What Is Price Action Strategy in Trading?
If you just came across the term price action trading, you’re probably wondering what it is. In simple terms, the price action strategy is a trading methodology that relies on historical prices to help traders make better trading decisions.
There is a lot to learn about price action strategy, which you will find in this article. In the end, you’ll find it easy to define and explain what price action is, know why traders use it, and learn price action strategy patterns.
That said, let us get straight to it.
Price Action Explained
When trading a financial asset, the asset’s price is essential because its shift determines if you will make a profit or a loss — traders who focus on the price alone when trading come up with a price action strategy.
This strategy studies price trends in the market over a period, and it helps the traders determine the time to enter or exit a position. Therefore, price action is the analysis of the performance of a commodity to forecast its behavior in the future.
During price action analysis, traders buy securities when the study shows a potential rise in prices and sell securities when there is a foreseen price fall.
Understanding price action trading is easy. You will look at the patterns of past markets and pinpoint the key indicators that influence your investments. It is also good to note that traders use various price action methods to predict market movements.
Price Action Signals
Price action signals are also called price action triggers or price action patterns. You can easily recognize these patterns in the market, and traders use them to forecast how the market will be in the future. Traders recognize the signals by spotting specific shapes or repetitions in the previous market performances.
Tools Used in Price Action Trading
Price action trading uses recent historical data and past price movements. The strategy focuses on technical analysis tools like charts, trend lines, and price bands. The trader uses the tools depending on their choice and strategy fit.
The trader can use simple tools and patterns like price bars, price bands, and trend lines. Others use complex combinations involving volatility and channels.
It is also vital for traders to decide on psychological and behavioral interpretations and subsequent actions. These are all significant aspects of price action trades.
Also, traders interpret price actions differently. Therefore, expect different interpretation results from two traders because they use different rules and behavioral understanding of the price action. Contrarily, with a technical analysis scenario, you could get similar behavior and action from different traders.
Fundamentally, technical analysis tools support price action strategy. With this strategy, traders can decide to take trading positions depending on their subjective, behavioral and psychological state.
Difference between Price Action, Indicators, and Technical Analysis
Price indicators are movements of activity on a chart that indicate the emergence of a new trend. Seasoned traders spot these indicators because they use them to make decisions on the market.
Market leaders use various calculations to forecast the future of the market when doing technical analysis. Price indicators and technical analyses are therefore different from price action because price action depends on the price movements within a given time.
How Profitable Is Price Action Trading?
The price of a commodity or security is an excellent measure of its success in the market.
Ensuring profitability when using price action depends on how the strategy is employed. Although most traders who use this tool claim that it can be profitable, the case could be different for those who only pay attention to price charts.
For the trader to make profits from this tool, they should consider other fundamental factors and economic indicators.
Reasons Why Forex Traders Use Price Action Strategy
Many traders use price action trading, but the strategy is common among forex traders. Below are some reasons why.
- The forex market is highly liquid, making it easier for traders to open and close their positions quickly.
- Although the forex market is constantly moving, it does not experience significant highs and lows often. This is an advantage to beginner traders who want to practice.
- The fast maturity of the market makes it easy to detect returning patterns and trends.
Price Action Strategy Patterns
Here are some of the price action strategy patterns.
Price Action Continuation Patterns
Continuous patterns happen during a trend. For example, we can assume that when a trend is up, a triangular shape will form in the data charts, which means there is an increased chance of the price breaking out to the upside.
This case also applies during a downtrend. When a downtrend happens, the pattern forms. Traders first wait for a trend and then a pattern. They will only trade if the price breaks out of the pattern in the trending direction.
The reversals happen when a trader fails to follow the rules of uptrend or downtrend. Violation of one price action rule drags the trend into trouble, and if there is a violation of both regulations, the trend is likely to reverse. However, the reversal depends on the waves the market leader is viewing.
Price Rejection Trading Strategy
Price rejection happens when a price that is moving through a critical level reverses direction due to a lack of sufficient force to maintain the trading speed. When rejection happens, you will notice hard and fast moves in the opposite direction.
Price rejection is likely to happen if you notice the following:
- The price is approaching a key price area. This could be supply, demand, or a pattern break-out area.
- The price gets very close to the area or breaks through
- The price speed fails, and the prices take a turn and start moving in other directions
- The price provides an entry opportunity by moving back the other way.
Renko Price Action Strategy
Another known price action strategy involves Renko charts. These charts form bricks and when the price changes by a specified amount, a new brick appears.
Bricks occur in the same colour, at an angle of 45-degrees, but the colour changes whenever a reversal occurs. A reversal gets noted when the price moves two bricks in the opposite direction.
Renko charts are primarily used in the trending market because they work well there. Traders will stick with the trade if the chart bricks maintain their colour and if the trend continues. However, if there is a reversal spotted, traders will exit the positions.
How to Learn Price Action Trading Strategy as a Beginner
For beginners, it is advisable to learn how price action works before applying it in actual trades. Most traders use online trading platforms to know about price action trading.
You can also use technical tools like drawing and price projection tools, as well as customizable charts. A demo account will come in handy because you can conduct trials with it before you get a live account where you deposit real funds.
Learn one strategy at a time and always ensure you learn things in depth. This enables you to gain more information about the one strategy and start earning profits before knowing about the rest.
The price of securities or stocks in the market determines if you will make a profit or a loss. Due to this fact, price action trading focuses on the market’s historical and current price movements to know the market’s direction.