Five rules of price action — distance from the average, and what tight ranges mean
Rules are cheap to state and expensive to obey, and the reason people disobey them is usually that nobody told them the mechanism. “Don’t trade far from the average” sounds like caution; read as a short signal it becomes a way to lose money slowly. This lesson takes the five rules exactly as our course states them, puts a chart under each — four of them the course’s own TradingView screenshots — and attaches a number to each: how far is far, what a zone is worth in R, what a tight candle buys you, where the body of a long candle is drawn and why. One measurement in the middle reorganises the first rule, and it is the part most write-ups get backwards.
The five rules as five sketches. Rules 1 and 4 are the same average seen from two distances; rules 2 and 5 are both about where a stop can be placed cheaply; rule 3 is about time. Schematic only — every measured claim below sits on a chart with its own numbers, four of them the course’s real screenshots.
KEY TAKEAWAYS
- “Far” has a size. Two standard deviations of the price-to-average gap is about 2.0% for a 20-period average, 3.2% for 50, 4.6% for 100, 6.5% for 200 — roughly 3, 5, 7 and 10 average candles. Price is that far about 4.5% of the time, whatever the length.
- The average walks to the price, not the other way round. When a two-sigma gap closes, the average’s move accounts for 78–83% of it and price’s move for 17–23%, over a median wait of 11 / 25 / 49 / 101 bars for the four lengths. That is the reason rule 1 says avoid rather than fade.
- A zone makes the risk the zone’s thickness. On the course’s LTCUSD chart the buy zone is 4.41 wide (3.39%) and the swing above it 12.72: 2.59R from the zone’s top, break-even 27.9%. Risk is 34.7% of reward because it is measured across the zone, not across the move.
- Rule 4 is rule 1 seen from close up. The same average, once price is hugging it and printing a narrow candle, gives a 2.0-candle stop instead of a 3.6-candle one: 1.44R becomes 2.25R, and $50 of risk buys 1.8× the position.
- A long body’s zone is the body. Open to close, not high to low — 9,050–9,400 in the example, six average candles tall on three times average volume. Every price inside it traded once; that is what gets defended.
- Rule 3 is the one that cannot be priced from first principles. The course’s own chart shows a 132-day range followed by a rise of at least five times the range’s height; the lesson states it as the course does, as a tendency with one clear example, not as a probability.
What are the five rules, and what do they have in common?
They are the first five of eight strategy statements our course puts under the heading Price action trading strategies, and each is a single sentence with a chart. The remaining three — false breakouts, trading with the trend, and the broken trendline — are the next lesson. Here are the five, in the course’s words:
| # | Rule, as the course states it | What it is really about |
|---|---|---|
| 1 | Avoid trading when price is far from the moving averages (MA20, MA50, MA100, MA200) | where the natural stop is, and who closes the gap |
| 2 | Support and resistance let you enter with the lowest risk | risk measured across a zone, not across a move |
| 3 | The longer the sideways range, the more durable the trend that follows | time spent building, and what it is spent on |
| 4 | The tighter the candle range, the bigger the move about to come | the cheap entry that rule 1 was telling you to wait for |
| 5 | A long candle body acts as potential support or resistance | where a zone can be drawn from one bar |
Read as a group they share one thing that the individual sentences hide: four of the five are about where a stop can go cheaply. Far from the average, it cannot; at a zone, it can; at a tight candle on the average, it can; under the body of a long candle, it can. Only rule 3 is about something else, which is time. That shared thread is why the rules belong together, and why the first one is the hinge — it is the one people read as a signal when it is a warning about geometry.
One thing the course does not say, and popular guides often do: that price action means trading without indicators. Rule 1 names four moving averages by length, and the course’s trend method is to find “which moving average price is respecting and hugging”, then buy the retest of it or sell the rejection at it. Price action here reads the price first and consults the average about it — a priority order, not a ban. Lesson 18 covers what the averages are; this lesson only uses them.
Rule 1 — how far is “far from the average”, and who closes the gap?
Far enough that a stop under the average is several candles wide, and the gap closes mostly because the average moves, not because price does. Both halves of that answer are measured below; the second half is the reason the rule says avoid and not fade.
The course’s chart for this rule first, because it shows what the rule looks like before any numbers are attached.
