Price Action Trading

Price Action Trading is a strategy that involves directly engaging with an asset's price and price history to make investment decisions. Investors and traders analyze and anticipate the potential direction of an asset with only the price movements as the base for decision-making.

Its relevance stems from its capacity to give traders vital information about market dynamics. The asset movements reveal support and resistance levels and prospective trading opportunities. Investors utilize the price action strategy to analyze market sentiment and discover ongoing trends. Understanding these factors helps them make better trading decisions based on the asset's price movement patterns.

Price action trading is a financial analysis technique that focuses on analyzing price changes in an asset over time to make investment decisions that are based on the features of an asset's price movement in a period. This strategy offers insights and actions based on the features of an asset's price fluctuations over time.

Price action trading strategies often plot prices on charts without the use of any additional technical indicators. However, sometimes volume is taken into account. Price action strategy can reveal nuanced moves of the asset that would be missed while using indicators.

Analyzing or trading markets based on current and historical prices involves focusing on three key factors: trends, chart patterns, and significant technical events. There are specific price action trading indicators, and observing prices is the key. However, the three above factors can be considered price action trading indicators. 

Higher highs and lower lows characterize trends. Chart patterns or price action trading patterns are extensive, like the symmetrical triangle or bullish engulfing candlestick pattern, but can be examined using basic trendlines or formulas. Technical occurrences, such as support and resistance levels, trendlines, or major patterns, play a pivotal role for price action traders. They inform future trading setups and decisions. Nevertheless, interpretations of price action readings can vary among traders, leading to subjectivity and variability in analysis.

Given below are some of the best price action trading strategies using price action:

#1 - Trend Trading:

Traders often base their trading choices on price trends, employing diverse techniques to monitor and adhere to market prices. This approach is advantageous for beginners as it enables them to take insights from seasoned traders. To capitalize on the trend trading strategy, traders may opt for a short position during a downtrend and a long position during an uptrend. Price action trend trading entails initiating a buy position in an uptrend and a sell position in a market downtrend.

#2 - Inside Bar:

The inside bar trading strategy comprises two bars. The outer bar is bigger and more significant than the inner bar, which sits within the high and low range of the outer bar. It typically emerges during market consolidation and may signify a potential turning point. Experienced traders analyze trends to discern whether the inside bar indicates a shift or continued consolidation.

#3 - Pin Bar:

The pin bar strategy, also known as the candlestick strategy, relies on the appearance of a candle possessing a long wick. This pin price action trading patterns suggest price rejection or reversal, with the wick representing the price range rejected by investors. Traders anticipate the price moving opposite the wick, determining whether to take long or short positions based on this signal.

#4 - Trend After Retracement Entry:

The trend after retracement entry strategy in price action trading involves traders aligning with the prevailing market trend. During a market downtrend characterized by lower highs, traders consider short-selling. Conversely, traders opt for buying positions in an uptrend marked by higher highs. This strategy emphasizes following the established trend, with traders entering positions based on price movements and trend direction.

#5 - Trend After a Breakout Entry:

The trend after breakout entry strategy involves traders observing market movements beyond support or resistance levels, known as breakouts. Traders anticipate retracements following price spikes. They consider short positions if the market trends below support lines and long positions if it trends above resistance lines. Breakouts occur when prices move beyond predefined support or resistance levels.

Let us look into a few examples to understand the concept better:

Example #1

Suppose Daisy, a beginner in trading, uses a price analysis strategy to make investment decisions. After analyzing the stock market for 10 years, she focuses on A and B stocks. She notices that A has erratic price movements and lacks clear trends, often experiencing sharp drops. On the other hand, B has a stable price trajectory with clear upward trends and well-defined support levels. Daisy also observes significant upside gains during positive market periods. Based on her analysis, she chooses B as her preferred investment. She believes that B has a higher potential for capturing upside gains during positive market conditions and can capitalize on its consistent performance. This decision is made through her price analysis strategy, as she identifies B as the more favorable choice due to its consistent upward trajectory and potential for capturing upside gains.

Example #2

A study was undertaken to develop a viable and profitable trading approach centered on price action within the foreign exchange market. The study sought to evaluate the effectiveness of combining various aspects of price action analysis, particularly focusing on recent and historical price movements. The study used data spanning from July 01, 2020, to December 23, 2020. it utilized a $5,000 demo account on the MT4 platform; a trading strategy was developed and tested across 10 pairs, resulting in 267 trades. 

Findings indicated that adept identification of candlestick patterns (Inside bar, Pin bar, and Engulfing bar), accurate creation of support and resistance levels, and proper trend line plotting helped the study. Along with it, proficient recognition of chart patterns (head and shoulders, channels, wedges, and flag patterns) significantly elevated trade success rates to 88.39%. It was concluded that traders could achieve consistent profitability over time by developing the skill of recognizing price action patterns on charts without the use of complex strategies.

Given below are some of the benefits of the price action strategy:

• Trading is made simpler as it concentrates on patterns of price movement.
• Gives insights into market sentiment and the direction of trends.
• Aids in recognizing significant support and resistance levels for entry and exit points.
• Allows traders to adjust to evolving market conditions.
• Reduces reliance on intricate indicators and excessive analysis.
• It is flexible and can be combined with other trading methods and tools.
• Enables efficient risk management via stop-loss orders.
• Provides a foundation for comprehending market dynamics.
• It is suitable for making short and medium-term profits.
• Facilitates decision-making on investment choices.