the same mistake:

They think complexity equals profitability.

Worse, they resist simple concepts, confusing them as ineffective.

Here’s the reality:

Simplicity is the market’s greatest disguise.

…which perhaps makes complexity the market’s greatest deception.

Complicated systems are difficult to execute in real time — and therefore difficult to consistently make money with.

Besides, without a solid understanding of market structure,* you shouldn’t even think about progressing to more advanced indicators and oscillators, including the ⚓️VWAP.

I’ve seen too many traders look for patterns they’ve seen online or in a book, without questioning:

• • Whether they (still) work
• • How and why they work

*By “market structure,” I don’t just mean the four stages (although those are a good place to start!), but something more fundamental:

Price action itself.

Traders look for patterns, but rarely dig into what’s driving those patterns: The psychology behind them.

This leaves traders vulnerable to the gyrations of the market, because if you can’t anticipate price action, you’re reacting to it.

That’s when emotions take over—and emotional decisions rarely work in the long term.

On the other hand, traders who learn the psychology behind the patterns, so they can correctly anticipate price action and position themselves accordingly, are rewarded.

This is the art of trading.

In this phase of their journey, the trader is successfully making the rules of the market their own, thanks to a deep understanding of the science of technical analysis.

That’s when the trader starts seeing success.

But you can’t reach the ‘art’ phase without a strong understanding of market structure:

• •  How does price action work in the first place?
• •  What makes price move?
• •  What forms the foundation of the four market stages?

To answer those questions, let’s talk about what I refer to as the 6 Pillars of Price Action:

1. Only price pays™

We study price action because only price pays.

Every other indicator, including volume and AVWAP, is secondary to price. The only true measurement of success in the markets is price: Did you make money on the trade, yes or no?

That is the scorecard. That is how you measure failure or success in the markets.

Price action tells you what people are doing with their money—not what they say they’re doing with it.

A mistake I made early in my career was to read too much into the story behind a stock, believing my opinion mattered.

But people tell stories. Charts tell the truth.

When you learn to analyze price action accurately, you learn to trust what you can objectively see in the charts. Price doesn’t have an agenda—people do. This is why I’ve learned to trust charts.

And when you learn to do the same, you’ll build your confidence as a trader and be able to make ideas your own.

2. Price movement is purely a function of supply and demand.

Since the markets are an auction process, prices represent the levels/ranges where trades took place. That’s why I care about price: Because it reflects the true state of supply and demand.

Price tells me every opinion in the market, all at the same time. I don’t need to know what motivated individual decisions to buy or sell, which are influenced by innumerable forces.

I’m only interested in the overall balance of supply and demand—which is constantly shifting.
This leads to price being in a constant state of flux as participants seek the elusive ‘true value.’
Stock prices are rarely in an actual state of equilibrium, and unlike many consumer goods, price changes don’t lead to corresponding changes in supply or demand.

(In other words, supply and demand for stocks is ‘inelastic.’)

Whenever supply and demand are out of balance, however temporarily, price moves:

• •  If demand overwhelms supply (because enough participants believe the value of a stock is higher than the current price, so want to buy it), price moves higher in search of an efficient price to satisfy demand.
• •  If supply overwhelms demand (because enough participants believe the value of a stock is lower than the current price, so want to sell it), price moves lower in search of an efficient price to satisfy supply.

The greater the imbalance, the stronger the subsequent move in both magnitude and duration.

3. The market is a discounting mechanism.

Anyone who buys, does so because they anticipate price will go higher. Anyone who sells, does so because they anticipate price will go lower.

That expectation might be based on careful analysis or on pure hype.

That expectation may be proven right or wrong.

But no matter the participant’s level of experience or approach to the markets, the basic aim of every participant is to make money.

So, the market discounts the past and anticipates future events.

However, many participants haven’t fully internalized this fact, because they haven’t recognized how news is often released after the price has moved.

Markets are forward-looking. They usually move on anticipation (based on speculation, rumors, etc.), not on the news itself.

