Trading Strategies With Price Action
Price Action is a method for making decisions trading from a clean chart by only analyzing price movement patterns.
Basically, price action is a series of price movements from time to time and takes an analytical action by observing the candlestick formation.
This means that no other indicator used to analyze the market. Price Action reflects all variables that affect the market within a certain period of time.
Chart Without Indicator Vs. Chart Full Indicator
Next, to show the contrast between a chart with pure Price Action and a chart with some of the most popular Forex indicators, see the chart below.
The first chart does not use indicators, there is nothing other than pure Price Action. Also called clean charts or pure charts.
While the chart below has Stochastics, RSI and Bollinger Bands installed. These are the 3 most common and most used indicators.
From the two examples of the chart above, that in a chart full of indicators, you must provide enough space on the chart to install the indicator at the bottom.
This forces you to make the Price Action at the top of the chart smaller.
It also distracts you from natural Price Action. So, not only do you have a smaller screen area to see Price Action, but your focus is not really on the behavior of market prices like the actual conditions.
If you observe the two charts above and think about which ones are easier to analyze to make trading decisions, the answer is that with a naked chart it is easier to determine the entry point.
All indicators actually come from the Price Action that underlies that because all indicators use data from the candlestick by taking open high low close data.
Basic Price Action Analysis Application
In order not to fall into malpractice trading with Price Action, you must first understand that Price Action is basically used only as a tool, and not as a final determinant.
Movements of price on the chart generally will always leave traces with price points that you should consider before opening or ending a position.
Price Action is used as a “magnifying glass” to help identify market conditions (trending or consolidation) and where important points of resistance and support are likely to affect the direction of prices again.
Steps For Price Action
To do an analysis based on price reactions there are steps that traders should know the steps needed, as below.
1. Identify Market Conditions
Market conditions are generally divided into two types; trending and consolidated (sideways). Price action can help us identify these conditions by paying attention to the High and Low prices.
The trending market condition itself is further divided into two types; uptrend and downtrend. Uptrends can be identified from higher high prices and higher low prices.
Whereas Downtrends are identified from lower high prices and lower low prices.
Difficulty in determining where the position of HH, HL, LH, and LL is due to the “zigzag” position? If so, then at that time you are facing a consolidated market condition (sideways).
The process of identifying market conditions above can help traders decide to open positions based on trading styles and risk management.
For example, Trend traders identify opportunities when prices will break through a prisoner (support or resistance).
Trend traders will usually stay in one position until the expectation of price movement trends changes. While swing traders take advantage of volatile moving prices in a range of areas or ranges.
Swing traders see buying potential at support and selling at resistance.
2. Identification of Support and Resistance Points
The second important point of the price action application is to find out the price points of support, resistance, and key levels.
Key level analysis or market confluence level is used to set up Price Action in taking a position.
These price points are vital in their usefulness because the continuity of a trend is likely to return towards the direction due to the “recurring” nature of the market.
Because of the repeated nature of market participants and the way they react to global economic variables, Price Action tends to repeat itself in various patterns. Then these patterns are called Price Action strategies.
To start learning Price Action can use support and resistance analysis and then look for setup or Price Action patterns that occur
The example above is when GBP / USD experiences Flash Crash early this October 2016.
Using Price Action at least this model warns us not to take long positions when prices form a new low.
A mistake that often occurs in taking a position is the price seems to be very cheap (take a buy), even though by using Price Action analysis we can avoid taking position errors.
You can develop accurate Break-Out and Reversal strategies by identifying movements in Support and Resistance.
3. Use Trading Tools in Identifying Key Levels
To simplify the decision making, there are actually many supporting trading tools that can be utilized.
For traders who want to learn Price Action can use supporting tools such as AUTOCHARTIST and DELKOS that can identify Key Levels, Price Patterns, Market Sentiment, and Price Volatility Analysis automatically.
Don`t need to manually specify important levels on a chart to avoid calculation errors.
Here are some terms in trading with price action:
In the Bullish Pin Bar, Reversal, the tail of the Pin Bar goes down because it indicates market resistance to lower prices or certain support points.
Also called the ‘bullish bar’, which is a bar with a high level higher than the previous high (higher high) and a low level higher than the previous low (higher low).
Also called ‘bearish bar’, which is a bar with a high level lower than the previous high (lower high) and a low level which is also lower than the previous low (lower low).
Inside Bar is a bar with a high level lower than previous high and a low level higher than the previous low. Many traders consider the bar with the same high or low level as the previous bar as the inside bar.
Outside Bar is also called the ‘mother bar’, which is the bar that ‘swallows’ the inside bar, or on the engulfing bar formation is the bar that ‘swallows’ the previous bar.
In candlestick terms, the combination of outside bar and inside bar formations is often referred to as ‘harami’.
Trading Signals From Price Action
Signals or gestures of price action are usually indicated by the formation of a pin bar which is a bar with a tail (axis) longer than its body. The longer the tail means the stronger the rejection sentiment at a given price level.
In trending market conditions, the pin bar usually indicates a reversal or opposite trend, and the pin bar is often called pin bar reversal. Here are some pin reversal bars where one of them fails or is a false signal:
The Supporting Factors Of Trading Signals From Price Action
To avoid the possibility of errors as in the picture above, it is necessary to support factors that confirm the trading signal of the price action.
Confirmators or supporting factors are support and resistance levels, trend direction and technical indicators. A frequently used indicator is the moving average to confirm the direction of the trend. Here is an example of a trading signal (pin bar) with 3 supporting factors:
Thus the probability of successful entry sell after pin bar is high.
Here are examples of trading signals from price action for trending and ranging conditions:
Looks the price broke the lowest level outside the bar which means seller re-control the market.