Most trading methods often use many indicators, leading to information confusion for investors. So, in this article, Forex Trading will introduce you to a trading method called Price action. A method based on price movements without any reliance on news or indicators. If you want to understand more, continue reading the content below.
What is the Price action method and why should we care about Price action?
Although Price action is a simple method, it is very effective especially when there is a market with high liquidity and great fluctuations.
Concept of Price action
The price action method is a way to analyze the market based on price movements over time (candles). Price action trading means relying on the price movements of a specific asset to make trading decisions.
Traders following this school of thought focus on candlestick charts (especially candlestick patterns and price patterns). They ignore indicators and news in the market. In fact, candlestick charts are the most powerful tool in technical analysis.
Some models of basic Price action method
With this method, traders will rely on information from price charts and use moving averages to identify support and resistance areas. The parameters on the price chart reflect the beliefs and actions of all participants. They represent a certain period of time. News and events also contribute to price fluctuations.
According to the principles of the method, price action is the footprint of money. Every transaction leaves a trace and the price is influenced by buyers and sellers. Therefore, price analysis can be used to predict trends. Because price movements often tend to repeat. There are 4 commonly used models in Price action :
- Inside Bar model
- Outside Bar model
- Pin Bar Pattern
- Fakey model
Note: These price patterns are part of technical analysis and are used to identify trading signals on price charts.
Analyze the pros and cons of Price action
After understanding the concept of price action, the next is to analyze the advantages and disadvantages of this method. The main purpose is to help investors have an overview and thereby take advantage of these advantages in their strategies.
Advantages of the Price action method
- The method is easy to learn and many learning materials are available.
- When trading with this method, you only need to focus on the price chart without paying attention to any other indicator tools.
- Price action simplifies your trading. The simpler it is, the more deeply we are able to grasp market psychology.
- Quickly and promptly reflect price fluctuations in the market. Allows investors the opportunity to stay ahead of the trend.
- The method provides a logical approach that helps investors easily determine exact entry points, stop loss levels, and take profit levels. At the same time, it helps predict the long-term direction of the market.
What are the disadvantages of the Price action method?
- Price action is subjective so each trader may have a different way of determining resistance and support levels. Therefore, trading based on price charts has a large subjective element. It depends on each person’s ability to analyze the market.
- Risk is an unavoidable problem. There may be “sharks” individuals or organizations manipulating the market to create fake price models. This causes traps that investors fall into.
In summary, it should be noted that no one can predict market trends with 100% accuracy. This is just a tool to help accelerate success. It is not the deciding factor for all transactions. Therefore, besides applying a good method, investors need to manage capital intelligently.
Tools used in Price action
There are three main tools commonly used in price analysis: resistance/support lines, price patterns, and candlestick patterns. These tools help analyze price behavior and determine who is in control of the market. Let’s learn about those tools in detail with Forex Trading.
Forex price action analysis is based on price patterns
When the candles combine into special patterns such as 2 top model, 2 bottom model, 3 top, 3 bottom model, cup with handle model, wedge model, pennant model, triangle, etc. Each model will provide different forecasts of price trends. It is important that you memorize each of these patterns so you can immediately recognize them when they appear on the chart.
Perform in-depth price action through candlestick patterns
Predicting price trends based on candlestick patterns is a popular method. As follows:
- Trend continuation candlestick patterns: Rising Three Methods, Falling Three Methods, Bullish Gap Tasuki candlestick pattern or Upside Gap Tasuki candlestick pattern, Bullish Harami candlestick pattern, etc.
- Bullish reversal candlestick pattern: Hammer candlestick, inverted hammer candlestick, dragonfly Doji candlestick, morning star candlestick…
- Bearish reversal candlestick patterns: Doji tombstone candle, evening star candle, Hanging man, three black crows candle…
Price action analysis based on support and resistance lines
Price action methods often rely on support and resistance lines to make trading decisions. These are important price zones that anticipate the trend before continuing.
