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What is Price Action in Trading?
Price action trading is a methodology for financial market speculation that consists of analyzing fundamental price movements over time. It is used by many retail traders and often by institutional traders and hedge fund managers to make predictions about the future direction of the price of a security or financial market. Simply put, price action is how prices change, i.e., the ‘action’ of price. This is most easily observed in markets with high liquidity and volatility, but virtually anything that is bought or sold in the open market will produce price action. Price action trading ignores the fundamental factors that influence market movements, and instead looks primarily at the price history of a market, i.e. its price movements over time. Thus, price action is a form of technical analysis, but what distinguishes it from most forms of technical analysis is that its primary focus is on the relationship of current market prices to past or recent prices, as opposed to ‘second-hand’ values derived from that price history. In other words, price action trading is a ‘pure’ form of technical analysis because it does not include indicators derived from second-hand prices. Price action traders are only concerned with the first-hand data that the market produces about itself; that is, its price movements over time. Price action analysis allows traders to understand market price movements and provides explanations that serve as a way for traders to construct mental scenarios to depict current market structures. Experienced price action traders often attribute their unique mental understanding and ‘gut feel’ of the market as the main reason for their profitable trading. Price action traders utilize the past history of market price movements, typically focusing on recent price action over the last 3 to 6 months, with a lighter focus on more recent price history. This price history includes swing highs and swing lows in the market, as well as support and resistance levels. A trader can use market price action to try and depict the human thought process behind market movements. Each participant in the market will leave price action ‘clues’ on the market price chart as they trade their markets, these clues can then be interpreted and used to try and predict the next move in the market.Price Action Function
After understanding the meaning, then you must understand the function of this price action. The function of price action is:- It is very easy to understand and practice Price Action trading strategies, even if you don't have much experience in trading.
- Price Action trading strategy works well on most financial assets like stocks, forex, crypto, etc. and is applicable on all time frames.
- You have the freedom to determine entry and exit points for each trade setup based on your interpretation of risk and reward.
Price Action Indicators
Here are the indicators of price action. These indicators are:Indicator Three-in-One
In case of the appearance of PA set on the currency pair (or other asset raw materials, stocks) in the period from M5 to W1, the indicator will signal about it. The corresponding directional arrow for determining the entry point appears on the chart. This allows not to miss strong signals and at the same time not to look for PA patterns where the model is too weak or absent.Osilator Price Action
For MetaTrader 4(5) there is a version of the Price Action trading indicator that displays information in the bottom window, does not have an information panel and works only on the current period. The analysis of the set up in this case we do on the indicator columns. The red column shows a negative trend, the green one is a growing trend. The analysis is done from the first column from the zero line.Candlestick Pattern Indicator (CPI)
Candlestick Pattern Indicator (CPI) which automatically distinguishes more than 30 patterns of the PA system, at least this number is contained in the indicator algorithm. It requires real experience of the trader in the PA technique, because Candlestick Pattern Indicator (CPI) shows not only the most productive models, but also weaker ones that require mandatory confirmation of the trading signal. When a pattern is detected, a colored arrow with the name of the formed formation is displayed, and the indicator gives a sound signal. The CPI indicator has proven itself well on small timeframes from M15 to H1, including on weakly volatile assets. It is desirable that there are at least 20-30 bars between one-way patterns.What is the Price Action Strategy for Trading?