That might hint at someone acting on insider information. Equally, it can indicate that someone has done good, solid research, uncovering little-known facts.

Either way, “buy the rumor and sell the news” is repeated for good reason:

By the time the news comes out, the best opportunity is often* long gone.

For example, let’s say you have a sector that has been underperforming, and then bad news comes out about that sector.

Less experienced traders may then point to the news and say: “That sector is going to get crushed.” But they overlooked that the sector had already tumbled. The market anticipated the news—and because the sellers have already sold, a bounce becomes more likely.

The market is a discounting mechanism. So, to profit from market activity, your analysis must be anticipatory rather than reactive.

(*True surprises can still occur, in which case the market anticipated incorrectly, and supply and demand must rebalance—likely through volatile price change.)

4. Price isn’t just the effect, but also the cause.

Since price movement is purely a function of supply and demand, price is the effect.

But how often do you see a stock gap down on good earnings? Or gap up on poor earnings? Or even make a sharp move with zero news on the company?

Most people then turn to the news to discover the ‘reason’ for that move…

…except the media is in the business of selling news, so when it can’t find a reason, it’ll create grand stories or weave a complex narrative.

For example, a journalist might (ignorantly) declare that a conference in another state, which discussed a competitor, caused the price movement.

Realistically, that’s a stretch: Most trading volume can be attributed to algorithms. And while a news catalyst might be the reason the algorithm is programmed, it’ll be executed based on technicals, not on news—whether it’s earnings, tariffs, trade deals, or any other fundamental price catalyst.

Price itself can cause the move.

Price can be the ‘news.’

For example, breakout traders might set a price alert just before a specific breakout level. And as price crosses that level, this can be enough to prompt a meaningful group of market participants to buy.

That makes price not just the effect, but also the cause.

Think about this:

We have 242 trading days a year.

Company-specific news comes out perhaps 20 days a year.

Yet price moves every single trading day—including those 200+ days a year without company-specific news.

Shifts in supply and demand can, by themselves, cause price to continue moving in the direction of the trend—because selling begets selling, and buying begets buying.

These patterns are often driven by emotions like fear and greed. After all:

5. The only true constant in the market is human nature.

People act, react, and overreact in similar ways to repeating situations.

This human predictability gives the market an overall structure—the various stages within the life of each stock:

• •  Stage 1: Accumulation. The process of the buyers gaining control from the sellers.
• •  Stage 2: Markup. The bullish phase of a stock’s life, defined by higher highs and higher lows.
• •  Stage 3: Distribution. The process of the sellers gaining control of the buyers.
• •  Stage 4: Decline. The bearish phase of a stock’s life, defined by lower highs and lower lows.

Each stage within a stock’s life is characterized by certain emotions:

Psychology of the long and short holder at various stages of the cycle.

This cycle repeats in the market over and over, because it reflects what participants tend to do in specific, repeatable situations.

This human behavior forms the basis for the study of price action. It also makes technical analysis a tool for gauging the collective psychology of all participants (‘crowd psychology’ or ‘crowd behavior’).

So, don’t just memorize price patterns—humanize the charts.

Ask questions like:

• •  How would I feel if I was long from [$20], and price gapped down 5% tomorrow?
• •  How would I feel if I was in cash, looking to get short—where might I enter?
• •  How would I feel, and what would I do, if I was short?
• •  If support breaks, who gets trapped? Where will stops get hit?
• •  How about if resistance breaks? Could that turn into a trap?

By analyzing the psychology behind price patterns, you can plan and execute your trades with more confidence.

Don’t think of patterns as GPS coordinates, pinpointing the market’s exact next move.

Think of patterns as smoke signals: Easily distorted by changing conditions.

Patterns can fail outright.

Patterns can morph into other patterns, with potentially the opposite expectation from the original pattern.

The only true constant in the market—human nature—is nebulous: It creates recurring patterns within the markets, on all timeframes, but without any guarantees those patterns will play out as expected.

