Trading based on Price Action is considered one of the most effective methods when investing in forex. Through many tools, investors will identify price trends and make specific order entry decisions. To better understand Price Action as well as how to apply it effectively, learn with Forex Trading below.
What is Price Action? Correct understanding of Price Action Trading
Price Action means price action, and can also be understood as price trend. This is a quite effective method of analyzing financial markets. It is popular in many financial markets such as stocks, forex, gold… To use Price Action Trading, investors do not need to use too many complicated technical indicators. Just observe and analyze the price chart to find reliable signals for trading.
Trading based on Price Action will be based on price models as well as the history of price formation. Through this, traders will determine how the price moves.
What is the goal of Price Action? That is to help investors deeply understand market psychology. Traders also learn how to analyze graphs and understand the interaction between supply and demand. At that time, you will definitely be able to make the most reasonable and safe investment decision.
See more: Master the Forex “game” with Price action
Evaluate and analyze the advantages and disadvantages of Trading based on Price Action
Compared to other forex investment methods, Price Action has many advantages. Of course, it cannot avoid certain limitations:
Advantages of trading using the Price Action method
- Simplicity: Although it is a technical analysis method, analysis based on price action is very simple. No need for many complicated indicators, traders just need to focus on price behavior to make investment judgments.
- Accuracy: History shows that the effectiveness of the Price Action method is very accurate. Traders can rely on price behavior to predict market psychology and make appropriate order decisions.
- Flexibility: Traders can use Price Action scalping Day trading, or Swing trading to trade. The method can be applied to many different trading styles and gives impressive results.
Disadvantages of trading with the Price Action method
- Traders need an in-depth understanding of price models as well as technical analysis knowledge of these models.
- Needs a lot of time: Price Action needs time to understand price movements through graphs. If you are not a patient person, it is very difficult to trade successfully with this method.
- It is possible to be deceived by the market with false signals, thereby making wrong judgments and decisions.
Structure and main tools in Trading based on Price Action
As mentioned, Price Action does not use overly complicated indicators. Trading using this method mainly relies on the following tools:
Japanese candlestick chart – the most used tool in in-depth Price Action
The Japanese candlestick chart is a typical tool in Trading based on Price Action school. Through Japanese candlesticks, investors can know all price information during the trading session:
- Opening price
- Closing price
- Highest price
- Lowest price
- Buying and selling trends (through color and candle body length).
Line chart, bar chart
These are the two main charts used in price action trading. At the same time, it is also an important tool in forex technical analysis.
- Line Chart – very simple. It displays the closing price at different times of the market. Each data will be connected in a straight line, creating a smooth, easy-to-read shape. It is used to track the general trend of prices.
- Bar Chart – The Bar Chart: displays information about the opening price and lowest price of the asset during the trading session. Each bar on the chart will represent the price movement over a specific period of time.
Depending on your preferences and trading style, traders can choose the appropriate chart template. You can even combine the two to get the most accurate signal.
Support and resistance – important tools in Trading based on Price Action
Not only in Price Action but with any technical analysis method, this is also a particularly important tool.
The support area is where the price cannot fall further, also known as the oversold area. The resistance area is where the price cannot go higher, also known as the overbought area. When the price breaks through these two areas, it can create a breakout (breakout pattern). After that, the price may reverse upward or downward.
Price chart
The fourth tool used in the Price Action trading strategy is price charts. It is also known as the price model. These are models with specific morphology. They show the continuing or reversing trend of the market, helping traders identify the future price path.
Some commonly used price models: are the wedge model, head and shoulders model, and bat model…
The 3 most effective Price Action methods
There are many ways to Trading based on Price Action effectively. In forex trading, traders often prioritize using the following 3 strategies:
Price Action trading with Breakout strategy
In price action, Breakout – Breakout Point – is a very important concept. Trading according to this strategy is to look for the breaking point of the support or resistance level:
- Dynamic Breakout: This is the time when the price crosses a trendline or a moving average. At this time, the price trend will have strong fluctuations: Continuing the old trend with greater intensity. Or turn around and create a new trend.
- Horizontal Breakout: This is the price breaking out when the price surpasses the support or resistance level that is horizontally located on the price chart. This sign provides a fairly safe buying or selling opportunity for traders.
The important thing when applying this strategy is that traders must identify support and resistance zones, learn how to draw trendline, and confirm breakout patterns. A valid model will ensure transaction efficiency and limit unexpected price fluctuations.
Retest Strategy
This is a price chart trading strategy that many traders have applied and succeeded. This strategy focuses on signs of price retests after a breakout. That is, the price reconfirms before continuing the old trend or reversing to a new trend.
For example, after the price overcomes the resistance level, creating a breakout, it then pulls back and hits the resistance level. At this time, the price is retesting, and that is an opportunity for traders to enter a buy order.
To be successful with this strategy, traders need to accurately identify support and resistance levels. At the same time, patiently wait for the price to retest before entering an order. In some cases, if the price does not retest, you may miss a trading opportunity.
Price Action Trading với Pullback
The pullback is a strategy that takes advantage of corrective trends within a major trend to trade. For example, the main trend is up, but during that increase, there are still periods of price correction. Traders will take advantage of these price waves to trade.
The principle of this method is that traders will assume that after the Pullback period, the price will continue. Therefore, just by correctly identifying the main trend, traders can get potential entry opportunities.
See more: Discover Exness – The world’s leading Broker
Note when Trading based on Price Action
It can be seen that Price Action is a fairly simple and highly effective technical analysis method. However, to trade safely, traders need to note:
- Always accurately identify support and resistance areas.
- Always place stop-loss orders to limit risks because the market can follow any scenario.
- Determine the validity of each model. If you identify the wrong signal, you will certainly enter an incorrect order and may incur heavy losses.
Conclude
Forex Trading has worked with you to learn in detail how to Trading based on Price Action. To understand more forex technical analysis methods, follow and update the latest content from us. The investment journey requires you to continuously learn and accumulate experience so that you can become a skilled investor and stand firmly in the market.
FAQs
What tools are needed for Price Action trading?
Popular tools are Japanese candlestick charts, Price models, Line charts, and Support and resistance charts …
Is Price Action absolutely accurate?
No, price action analysis can also be wrong and misled by the market.
Can the in-depth Price Action method be applied to scalping investing?
Yes, Price Action is effective for both scalping and long-term trading options.
