Price Action – Complete Guide For The Average Trader
In a nutshell, price action is described as the study of price which is one of the purest indicators available to forex traders. Price action describes characteristics of price movements of a security i.e. where and when it’s expected to make a move. This movement is further analyzed and compared by traders against recent price changes, in the past. In short and simple terms – traders find the ability to read the trading market and make subjective trading decisions with price action. It’s a common trading technique that uses information gained from recent and actual price movements as opposed to only technical indicators.
Wide Range of Technical Analysis Functions Are Performed Without Any Indicators
Having sound knowledge of price action trading technique is enough for traders to perform numerous technical analysis functions without having to keep an eye on indicators. Even more importantly, traders can deal with effective risk management without any trouble, whether managing positions after entering trade or setting up good risk-reward ratios.
Today, we will learn the different yet important elements of price action and how traders will benefit from implementing each to their trading strategy. We will also cover all the common price action trading strategies and how you can determine the market’s ongoing trend.
Price Action – Learn How to Trade
There is a big difference in learning different price action strategies and applying them in your trade. This is a common question most traders have; how and when to implement price action when trading. Take note of the following:
Traders often attempt to diagnose prevalent trend (or lack thereof); in fact this is the first area of analysis. By doing so, traders find out what is likely to affect their trade, i.e. any perceivable bias or sentiment that may affect entry into a trade.
Look at the chart above—it shows higher-highs and higher-lows in currency pairs. This price movement denotes down-trends (lower-highs) and up-trends (lower-lows).
Traders must always keep an eye on global economic news. Ups and downs in one country’s forex exchange can and will bring economic upheaval to their currency or another that you are trading on. Remember that you are trading on currency pairs which mean certain global events or news will undoubtedly effect price movement, for the better or worse.
Recognizing certain patterns on a trading chart that may indicate opening for a potential trade is known as technical analysis in price action trading. Traders often forget that charts are actually subjective i.e. price moves in that way because of trading decisions made by real traders.
You can analyze a trade chart by:
As human beings, we look for patterns and similarities everywhere. Similarly, expert traders refer to past recent trading charts and see whether a pricing movement will be repeated or not. If for instance past price moved down sharply from a certain area and is now reaching the same area, traders will look and expect the same price movement. This helps in understanding, identifying and implementing potential trades which make technical analysis extremely important for traders.
Next is support and resistance, areas where potential trades are found.
Support and Resistance
Support and resistance are areas in a chart that signal trade opportunities, as both show highest probability of low risk trades. Expert traders believe (and rightly so) that support and resistance are those areas on a chart which feature heavy buyer and seller activity. Understand the basics of support and resistance before attempting price action trading.
The final and just as important element of price action trading brings all other elements together and makes it easier for traders to read a chart correctly.
As the name suggests, candlestick analysis means reading or analyzing the candlestick patterns in a chart. This is done one candle at a time to ensure accurate and up-to-date market sentiments. Since price action sometimes covers a larger amount of time, it’s essential to trade with higher time frames. For example: you have two candles, one is a 5 minute candle and the other is a 12 hour candle. It would make more sense to trade in the 12 hour price trade window or candle.
Some Common and Popular Trading Strategies Using Price Action
Following are some of the most common and popular price action trading strategies. Note in the side image, a ‘failed’ trade setup is also highlighted. It’s important to keep in mind that not every trade setup will be a winning trade. Individuals should only implement trading setups that are easy to understand, identify and use when trading:
o Inside pin bar combo
o Inside bar setup
o Pin bar continuation setup
o Pin bar reversal setup
How to – Determine a Market’s Trend
As a trader just learning price action basics, you must first learn to identify a trending market. This is really important for two reasons. Traders find it difficult to identify trending markets when they are placed opposite a consolidating market. Secondly, trading within the trending market promises highest probability of a good trade, i.e. if done right; this strategy can help earn you serious money.
The above chart shows how traders can use price dynamics when it comes to determining a market’s trend. An uptrend market (shown) will feature higher highs and higher lows (HH, HL). Similarly, a downtrend in the market will feature lower highs (LH) and lower lows (LL).
Identifying price action in an on-going or new market trend isn’t that much difficult. However, you must remember these basic price action elements before implementing a trading move with price action. Sign up on AlpsSocial and see what trading strategies are being used by other traders. Build your forex trade plan and journal by gaining valuable insights from these trades and implement them on your own!