Well, next we will learn about how the strategy of price action. The strategy can be seen below.Price action trend trading
If Price Action trading is the study of price action, Price Action trend trading is the study of trends. Traders can use a number of trading techniques to spot and follow Price Action trends such as head and shoulder reversal trading. This is a great trading tool for new traders, as it allows them to effectively learn from their more experienced peers by chasing Price Action trends as they appear. In the screenshot below, you would open a ‘buy’ position to profit from the green uptrend, or a ‘sell’ position to profit from the red downtrend.Pin bar
Sometimes called a candlestick strategy because of its distinctive shape, the pin bar pattern looks like a candle with a long wick on top. It represents a sharp reversal and rejection of a particular price, with the ‘wick’ or tail indicating the price range that was rejected. The assumption is that price will continue to move in the opposite direction to the tail, and traders will use this information to decide whether to go long or short in the market. For example, if the pin bar pattern has a long lower tail, this tells traders that there is a lower price trend that was rejected, implying that price will rise.Inside bar
The inside bar pattern is a two-bar strategy, where the inside bar is smaller than the outside bar, and falls within the high and low range of the outside bar (or parent bar). Inside bars often form during times of consolidation in the market, but they can also act as red herrings, signaling a turning point in the market. Skilled traders can spot these trends at a glance, and should be able to use their macro knowledge to predict whether the inside bar represents a consolidation or a shift in the prevailing trend. The size and position of the inside bar will determine whether price is likely to move up or down.Trend following retracement entry
This is a relatively simple Price Action strategy where the trader simply follows the existing trend. If price is in a clear downtrend, with consistently lower highs being made, the trader may want to go short. If price is gradually rising, with trending higher highs and lower lows, the trader may want to go long.Trend following breakout entry
This trend tracks every major movement in the market with the assumption that after a price spike, a retracement will follow. If the market moves outside of a defined support or resistance line, it is known as a breakout. Traders can use this as a signal to act, going long if the stock is trending up or breaking above the resistance line, or going short if it moves below the support line.Head and shoulders reversal trade
As the name suggests, the head and shoulders pattern is a market movement that somewhat resembles the silhouette of a head and shoulders. In other words, the price rises, falls, rises further, falls again, and rises to a lower high before a moderate decline. Trading the head and shoulders reversal is one of the most popular Price Action trading strategies because it is relatively easy to pick an entry point (usually right after the first shoulder) and to set a stop loss (after the second shoulder) to take advantage of the temporary peak (the head).The sequence of highs and lows
At its core, Price Action trading is a game of ups and downs. Price Action traders can follow the sequence of highs and lows to chart emerging trends in their markets. For example, if price is trading at higher highs and higher lows, this indicates that price is in an uptrend. If it is trading at lower highs and lower lows, the trend is down. Traders can use their knowledge of the sequence of highs and lows to pick entry points at the lower end of an uptrend, and by setting a stop just before the previous higher low.How to Confirm Price Action?
It is important to understand that every trade and every chart situation is unique. There will never be two trading situations that are exactly the same in the market. Therefore, how a trader enters is at their own discretion and is based on their perception of the chart at that particular time. So, whether or not you enter on a Price Action signal or without a signal will be determined on a case by case basis. You may choose to wait for a signal at a key chart level that is in line with the trend, or you may just enter ‘blindly’ at a key level. It is ultimately up to you. You may choose to wait for the ‘perfect storm’ of confluence with as many supporting factors as possible in your favor, or you may decide there is a very clear pin bar signal with a long tail and that is enough for you to enter. As long as you are incorporating one strong component (ideally two or more) of the TLS ‘system’ (Trend, Level or Signal), and it makes sense to you, that is fine. There are many variables at play and there is no systematic way to look at trading. Anyone trying to sell you on a mechanical trading system has not developed their trading instincts and is still looking for the ‘Holy Grail’ of trading that does not exist.Trading with Price Action confirmation signals
Trading on Price Action signals means you wait for a clear Price Action signal or setup to form in the market, ideally from a key chart level of support or resistance or in a trending market.Trading without Price Action confirmation signals
There is no reason not to enter a trade for a long period of time just because you don't have a Price Action signal. We can enter a trade without a confirmation signal in several different ways, and this can still be considered a 'smart trade' because we are waiting to enter from a level or from a value point in the trend, regardless of what you may have read elsewhere. By knowing price action trading means that you also know the strategy when trading with this price action. After knowing it, the next step to be able to trade is by registering at GIC to start trading with a minimum capital of 150,000 rupiah!
