Price Action Trading is a trading method based on price action that is popular with many traders. With this method, only basic technical analysis tools need to be used. From there, traders will make trading decisions based on the price chart. So specifically, what is Price Action in forex? How effective is the trading strategy with this method? Let’s explore more details with Forex Trading through the article below!
Explore Price Action Trading Strategies
Price Action Trading is a method of trading stocks based on price charts. It applies specific tools and strategies. This is a very effective forex trading method that every investor should learn.
What is Price Action?
The price Action method is a trading method based on price action. With this method, traders or investors decide to buy or sell based on information obtained from the price chart. Use moving averages to identify support and resistance zones along with trend lines.
The parameters on the price chart reflect the beliefs and actions of all market participants. At the same time, it is possible to trade within a specific period of time. News and events can also impact price movements.
Because the market fluctuates rapidly, this trading method often makes little use of price indices with time lags. Examples include Stochastic Oscillator, and RSI (Relative Strength Index). Or the MACD (Moving Average Convergence) indicator, which can sometimes be a waste of time.
Often, investors will study support and resistance lines. Look for candlestick patterns and price models to determine reasonable entry points.
Although trading methods based on price action and price chart analysis are said to be highly accurate. However, it also requires the trader price action to have a lot of experience in this analysis method.
Characteristics of trading methods with Price Action
According to the principles of Price Action Trading: Price action is the trace of capital. Every exchange transaction leaves a footprint. Prices always react based on the buying and selling activities of participating parties. Price movements often tend to repeat. Allows price line analysis to predict trends.
Therefore, one will analyze the behavior of buyers and sellers. Determine which faction is dominating and dominating the market. From there predict the next direction of the price.
- If buyers are controlling the market (i.e. demand is greater than supply), then the price tends to increase => Traders can consider a BUY order.
- If the sellers are controlling the market (i.e. supply is greater than demand), then the price tends to decrease => Traders can consider a SELL order.
With Price Action Trading, traders will rely on the shape and pattern of candles or special price ranges that candles create. Thereby analyzing price action to predict the next direction: increase, decrease, or continue.
See more: Master the Forex “game” with Price action
Tools used for in-depth Price Action analysis
Before trading price action, remove unnecessary indicators on the chart. Observe the chart and look for trading signals.
There are 3 important tools when Price Action Trading: resistance-support, candlestick patterns, and price patterns. This helps analyze price behavior and determine who is controlling the market. However, you must determine them yourself by observing the chart. No matter what tool you use, traders need to understand the meaning that each candle brings.
Price Action Trading follows the information provided by a candle
Each candle provides traders with 4 basic pieces of information: the opening price, closing price, highest price, and lowest price of the trading session that constitutes that candle. The candle wicks and candle body represent the behavior of the buying and selling sides during the trading session:
- The color of the candle body indicates whether the price increased or decreased compared to the opening level.
- The length of the candle body indicates the degree of control of the buyers or sellers during the session.
- The long wick above shows stronger selling pressure. On the contrary, long candlestick wicks below show stronger buying pressure.
- The length of the full-body candle indicates the degree of price fluctuation during the trading session.
Characteristics of candlestick patterns
Candlestick patterns are an important tool in the Price Action Trading method. It provides traders with important information about price behavior and market sentiment. This is intended to help predict future price trends.
Candlestick patterns that traders need to pay attention to include:
- Basic candlestick patterns include the Inside bar, Pin bar, and Fakey.
- Bullish reversal candlestick patterns include Dragonfly Doji candles, Hammer candles, Inverted Hammer candles, Morning Star candles, and bullish engulfing candles.
- Bearish reversal candlestick patterns include Tombstone Doji candles, Hanging man candles, bearish engulfing candles, evening star candles, Shooting stars, and three black crows candles.
- Continuation candlestick patterns include Rising Three Methods and Falling Three Methods.
Price Action is based on support and resistance levels
Support and resistance are important price zones where trends often reverse or slow down before continuing. This is the best point to make a purchase or sale. Therefore, traders using the Price Action method often rely on important support and resistance zones to make trading decisions.
- When the price increases and touches the resistance area, it may level off or reverse down if there is enough selling force. At this point, traders can consider opening a sell order.
- If the price drops and reaches the support zone, it will likely level off or reverse upward if there is enough buying force. In this case, traders can consider opening a buy order.
Use price models
A price pattern is a combination of many candles in the same period of time. To create special shapes with specific transactional meanings. Based on the price model, traders can evaluate the developments of buyers and sellers during the formation of the model. From there, it is easy to predict the next direction of the price.