That’s why risk management is non-negotiable.

6. Markets possess fractal properties.

The repeating patterns we can observe across all timeframes reveal the fractal nature of the market.

Notice the similarity of the pattern on different timeframes (i.e. at different levels of magnification). Furthermore, the pattern had the same significance on both timeframes: The break of resistance led to a quick move higher on both timeframes.

But the fractal properties in the market don’t stop at seeing the same patterns at every level of magnification.

Markets exhibit three key fractal characteristics:

1⃣ Self-similar patterns at different levels of magnification.

The repeating patterns in the market are the same (or similar) across different levels of magnification.

But more than that, they’re also self-similar.

In other words, when you take a pattern on, for example, the daily timeframe, then zoom into a section of that pattern, that section can look similar to the overall pattern.

This property (known as ‘self-similarity’) is a key characteristic of fractals in general.

Self-similar patterns also appear in the markets, because when people put their money on the line, the emotions they go through are independent of the timeframe.

In aggregate, this tends to make their actions predictable—because every participant is looking to either make money or avoid losing it.

Traders can take advantage of this in several ways. For example:

• •  Observe price action on intraday timeframes to learn market structure faster. (Note: DON’T participate intraday unless you’re skilled at this type of trading!)
• •  Look at multiple timeframes so you can observe the trends within trends revealed through the market’s fractal structure.

By looking at multiple trends, you improve the accuracy of your analysis. This allows you to time entries and exits better and capture more of the opportunity, gaining an edge over single-timeframe participants.

Another key characteristic of fractals (in general) is how the patterns aren’t just self-similar, but also able to endlessly repeat themselves.

That’s because the output of one ‘step’ becomes the input for the next. Does that remind you of anything in the markets?

Hopefully, you were thinking about an earlier Pillar: Price isn’t just the effect, but also the cause.

⚓️ Each price movement creates the conditions for the next price movement.

The market constantly feeds back on itself. That’s how, for example, price has a memory: Support, once broken, often becomes resistance, and vice versa.

⚓️ This type of iteration and recursion is also reflected in the cyclical nature of the market.

After a stage 4 decline, we expect a quiet period of stage 1 accumulation, before going into a stage 2 uptrend, followed by stage 3 distribution, which breaks down into another stage 4 decline, and so on.

That repeating emotional cycle is caused by our one true constant in the markets:

Fractals in nature (think mountain ranges, coastlines, etc.), in spite of their self-similar, repeating patterns, still have an element of chance.

That reflects the natural force that produced those patterns. The shifting of tectonic plates, for example, aren’t 100% predictable—they just occur with enough regularity that we can still observe similar patterns at different scales.

This is also how markets behave. Fundamentally, markets represent how humans respond to different price stimuli or other information—and so humans become the force behind price patterns in the market.

But keep in mind that patterns aren’t 100% predictable, for a couple of reasons:

• •  Much like nature itself, human nature is a nebulous force. People tend to act in similar ways in repeating situations, which allows skilled traders to anticipate and capitalize on price fluctuations. However, humans aren’t 100% predictable.
• •  As mentioned earlier, true surprises happen in the market, which can cause volatile price action as supply and demand rebalance.

Markets always involve risk, so risk management your #1 job. No matter how careful your analysis, you have no guarantees that a pattern will play out as expected.

Again, don’t think of patterns as GPS coordinates, but as smoke signals.

You now have a simple, strong foundation in the study of price action.

These 6 Pillars of Price Action individually highlight truths of how markets fundamentally work.

More than that, they interact with each other to collectively get to the foundation of technical analysis and market structure. With this foundation:

• •  You won’t need to be told what to do—you can make ideas your own.
• •  You can build strategies based on how markets actually behave, understanding both their structure and their inherent unpredictability.
• •  You can use tools like AVWAP

Master these fundamental Pillars to learn not just the science of technical analysis, but the art of trading—in any market, on any timeframe.