What Is Price Action?

Welcome back, traders!



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In the coming weeks, we will be discussing various trading strategies! We hope that this will give you a better idea about all the various methods you can use, including Price Action, Position Trading, Scalping and more. We believe that a brief introduction will enable you to better understand the differences, key concepts, advantages and disadvantages of each strategy. W hope that some of the strategies discussed here will motivate you to do further research and that by studying new concepts, you will become a better, more profitable trader!


What is Price Action?

Price Action is a study of price movement over a set period to interpret who was and is in control of the price. The strategy aims to best predict the future direction of the markets based on the information presented, including trends, breakouts, swings, reversals, support and resistance levels but most importantly based on recognizable candlestick and/or chart patterns. This is based on the assumption that history repeats itself and that repeating patterns will more often than not lead to similar outcomes. Traders using Price Action rely on the analysis of the charts and do not use any unnecessary technical indicators. The main aim of the strategy is to keep it simple at all times! The main focus is always on one factor: the price.

Price Action works best in high liquidity markets, however, some more experienced Traders can adapt Price Action to trade profitably in other market conditions, including low volatility or ranging markets.



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Japanese Candlesticks are a technical analysis tool that provides a trader with detailed and accurate information about the supply, demand and price movements. Due to the amount of information presented, these candlesticks are preferred by Price Action traders.



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Candlestick Formation includes


Open - the price at which candlestick opened for the trading period.

Real Body - the distance between the open and close during the trading period.

Close - the price at which candlestick closed for the trading period.

Shadows:

upper shadow - price distance between the top of the body and the high for the trading period

lower shadow price distance between the bottom of the body and the low for the trading period

High & Low - the highest or lowest price for the trading period.


Take a look at some of the most common price action strategies below.


The Pinbar

The Pinbar is one of the most popular candlesticks there are. A Pinbar is a single candlestick with a long shadow (wick) and a small body in the opposite direction - representing a high chance of a sharp reversal due to the rejection of the price level. The shadow represents the range of the price that was rejected. Generally, the longer the wick the stronger the signal and traders will use this information to decide whether they should enter the market. Price Action traders are usually looking for a Pinbar that - has only one wick

- close at the opposite end

- is larger than the last candlestick

They would also consider support and resistance levels as a confirmation for a stronger entry.


Inside Bars

The Inside Bar is a two-bar price action strategy: the inner bar is smaller than the outer bar. It also falls within the high and low range of the outer bar. Inside Bar represent a moment of consolidation (giving time for traders to think about the direction of their next trade) or a signal of the trend reversal. The outcome depends on the direction of the candle that breaks out of the inside bar next! More experienced traders can spot these patterns quickly and try to predict where the price is heading based on the size and position of the inside bar itself.


Engulfing Bar

Engulfing Bar consists of two candlesticks: a first smaller one and a second larger one. The second candle engulfs the first candle entirely (it can also engulf more than one candle). There are two types of Engulfing Bar: Bullish Engulfing Bar and Bearish Engulfing Bar - to be valid, the candle should completely cover the previous candle range - including the previous high and low! Engulfing bars show the strength of the price action (or momentum) thus generating some of the most accurate and reliable entry signals (if identified and executed correctly).


Head & Shoulders Reversal

Head and Shoulders is another very popular chart formation that can indicate the end of a bullish trend and imminent reversal. It consists of four parts:

  1. The Left Shoulder - long bullish trend with the price rising to a peak (forming a higher high) and subsequent decline to from a trough

  2. The Head - another bullish run to form a new higher high (above the previous one), followed by another decline

  3. The Right Shoulder - another bullish run, forming a new lower high at the level of the first peak (left shoulder peak), followed by another decline

  4. The Neckline - is the line connecting the first and second troughs, the break of the neckline is most often considered to be a valid entry signal as the price continues to go down


Trend Trading

Trend Trading is a very common and relatively straightforward Price Action Strategy. Traders study the charts to identify the direction in which the price is going and execute trades in line with their "friend" - the trend. The main focus is to go long in a bullish market while shorting positions during a downtrend. But remember, the trend is relative and will depend on the timeframe you are studying!

An asset can be in an uptrend on a higher timeframe (for example Daily) but, at the same time, traders can draw a bearish trend line on a lower timeframe (for example hourly) - and vice versa!

To draw a trend, you will have to simply draw a line on the chart:

for an uptrend, you have to locate at least two major bottoms (valleys) and draw a line connecting them;

for a downtrend, you need to identify at least two major tops (peaks) and draw a trend line connecting them.

These trend lines become stronger the more times they have been tested. As such, they can provide accurate & profitable entry/exit points if identified and executed correctly.


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We hope you have enjoyed our new lesson! Make sure to join us next week as we continue our overview of various trading strategies!