Some popular price patterns today in forex include:
- Double top pattern, 3-peak model
- Model of 2 bottoms, 3 bottoms
- Head and shoulders pattern
- Cup and handle model
- Wedge model
- Bunting pattern
- Triangle model
- Rectangular model…
However, to accurately identify price patterns, traders need to clearly understand each pattern. Make observations on price charts in many different time frames.
Strategies for Implementing Effective Price Action Trading
There are many strategies available for you to apply when trading Price Action Trading such as Breakout, Retest, and Pullback… In this article, we will introduce 4 effective Price Action trading strategies. Let’s follow along.
Price Action Trading with Breakout Strategy
Break-out trading occurs when prices break important resistance or support areas. It tends to move strongly in the direction of a breakout. This strategy is implemented with the following basic steps:
Step 1: Observe the price chart (preferably use the time frame from M15 to D1) to identify support and resistance zones.
Step 2: Wait for the price to break out of the support/support zone, then execute the order.
- If the price breaks out of the resistance area and goes up, traders can open a BUY order. On the contrary, if the price breaks the strong support zone and goes down, you can consider opening a SELL order.
Step 3: Place an order as follows:
- Order placement point: It is the closing price of the candle that breaks out of the support/resistance level.
- Stop loss: Place stop loss a few pips below the resistance line or closest to the bottom for Buy orders. Can be placed a few pips above the support area or at the peak closest to the Sell order.
- Take profit: A distance from the order point equal to the width of the support and resistance zone.
Pull back strategy
With 70% of the market operating sideways, Pullback trades are a popular choice among traders according to Price Action Trading. In this way, traders only need to identify support, resistance and price channels. When prices reach these areas, the market will usually bounce back. This is an opportunity for traders to participate.
This strategy does the following:
Step 1: Identify important support and resistance zones.
Step 2: Wait for price action to take place at the support or resistance zone.
Step 3: Make the transaction
- Open a Sell order when the price touches the resistance area and goes down. However, it is necessary to confirm the signal by the weakness of the buyers. The green candle gradually shortens before touching the resistance. Or a number of bearish reversal candlestick patterns appear.
- Open a Buy order when the price touches the support zone and goes up. It is also necessary to confirm the weakness of the sellers (the red candle is getting shorter before touching support). Or a number of bullish reversal candlestick patterns appear.
Step 4: Set stop loss and take profit
- Stop loss: Set stop loss a few pips above resistance for Sell orders and a few pips below support for Buy orders.
- Take Profit: Set take profit according to the distance from support to resistance.
See more: XTB: The most reputable and quality broker in UK
Retest Strategy
To increase safety when trading Break-out, traders can wait for the price to retest the breakout zone. Because in many cases, the price only breaks the resistance or support area in one candle and then turns back. In this situation, the risks can be high.
The Retest trading strategy is usually implemented as follows:
Step 1: Identify important support and resistance zones.
Step 2: Wait for the price to break the resistance or support zone. Then go back to retest the breakout area before opening the order.
- If the price breaks the resistance area and then returns to touch it, there is confirmation of the green candle. At this time, traders can open a Buy order.
- If the price breaks the support zone and then retests, there is confirmation of the red candle. At this point, traders can open a Sell order.
Step 3: Set stop loss and take profit.
- Stop loss: Set stop loss at the nearest peak for Buy orders and the nearest trough for Sell orders.
- Take Profit: Set take profit at a distance from the entry point from support to resistance or according to the R:R ratio you desire.
Price Action Forex with price models
There are many types of pricing models, classified into two main categories. Includes reversal price patterns and continuation price patterns. Based on this signal, traders can easily determine the entry point. Trading strategies with price models are usually implemented as follows:
Step 1: Observe the chart and identify price patterns.
Step 2: Classify price patterns as reversal or continuation.
Step 3: Watch the price action and wait for the price to break out of the model to open an order. Depending on each model, traders will have different strategies for entering orders, cutting losses and taking profits.
Conclude
The Price Action Trading method is considered simple but difficult to access. Because it depends on the skills of each trader. Therefore, if you want to apply this method, you should clearly understand what Price Action is, the tools used, and need to improve your knowledge before starting. Forex Trading hopes the above article will help readers effectively in the investment process.
Frequently asked questions
How to get started with the Price Action trading method?
To get started with Price Action Trading, traders need to understand candlestick patterns. Support and resistance zones, as well as the basic principles of this method. From there, they can practice on a Demo account before trading with real money.
What are the disadvantages of Price Action Trading?
Although Price Action can be very effective, it requires patience from the trader. Have observation skills and the ability to analyze market situations. Additionally, it may take time and experience to master this method.
What trading strategies are there based on Price Action Trading?
There are many trading strategies based on Price Action such as Breakout, Retest, and Pullback. Candlestick patterns like Pin bar, Inside bar, and Fakey. These strategies often focus on finding entry points and placing orders based on price behavior.
