What is Price Action? - Price Action Trading Explained
Price action trading is a methodology for financial market speculation which consists of the analysis of basic price movement across time. It's used by many retail traders and often by institutional traders and hedge fund managers to make predictions on the future direction of the price of a security or financial market.
Put simply, price action is how price changes, i.e., the 'action' of price. It's most easily observed in markets with high liquidity and volatility, but really anything that is bought or sold in a free market will generate price action.
Price action trading ignores the fundamental factors that influence a market's movement, and instead it looks primarily at the market's price history, that is to say its price movement across a period of time. Thus, price action is a form of technical analysis, but what differentiates it from most forms of technical analysis is that its main focus is on the relationship of a market's current price to its past or recent prices, as opposed to 'second-hand' values that are derived from that price history.
In other words, price action trading is a 'pure' form of technical analysis since it includes no second-hand, price-derived indicators. Price action traders are solely concerned with the first-hand data a market generates about itself; its price movement over time.
- Price action analysis allows a trader to make sense of a market's price movement and provides him or her with explanations that serve as a way for the trader to build a mental scenario to describe the current market structure. Experienced price action traders often attribute their unique mental understanding and 'gut feel' of a market as the main reason for their profitable trading.
Price action traders make use of the past history of a market's price movement, most typically focusing on the recent price action of the last 3 to 6 months, with a lighter focus on more distant price history. This price history includes swing highs and swing lows in a market, as well as support and resistance levels.
A trader can use a market's price action to try and describe the human thought process behind a market's movement. Every participant in a market will leave price action 'clues' on a market's price chart as they trade their markets; these clues can then be interpreted and used to try and predict the next move in a market.
Price Action Trading - Keeping it Simple
Price action traders often use the phrase "Keep It Simple Stupid" in reference to the fact that trading is something many people over-complicate by clouding their charts with numerous technical indicators and generally over-analyzing a market.
- Price action trading is also sometimes referred to as 'clean chart trading', 'naked trading', or 'raw or natural trading', in reference to trading from a simple price action only price chart.
The simple stripped-down approach of price action trading means there are no indicators on a trader's charts and no economic events or news is used in making one's trading decisions. The sole focus is on a market's price action, and the belief amongst price action traders is that this price action reflects all the variables (news events, economic data etc.) that influence a market and cause it to move. Therefore, the implication is that it's much simpler to just analyze a market and trade from its price action, rather than trying to decipher and sort the many different variables affecting a market each day.
Price Action Trading Strategies (Patterns)
Price action patterns, also called price action 'triggers', 'setups' or 'signals', are really the most important aspect of price action trading, because it's these patterns that provide a trader with strong clues as to what price might do next. Examples of some simple price action trading strategies include:
- Inside bar pattern
A two-bar pattern consisting of the inside bar and the prior bar (usually called the "mother bar"). The inside bar is contained completely within the high to low range of the mother bar. This strategy is commonly used as a breakout pattern in trending markets, but it can also be traded as a reversal signal if it forms at a key chart level.
- Pin bar pattern
Consists of a single candlestick and shows rejection of price and a reversal in the market. It works well in trending markets, range-bound markets, and can also be traded counter-trend from a key support or resistance level. The pin bar implies that price might move opposite from the direction the tail is pointing, as the tail shows rejection of price and a reversal.
- Fakey pattern
Consists of a false breakout of an inside bar pattern. If an inside bar pattern breaks out briefly but then reverses and closes back within the range of the mother bar or inside bar, you have a fakey. It's called a "fakey" because it fakes you out - the market looks like it's breaking one way but then comes back in the opposite direction. Fakeys work well with trends, against trends from key levels, and in trading ranges.
Trading with Price Action Patterns
The article provides real-world chart examples (described in text), including:
- A bearish fakey sell signal in a downtrend.
- A bullish fakey pin bar combo setup in an upward market.
- Inside bar and inside pin bar combo setups in trending markets.
- Pin bar buy signals with long tails that led to large up moves.
Trading Price Action Patterns with Confluence
Trading with price action signals is not only about the signal itself, but also about where the signal forms on the chart. The best signals form at 'confluent' points (where multiple factors align), such as a pin bar in the direction of an uptrend at a support level. The more confluent factors supporting a signal, the higher-probability it is considered to be.
Conclusion
The article states that readers now have a solid basic understanding of what price action is and how to trade it, and encourages expanding knowledge further. It promotes the author's price action trading course for more in-depth strategies and professional insights.
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