What is Price Action strategy?
Price Action based trading is completely based on the study and analysis of price movement on a chart to identify trading opportunities in financial markets. Price action trading is purely based on the concept that the market information will be reflected in the price movement of an asset. Price Action based traders focus on analyzing the support and resistance level of an asset, identifying trend, candle stick patterns and chart patterns of an asset to interpret and make decisions based on the historic data.
Traders can merge price action trading along with reliable technical indicators to make high probable trading decisions in the stock market. Price actions provide a valuable understanding to traders about market behavior and market dynamics. Learning and mastering price action is a time taking process and it requires patience and relevant market knowledge. Once you have mastered price action, it helps you to build a solid foundation to make intelligent trading decisions in the stock market and can achieve consistent profits eventually from stock market.
- Price action trading involves making trading decisions based on the price movements of an asset.
- Asset Price always tends to follow certain price levels and chart patterns. These patterns formed in an asset price will repeat over time. Traders can identify patterns and can make informed trading decisions in the market.
- Price action allows traders to get an insight into market sentiment by analyzing the price movements.
- Rather than relying solely on technical indicators, traders can combine technical indicators along with price action to take high probable traders in financial market.
Price Action Analysis used in Stock Market
Support and Resistances
Support and resistance are the backbone of Price Action based trading. Traders must identify the key support and resistance zones of an asset to make an informed decision. Traders make entry and exit decision of an asset identifying the trend reversals and trend continuation based on how the price on an asset is respecting the support and resistance zones.
- Support zones are the price zones where the asset faces a huge buying momentum and refuses to fall further from the zone. Traders use support zones as the best buying opportunity to make profit.
- Resistance zones are the price zones where assets face resistance to move up with huge selling pressure. Traders use resistance zones to book profits or to enter a short position.
Trend analysis is vital for a trader to understand what trend the asset is currently following. There are three market trends. The asset can either be in an uptrend, downtrend, or sideways trend. Understanding the trend and taking trades according to the trend is what simplifies the trading journey.
For example, if the market is in an uptrend trader can Enter into a long position Expecting that the price of the asset will move up. If the market is in a sideways trend trade can either wait for the price to break out from the sideways trend or can enter a non-directional position and make money in the market. If the market is in a downtrend traders can either enter a short position or can consider booking profits in the market. Traders must do proper trend analysis and always must keep in mind to trade with the trend and not to trade against the trend.
Candle stick analysis
Candlestick analysis is a relevant tool used by Price Action based traders in financial markets. Traders use single candle stick analysis and multiple candle stick analysis to identify potential reversal points, indecision, and trend continuation in market.
Single candle stick analysis includes analyzing a single candle stick and taking informed trading decisions in stock market. Most used single candle sticks are
- Doji candle
- Spinning top
- Marubozu candle
- Paper umbrella
- Shooting star
Multiple candlestick analysis includes analyzing multiple candlesticks together to get an insight to make trading decisions in market. Most used multiple candlesticks are
- Engulfing patterns
- Partial engulfing patterns
- Harami patterns
- Gap based patterns
Chart pattern Analysis
Chart pattern analysis is also a crucial tool used by Price Action based traders in financial markets. Different chart patterns provide insights into market trends and trend reversals. Understanding the chart patterns helps traders to identify potential price movements and generate income by taking high probable trades. Traders commonly use the following chart patterns for Chart Pattern based trading, they are
- Head and shoulders
- Triangle pattern
- Double top and double bottom
- Flag and pole pattern
Best Price Action Based Trading Strategies
Breakout and Breakdown trading
The most popular Price Action based strategy used by traders is the breakout and the breakdown strategy. The price of an asset tends to consolidate between support and resistance zones. Once the support or the resistance zone is broken with huge volume, the traders expect huge momentum towards that side and takes positions accordingly. If the resistance zone of an asset is broken with strength, the trader expects the price to move up, breaking out of the resistance zone. This is called a breakout. Traders enter a long position to capitalize the up movement this is called a breakout trading. Similarly, if the support zone of an asset is broken with strength, the trader expects the price move down breaking the support zone. This is called a breakdown. Traders enter short positions to capitalize the down movement, and this is called breakdown strategy.
Pull back trading strategy
Pull back trading strategy involves the traders waiting for a pull back or a retracement during an uptrend or downtrend to enter a position and ride the trend to make an income. Pull back traders expect the trade to continue and wait for the price to come to a favorable level to make an entry. Pull back traders commonly use trend lines to identify potential entry points and can make high probable trades in market.
Chart Patterns based breakout strategy
Chart Patterns based price action traders find the chart pattern formation in market and wait for the price to provide Chart Pattern based breakout or breakdown to make high probable trades in market. Chart Pattern based trading is a highly effective strategy and it requires the effort to plot the chart pattern and wait for it to give momentum.
Swing traders capitalize the market swings from support and resistance zones to generate an income. Swing trading is an effective Price Action based strategy commonly used by traders in the financial markets. Swing trading strategy is completely based on support and resistance of an asset. When the asset price is in the support zone the swing trader enters into a long position targeting the next resistance zone. When the asset prices are in a resistance zone the swing trader enters into a short position targeting the support zone.
Inside candle trading strategy
Inside candle trading strategy is used by traders when the market is in a sideways trend. Multiple candles will be formed in a single candle indicating less volatility in the market. Inside candle formation happens mostly when the market is waiting for some relevant news or events. Traders take position accordingly when the low or the high of the candle is broken. Traders take long positions if the high is broken or enter a short position if low is broken. Trading position completely depends on which direction the price is moving.
Price action trading and other technical indicators in financial market provide high probable trades. Traders must take trading decision based on their own research and analysis to become net profitable in long term.