Introduction to Price Action Trading: Trading has become a trend that everyone wants to engage in due to the huge earnings that come with it. However, due to the failure to know some basic trading rudiments, not everybody who ventures into trading eventually makes these vast returns.
Whether you are one of such people who is planning to go into trading or have made some bad trades before, or you even want to understand the concept of Price Action Trading comprehensively as the key to successful trading, trust me, you are in the right place.
This article extensively examines what price action is, trading strategies using price action, the benefits of price action trading, and every other thing you need to know about Price Action Trading.
First, What Is Price Action Trading?
Price Action Trading is an economic market conjecture method involving analyzing basic price movement over time. Simply put, price action is how price moves – the “action” of price.
It’s most easily practiced in markets with high liquidity and volatility, but anything bought or sold in a free market will undoubtedly produce price action.
Price Action Trading evaluates index, security, commodity, or currency performance to forecast what it might do in the future. For example, if you think the price will decrease, you might decide to short the asset; if your price action analysis tells you there will soon be a price increase, you might take a long position.
To understand price action trading, you must look at patterns and identify the primary indicators that might influence your investments.
Price Action Trading disregards the essential factors that affect a market’s movement and looks mainly at its price history, i.e., its price movement over time. Hence, price action is a form of technical analysis, but what distinguishes it from other technical analyses is its focus primarily on the relationship of a current market’s price to its past prices.
Therefore, the only concern of Price action traders is the first-hand information a market generates about itself – its price movement over time.
What Are Price Action Signals?
Price action signals – called price action “triggers,” “setups,” or “patterns” – are the essential aspect of Price Action Trading because these patterns give a trader a vital clue as to the price subsequent action.
Thus, they are easily-identifiable market patterns that can be used to predict future market behavior. Moreover, expert traders can occasionally spot these signals with a brief look by identifying specific shapes or repetitions in historical performance.
Benefits Of Using Price Action
1. A Price Action Analysis Is A Time-Tested Strategy.
Expert traders have traded based on specific price action setups for eras. It shows you how to read the core performances of any market’s price movement; When you study to trade with price action analysis, you can be confident that your technique is relevant. A price action analysis is always pertinent and is flexible enough to predict the market direction under any situation.
Many traders used different combinations of lagging indicators, which have not been used for long by most other traders due to their ineptness in adjusting to ever-changing market circumstances. Therefore, Price action analysis is always relevant and flexible enough to help you predict market movement under any circumstances.
2. Price Action Analysis Performs Well in Trending or Ranging Markets
Secondly, one of the unique things about price action analysis is that it gives relevant and gainful signals in range-bound markets and trends. Many trading approaches work well in trending markets but stop in trading ranges or vice versa. Therefore, a great and flexible trading technique will dependably offer profitable indicators in any market.
3. Price Action Analysis Allows Profitable Uses of Higher Time Frames
Some price action traders use daily or weekly time frames, which is more trustworthy because one daily bar contains more data than one 10-minute bar. Hence, the higher the data, the higher the reliability of the signals produced by the bar. As a result, these signals have a substantial possibility of leading to a successful trade.
Trading using higher time frames offers you the chance to have your time, as you don’t have to spend hours daily looking for an intraday signal, and it even allows you to focus on your full-time job.
Therefore, price action analysis repays a disciplined trader that does not overtrade. It would be best to rely only on price action strategies to benefit from market movement. No wait is present; either there is a candle setup or not.
4. Price Action Trading Setups Are Easy to Assess on Demo Accounts.
Price action setups often occur in the forex market and are easy to identify once you precisely know what to look for. Discovering what the three indicators ask you to do is unnecessary. Instead, you wait for your anticipated price setup to form and implement your edge. In addition, the forex market has wide available demo accounts that you can use to practice price action setups before going live.
5. Price Action Analysis Is Simple to Use
With price action, a trader does not need to jampack their price chart with tons of technical indicators, like Fibonacci retracements, oscillators, several moving averages, pivot points, etc., to decide to enter the market.
Unfortunately, using such an intricate approach to examine the chart eventually drains one energy, resulting in stress, and opens the door to trading emotionally; hence emotional trading is the surest way to financial devastation.
6. Price Action Signals Are Quite Easy to Detect
To know price action strategies, one does not necessarily need a Master’s degree in Finance or Economics. Instead, access is allowed to anyone willing to devote time to studying its fundamental ideas of price action will understand it.
Limitations Of Using Price Action Trading
1. Low Number of Trades
Price Action Trading requires patience; the trader must wait for confirmation, which could be in a Pin bar or Engulfing pattern at support & resistance. However, while waiting for confirmation, traders tend to miss out on trading opportunities when prices basically ‘touch and go. Therefore, seeing price bounce off your levels without being in the trade is heart-wrenching.
How to fix this?
Not waiting for confirmation is one way to overcome this problem. Just identify your normal levels and trade without price confirmation at your levels. Try this on a demo first, then compare it with your trading. Check if there’s any difference in your trades and profitability frequency. You may be amazed at the outcomes.
