Did you know that price action trading strategies are one of the most commonly used methods in trading the financial market? Whether you are a short-term or long-term trader, trading forex or stocks, analysing the price of a security is perhaps one of the simplest, yet also the most powerful, ways to gain an edge in the market.
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After all, every single trading indicator in the world is derived from price, so it makes sense to study it, understand it, learn from it and use it in your trading. In this article "Price Action Trading Strategies" article, we cover what price action trading is and how to start trading four price action trading strategies today.
Table of Contents
What is Price Action?
What is price action? Price action is the study of a security"s historical price movement. Traders using price action trading strategies look to study historical prices to identify any clues on where the market could move next. The most commonly used price action indicator is the study of price bars or candlesticks which give details such as the open and closing price of a market and its high and low price levels during a specific time period.
Analysing this information is the core of price action trading. In fact, it could be said that price action is really the study of the actions of all the buyers and sellers actively involved in any given market. Therefore, analysing what the rest of the market participants are doing, can give traders a unique edge in their trading decisions.
The most commonly used price bars which are used as a price action indicator, are called candlesticks. All trading platforms in the world offer candlestick charting - proving just how popular price action trading is.
What is a Price Action Indicator?
As discussed above, we now know that price action is the study of the actions of all buyers and sellers actively involved in a given market. The most commonly used price action indicator is a candlestick, as it gives the trader useful information such as the opening and closing price of a market and the high and low price levels in a user-defined time period. Let"s look at an example:
If you were to view a daily chart of a currency pair, stock or commodity the above candles would represent a full day"s worth of trading. Both candles give useful information to a trader:
The high and low price levels tell us the highest price and lowest price made during the trading day. The seller candle, shown by a black, or sometimes red body tells us that the sellers won the battle of the trading day. This is because the closing price level is lower than the opening price level. The buyer candle, shown by a white, or sometimes green body tells us that buyers won the battle of the trading day. This is because the closing price level is higher than the opening price level.Using this simple candle setup is one of the first steps towards creating a price action strategy. For example:
If after the seller candle, the next candle goes on to make a new low then it is a sign that sellers are willing to keep on selling the market. This weakness will cause some traders to initiate short (sell) positions or hold on to the short positions they already have. If after the buyer candle, the next candle goes on to make a new high then it is a sign that buyers are willing to keep on buying the market. This strength will cause some traders to initiate long (buy) positions, or hold on to the long positions they already have.This type of price action analysis is just one way to use candlesticks as a price action indicator. However, the candles themselves often form patterns that can be used to form price action trading strategies. Before we look at these patterns, let"s first look at where they work best.
Forex Price Action Trading
As price action trading involves the analysis of all the buyers and sellers active in the market, it can be used on any financial market there is. This includes forex, stock indices, stocks and shares, commodities and bonds. You can view instruments within all these markets on candlestick charts and, therefore, implement a price action strategy on them.However, the forex market has some specific advantages for price action traders, such as:
Open 24 hours a day, five days a week - a true representation of buying and selling across all continents. Large liquidity - enabling you to trade in and out of markets within nanoseconds. Low spreads - some, not all, forex currency pairs offer low spreads which could keep the traders" commission costs low.These are just some of the reasons why price action forex trading is popular. In the next section, we will use the Forex market to demonstrate four different trading strategies based on price action. The first three price action trading strategies are suitable for swing trading, whilst the fourth is for day trading, in particular scalping.
4 Price Action Trading Strategies
A trading strategy requires three different elements: the why, how and what.
The "why", is the reason you are considering trading a specific market. This is where price action patterns come in use. Through your price action analysis, you will gain an edge on what is more likely to happen next - the market going up or down.
The "how", is the mechanics of your trade. In essence, it is the manner in which you will trade. This analysis involves knowing your price levels for entry, stop-loss and target. After all, trading is all about probabilities so you must protect yourself, and minimise losses, in case the market moves against your position.
The "what" is the outcome of the trade. What are you looking to achieve from it? Is it a short-term trade or long-term trade? This comes down to how you manage the trade to profitability and manage yourself if the outcome is not what you desire.
If you are interested in learning more about price action trading strategies and indicators, watch the video below from our Youtube channel.
1. The Hammer Strategy
The hammer price action pattern is a bullish signal that signifies a higher probability of the market moving higher than lower and is used primarily in up-trending markets. Here is an example of what a hammer candle looks like:
A hammer shows sellers pushing the market to a new low. However, the sellers are not strong enough to stay at the low and choose to bail on their positions. This causes the market to rally back up, leading buyers to also step into the market. The open and close price levels should both be in the upper half of the candle. Traditionally, the close can be below the open but it is a stronger signal if the close is above the opening price level.