How far is far. We generated a Gaussian random walk of 400,000 bars at σ = 0.4% per bar, seed 20260905, and computed the gap between the close and a simple moving average of four lengths, as a percentage of the average. “Far” was defined as two standard deviations of that gap — the same threshold for every length, so the lengths can be compared. The average candle range on this series is 0.639% of price, which is what the candle column uses.
| Average | Std. dev. of the gap | “Far” = 2σ | In average candles | Share of bars that far | Half-life of the gap if price stands still (EMA) |
|---|---|---|---|---|---|
| MA20 | 0.992% | 1.98% | 3.1 | 4.57% | 6.9 bars |
| MA50 | 1.604% | 3.21% | 5.0 | 4.59% | 17.3 bars |
| MA100 | 2.282% | 4.56% | 7.1 | 4.61% | 34.7 bars |
| MA200 | 3.265% | 6.53% | 10.2 | 4.39% | 69.3 bars |
The last column is arithmetic rather than simulation: an exponential average with smoothing α = 2/(n+1) closes a fixed gap by the factor (1 − α) every bar, so with price frozen the gap halves in ln 2 ÷ −ln(1 − α) bars. For a 200-period average on a 4-hour chart that is 69 bars — eleven and a half days of price going nowhere before the gap is even half gone, without a single down bar.
Who closes the gap. The half-life assumes price stands still, which it does not. So the second measurement follows every episode in which the gap first exceeded +2σ until the first bar on which it was back inside ±0.5σ, and splits the closing between the two things that could have done it: the average rising, or price falling.
| Average | Episodes | Closed by the average rising (median) | Closed by price falling | Median wait |
|---|---|---|---|---|
| MA20 | 2,273 | 79.6% | 20.4% | 11 bars |
| MA50 | 1,092 | 78.0% | 22.0% | 25 bars |
| MA100 | 579 | 77.3% | 22.7% | 49 bars |
| MA200 | 300 | 82.7% | 17.3% | 101 bars |
Four lengths, one answer: the average does roughly four-fifths of the work, and it takes about half its own length to do it. A gap to the 20-period average does not promise a fall; it promises eleven bars of the average catching up. That is the mechanism behind the course’s wording. The trader who chases the spike buys with a stop several candles below; the trader who fades it sells against a mechanism that removes the gap without price needing to drop at all. Both are trading the gap, and the gap is not a force. Avoiding it is the only reading of the rule the numbers support.
Here is that mechanism drawn with the lesson’s own numbers, which will carry through to rule 4.
Rule 2 — why does a horizontal level give the lowest-risk entry?
Because it tells you where the stop goes and puts it close, so the risk is the thickness of the zone rather than the size of the swing. That is a statement about geometry, and the course’s chart for this rule happens to have the geometry measured on it.
Take the two printed tags at face value. A zone 4.41 wide that is 3.39% of price puts the top of the buy zone at 4.41 ÷ 0.0339 = 130.09 and its bottom at 125.68. A zone 4.07 wide that is 2.85% puts the bottom of the sell zone at 142.81 and its top at 146.88. Now price the trade the labels describe — buy low, sell high:
| Item | Price | Derived from |
|---|---|---|
| Entry — top of the buy zone | 130.09 | 4.41 ÷ 3.39% |
| Stop — half a dollar under the zone | 125.18 | 125.68 − 0.50 |
| Risk | $4.91 | the zone’s thickness plus the buffer |
| Target — bottom of the sell zone | 142.81 | 4.07 ÷ 2.85% |
| Reward | $12.72 | 142.81 − 130.09 |
| R:R · break-even win rate | 2.59R · 27.9% | 1 ÷ (R + 1) |
The point is in the ratio of two widths. The swing between the zones is 9.8% of price; the buy zone is 3.39%. Because the stop is measured across the zone and the reward across the swing, risk comes out at 4.41 ÷ 12.72 = 34.7% of reward. Enter halfway up the swing instead and the nearest defensible stop is still under the same zone, so the risk grows by the distance you climbed while the reward shrinks by the same amount — the ratio collapses from both ends at once. “Lowest risk” in the course’s sentence means exactly this: the zone is the only place where the stop’s natural home is also close.
Rule 3 — why does a longer range make the trend after it more durable?
The course states it as an observation with one example, and this lesson will not pretend to more than that. But the example is a good one, and there is a reason the observation is plausible that is worth spelling out.
Why would a longer range produce a more durable trend? The mechanical answer is that a range is where positions are built. Every bar spent between 3,200 and 4,200 is a bar in which someone bought and someone sold at those prices, and the longer it lasts, the more of the eventual holders bought inside it. When price finally leaves, those holders are the ones who are not selling on the first pullback — they are in profit and were patient enough to sit through four months of nothing. A range that lasted a week has built no such base.