- If the price rises and approaches the resistance area, there will usually be a leveling off or a reversal to the downside. If the selling force is strong enough, you can consider entering a SELL order.
- If the price falls and approaches the support zone, there will usually be a leveling off or a reversal up. If the buying force is strong, you can consider buying a BUY order.
How to recognize signals for Price Action?
Price action in the Forex market sometimes causes noise and creates misleading signals. In the market, there are price corrections to continue moving. This is the time when traders are often triggered by Stop Loss or encounter “losses”. Forex Trading will help you filter out the best trading signals and avoid bad/noise signals.
Look at the Pin Bar
Pin Bars appear after a sustained trend and can be a signal that the price is reversing. However, many traders are not patient enough to wait for the Pin Bar to be completely formed.
A common problem is that traders do not wait for a candlestick to complete. They immediately enter orders when they see the price surpass the support/resistance lines. The price will return to form a Pin Bar. This phenomenon is called False Breakout.
The longer the Pin Bar tail, the more accurate it is
The length of the candle shadow in a Pin Bar represents the strength of the price rejection. The longer the tail, the stronger the initial price correction and the stronger the subsequent price rejection. A Pin Bar with a long tail has important meaning. It acts as a previous trend reversal signal.
Enter orders when there is confirmation
The Breakout phenomenon only appears when the candle has closed. Price action on a strong breakout. However, Pin Bar price rejection will occur immediately. This forces the price to return to the old price.
Long-tailed Pin Bar after a stable trend is a good signal
A Pin Bar candle with a long tail after a steady trend often signals a reversal in price action. However, that reversal needs to be accompanied by some other confirming signals. The story here shows that sellers are dominating the market. This is a sign for a Sell order.
Try to trade Breakout on price recovery
Breakout is a reversal of price functions. Once the support line is broken, it will become resistant and vice versa. In many cases, the price will try to return to the position it broke out to test, this is called the price recovery segment.
Abandon the transaction when the price is unknown
Unclear price movements that often appear are called “whipsaws”. This is when buyers and sellers are fighting for control of the market with no one winning. In this case, any Pin Bar or signal is not a good signal. It is best for us to stay away from these stages.
Find areas with a high concentration of signals
Areas with many signals are formed when two support or resistance levels appear at the same price.
Tips for performing operations to increase success rates with Price action
Here are some tips for making trades with Price action. Let’s see what these tips are and apply them if you see fit.
How to set a stop loss to increase the winning rate with Price action forex
Setting stop losses is an important part of managing risk and increasing your win rate in Forex trading using Price action.
- The stop loss must be above an important key level: Determine the stop loss based on the price structure. Use support and resistance levels, moving averages, or price patterns to determine suitable stop-loss locations. The stop loss should be placed at a position where if the price crosses it, your analysis will no longer be valid.
- When the price goes sideways, you should not enter an order: Sideways are the following candles that are neither higher nor lower than the previous candle. Those equal candles are called sideways
- The RR must be high to be able to manage the order: Make sure that the potential profit from an order can exceed the risk you take. When the RR ratio is high, the risk in a trade can be reduced.
- Use daily or 4-hour charts: Consider placing stops based on daily or 4-hour charts to avoid short-term shocks.
- Use the Pin Bar candle to determine stop loss points: The Pin Bar candle can provide a strong signal for placing stop loss.
How to enter spinner orders to increase profits according to in-depth Price action
Trading according to the 4H main trend, when the 1H and M15 trends are going backward, you can find an early reversal point to hit the sniper at M1 and manage orders. To enter a spinner order (also known as a spin trade) and increase profits using in-depth price action, you can apply the following steps:
- Identify spinner entry points: Look for spinner candlestick patterns on the chart. This pattern often appears when the price has a strong increase/decrease. Then turn it around and create a spinner candle with a long tail. The spinner entry point is located when the price crosses the top or bottom of the spinner candle and confirms the reversal.
