Introduction to Trading with Price Action
Price action traders believe that changes in the sentiment of market participants in a certain period of time have been reflected in the pattern, shape or setup of the candlestick formation. Price action cannot be classified as one hundred percent in technical analysis because it uses very few technical indicators.
What exactly is price action trading ?
If taken literally, price action means price movement. Price action trading can mean trading by relying more on observing the price movement itself. Thus the decision for entry or exit is based more on changes in pattern, shape or setup of the candlestick bar formation.
Trading in this way does not use technical indicators that are considered lagging or always lag behind changes in market prices. Technical aids are limited to moving average indicators, horizontal lines and Fibonacci retracement level lines to help determine the direction of trend and support and resistance levels.
Price action traders believe that changes in the sentiment of market participants in a certain period of time have been reflected in the pattern, shape or setup ofthe candlestick formation. Price action cannot be classified as one hundred percent in technical analysis because it uses very few technical indicators.
In addition, market news or fundamental analysis that can drive the price is also not so considered because it is considered to have been reflected by the price movement itself. Most price action traders use fundamental analysis only to see changes in market sentiment.
Between the price action chart trader with technician trader chart
In addition to technical indicators considered lagging, price action traders think that charts with many indicators will tend to be difficult to analyze, confusing and not infrequently conflicting interpretations between indicators. For example following a clean daily EUR / USD chart (no indicator) and using some important indicators that are often applied together like Bollinger bands, MACD, stochastic and ADX:
According to the traders’ price action, high probability trading signals are easier to find in trading charts that are ‘clean’ or without indicators. By simply focusing on price action setup on the trading chart, usually between price action traders rarely different interpretation, because the pattern or setup tend to be clear and in accordance with market sentiment. This is different from the technician traders who often differ in interpretation because they use different indicators.
Price action traders argue that all technical indicators are based on price action, so using many technical indicators will add many variables that must be analyzed.
An example of a price action setup on a trading chart
Like what is the price action pattern, form or setup? There are several setups, the popular ones are pin bars and inside bars . Here’s an example of some price action setups formed on the AUD / USD daily chart:
Even so, not all setups provide the right trading signals, such as the wrong pin bar, or failed ( failed pin bar) as in the example above.
Because trading with price action is very dependent on pattern changes or candlestick formation setup, knowing the direction of price movements is absolutely necessary. If the market moves uptrend , it will form a higher high and higher low pattern, while a downtrend will form a lower high and a lower low . The transition from sideways to trending usually starts with a break in the resistance or support level, followed by a price action setup that supports market sentiment.
Determine the trend of price movements
Because trading with price action really depends on changes in pattern, shape or setup of candlestick bar formation, then knowing the direction of market price movements is absolutely necessary. Is the market currently trending or consolidating (sideways)? If it’s trending, uptrend or downtrend ? If you are consolidating, consider the resistance and support levels, or the upper and lower bounds of the range.
Most of the price action trader entry at the time of market trending because the probability of trading signals generated higher than the market being consolidated. Whereas if the consolidation range is quite narrow, and price movements tend to be ‘ choppy ‘ (narrow and uncertain range), then it should not enter the market.
When the market moves trending ( uptrend or downtrend ), there are swing points ( swing points ) which are reference points to identify the direction of the trend (circle in the bottom image). The most basic way to determine the trend is to look at the pattern formed by the swing points.
If the market moves uptrend , the swing points will form a higher high or a high level higher than the previous high and a higher low or a low level higher than the previous low level.
For a downtrend market the swing points will form a lower high or a high level lower than the previous high level, and a lower low or a low level lower than the previous low level.
In the AUD / USD daily picture above, we see a reversal pin bar setup which indicates a change in the direction of the trend from the uptrend to the downtrend.
Consolidated market and trending market
Analysis of price action from time to time is necessary to know the direction of price movement. If no higher high, higher low , lower high or lower low pattern is found then it means the market is consolidating and prices will move ranging or sideways.
The transition from sideways to trending usually starts with a break of the resistance or support level, followed by a price action setup that supports market sentiment. Here’s an example of a switch from consolidation to trending on GBP / USD daily:
After breaking the resistance level (which then becomes support), it appears that the pin bar experienced rejection at the support level so that it can be considered as an entry signal with a high probability.
In the forex market the trend usually only occurs 25% to 35% of a certain period of time (especially on the daily time frame), the rest is sideways or choppy .Therefore we must be able to take advantage of the momentum by identifying the right trends, among others by observing the price action setup that is formed.
Market sentiment can be observed through the pin bar, inside bar or fakey bar. For entry, the most important is to determine the supporting factors that confirm the situation, can be both resistance and support both static and dynamic, and Fibonacci retracement levels. Many factors influence market sentiment, including economic news releases to geopolitical factors. Price action strategy is only one way of trading that is relatively simple and easy to understand.
Trading with a price action strategy
After identifying market conditions, the next step is to determine the key levels as a supporting factor. Trending or consolidation reflects market sentiment for the medium and long term. Uptrend indicates bullish sentiment and downtrend hints at bearish market sentiment.
Current market sentiment can be observed through the pin bar , inside bar or false bar . For entry, the most important thing is to determine the supporting factors that confirm the situation. Supporting factors can be either the resistance level and the support either static in the form of horizontal or dynamic line in the form of moving average , as well as Fibonacci retracement levels.
Without confirmation of supporting factors, it could be that the price action setup is less valid, or the probability is low. This is because almost all market participants pay attention to important levels (resistance or support). If the price breaks the important resistance level, then the probability for bullish sentiment is quite high. With the formation of a price action setup around the resistance, then a buy signal around that level will be very valid.
The nature of the market will naturally repeat itself, reflecting the reaction of the perpetrators to the global economic variables, so that the pattern of price movements will also be repeated.
Trading strategy by following the change of pattern is called price action strategy. Repetition of a particular pattern shows the market sentiment that has happened before, and usually provides strong clues to happen again. The price action trader believes that by observing the price action setup and its supporting factors, a picture of the next price movement will be obtained. Following is the illustration of the situation on the GBP / USD daily chart:
Another example is on the daily USD / JPY chart below:
Looks at the level of Fibo retracement 50% is a strong support after 2 times tested, and is considered a key support level. With the formation of a pin bar that cuts this level, or experiences rejection , the market sentiment tends to be bullish . In this case the key support level of Fibo retracement 50% is a strong support factor.
If noted, the above rejection pin bar is a repetition of the situation in the previous example for resistance levels, where the market sentiment tends to be bearishafter the pin bar experiences rejection at the resistance level (pin bar reversal). Even so, market sentiment will not always repeat itself, only a high probability.
Trading with a price action strategy is about market sentiment, and market sentiment can not be predicted with certainty. Many factors influence it, including economic news releases to geopolitical factors. Price action strategy is only one way of trading that is relatively simple and easy to understand.