Price action has become one of the most popular trading techniques in recent times. Many new traders find this trading technique easy to understand, practice and master. It is also a technique used these days by programmers for trading algos, which either trade automatically (robots) or provide trading alerts (scanners).
In this article I will explain what is Price Action and demonstrate some of the basic elements of this simple, yet powerful trading technique.
What is the Price Action technique and why does it appeal to so many traders?
Finding the right trading strategy
One of the first challenges that a new trader meets once he entered the trading world is to decide which trading system/technique to use. I previously posted several articles about the trader’s road to success, and in these articles, I mentioned that there are several things that a trader looks for in a trading system:
- P/L – Probably the first thing someone looks for in a trading system
- Fitting one’s character – Usually the last thing a new trader understand its importance.
After some searching time, some traders (unfortunately) reach to a situation that their charts just explode with way too much information in an attempt to find a good trade signal:
The smart ones (or the lucky ones) quickly realize that with overdose of information they will not be able to accomplish anything.
The Price Action technique uses clean chart that allows the trader monitor the Price and not all the noise surrounding it.
Trading the clean chart
The Price Action technique suggests that all decisions will be based on price movement in a “clean chart” environment. No indicators involved!
By considering several technical analysis assumptions like “all information is priced and reflected in the chart”, Price Action suggests that you don’t need anything more than a candlesticks chart (or Bars) and basic technical elements like Support, Resistance and Trend lines.
The example above demonstrates a Price Action analysis that can be used by Price Action traders:
Marking important Support & Resistance line (I’m using Zones).
Marking trend lines in order to understand the asset’s direction (trending or consolidating).
Some traders add basic moving averages that have a role of Support & Resistance zones.
Since all the trading information (trades, reaction to economic data etc..) in a certain time period is packed into a candle form, the Price Action uses the combination of the candles formations and the potential importance levels (support/resistance/trendline) to make trading decisions. I’ll show some examples below.
The result is a pretty accurate trading system which is simple to understand and has strict trading rules to follow.
Price Action can be used to trade Forex, Equities and Futures. Every trading vehicle with a chart is tradable without understanding any fundamentals at all.
Trading examples and basic patterns
Pin-Bar pattern – A single Pin to blow up a trend
PinBar is a form of candle where the candle’s body is small (smaller than third of the candles size) and the tale/wick is much bigger.
PinBar can come as a bullish PinBar or as a bearish Pinbar and it all depends on the which side the body and the wick are. Bullish PinBar looks like a Hammer candlestick pattern and bearish PinBar looks like shooting star or inverted hammer. We can see an example of a bearish PinBar in the $GBPCAD chart below:
Notice how long the tail is and how short the candle’s body is. This candle tells us that despite the bulls attempt to push the price higher, they failed and within the candle’s period (daily here) the bears had huge victory as the pushed the price all the way down, below the opening price.
Price Action rules say that if you see a PinBar formation near important price level there is a chance for a future reversal.
Let’s examine the example shown in the $GBPCAD:
So, in this chart we see the details of the trade setup. The Price Action rules for this PinBar formation are:
Enter when the price close below the body of the PinBar
Once you entered – Place stop loss above the highs
Target nearest support level
As you can see, the price closed below the PinBar on the following day – The short order was filled or executed. During that day alone, the position was already up about 100 pips! If you had just entered a trade and exit the trade on the same day you would have booked 100 pips.
Following the trading rules, the trade kept open and the price bounced up and down, never touched the stop loss zone and finally few weeks later reached the target level for a little more than 200 pips.
The same scenario could have been in an hourly chart if you are day traders and you don’t keep position open for days and weeks.
We had other similar setups in this pair, few days after this setup:
As you can see, just by trading this Single Candle pattern, you can get very successful trades without any use of lagging indicators or advanced mathematics formulas.
Outside Bar – The Price Action’s version of Engulfing candles
Staying with that $GBPCAD chart, we see another pattern which is commonly used when trading Price Action:
is a candle that his size covers his predecessor completely. Unlike traditional candlesticks pattern, in Price Action, the body of the candle isn’t important – It is the full size that matters (including wicks).
Notice how I used the extreme case of an Outside Bar when the body is actually smaller than previous candle but the size is bigger – therefore it considers Outside Bar.
Let’s see it in another trading example:
In this daily $EURNZD chart we see three different cases of an Outside Bar pattern :
At the top of the resistance zone
At the bottom of the resistance zone
At the 200 SMA line resistance
The rules of the Outside Bar pattern is similar to the Pinbar’s rules (Since the three patterns demonstrated here are short setups I will talk about bearish rules but it is simply the opposite on a bullish setup):
Enter when the price closes below the low of the Outside Bar candle.
Stop loss should be placed above the Ouside Bar’s high
Target the nearest support level.
The Zones strategy and its use of Price Action
In the Market Zone I use Price Action as a entry timing setups and confirmation signals. By using combination of advanced patterns, like harmonic trading patterns, and simple Price Action patterns, you increase your probability of success, the accuracy of your setups and you get much better trading edge while you enter new position.
You can see each week examples for the use in Price Action and harmonic trading patterns in my Weekly Markets Analysis newsletters which are totally free to subscribe.
In the Elite Zone, the members receive detailed intra-week setups that also demonstrate how I combine several techniques and tools to find entry Zones which allows trading high accuracy setups with strict trading rules and great Risk/Reward potential.
Did you like Price Action trading? Do you know harmonic trading? Press here to read a trading article about harmonic trading patterns