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How To Master Price Action Trading
Known for its simplicity, price action trading is a popular strategy among traders. But despite being simple, it does not mean that trading price action is easy. Just like any other strategy, you will need to invest time to study and learn the ins and outs of this trading strategy. This article will take you to the basics of price action trading strategies and other important aspects that will help you trade with confidence.
Trading Strategies – Bar, Volume & Red Zone
Before we discuss price action trade setups, you need to familiarize yourself with the different tools used by price action traders:
Trendlines are used to identify uptrends and downtrends in the market. Traders usually trade the market in the direction of the underlying trend.
Breakouts may happen if a market’s price moves above the resistance level or below the support level. They provide trading opportunities especially if the breakout occurs in high volume, signifying that the trend is probably going to continue in that direction.
- Candlestick patterns
The candlesticks represent the open, close, high, and low values of a market and are used to reinforce a trading setup or trade strategy.
- Support and resistance levels
The support and resistance levels are areas where a reversal or pause of a certain trend may occur.
- Red Zone
In this strategy you wait until a price converges towards a round number, especially when the trend is supported by a positive news event.
Note: always use a stop loss as part of your trading strategy.
Now that you have the basic tools and idea for price action trading, here are the most common trading strategies and setups that you can trade:
- Spring at support. In this setup, the price of a market drops below the support level but suddenly rises and creates a new trend. To identify if there is a spring at support, look at the volume and see if there is a follow-through or support for that particular market.
- Bullish engulfing candle pattern. This occurs in a downtrend and signifies bottom reversals. It forms when the market opens below the price of the previous close and opens above the price of the previous open. The market should also have a small upper wick which indicates that it closed near its highest price as this means that the price is still moving higher.
- Inside bars after a breakout. An inside bar represents consolidation in a trending market but with low volatility and is shown as a two-bar candle pattern with the inside bar contained within the prior bar or mother bar. Traders look for the break of the inside bar and observe the direction to where it is going as it would provide a trade opportunity for them.
- Pin bar trading strategy. Pin bars represent the rejection or reversal of a market price. The tail or wick is the area where the price is rejected and the logic of this pattern is that the price will move in the opposite direction. This pattern can either be bullish or bearish depending on the area where pin bars are formed.
- Hammer candlestick pattern strategy. The hammer pattern is found at the bottom of the downtrend at a swing low and signifies a reversal in the market trend.
- Harami candlestick pattern strategy. The harami pattern signifies a change or continuation in trend and can either be bearish or bullish depending on the direction of the asset’s price.
Price Action Trade Entry Rules
Most trades in price action trading require confirmation to trigger them. A breakout is the most common form of confirmation which is reinforced by any chart patterns. But how do you enter a market with a high probability of making profit and cut losses?
If you think that the asset’s price continues in the same direction after a breakout, you should use a stop order. A stop order is an automatic trigger when an asset’s price hits a certain price level. On the other hand, if you think the trend will reverse after a breakout, you should place a limit order. A limit order is an order to buy an asset at a certain price. This would help in limiting losses you might incur when a reversal happens.
What Does Price Action Mean In Trading?
Price action is a trading strategy that is used by monitoring a stock’s price movements over time. In this strategy, a trader follows the price movement of an asset in the recent past to determine which direction the market will be moving in. Unlike other trading strategies, price action does not rely on technical indicators but solely on actual price movements to identify the best entry and exit points. Price action traders analyze past events and combine them with the present as they believe that whatever happened before will likely happen again.
Why Is Price Action Important?
One of the reasons why price action is important is because every trader will benefit from it, beginners and seasoned traders alike. This is because price action is the basis of all trading indicators. Whether or not you will opt to use indicators, you will still need to study the price movement of an asset to build a strategy and make profitable decisions.
Traders who use the price action strategy believe that history will repeat itself which makes it easier for them to predict the behavior of an asset’s price. Once they predict it, they will already have an idea of the market’s direction which will help them determine the market trend.
What Is Advanced Price Action?
Advanced price action is a more comprehensive approach in price action trading. It delves into a more in-depth analysis which is ultimately helpful especially for traders who are serious about this kind of trading technique. In advanced price action, there are more strategies and tools that you can study and use once you are more capable.
How Do You Calculate Price Action?