- Determine a take-profit target: Determine a reasonable profit target based on price structure, subsequent candlestick patterns, or potential support and resistance levels. Make sure your risk/reward ratio is reasonable and advantageous.
- Risk management: Set the order size to match your desired risk ratio. Use risk management rules and adjust orders when prices move in the predicted direction.
- Test and experiment: Test your price action spinner trading on a demo account. This helps you determine effectiveness and adjust your strategy if necessary.
See more: Be more successful through this technical analysis
Top 4 most effective Price action methods you cannot miss
Forex Trading introduces you to 4 Price action trading methods that you should not miss.
Price action trading based on breakouts
When prices break important areas such as support and resistance, there is often a tendency to move strongly in the direction of the breakout. To take advantage of this opportunity, you can apply the following principles:
- Observe the price chart on the time frame from M15 to D1 to identify important support and resistance zones.
- Wait for the price to break the support zone and go down, then you can consider entering a SELL order. On the contrary, if the price breaks the resistance zone and goes up, you can consider entering a BUY order.
- Place the entry point at the closing price of the candle breaking out of the support/resistance zone.
- Set your stop loss a few pips below the resistance line or the nearest low for BUY orders. A few pips above the support zone or at the nearest peak for a SELL order.
- Set the take profit point at the distance from the order entry point equal to the distance between the support and resistance zone.
Trade based on retests
A safe approach is to wait for the price to retest the breakout zone before entering a trade. For example, if the price breaks a resistance area and then comes back to touch that area and there is confirmation from a green candle. You can consider entering a BUY order. Similarly, if the price breaks the support line and then returns to touch the support area there is confirmation from a red candle. You can consider entering a SELL order.
- The stop loss point in this case is at the nearest bottom for BUY orders and the nearest peak for SELL orders.
- The take profit point can be placed at a distance from the entry point equal to the distance from the support line to the resistance line. Or it can be based on the desired risk/return (R: R) ratio.
Execute price action trading with a pullback strategy
First of all, to trade safely, we need to identify important support and resistance zones. Wait for price action to take place in these zones before proceeding with the trade.
- When the price touches the resistance area and goes down, we should consider entering a SELL order. You should enter if there are shorter green candles or a bearish reversal candlestick pattern.
- When the price touches the support zone and goes up, we should consider entering a BUY order. You should enter if there are shorter red candles or a bullish reversal pattern.
It should be noted in the case when approaching important zones if the candles do not shorten but tend to be longer than the previous one. This shows that the buying or selling force is very strong. At this time, we should avoid entering orders and wait for other signs. This is to ensure safety in trading decisions.
Price action method with price model
To apply this strategy, it is important that you clearly understand price patterns. You must be able to recognize them as soon as they start appearing on the chart. There are three main types of price patterns: continuation patterns, bullish reversal patterns, and bearish reversal patterns.
Based on the appearance of price patterns, you can analyze developments on the chart. From there, determine which type of model to enter the appropriate order. Each price model will have different take profit and stop loss points.
Epilogue
Below are Forex Trading‘s shares about Price action trading. Hopefully, they can help you build your own style in forex analysis and trading. If you experience too much psychological pressure, your ability to win in the market will become more difficult. Be confident that success will come to you if you keep your passion. And don’t forget to follow Forex Trading to receive more useful information about the Forex world!
Frequently asked questions
What is the popular price action model?
From basic to advanced, including 4 popular models as follows:
- Inside Bar model
- Outside Bar model
- Pin Bar Pattern
- Fakey model
Why is this method subjective?
Each trader has their own way of identifying resistance and support. Therefore, in chart-based trading, value is more subjective. It depends on each person’s ability to analyze the market.
What is the relationship between Forex trading and price action?
Price action plays an important role in trading. Where currency value fluctuations occur rapidly and unpredictably. Traders use price action to analyze trends and predict future price movements. From there, determine the time to buy and sell assets.
