Price Action Basic's

 

Price Action

Price action trading is a strategy that helps predict market movements by spotting patterns or ‘signals' in an underlying market's price movements.

 

In trading, what is price action?

In trading, price action examines a security's, index's, commodity's, or currency's performance to forecast what it might do in the future. If your price action analysis indicates that the price is about to rise, you may want to take a long position; if you believe the price is about to fall, you may want to short the asset.

 

Understanding price action trading entails analyzing patterns and identifying key indicators that may affect your investments. Many traders use a variety of price action methods to predict market movements and make short-term gains.

The top seven trading strategies that use price action signals

1. Trend based on price action
   
   
2. Pin bar Candle
   
   
3. Inside bar candle
   
   
4. Trend after retracement entry
   
   
5. Trend after breakout entry
   
   
6. Head and shoulders Pattern
   
   
7. The pattern of highs and lows

Trend based on price action

Price action trend trading is the study of trends, whereas price action trading is the study of price movements. Traders can use a variety of trading strategies to identify and follow price action trends, such as the head and shoulders trade reversal.

This is an excellent trading tool for inexperienced traders because it allows them to effectively learn from more experienced peers by chasing price action trends as they emerge. In the screenshot below, you'd open a 'buy' position to take advantage of the green uptrend’s, or a ‘sell' position to take advantage of the red downtrends.

Pin bar Candlestick

The pin bar pattern, also known as the candlestick strategy due to its distinctive shape, resembles a candle with a long wick. It denotes a sharp reversal and rejection of a specific price, with the 'wick' or tail indicating the price range that was rejected.

 

The assumption is that the price will continue to move in the opposite direction of the tail, and traders will use this information to decide whether to enter the market long or short. For example, if the pin bar pattern has a long lower tail, the trader knows that there has been a trend of lower prices being rejected, implying that the price is about to rise.

Inside bar candle

The inside bar pattern is a two-bar strategy in which the inner bar is smaller than the outer bar and falls within the outer bar's high and low range (or mother bar). Inside bars frequently form during market consolidation, but they can also serve as a red herring, signaling a market turning point.

 

Skilled traders can identify this trend at a glance and should be able to predict whether the inside bar represents consolidation or a shift in the prevailing trend using their macro knowledge. The size and position of the inside bar will determine whether a price will rise or fall.

Trend after retracement entry

This is a straightforward price action strategy in which the trader simply follows the current trend.

 

If a price is clearly declining, with lower highs being created on a consistent basis, a trader may consider going short. If prices are rising incrementally, with highs and lows trending higher, the trader may want to buy in.



Trend after breakout entry

This trend follows any major market movements, assuming that a price spike will be followed by a retracement. A breakout occurs when a market moves outside of a defined support or resistance line.

 

Traders can use this as a signal to enter a long position if the stock is trending upwards or breaks above the resistance line, or a short position if it moves below the support line.

Head and shoulders Pattern

The head and shoulders pattern, as the name implies, is a market movement that resembles the silhouette of a head and shoulders. In other words, prices rise, fall, rise again, fall again, and rise to a lower high before a small drop.

 

The head and shoulders reversal trade is one of the most popular price action trading strategies because it is simple to choose an entry point (generally right after the first shoulder) and a stop loss (after the second shoulder) to profit from a temporary peak (the head).

The pattern of highs and lows

Price action trading is fundamentally a game of highs and lows. Price action traders can use the sequence of highs and lows strategy to identify emerging market trends.

For example, if a price is trading at higher highs and lower lows, it is in an upward trend. It is trending downward if it is trading at lower highs and lows. Traders can use their understanding of the sequence of highs and lows to select an entry point at the lower end of an upward trend and set a stop just before the previous higher low.