Introduction to Price Action Analysis Trading Strategies

Introduction to Price Action Analysis Trading Strategies

Introduction to Price Action Analysis Trading Strategies

Introduction to Price Action Analysis Trading Strategies

There are different ways and different strategies that you can use to trade the Forex market. Some people use a lot of trend indicators such as ADX, moving averages, etc, to tell them whether the price is trending or not. Others prefer the oscillators, especially when trading a ranging market. Yet another group prefers having their price charts naked and simple without complicated indicator. They try to interpret what the price is doing by watching the price bars. These are the Price Action Traders.

What is Price Action Analysis Trading?

Price action is the history of past and recent price movements as seen in the charts which you can analyze to make trading decisions. Price often forms structures which you study, analyze and come up with strategies of trading them. Price activity is mostly recorded in specified units — timeframes as bars or candlesticks. The Japanese candlestick chart is the most preferred chart for analyzing price action because you can easily see the price’s movement and direction. In addition, the shape of a candlestick and the arrangement consecutive candlesticks may tell you some important stories about price activity.

Price action trading strategies are ways you can trade the market using mostly the price action and probably some tools that will help you identify the price levels and trend. Price action trading is purely focusing on what price is doing without the indicators — reason it is called naked trading.

Why Price Action Trading Strategy?

  • The candlestick pattern may tell some important stories about what price has done, is doing, and will most likely do next.
  • Price often forms structures which you can learn how to identify and trade. These structures often give measurable profit target.
  • You don’t need those lagging indicators that only indicate after the fact.
  • Your chart is clean and neat.
  • You can easily see what price is doing.
  • It is easy to appreciate the trend direction and price levels.

Tools for Trading Price Action Strategies

  • Candlestick patterns
  • Price structures
  • Moving Averages
  • Trendlines
  • Fibonacci retracement and extension levels
  • Pivot points
  • Previous price swing highs/lows
  • Support and resistance levels
Introduction to Price Action Analysis Trading Strategies

Introduction to Price Action Analysis Trading Strategies

Some common Price Action Strategies

Price structures: There are many price structures such as head and shoulder, inverse head and shoulder, double tops/bottoms, triangles, wedges, rectangles, flags, pennants, etc. You can learn a few of them and trade them.

  • The head and shoulder, double top, triple top, and rising wedge are powerful bearish price setups. When you see them after an uptrend, they indicate that price may turn downwards.
  • Double bottom, inverse head and shoulder, and falling wedge are great bullish price setups. Seeing them after a downtrend tells you that the trend may be potentially over and a reversal is very likely.
  • The rectangles, triangles, flag, and pennants are price consolidation in a trend. They are mostly continuation setups. A breakout in the direction of the trend, is a profitable setup to trade.

Reversal candlestick patterns + support/resistance levels, Fibonacci, etc: There many reversal candlestick patterns such as the hammer, hangman, shooting star, Harami, engulfing, piercing, evening star, morning star, etc. These patterns show that the trend is getting exhausted and a change in price direction is highly likely.

When you have any of these candle patterns at key price levels such as support and resistance levels, pivot points, previous swings high or low, etc; there is a good chance that the price level is holding up further price move in that direction thereby making a reversal very likely. Many price action traders use the combination of key price levels and reversal candlestick patterns as potential trade setups.

Reversal Candlestick Pattern at price dips in an uptrend and rallies in a downtrend: It is safer to buy dips in an uptrend, and sell rallies in a downtrend. One good way of gauging the end of the pullback and potential reversal to the trend direction is seeing reversal candlestick patterns such as hammer, shooting star, engulfing pattern, harami, evening star and morning star.

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