Traders use different chart compositions to be able to plot prices over time. This is to observe patterns that are beneficial in trading decisions. In price action trading, traders are on the lookout for trends, breakouts, or reversals. The most commonly used tool in determining price action is the candlestick chart as it displays information on an asset’s price changes over a specified time. It gives more information regarding the open, close, high, and low values of the asset. Price action trading strategy is also used with some technical analysis tools such as support and resistance and trends to get a better perspective of the direction where the market is going.
Aside from the market structure and market direction, price action is also calculated by analyzing the psychology of the market and its participants. When you know how the market thinks, you will have a clear view of the best time to place orders.
What Is The Best Time Frame For Price Action Trading?
Choosing the time frame for your choice in trading is an important aspect of your trading plan. When it comes to price action trading, some factors are needed to be considered to find the best time frame:
- The expertise of the trader. If you are an experienced price action trader and have the ability to read and analyze fast price movements, then faster time frames might be the better option for you. But if you are a new trader, it is ideal to start with slower time frames especially if you are still learning to analyze price action.
- The volatility and liquidity of the market. The market you are trading in is also a factor for choosing the best time frame. If the market is highly volatile and liquid, faster time frames are more suitable as it will show more profitable trades.
- Your trading strategy. Your time frame should also be compatible with your trading strategy or plan. Long-term traders would benefit more from using longer time frames such as daily, weekly, or monthly time frames, while short-term traders would need to observe price action using shorter time frames such as minute or hour time frames.
- Your allotted time for trading. If you do not have any work or activities besides trading and have time to watch the market, shorter time frames are more apt especially if you are an intraday trader. However, if you can only commit several hours a day or only certain days of the week for trading, longer time frames are more ideal for your setup.
To sum it up, the best time frame is not a one-size-fits-all concept. Determining the best time frame will still depend on the trader and his strategy. This is why it is recommended to try trading in different time frames until you find which one works for you.
Why Do Price Action Traders Fail?
Not all price action traders have the same trading experience. Some might be successful and make a constant profit, while others might fail countless times. One reason might be because price action traders see and interpret charts differently. The capability and patience of the trader to read price action also play a role in their success or failure. Other reasons why traders fail are:
- Fewer number of trades. Price action traders often miss out on opportunities because they wait for confirmation from support and resistance levels.
- Waiting for price to get on the desired level. Traders wait for the price to get on their level whether on support or resistance.
- Weak stop placements. Dealers easily predict stops placed by traders since these are usually put in obvious places.
How Long Does It Take To Learn Price Action Strategy?
As mentioned before, price action trading is a simple strategy that does not require complex indicators. However, that does not mean that learning and mastering it is not an overnight process. Depending on your commitment and willingness to learn, it will take some time before you will get the hang of price action trading.
Does Price Action Really Work?
Yes, price action works as long as you have studied and understood all its aspects. Many traders have been successful in making a profit using this trading technique. Of course, your success still lies in how you plan and execute your strategy so you better arm yourself with enough knowledge and experience to make price action trading profitable.
Is Price Action Better Than Indicators?
One reason why some traders prefer looking solely at the price action is that it is much simpler and more straightforward than using technical indicators. Not much research is required when using price action unlike when you use technical and fundamental analysis in trading. It is also flexible meaning you can tailor it to any strategy that you will use. Entry and exit points are well-defined since following price action is not tied to any rules unlike when using indicators, giving the trader more factual information to be decided upon.
Another advantage of price action over indicators is that it is easier to use with any trading software and also easy to backtest.
How Do You Master Price Action Trading?
In order to be proficient in price action trading, you need to invest time and effort in learning to read charts. This is because you need to identify and understand past patterns that will help you in determining the current movement of an asset’s price. If you are able to master reading chart patterns, then you will have a greater chance of making profitable trades.
After you get a good grasp of the basics, the next thing you need to do is to practice it. By practicing what you learned, you gain more experience and understanding about price action. This is the best way to improve your trading using this technique.
How DynoBars Helps With Price Action Trading Strategies
Trading using price action has never been easier with DynoBars. DynoBars filters out noise and removes distortions leaving your chart organized and clean. Why use indicators when you can just keep everything simple? When it comes to price action trading, all you need is to reveal the master trend and from there, you can already use your own trading strategy to make profitable trades.
What are you waiting for? Keep your trading simple and stress-free with DynoBars today!