2. Waiting For Your Levels
One of the drawbacks of Price Action Trading is constantly having to wait for the price to come to the Price action trader’s levels, including support and resistance, previous resistance turned support, etc. Because of the solid fundamental momentum in a trending market, price does not usually return to identify these levels; it puts price action traders on the sideline while the market is making a directional move.
How to fix this?
Going down into the lower time frame and searching for your trading setups is the way to handle this issue.
If the price makes a parabolical change in the daily timeframe, bit down to the 1-hour timeframe to check trading prospects. On the lower time frame, you will realize it has a particular support & resistance set. Then, you can trade these levels with favoritism from the higher time frame.
3. Poor Placement of Stop Loss
You will learn to put your stop loss just beyond the highs/lows of the candle when you read most trading books or attend a trading seminar. Thus, it is no news that traders place their stops at apparent levels. For instance, a few pips beyond the candle wicks, just below support, or at round numbers, just above resistance.
However, brokers have an intelligent guess of the position of your stops without checking the order book. Because of this, you see yourself unnecessarily being stopped from your trades, only to see the price return in your favor.
How to fix this?
Putting your stop loss away from support & resistance is the solution to this drawback. Consider using the ATR indicator to gauge how far away your stop loss should be. This way, if you get stopped, it’s a good sign the support & resistance has failed to hold up.
Top 5 Price Action Trading Strategies
1. Inside Bar Pattern
This is a two-bar pattern comprising the inside bar and the previous bar, often called the “mother bar.” The inside bar is thoroughly checked within the mother bar’s high-to-low variety. This price action approach is commonly used as a trending market escape pattern. Still, it can also be traded as a reversal indicator if it forms at a fundamental chart level.
This chart demonstrates an inside pin bar combo (an inside bar with a pin bar for the inside bar) setup or a regular inside bar signal.
2. Pin Bar Pattern
A pin bar pattern involves a single candlestick; it illustrates the refutation of a reversal and price in the market. The pin bar indicator works well in a range-bound, trending market and can be traded counter-trend from an essential support or resistance level. The pin bar means that the price might move contrary from the tail direction, as the pin bar tail displays rejection of a reversal and price.
3. Price Action Trend Trading
Since Price Action Trading studies price movements, price action trend trading is the study of trends. Trendline trading entails using lines to create the optimal points for trades in trending markets. Traders can utilize several trading methods to locate and follow price action trends like the head and shoulders trade reversal.
Price action trend trading is an excellent tool for new traders, as it gives room to learn effectively from their more skilled peers by chasing price action trends as they become evident. In an uptrend, for example, a trendline is plotted from a specific swing low to the subsequent and then projected to the future.
The retracement trendline signifies a perfect price point to join the uptrend, and the horizontal trendlines can be used in ranging markets to map out support and resistance zones.
4. Head And Shoulders Reversal Trade
As the name implies, the head and shoulders pattern is a market movement that resembles a head and shoulders silhouette. Here, prices increase, decrease, increase even further, drop again, and increase to a lower high before a moderate drop.
It is one of the most prevalent Price Action Trading strategies as it’s pretty easy to select an entry point (usually after the first shoulder), then set a stop loss (subsequently, the second shoulder), and benefit from a temporary top (the head).
5. Trend Following Retracement Entry
Trend following retracement entry is a straightforward price action strategy whereby the trader follows the current trend. For example, if a price is on a visible decline, with a constant lower high established, the trader might need to take a short position. On the other hand, if prices are constantly increasing, with the highs and lows trending progressively higher, the trader might want to buy in.
Frequently Asked Questions on Price Action Trading
How Accurate Is Trading Using Price Action?
Price Action Trading is imperfect, as no trading strategy or system will be 100% right always. Nevertheless, price action strategies have been demonstrated to be relatively accurate, with many setups used by the price action trader illustrating a 75% or more success rate.
Most significantly, the head and shoulders (or inverted head and shoulders) system commonly used by price action traders has proven to be a very accurate trading pattern if spotted and traded appropriately (over 83% accurate in hitting projected targets). Another natural system consists of triple tops or triple bottoms (almost 80% correct) and bullish and bearish rectangles (also approximately 80% accurate).
Does Price Action Trading Work?
Price Action Trading can work; however, the trader knows that using price action to trade in the markets successfully requires a high degree of patience. There are very particular systems that a price trader will look for on the charts, which could take some time to come up.
Meanwhile, going into trading before the ideal time can result in losing trades and money. Therefore, to use a price action approach when trading, you must have a precise entry and exit plan and follow that plan.
How Do You Learn Price Action Trading?
As a foundation, the trader will want technical analysis knowledge, specifically support and resistance levels. Also, learning different approaches for spotting trends and common patterns that price action traders use.
I teach newbie traders how to trade using price action in my Forex Trading Academy. It’s a one-on-one mentorship program that guides you throughout your trading journey.