When using price action in your trading you are looking to create a set of rules and systems that you can use to create a consistently profitable edge over the market.
Price action trading is not about winning every single trade, but instead being able to make profits from using a strategy that makes money overall.
As we will discuss in-depth and go through in this post, you can do this with a wide range of different strategies. These include using candlestick patterns, broader price action patterns, trends and even combining with indicators.
Note: Get Your Free Price Action Trading PDF Below.
What is Price Action Trading?
Price action trading is a technique or trading style where a trader makes decisions based on the price movement on the charts as opposed to relying on lagging indicators.
Price action trading also ignores the fundamental factors of a security or Forex pair and only looks at the price history.
Price charts reflect the beliefs and actions of all the traders trading the market. For example; if the price has made a sudden large move higher, then the price action charts will clearly show this because all you are looking at is the price movement.
This movement could have been caused from many different factors, but the underlying reason does not change the fact that price made a sharp move higher.
This was created from the bulls (buyers) having control over the bears (the sellers).
As a price action trader you are creating a clear system so that over a set of trades and after you have taken into account all of your wins and losses, you are making profits.
Price action allows you to do this and also create a system that suits your personal style. You can trade on many different markets, you can use the small to larger time frames and you can even use price action to scalp the markets.
How to Learn Price Action Trading
As we go through this post and discuss the different price action strategies, systems and patterns, there are three things to keep in mind;
#1: Price Action Discounts Everything
Price action has been criticized by experts for not following the fundamental factors.
As a price action trader the only thing that you are looking to do is analyze the chart in front of you. For example; the trend, patterns and potential trade setups.
You are trading what you can see in front of you and not what you ‘think’ could happen like with fundamentals.
#2: Price Moves Based on Trends
After establishing a trend, the future price movement will more likely stay in the same direction.
Until a trend bends it is your friend and it is often one of the best ways to put the odds in your favor.
#3: History Repeats Itself
History does repeat itself.
When price action trading you are using chart patterns to analyze the markets movements.
Many forms of price action analysis have been used for more than 100 years and they are still relevant today because it illustrates the same patterns in price movements.
When reading price action charts we are reading trader behavior that is showing itself through patterns.
The reason these patterns continue to repeat is because people and traders continue to repeat the same habits when put in similar situations.
Price Action vs Indicators
Price action trading is based on the belief that past price history can help predict the future of a market, or the potential for a pattern to repeat.
Indicators are similar in this way. However, when using price action you are reading live price as it is being printed on a chart, whereas indicators are ‘lagging’.
This means that indicators are using old price information to create the indications you see. For example; a 21 period moving average is using the past 21 periods of price action.
Whilst some traders are very anti indicators, often the best systems will come when price action and indicators are combined.
The reason for this is because indicators can often help you filter out bad price action, find trends, find strong momentum and even help with profit targets.
Price Action Trading in the Forex Market
One of the best markets to use price action is the Forex market.
The reasons for this is because of how the Forex market operates and the benefits that many Forex brokers will afford to you.
The Forex market is open 24 hours a day and 5 days a week. This gives you a lot of trading opportunities.
This also means that you can trade at a time that is suitable to you no matter where you are in the world.
Most Forex brokers will allow you to use leverage. This will allow you to both deposit a small sum of money and trade with a small sum of money whilst using leverage to open larger trading positions.
If not used correctly, then leverage can be an account killer, but if used with smart money management controls it can boost your account.
Another reason many will use price action in the Forex market is because of the large range of Forex pairs and volatility.
Intraday Price Action Trading
Increased volatility can be a great opportunity for a trader.
When price is volatile it means it is making a lot of movement. This gives you a lot of chances to make large profitable trades. Other markets that make small moves can see you locked in and waiting for something to happen.
Some of the fastest and most profitable moves can be seen on the intraday Forex markets.
These time frames include the 5 minute, 15 minute, 30 minute and 1 hour charts.
When trading these charts there are both positives and negatives.
You will find a lot of trading opportunities and have many chances to make profitable trades. You will also be able to get in and out of your trades quickly without holding them overnight.
The smaller time frames can contain more risk if you are inexperienced. If things go wrong, then they can go wrong quickly.
If you are thinking about trading price action on the smaller intraday time frames you need to ensure you use strict money management and you are always using a stop loss for account protection.
Simple Price Action Trading Strategies
Some of the simplest trading strategies involve using price action.
The reason is because when price action trading you are simply looking and reading raw price action. From there you can create any system that suits you.
Some of the best systems you will find are also the simplest with the clearest rules.
Simple price action trading systems include;
- Price action trend trading
- Candlestick trading
- Pattern trading
- Combining price action and indicators
Trading Price Action Trends
Trading with a price action trend can be one of the easiest ways to start increasing your trades odds.
As Ed Seykota said;
The trend is your friend, except at the end when it bends.
The market will often trend higher or lower for far longer than what traders ‘think’ and is why it is important we trade with what we see on the chart and not what we think could or should happen.
Two of the easiest ways to find trend trades with price action are using trendlines and moving averages.
When using a moving average you are looking for a clear move in either direction. Using a moving average combination such as the 50 and 200 EMA (exponential moving average) can also show us when price action is either looking to start a new trend or is strongly trending.
Another simple way to find and then trade trends is using trendlines.
As the example shows below; price is in a trend higher. Price continues to test the uptrend line. Potential trades could be found in the trend higher at the next test of the trendline.