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Depicted: EURUSD Weekly - Admirals Meta
Trader 5. Date Range: 26 May 2020 - 4 August 2020. Captured on 20 April 2023. Please note: Past performance is not a reliable indicator of future results. In the above price action forex chart of EUR/USD, there are two examples of a hammer pattern highlighted in the gold boxes. Through the analysis of the open, close, high and low price levels the pattern suggests a move higher is likely. In these highlighted examples, the price did move higher after the candles formed. Of course, this will not always be the case and there are even examples of this in the same chart. However, how could you have traded these highlighted indicators?
ENTRY: A possible price level to enter a trade, could be when the next candle finally manages to break the high of the hammer candle. The high of the second highlighted hammer candle above - which formed on the week of 16 February 2020 - is 1.0863. Therefore, an entry price could be 1.0864.
STOP-LOSS: A possible stop loss level could be at the low of the hammer candle. If the market triggers the entry price but no other buyers step in, it"s a warning sign the market may need to go lower for any buyers to be found. Therefore, you would not want the stop loss to be too close to your entry. With the low of the hammer candle at 1.0777, a possible stop loss could be 1.0776.
TARGET: There are multiple ways to exit a trade in profit such as exiting on the close of a candle if the trade is in profit, targeting levels of support or resistance or using trailing stop losses. In this instance targeting the previous swing high level would result in a target price of 1.1095.
THE TRADE: With an entry price of 1.0864 and stop loss of 1.0776 the total risk on the trade is 88 pips. Trading at 0.1 lot would mean that if this trade triggered the entry price, then hit the stop loss, the overall loss would be $88. In this instance, the market traded higher to the target price resulting in an approximate trade profit of $231.
2. The Shooting Star
The shooting star price action pattern is a bearish signal that signifies a higher probability of the market moving lower than higher and is used primarily in down trending markets. In essence, it is the opposite of the hammer pattern. Here is an example of what a shooting star candle looks like:
A shooting star shows buyers pushing the market to a new high. However, the buyers are not strong enough to stay at the high and choose to bail on their positions. This causes the market to fall lower, leading sellers to also step into the market. The open and close price levels should both be in the lower half of the candle. Traditionally, the close can be above the open but it is a stronger signal if the close is below the opening price level.
Depicted: EURUSD Weekly - Admirals Meta
Trader 5. Date Range: 19 May 2020 - 4 August 2020. Captured on 20 April 2023. Please note: Past performance is not a reliable indicator of future results. In the above price action forex chart of EUR/USD, there are three examples of a shooting star pattern - all highlighted in the gold boxes. Through the analysis of the open, close, high and low price levels the pattern suggests a move lower is likely. In these examples, price did move lower after the candles formed. Again, this is not guaranteed to happen and if you look closely you will see examples in the same chart where the price did not move lower. How could you have traded it?
ENTRY: A possible price level to enter a trade, could be when the market finally manages to break the low of the shooting star candle. The low of the third shooting star candle - which formed on the week of 12 January 2020 - is 1.1086. Therefore, an entry price could be 1.1085.
STOP-LOSS: A possible stop loss level could be at the high of the shooting star candle. With the high of the shooting star candle at 1.1172, a possible stop loss could be 1.1173.
TARGET: There are multiple ways to exit a trade in profit such as exiting on the close of a candle if the trade is in profit, targeting levels of support or resistance or using trailing stop losses. In this instance targeting the previous swing low level would result in a target price of 1.0981.
THE TRADE: With an entry price of 1.1085 and stop loss of 1.1173 the total risk on the trade is 88 pips. Trading at 0.1 lot would mean that if this trade triggered the entry price, then hit the stop loss, the overall loss would be $88. In this instance, the market traded lower to reach the target price resulting in an approximate trade profit of $104.
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Khung thời gian để Day Trade 11Chiến lược inside bar Day Trading 11Ví dụ 12Đánh giá chiến lược inside bar Day Trading 13
inside bar và NR4 là gì? 15Quy tắc vào lệnh inside bar NR4 16Ví dụ chiến lược inside bar NR4 16Đánh giá chiến lược inside bar NR4 19
NR7 là nến gì? 20Quy tắc vào lệnh chiến lược NR7 20Ví dụ chiến lược NR7 21Đánh giá chiến lược NR7 22
Mô hình tiếp diễn Yum-Yum là gì? 24Ví dụ mô hình tiếp diễn Yum-Yum 24Đánh giá mô hình tiếp diễn Yum-Yum 26
Trading price action của A.I.Brooks 28Forex price action Scalping của Bob Volman 29YTC price action của Lance Beggs 30Bộ sách price action của Galen Woods 31Martin Pring on Price Pattern 32Japanese Candlestick Charting Techniques của Steve Nison 33Integrated Pitchfork Analysis - Basic to Intermediate bởi Mircea Dologa 34A complete guide to Volume Price Analysis của Anna Coulling 35Trend Qualification and Trading của L. A. Little 36The Art and Science of Technical Analysis của Adam Grimes 37
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