Price Action Trading: What You Need to Learn

Price Action Trading: What You Need to Learn

What is Price Action Trading?

Price action decorated text.

Price Action Trading or P.A.T is the discipline of making all your trading choices from a stripped down or “naked” price chart. This means no lagging indicators outside of maybe a two moving averages to help recognize dynamic support and resistance areas and trend.

The price action is a method of billable negotiation in the analysis of the basic movements of the price to generate signals of entry and exit in trades. Price action stands out for its dependability and for not needing the use of indicators.

A price action trader believes that the solely true source of information comes from the price itself. If a stock goes up, that tells the price action trader that people are buying.

The trader then assesses, based on the aggressiveness of the buying, whether it will likely continue. Price action traders don’t usually worry themselves with “why” something occurs.

They instead use a combination of price movement, chart patterns, volume, and other raw data from the market to define whether or not they will make a trade.

Price Action Trading Advantages

There are some advantages to using this method to trade, the main one being convenience. Here the two advantages you get to enjoy:

It’s a simple way to trade

The stand out advantage is that price action is also very simple. The advantage of this is that trading becomes very clear there are no indicators making clutter. If you were to think about all the available indicators, then you will be so stressed eventually as you will suffer from an “information overload”.

With price action, all you focus on are the candlesticks charts and you will be able to see what is trendy in the market.

Easy to understand signals

 Price action signals are also very easy to understand. You do not need to be an expert trader with much experience to understand the signals.

With price action, you are able to recognize the trends in the market, which make it possible for you to trade with the market, instead of against it.

Candlestick financial chart.

Candlesticks

A candlestick is a type of price chart used that shows the high, low, open and closing prices of a security for a particular period.

Candlesticks originated from Japanese rice merchants and traders to track market prices and daily momentum hundreds of years before becoming popular in the United States.

The name of the wide part of the candlestick is “real body”.  Investor tells whether the closing price is higher or lower than the opening price.

Candlesticks can be use traders looking for chart patterns. Therefore in an entire monthly chart, you will have some candlesticks carrying information about all the trading days in that month.

There are some candlestick patterns traders should learn about, some which are:

Doji candlestick.

Doji

A doji is an important signal candlestick in technical analysis. The doji represents indecision in the market. If prices finish very closer to the same level (so that no body or a very small real body is visible), then that can also be read as a doji.

See also: Technical Analysis and Fundamental Analysis: A Brief Comparison

Long-legged Doji

Long-legged doji is a candle with long upper and lower shadows and a small real body. The pattern shows that there is indecision between the buyers and the sellers, and that the market is approaching transition period.

Dragonfly Doji

A dragon doji is the most unusual candle of the four different types of doji candlesticks. As with any doji, the dragonfly depicts situation in which supply and demand are in balance, thus possibly signaling an significant reversal. It is considered by having a small real body or none at all and a long lower shadow.

Gravestone Doji

A Gravestone Doji, on the other hand, conveys that the price opened at the low of the time period. There was a great rally during the session, and then the price closed at the low of the session. Hence, the open, low, and close are all the same (or about the same) price. This signal’s presence is most important when it appears after an uptrend, preceded by bullish candlesticks. It advises that the trend’s upward direction may soon reach a turning point.

Four Price Doji

Four price doji is a candlestick where open, high, low, and close are all the same. This candle reflects the highest extent of indecision between bulls and bears. This candle is usually seen on low trading volume. It often appears in pre-market and afterhours trading.

Pin bar word.

Pin Bar

This is an individual candlestick pattern known for its long wick and small bodies. The wicks in this type of pattern should be longer than the body. When they appear, they offer unique clues to the unfolding price action.

Bearish Pin Bar/Bullish Pin Bar

A bullish or bearish candlestick whereby the length of the tail / lower shadow is at least two thirds of the total shadow length. It is considered a weak bullish pattern and takes on greater importance when the market is overpraised or at support.

See also: Bull and Bear Market Explained

Engulfing Price action of candlestick chart.

Engulfing

The engulfing candlestick patterns, bullish or bearish, are one of the easiest of candlestick reversal patterns to pinpoint. Because these candlestick patterns are two-candlestick patterns, they are more valid and are often looked upon as reversal patterns.

Bullish Engulfing

A bullish engulfing pattern occurs in the candlestick chart of a security when a big white candlestick completely engulfs the smaller black candlestick from the period before. This pattern usually happens in a downtrend and is thought to signal the starting of a bullish trend in the security.

See also: Bull Market: Clever Things to do before it Ends

Bearish Engulfing

A bearish engulfing pattern is a technical chart pattern that may presage a future bearish trend. The pattern consists of a small white candlestick with short shadows or tails followed by a big black candlestick that eclipses or “engulfs” the small white one.

See also: What to do during a Bear Market

Two-bar Reversal

Two-bar reversal is a price action candlestick pattern that can be found on any time frame. Two-bar reversal pattern comprise two candles. For a bearish two-bar reversal the first bar must go up. The second candlestick must then open and snap back lower.

Strong Bearish Bar

A Strong Bearish Bar Reversal happens once today’s high is higher than its preceding day high and the present price/today’s close is lower than its preceding day low.

See also: Bear Markets: 4 Ways to Ride Out the Storm

Strong Bullish Bar

A Strong Bullish Bar Reversal is opposite of strong bearish bar. It happens when today’s low is lower than its preceding day low and the existing price/today’s close is higher than its previous day high.

Inside bar price action of candlestick chart.

Inside Bar

An inside bar pattern is a two-bar price action trading strategy in which the inside bar is smaller and in the high  to low range of the previous bar. For example, the high is lower than the preceding bar’s high, and the low is higher than the preceding bar’s low. Its relative position can be at the top, the middle or the bottom of the prior bar.

Support and resistance levels candlestick.

Entry and Exit

Support and resistance levels are the horizontal price levels that naturally connect price bar highs with other price bar highs, or price bar lows to other lows.  Support and resistance levels are very significant to a price action trader because when a resistance or support level is reached; this is the best time to make an entry.

Support level

A support level is a level where the price tends to find support as it falls. This means that the price is more likely to “bounce” off this level instead of break through it. Nonetheless, when the price has breached this level, by an amount exceeding some noise, it is about to continue falling until meeting another support level.

Resistance level

A resistance level is the opposite of a support level. It is where the price tends to find resistance as it rises. Again, this means that the price is more likely to “bounce” off this level instead of break through it. Nevertheless, when the price has breached this level, by an amount exceeding some noise, it is likely to remain rising until meeting another resistance level.

Conclusion

Price action can be a difficult concept even for expert traders. One reason for this is that no two traders will analyze previous prices in the same way. It is, to some degree, subjective. This means that price action traders must be independent and comfortable with their own understanding of the markets. Price action traders are also not likely to gain huge profits overnight, but they can stand to make large earnings if they are experienced.

Price action trading has possibly the highest success rate among all of the trading strategies. The reason for this is its basis – price action trading is based on real supply and demand levels of exchange pairs, reflected by trends, support and resistance zones, and powerful chart patterns. All instruments of technical analysis are primarily used to measure the stage of a trend and potential reversal zones. In addition, price action traders often use candlestick patterns as verification signals to enter a trade.

All you need to successfully trade price action is a clean chart, which is much more elegant than a chart messy with many lagging technical indicators. With a little practice, the tools mentioned in this article are sure to make an important difference to your bottom line.

Learn more about trading here in FSMSmart Reviews! Enhance your trading skills to the fullest. Join our community now.

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