Price action is used to describe the movements in the price of a security. The way to appropriate and analyze this movement is to look for changes in price in recent history.
In layman’s terms, price action refers to the strategy that lets the investors and traders analyze the market profoundly and make rational decisions based on recent price movements. In addition, price actions give traders the freedom to provide beyond technical indicators.
What is Price Action Trading?
Price action trading is a type of day trading in which traders make trade choices based on price movements rather than technical analysis indicators.
Most price action traders don’t use technical indicators like moving averages and Bollinger bands, but if you do, you should give them very little weight in your trading decisions.
A price action trader consider that the price and its movements are the sole reliable source of information.
If a trader learns every aspect of how price action trading strategies work, he or she can trade with clear and more systematic price charts and precisely point out exit and entry spots.
How Price Action Works in Trading
Price action trading is based on trends and momentum. The idea is quite understandable. Once the trend changes, the price rises. And only when a more robust trend emerges on the opposite side does the opposite direction change.
In the middle of the emergence of these strong trends, there will be instances of trading sideways, consolidation periods, and pieces will hop off the lines of resistance and support.
Core Pillars of Price Action
Before we step ahead, we need to understand what makes up the price action. Here are four main concepts that pave the way to price action. It is essential to know how these concepts are related.
Candlesticks are one of the most popular charting techniques in current times. However, figure charts, points, and line graphs have enjoyed their glory days in the past.
However, there are no hard feelings. You can choose any chart method that you like.
The candlestick charts lists the highest and lowest prices, opening and closing prices, and tells if the prices are closed higher or lower by changing color from red (or black) to green (or white).
To keep in mind candlesticks, you have to think of the market as various layers that it embraces – each candle is pouring out information, and a group of candles conveys something.
For most investors and traders, the bearish trend brings wrath. Selling your stocks and securities for lower prices is no fun. But if you are in for a more extended stay in the market, you must get accustomed to the bearish market. In a bearish trend, the prices of securities fall to the lowest, and the trends form at a 315-degree angle.
This is an easy point to identify in the market price charts. A bullish trend develops when the price movements of the stocks keeps on increasing at a constant. It trends at a 45-degree angle.
At 70 percent of the time, the market runs on a flat trend. It is sporadic for stocks or securities to move in a particular direction all day long.
In flat financial markets, you ought to losing money rapidly. The reason would be that what you expect of the market and what the market produces do not match.
Who is most likely to Use Price Action Trading
Since the price action approach is used to predict the prices and their movements, it is used by traders and speculators centered around retail and firms that tend to employ traders. The price action strategies can be used on a wide range of securities like forex, bonds, commodities, stocks, equities derivatives, etc.
The steps for price action trading strategies
The traders who have been trading for a long time and are following the price trading action strategies will use multiple methods to identify trade patterns, entry and exit spots, and other observations.
Keeping just one strategy in mind will not prove fruitful. In most cases, a process of two steps is involved.
- Identification of a situation or a scenario like a price movements sweeping into a bear or bull phase in the market, breakout, etc.
- Now within a particular scenario or situation, identification of trading opportunities.
The Four Stages in which the Market Moves
The trends and volatility in the market are the factors that result in constant changes in the price.
But if traders look from a wide angle, they will realize that the market moves in a stage-wise system in the accumulation, advancing, distribution, or declining Stages.
This Stage comes in place after the price decreases and the market faces a downtrend. It occurs when the price has fallen over about the last four to five months. The market will look like a range with resistance and support areas in this stage.
The Stage of advancing
The advancing Stage is depicted in an uptrend with higher lows and higher highs. It takes place after the resistance breakthrough in the accumulation stage. Here, you can see a visible series of lows and highs.
The Stage of distribution
This stage occurs when the prices have risen over four to five months or more. It would look like a market of multiple resistance and support areas. The market remains at equilibrium in the distribution stage, with both sellers and buyers at the same pace.