One refinement from the trading notes this site draws on, restated in our own words: not every range is the same kind of range. Some are quiet because nothing is happening — neither side has force. Others are quiet because two timeframes are pulling against each other and cancelling. The second kind tends to resolve harder, because the losing side is already committed. Telling them apart is a matter of reading the larger frames, which is Lesson 17’s job; rule 3 only tells you that the length is worth noticing. And a figure worth holding loosely: one school of the same notes puts markets in ranges roughly 60% of the time and in trends 30–40%, which if even approximately right means rule 3 describes the majority of any chart, not an exception.
What this lesson will not do is attach a probability to the rule. A structureless series has no such effect to measure, and any number offered would be an invention. The course gives one example; the lesson gives the mechanism; the reader gets to look at the next range with both in mind.
Rule 4 — what do tight candles at the average actually buy you?
A cheap stop, which is the same thing rule 1 was refusing to give you. Rules 1 and 4 are one rule about one average seen from two distances: far away, the stop under the average is several candles and the rule says wait; close up, with the candles tight, the stop is two candles and the rule says this is the place.
Return to the chart from Section 2, twelve bars on. Price has held between 9,175 and 9,220; the exponential average has climbed to 9,126; the thirteenth candle spans 9,175 to 9,210 — $35, or 0.60 of an average candle. That is a narrow-range candle on the average, and it is where the course’s trend method says to buy the retest. Compare the trade you were tempted into at the top of the spike with the one the rules waited for:
| Trade | Entry | Stop (under the average, ½-candle buffer) | Risk | Reward to 9,480 | R:R | Break-even | Size for $50 risk |
|---|---|---|---|---|---|---|---|
| Buy the spike — rule 1 says no | 9,180 | 8,971 | $209 · 3.6 candles | $300 | 1.44R | 41.1% | 0.239 BTC |
| Buy the narrow candle’s break — rule 4 | 9,215 | 9,097 | $118 · 2.0 candles | $265 | 2.25R | 30.8% | 0.424 BTC — 1.8× |
Waiting cost $35 of entry, six-tenths of a candle. It saved $91 of stop. Nothing about the target changed; the whole improvement came from the stop’s natural home moving up by $126 while price went nowhere — which is the four-fifths from Section 2 doing its work. The position-size column is the practical consequence: with risk fixed in dollars, the narrow-candle entry buys 1.8 times the coins, so the same correct call pays 1.8 times as much. Lesson 42 has the arithmetic behind that column.
As for the rule’s stronger claim — that the tighter the range, the bigger the move — the honest position is the same as for rule 3. It is a tendency the course illustrates with three boxes, not something a structureless series can confirm. What the numbers above establish is narrower and firmer: if the move comes, the tight candle is where it was cheapest to be positioned for it.
Rule 5 — why does a long candle body become support?
Because a long body on heavy volume is a record of positions opened at every price inside it, and those positions are what defend the area when price returns. The zone is drawn across the body — open to close — not across the wicks, because the wicks are prices that were visited and abandoned within the bar, and few positions live there.
Two details decide whether the rule is being applied or merely quoted. The first is volume: a long body on ordinary volume is one bar that happened to be tall, and it holds nothing, because nobody is in it. The course’s slide couples the two — long body, with volume — and the coupling is the rule. The second is where the return stops. A pullback to 9,120 that holds inside the body is the rule working; a close below 9,050 is the rule failing, and the stop belongs just under the body for exactly that reason. This is the same logic as rule 2 — a zone puts the stop’s home close — with the zone supplied by a single bar instead of a hundred.
PRACTICE CORNER
Do this once and rule 1 stops being a sentence you nod at. Put a 20-period exponential average on a chart you follow, find the last time price closed about three average candles above it, and count the bars until price and the average were back within half a candle of each other. Then look at what moved: write down how much the average rose over those bars and how much price fell. On most charts the first number is the larger one, often by a wide margin — the 80% from Section 2 seen once on your own screen is worth more than the table. While you are there, find the narrowest candle in the stretch where price was hugging the average, measure its range against your average candle, and price the stop under the average from that bar. Compare it with the stop you would have had at the spike. That difference is what rule 4 is for.
You need a chart with a moving average whose value you can read and bar-by-bar inspection. These are the three exchanges this site uses for its own worked examples; all three have the tools, and the exercise costs nothing.