Trade With Candlestick Patterns
One of the most popular price action strategies is using candlestick patterns. The reason for this is because they are very easy to spot and they can help with entry and exit levels.
The most popular chart type among professional traders is the candlestick chart because it shows the price action in the clearest form. The candlestick chart will also help you easily and quickly spot candlestick signals.
A few of the most popular candlestick patterns are;
Pin Bar Pattern
You can find pin bars on any “naked” bar chart or candlestick chart.
The pin bar has a long upper or lower tail, shadow, or wick and a much smaller real body.
A bullish pin bar shows that price is rejecting lower prices. You can see this as the price moved lower, but by the end of the session it had snapped back higher to reject the lower prices.
The bearish pin bar shows it is rejecting higher prices.
Price tried to move higher, but by the end of the session it had been snapped back lower rejecting the higher prices.
Bullish and Bearish Engulfing Candlesticks
Engulfing candlesticks are reversal price action signals.
Following the first small candlestick price will then form a second candlestick that fully engulfs the first small candle.
This shows a reversal in the price action order flow.
For example; a bullish engulfing pattern will show that price first formed a small candle, in the second session it moved lower, before reversing and breaking completely above the first candle.
Inside Bar Pattern
This pattern is a popular candle formation, but does come with some risks.
The inside bar candlestick pattern is a two candle pattern that is showing indecision.
The first candle forms followed with the second candle forming completely ‘inside’ the first candle. This shows that price could not break either higher or lower and is indecisive.
Trading With Price Action Patterns
Whilst one and two candlestick patterns are popular and can show us the very short-term potential, there are other patterns that show what the market is doing overall.
These patterns can help us get a far better idea of what side of the market we should be on.
Head and Shoulders Pattern
The head and shoulders pattern is one of the most reliable trend reversal patterns.
This pattern looks to predict a bullish or bearish trend reversal.
This pattern is also known as the saucer bottom pattern.
This pattern indicates that a stock or Forex pairs price is low and the downward trend is now closed.
Double Tops and Double Bottoms
This pattern forms after a sustained trend and is incredibly powerful for finding when a market has topped out.
The double top is a chart pattern used to describe when the price of a market drops, rebounds and then drops from the same level creating a double top.
Traders use triangles because they occur more frequently than some of the other patterns. Triangle patterns can also be used on different time frames and can last anywhere from a couple weeks to months.
There are three common triangle patterns; the symmetrical, ascending, and descending triangles.
- Symmetrical triangle pattern: This is often referred to as the coil. This pattern is normally a trend continuation pattern.
- Ascending triangle pattern: This pattern forms during an uptrend. Usually this pattern is seen as a continuation pattern.
- Descending triangle pattern: This pattern is the bearish counterpart of the ascending triangle.
Combining to Create a Price Action Trading System
One of the best ways to create your own price action trading system is to combine different strategies until you find what suits your trading personality.
As traders we are all different. We see charts slightly differently. We have different risk tolerance levels and we have different favorite markets.
Using price action in your trading is no different. There are endless ways you can use price action to create your own custom trading system.
Below are just a few examples of what you could do in your own trading.
Example Price Action Setups
You may be suited to using just raw price action and candlestick trading.
If this is your trading style, then using candlesticks such as the pin bar or dragonfly doji may be for you.
The example below shows a bullish pin bar reversal that formed at a major support level. This was a potential entry to get long from the pin bar.
You could be the type of trader who needs to add more confirmation into your trading. You may also want to filter out bad price action or help with finding trends.
You could combine indicators into your price action trading.
The example below shows how you could use a moving average to first find a trend and then using price action confirm an entry point. As the chart shows; price moved to test the moving average in the trend lower and then formed a bearish engulfing candlestick.
Another simple trading style is looking for bigger overall market moves.
This can be done with patterns such as the head and shoulders or the double top and bottom.
The example below shows how price formed a second bottom. This presented with a bigger overall opportunity to look for long trades.
The Best Price Action Trading Books
There are a lot of books out there discussing price action trading and technical analysis.
A lot of them are mind numbingly boring and are not a huge amount of help.
Three of the best price action trading books from three of the best authors that will teach you everything from price action patterns to candlestick trading are;
#1: Martin Pring on Price Patterns
Martin Pring on Price Patterns: The Definitive Guide to Price Pattern Analysis and Interpretation by Martin J. Pring
Martin Pring is one of the world’s most respected traders and trading analysts.
This book is a complete and in-depth look on everything price action patterns. It shows the best patterns, why they work and why others don’t.
#2: Encyclopedia of Chart Patterns
Encyclopedia of Chart Patterns by Thomas Bulkowski
In this the second edition of the Encyclopedia of Chart Patterns, Thomas Bulkowski goes through a huge range of market statistics that are extremely interesting.
These statistics include bull and bear market statistics, trends, charts patterns and event patterns.
#3: Japanese Candlestick Charting Techniques
Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East by Steve Nison
Steve Nison is perhaps the most famous price action trader of all with two international best selling books.
This is one of the easiest to read and understand books and makes what is often a very complicated subject easy to understand
I hope you have been able to get something out of this price action trading guide.
There is a lot to learn when it comes to price action trading and it is not just as straightforward as finding one candlestick and then entering trades.
That is also the beauty of price action trading. You can customize and find a system that suits you and your personal style.
Make sure you test many different price action strategies to find what you are most comfortable with and always test them first on good free demo charts.