Price action trading strategies rely solely on the interpretation of candles, candlestick patterns, support and resistance, and chart patterns and are frequently confused with volume and price analysis (VPA), which combines volume and price action to paint a more complete picture of the stock’s story.
In this post, we will look at a few of the top price action trading tactics and best forex trading strategies to help you improve your chart eye.
What Are Price Action Trading Strategies ?
Price action refers to the analysis of a security’s historical price movement, in which traders employ a price action trading method to examine past prices in search of any hints as to the direction the market might go next. And the most common price action indicator is the candlestick chart, which provides traders with information like as a market’s open and closing prices, as well as its high and low price levels during a given time period. Learn more about Price Action Trading.
The basis of price action trading strategy is the analysis of this information, and it might be claimed that price action is basically the study of all buyers and sellers actively engaging in any particular market. As a result, by analyzing what other traders are doing, you can gain a distinct advantage in your trading decisions.
4 Pillars of Price Action Trading Strategies
Before we go into the greatest price action techniques, let’s first grasp the four pillars of price action trading strategies that are essential for price action trading success.
Candlesticks are the most popular charting method in the trading market, but you can use any charting style you like because there is no hard and fast rule here.
However, we will concentrate on candlesticks because they are the best chart pattern for providing adequate information to trade with because each candle in the chart pattern conveys some information.
2. Bullish Trend
A bullish trend is a straightforward formation to spot on the chart, and you may be familiar with it. A bullish trend develops when a grouping of candlesticks extends up and to the right, and the key thing to look for is that as the stock makes a new high, the subsequent retracement should never overlap with the prior high, ensuring that the stock is trending and moving in the right direction.
3. Bearish Trend
A negative trend aids in shorting a stock, which many new traders are unfamiliar with or have no interest in doing, yet it is necessary to learn this trend for comfortable trading.
4. Flat market
Since securities do not trend in one direction all day, a flat market implies that the market is in a trading range. You may notice the morning range within the first hour of the day, and the rest of the day is merely a string of head fakes.
Flat markets are the most likely to lose money since your expectations and what the market can produce are not in sync. As a result, when the market is in a narrow range, a large gain is improbable, thus you should focus on tight ranges to buy low and sell high.
Best Price Action Trading Strategies
The price action trading approach necessitates three distinct components. Why, how, and what, where the ‘why’ represents the reason you’re thinking of trading a particular market, and this is where a price action pattern comes in. With price action analysis, you can predict what will happen next, such as whether the market will rise or fall.
The ‘how’ refers to the mechanics of your trade, as it is the way you will trade utilizing analysis, which includes knowing your price levels for entry, stop-loss, and target.
And the ‘what’ is the trade’s conclusion, as it signifies how you handle the trade to earn a profit and what you want. Some of the best price action trading tactics for beginners are included here.
1. Hammer strategy
The hammer price action trading strategy is a bullish indicator that indicates a greater likelihood of the market heading higher rather than lower and is utilized mostly in uptrending markets.
The market is being driven to a new bottom by sellers, but because they lack the strength to hold the low, they decide to quit their positions, which leads to a market rebound and the entry of buyers.
Both the open and close price levels should be in the top half of the candle, although the close can be lower than the open and is a stronger signal when the closing is higher than the open price.
2. Shooting star strategy
The shooting star price action trading strategy is a negative indicator that indicates a greater likelihood of the market heading lower than higher and is employed mostly in downtrending markets; it is the inverse of the hammer pattern.
A shooting star price action trading strategy demonstrates that buyers are pushing the market to a new high, but the buyers are not strong enough to hold the high and choose to exit their positions, causing the market to fall lower and sellers to enter the market.
Also, the open and close price levels should be in the lower half of the candle, where the close can be higher than the open, but a stronger signal comes when the close is lower.
3. Harami strategy
The harami price action trading strategy is a two-candle pattern that symbolizes market indecision and is typically utilized for breakout trading; it is also known as an inside candle formation since one candle occurs inside the range from high to low of the previous candle.
A bearish harami emerges when the high-to-low range of a selling candle develops within the high and low range of a preceding buyer candle, and because there is no continuation to establish a new high, the bearish harami reflects market hesitation, which could lead to a downside breakout.
A bullish harami emerges when the high-to-low range of a buyer candle develops within the high and low range of a preceding selling candle, and because there is no continuation to form a new bottom, the bullish harami reflects market indecision, which could lead to an upside breakout.
Price action trading strategy is a powerful tool and the foundation for many strategies employed by traders all over the world since it gives a systemized and practical technique to evaluate the market, giving a trader a focus. As a result, the more focused a trader can be, the more likely recurrent patterns of buyer and seller activity can be discovered and traded on.
1. What is the definition of a price action trading strategy?
Price action is the process of examining historical price behavior in order to forecast price movement in the future. Candlestick patterns, which show how buyers and sellers interact over a certain time frame, are frequently analyzed in price action trading.
2. What is the best way to trade price action?
Price action is most commonly traded using chart patterns and candlestick patterns. Candlestick patterns aid in identifying the interaction between buyers and sellers over a specific time period by studying the open, closed, high, and low prices.
3. Is price action trading strategy suitable for beginners?
Price action trading strategy is a fantastic place to start for beginners since it gives them something practical to focus on. Price action is an excellent beginning point since traders who can discover a focus in the random up and down movements tend to perform the best.