How to Master Price Action
Trading in forex, commodities, cryptocurrencies, or any other financial market can be done in many ways. Price action is one of the most popular, widely used, and easiest ways to start trading. In this article, we will discuss how to trade using this strategy, its features, pros and cons.
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Price action is a method of monitoring the price movements of financial assets and making buying and selling decisions based on it.
- Trend Lines
- Support & Resistance
- Breakout Trading
- Trading Indicators
- Pin Bar
- Head and shoulders
- Inside Bar
- Suitable for all Style
- Easy to use
- Wide Scope
- Ignore fundamental and sentimental analysis
- Subjective
- False Signals
What is Price Action?
Price Action is also known as naked trading or chart trading. Under this method, traders watch the price movements of the financial assets and make buying and selling decisions based on it. Price action is the change or fluctuation in the price of the financial asset over time. In the forex market, traders predict the currency pair’s price movement and make trade decisions accordingly.
Price action trading is a strategy based on technical analysis tools. Traders, based on historical data, charts and indicators, predict the market.
Price Action Strategies
Price action is amongst the easiest method for trading in currencies. One can make effective trade decisions by monitoring charts and indicators. Here are some popular ways to trade using price action.
Trend Lines:
If you know how to read charts, you must be aware of trend lines. Many traders trade considering the present trend. The trend line is a way to spot the prevailing trend.
A trend line connects the highs or lows of price; the more the touches stronger the trends, and vice versa. A strong trend in an upward direction suggests opening a long position, while a trend in a downward direction suggests opening a short position.
Also, these trend lines are helpful for reverse trend trading, where traders place trade in the opposite direction, hoping for a price reversal.
Support & Resistance:
These two are the vital price action patterns used to make the trade decision. Support is the level where a downtrend stops and moves upward.
Meanwhile, resistance is a level where an uptrend pauses and moves downward. So when the asset price touches the support level, the expecting price reversal trader opens a long position, and when the price touches the resistance level trader opens a short position.
Breakout Trading:
A breakout is when the price breaks the support and resistance levels. Trading Breakouts are quite simple; a breakout in the upward direction suggests that the asset’s price will rise further due to the bullish pressure.
A breakout in the downward direction suggests that the asset’s price will fall further due to the bearish pressure. So, a trader can make buy and sell decisions by watching these breakouts.
Trading Indicators:
any traders struggle to identify price trends, support, resistance levels, etc. However, many charting platforms provide indicators to determine trade crucial levels.
Price action traders can use indicators like Bollinger bands, relative strength index, moving averages, etc, to identify these patterns.
Pin Bar:
A candlestick-long wick pattern indicates price reversal or rejection. Identifying the pin bar pattern is quite simple; it is a small candle with a long wick in either direction.
A pin bar with a long wick lower indicates a bullish reversal, suggesting traders take a long position. In contrast, a pin bar with an upper long wick indicates a bearish reversal, suggesting a trader to go short.
Head and shoulders:
Inside Bar:
Another popular price action pattern is the inside bar for identifying trend continuation or reversal. Under this, the highs and lows of the second candle are in the range of the first candle.
When the insider bar is under the bearish candle, it suggests opening a long position; meanwhile, when the inside bar is under the bullish candle, it suggests going short.
Pros of Price Action
Suitable for all:
Easy to use:
Price action trading is the simplest and most effective strategy. Even beginner or novice traders can use this strategy. You just have to dedicate a few hours a day to learning different patterns and indicators to place trade using them.
Wide Scope:
The biggest pros of this method is you can use it in different markets, including forex, cryptocurrencies, commodities, stock, etc. So, it is beneficial for traders who diversify their trade capital in different markets.
Cons of Price Action
Ignore other analysis:
In the forex market, the price of currency pairs is due to different fundamental and sentimental analysis factors like news, opinion, economic calendars, central bank policies, inflation rate, interest rate, etc.
However, the price action strategy is purely based on technical analysis and does not consider the current market conditions. So you cannot entirely depend on this strategy; you have to keep monitoring the other factors also.
Subjective:
In trading, different kinds of traders use different approaches, so the pivot point may vary. The interpretation of every trade is different based on the approach or tool. As a result, they may come to different conclusions.
One trader may perceive a pattern as a breakout, and one may not or wait for confirmation. Also, the pattern may vary based on the time frame. So, price action patterns or charts are subjective and may result in different interpretations.
False Signals:
We have studied price action tools like breakouts, support and resistance, head and shoulders, trend lines, etc and how to interpret them. However, in trading, nothing is 100% accurate.
All these interpretations and assumptions are made after studying the historical movements. So, there is no guarantee that the price will move in a particular direction, and these indicators may generate false signals sometimes.
Wrapping Up
Every strategy has its advantages and disadvantages. Price action also has pros and cons. However, if the method is used effectively after proper learning, it may result in excellent trading outcomes.
Every trader has different expectations from the market, account balance, leverage, risk ratio and other factors. So, a trader should consider these factors for selecting the best price action strategy.
Price action trading is purely based on technical analysis. No doubt, technical analysis is a great way to predict the market. However, you cannot solely depend on this strategy; you must also consider correlations sentimental and fundamental analysis for desired results.