The Stage of decline
The decline stage depicts a series of lower lows and lower highs. This stage occurs after the breakthrough of support in the distribution stage.
Most popular Price Action Trading Strategies
The most used strategies of price action trading are as given below:
Support and Resistance
When using support and resistance in price action trading, it is essential to note that once a level of support is busted, it can be turned into resistance and conversely. Most of the time, price action traders try to focus on volatile prices, but they trade sideways in a humble range.
When the price is in a firm range, it hops off the resistance at various times. But when an actual breakthrough takes place, it signals an uptrend.
Outside bar (resistance or support)
The outside bar indicated the change of a trend on the price chart. It shows a two-day formation when the asset’s low and high prices of the current day exceed the low and high prices of the previous day. It can either pan out to be a bullish or bearish pattern.
A bullish outside bar comes into being when the current day’s low is more than the low of the previous day, but the stock still closes at a higher price than the last day.
In a bearish trend, the exact opposite happens.
Inside Bars (breakout)
Inside bars are for the aftermath of a breakout. Inside bars are indicated when many candlesticks are stacked together, and the price starts to fold at support or resistance. At a swing spot, the candlesticks will fix themselves into the low and high because major price action traders for the stock dominate to build up more shares.
The bars might also occur before breakouts which increases the chances of a stock falling into breakthrough resistance.
Inside bars provide you with clean bars where you can smoothly place stops. You don’t have to place your stops on one indicator or candlestick.
Spring refers to when the stock is in the low range but rapidly returns to the trading zone. Springs mostly occur later in the trading range and give traders time to test the supply before the whole trend is alive.
Long wick candles
The set up of long wick candles consists of gap high or gap low during the day start, then witnesses a considerable push which then withdraws. This kind of price action is likely to produce a long wick, and price action might be tested more times.
The MAE formula for Price Action trading
The MAE formula is a proprietary technique with market structure, area of value, and entry trigger.
The foremost thing to do is to identify a market structure because it will give you directions and tell you how to operate. You need to ask yourself if the market is downtrend, uptrend, or flat. When you can identify the market structure, you’ll be able to guide your trade with the least resistance. For example, if the market is in a downtrend, you’d only sell, but you can both sell and buy if the market is in range.
Area of value
Just identifying and defining the market structure won’t serve a purpose. It is also essential to understand where to put your trade. One must trade in the area where she or he can buy low and sell high.
Now that you’ve identified the market structure and the area value, the finality of this process would be to analyze when to enter. Many traders like to join the market when it is functioning in reverse.
How to escape the false setups in price action trading
The market is a big game with numerous players trying their best to realize maximum profits. And as much as competition is prevalent in the market, so are the false setups.
A price action trader cannot trust indicators that are off-charts for getting hints that a formation is falsely set up. Since price action traders focus on the present and what is happening, they must have clear rules and be disciplined about when to get out of the trade.
One can use ‘time’ as a technical indicator in this case. The chart formation should give you the first signals of false setup, but if they’re blurry, the time can act as a defense factor.
Advantages of Price Action Trading
- The self-defined price action strategies provide flexibility and can be applied to various assets and securities.
- These strategies work smoothly with software, applications, and portals facilitating trading.
- Any strategy can be easily backtested on the historical data.
- Traders feel in control as the price action strategies give them freedom of their actions rather than just following a set of stubborn rules.
- When combined with technical analysis tools, these strategies can garner great results and can be of vital support to the community if trading.
Learning the nuances of price trading strategies thoroughly will help you improve your trade management by imbibing clarity in your entry and exit points, stop spots, etc. The price action strategy has good potential if it makes high profits for the trader, but one must also look for all the risks that come with it, in a trader’s hands how they pursue the market and what meets their requirements for making profits.
If you are looking for genuine brokers and financial service providers to facilitate price action trading, you can bank on Primefin and T1 Markets. These brokers are authorized legal service providers and deal in various assets and securities like indices, forex, commodities, etc.