We may earn a commission if you open an account through these links, at no cost to you. It does not change what is written above.
When are these rules wrong?
Rule 1’s measurement comes from a random walk, and a real market can be worse or better than that. In a trending market price keeps going after it is far from the average, so the share of the gap closed by the average is higher than 80% and the fade is even more wrong. In a genuinely mean-reverting market — a range — price does more of the closing, and fading a spike can work. But that edge belongs to recognising the range, which Lesson 16 and Lesson 24 cover; it does not belong to the gap. The gap alone, in either regime, is not a signal.
The thresholds depend on the bar size chosen. Two sigma at 0.4% per bar gave 1.98% for the 20-period average; a more volatile series gives a wider “far” in percent but about the same in candles, which is why the candle column is the one to carry to a real chart.
Rule 2 assumes the zone holds. The course’s own chart ends with the lower zone breaking. The stop under the zone is not decoration; it is the part of the rule that makes the failure cost one zone’s thickness instead of a swing.
Rules 3 and 4 are tendencies with examples, not laws with rates. Nothing on this page claims how often a long range or a tight candle is followed by the move the course describes, because nothing here measured it. What was measured is what the setups cost when taken.
Rule 5 without volume is a tall candle and nothing more. The rule is the pairing.
What are the most common mistakes with these rules?
| Mistake | What it actually does |
|---|---|
| Reading rule 1 as “far above the average, so short it” | Bets on the 20% of the mechanism. Four-fifths of a two-sigma gap closes by the average rising, over about half its length in bars |
| Chasing the spike because “the trend is strong” | Buys with a 3.6-candle stop when a 2.0-candle stop was 12 bars away. 1.44R instead of 2.25R for the same target |
| Entering mid-swing between two zones | Keeps the same stop under the lower zone while giving up reward from above — the ratio collapses from both ends |
| Measuring risk across the move instead of across the zone | Misses the point of rule 2. On the course’s chart the zone is 3.39% and the swing 9.8%; the stop belongs to the zone |
| Drawing rule 5’s zone from wick to wick | Includes prices where almost nobody holds a position. The zone is the body, open to close |
| Applying rule 5 to a long body on ordinary volume | One tall bar with nobody in it. The course’s slide couples the body with volume, and the coupling is the rule |
| Quoting a probability for rules 3 and 4 | Inventing a number. The course gives examples; this lesson gives mechanisms and costs; neither gives a rate |
What else do people ask?
What does 'far from the moving average' actually mean in numbers?
There is no universal number, but there is a usable one: two standard deviations of the gap between price and that average, which on a series with 0.4% bars works out to about 2.0% for a 20-period average, 3.2% for 50, 4.6% for 100 and 6.5% for 200. In average-candle units that is roughly 3, 5, 7 and 10 candles. Whatever the length, price spends about 4.5% of its time that far away. The practical test is simpler than the statistics: if a stop under the average would be several candles wide, you are far, and the rule applies.
If price is far above the average, should I short it?
Our course says avoid, not fade, and the measurement explains why. When price is two standard deviations above a moving average and the gap later closes, about 78 to 83% of the closing comes from the average rising toward price, and only 17 to 23% from price falling — measured over thousands of episodes on a structureless series. The gap does not promise a drop; it promises a wait of roughly half the average's length. A short entered on the gap alone is therefore a bet on the smaller part of the mechanism, with a stop that has to sit above a price that is still drifting up.
Why is a support or resistance level the lowest-risk entry?
Because it fixes where your stop goes, and puts it close. On the course's own LTCUSD chart the buying zone is 4.41 wide, or 3.39% of price, and the swing between the two zones is 9.8%. Buying at the top of the zone with a stop just under it risks about $4.91 to make about $12.72 — 2.59R — because the risk is the thickness of the zone, not the size of the move. Enter in the middle of the swing instead and the nearest sensible stop is the same zone, so the risk barely changes while the reward shrinks.
Does a tighter candle range really mean a bigger move is coming?
That is the course's rule 4, stated as a tendency rather than a law, and the honest position is that it cannot be proven from first principles — a random series has no such effect. What can be shown is what the rule buys you when it holds: a narrow candle sitting on the average gives a stop of about two candles instead of three or four, which in the worked example turns a 1.44R trade into a 2.25R trade and lets the same dollar risk buy 1.8 times the position. Tight ranges are the entry the rule about being far from the average was telling you to wait for.