What is Price Action Strategy?
As we know the price movement of the stocks, crypto, index or any other financial script depend on the market variables like news, politics, economic report etc. These things make the market participants(Human and Computers) buy and sell the scripts due to which a continuous movement of price happens.
At each and every moment some people buy and some people sell based on their perceptions. But, The market formation takes place by the dominating psychology(Bullish, Bearish or Choppy) of participants. Thus, Cumulative dominating psychology of market participants based on their own perception extracted from various market variables makes the market move in a particular direction, which is reflected through the price charts.
Action and reaction of market participants is patterned, repeated and limited which eventually reflects the participants’ psychology. Thus, by analysing the historical price chart data we can understand market behaviour under different circumstances and somehow we can predict it too.A study and observation of historical price chart patterns and signals under different circumstances(Market trend and structure, patterns, support and resistance) and based on that making a set up to most likely to predict the market move under certain conditions is referred to as price action strategy.
Why Choose Price Action Strategy?
- Simplicity: No need for additional indicators or complex tools.
- Universality: Works across all markets and timeframes.
- Real-time insights: Provides a clear view of market sentiment.
- Flexibility: Adaptable to various trading styles (scalping, day trading, swing trading).
- Real-time adaptability without lagging indicators.
- Encourages a deeper understanding of market behavior.
- Minimal clutter on the chart, offering clarity.
Key Components of Price Action Trading
1. Candlestick Pattern
Different type of price chart (Line chart, Bar chart, Candlestick charts) is used to represent price movement or price action. Candlestick patterns is widely used by price action traders as they visually represent price movements and helps traders in making trading decision. Some example of candlesticks pattern are Doji, Hammer, Engulfing patterns, and Shooting Star.
2. Support and Resistance levels
Support and resistance are the key level where the price tend to reverse or consolidate. Support is the level where demand tends to prevent the price from falling further and Resistance is the level where supply tends to cap price to further incease. A single key level acts as resistance in the bullish market and it also acts like support in the bearish market.
3. Trend Identification using price action
Executing trade in the direction of prevailing trend is a core principle of price action trading. Identification of trend can be done by using price chart or trading indicators. For example, on price chart Higher highs and higher lows indicates Uptrend, Lower highs and lower lows indicates Downtrend and Price movement within a defined range indicates Sideways or Range-bound market.
4. Chart Patterns
Chart patterns are visual representations of price movements on a trading chart that help traders predict future market behavior. Formed by repeated price actions over time, these patterns reflect market psychology and the balance of supply and demand.
5. Price Action Signals
- Breakouts: A breakout occurs when the price moves beyond a significant support, resistance, or consolidation zone, often signaling a continuation of the trend. As a signals normally formation of a Large Bullish Candle or Large Bearish Candle takes place.
- Retests: A retest happens when the price revisits a previously broken level (support or resistance) to confirm its validity before continuing the trend. As a signal small doji candlestick forms.
- Rejections: A rejection occurs when the price tests a level but fails to close beyond it, showing that the level is holding as support or resistance. As a signals Hammer Candlestick, Shooting Star candlestick etc.
Some Important Price Action Strategy
How to Use Price Action in Trading
- Analyzing the Chart: Start by identifying the trend, key levels, and patterns.
- Entry and Exit Strategies: Use price action signals (e.g., pin bars, engulfing candles) to determine entry/exit points.
- Risk Management: Position sizing, stop-loss, and take-profit strategies.
- Combining with Market Context: News events, timeframes, and market conditions.
Conclusion
“Price action trading is a journey that empowers you to understand the market on a deeper level. With patience and dedication, you can unlock its full potential and elevate your trading game.”
- Requires time and practice to master.
- Subjective interpretation; results can vary between traders.
- Not suitable for traders seeking instant signals.