What is price action in Trading ?

What is Price action in trading, this term must be heard by all of us. In this article we will understand what is price action and how trading is done using price action in depth. Price action trading is defined as the technique of interpreting market information directly off the price chart. Price action is not hard to understand once we master it. Not a single lagging indicator anywhere, no complex apparatus – just price fluctuations, trends, and even psychology as your parameters to base your trades on. Find out how to read the trends, the levels, and how to enter and exit the market with exactness. Regardless if you are a new trader or a professional, incorporating price action in trading changes a lot. Take the plunge and learn how this time tested method can assist you in sorting out the markets and your investment choices. In this article, we’ll take a closer look at a few important things connected to Price Action Analysis in Trading.

1. What is price action analysis in Trading?
2. Getting to know the advanced points about candlestick analysis.

Everything that you want to know about candlesticks and how they work is in this post. After reading this, you will not have to figure out any candlestick patterns anymore.

What is Price Action analysis in trading ?

Price Action Analysis is more or less the same as observing the price patterns a chart presents. This movement is also easier to see in the candlestick format. This one reveals the actions of buyers and sellers at a given period. All of this is reflected in the candlestick when observing their actions. If we want to comprehend price action we have to be familiar with the tools which is candlesticks and expanded to form features.

As you will recall, price action trading hardly put emphasis on the fundamentals that influence how a particular market is priced. Instead, it focuses mainly on examining the past of a certain price of a market —how that price evolved. However, what makes it different from other types of technical analysis is that, mostly, it just focuses on the current price and to some extend cares about what prices used to be like.

Price action traders consider how a given market’s prices were traded especially in the most recent period or the last three to six months. They make more emphasis on the current prices than those of the past. These features comprises of price levels at which prices rose significantly (swing highs), fell significantly (swing lows), and price levels that sees lots of action or reversals (support and resistance levels).

This price history is used by traders so they can know how people are thinking each time they engage themselves in trading the market. On a price chart, every participant of the trading process leaves some ‘hints’ concerning his actions. Others are traders can then study and try and interpret these clues so that they can guess or predict what likely to happen next in the market.

Below image shows sample price action in chart.

The Price Action Analysis also refers to movement of price in the chart. The format of the candlestick is good because it indicates price movement. It might refer to what buyers or sellers were engaging in during that particular period. Their activity can be seen clearly In CANDLESTICK. Therefore, in order to study price action, it is necessary to study all the elementary and complex characteristics of the candlestick

Step1: The size of the body from high to low

BODY:

1. Narrow
2. Average
3. Wide

With different timeframe, the body of candle shows lots of important information like below :

• A long body is expressing its good strength.
• A narrow body shows weakness When two successive bodies are in contact, its mean that the size of consecutive bodies are getting bigger and bigger is indicative of an increase in the momentum.
• This he demonstrated when he indicated that when consecutive bodies become smaller and smaller, the momentum slows.
• If an up or down move with the greater than average body candle it indicates high volatility.

How to compare?

1. current candlestick with respect to the previous one or the bars which have formed before it.
2. current candlestick with regards to a similar swing.
3. candlestick with regard to the previous swing

Step2: The length of the wick

• Thick wicks indicate that the price was volatile during the formation of the candle but was refused, which proves the presence of supply or demand.
• When price touches big round numbers – support and resistance levels. Candlewick increases, which means that it is volatile. This is usually experienced after the trending phase, and before a reversal occurs from the support and resistance level.
• One more thing: the longer the shadow the higher the probability that the prices would go in the reverse of the shadow Lengthy wick candles do not always imply a reversal. If subsequent move engulfs wick of the rejection candle, it fails; it is known as reverse rejection.
• Long wick on the lower end of a candle implies lower prices may break in the opposite direction of the wick while multiple clustered wicks imply prices may in the same direction of the wick created, and if the body closes the direction of the trend.

Step3: Comparing the wicks to the bodies

To understand relationship between the open and close in comparison with the high and the low of the present bar

• Open price informs us of the state of buyers and sellers at the start of that particular period.
• Closing price, therefore, informs us where the equilibrium point was at the time period of consideration.

Direction of candle : Let us understand few major price action candle to understand direction of market.

The position of each bar relates to the previous bar’s high/low

• An up bar begins an upturn and provides the signal that the previous downtrend is over
• A down bar begins a down phase and signals the end of an up phase.
• If the inside bar candle do the break the high of previous candle low, then it does not effect the direction of the current swing .
• The outside bar violates the previous high as well as the low, thus creating change in the structural aspect in the market. The first external bar in the upward movement maintains the upward movement and the first external bar in the downward movement maintains the downward movement. Normally, an outside bar does not signal the end or start of a price swing without a down bar or a breakdown below the swing low.

Advantages and Disadvantages of Price Action in Trading

Advantage	Disadvantage
1. Simplicity: Price action trading does not require other forms of indicators apart from the price chart.	1. Subjective Analysis: Sometimes a chart of prices will be read one way by one trader and a different way by another trader.
2. Flexibility: It can be used on any market type – be it stocks, forex, commodities and so on and on any time frame.	2. Learning Curve: Does take time and effort to learn to correctly read patterns and charts.
3. Focus on Market Psychology: It assists traders to predict the market trend and the characteristics of the market.	3. Emotion-Driven Decisions: The self regulation by traders is equally likely to fail because there is no well defined set of rules regarding their trading activities.
4. No Dependence on Lagging Indicators: Depends on the current market price information, provides information at the right time.	4. Risk of Overtrading: Market participants may become overactive when interpreting others’ actions, or when making action, they may do it too early.
5. Cost-Effective: There are no expensive tools, software, or indicators required to subscribe to and learn from.	5. Requires Patience: This may not offer the trader several trading chances as may be required in ranging markets.
6. Enhanced Risk Management: This one permits formulation of entry, exit, and stop-loss levels in relation to price systems.	6. Lack of Statistical Edge: It does not inherently mean the chance will improve without much back testing.

How to implement the Price Action to be a profitable trader

Understand the Basics:

• Candlestick chart patterns (and elements) to understand: Doji; Engulfing candles; Pin-bar candles.
• Look at study support and resistance levels in order to define main areas of interest.

Identify Market Structure:

• Concentration on momentum – uptrends (higher highs and higher lows) downtrends (lower highs and lower lows).
• Identify range-bound markets in order to eliminate the noise.

Master Key Patterns:

• Get to know patterns such as head and shoulders, double tops/bottoms and flags.
• Learn when the price is rejected such as wicks and breakouts.

Backtest Your Strategy:

• You want to practice price action? It is good to use historical data to test your strategy.
• Altered entry/exit criteria and rules based on the outcomes obtained through analysis above.

Develop a Trading Plan:

• This should be done in order to clearly understand what kind of risks are acceptable and which are not (for instance, limit the total risk per trade to 1-2%).
• It is good to define your entry method, exit point and your stop loss level properly.

Practice Discipline:

• Take your cues from your trading strategy instead of your feelings.
• Always it is better to go with the demo accounts which would be more helpful to learn the strategies in one way without actually investing the real money.

Monitor and Improve:

• Adopting the trading journal in order to record trades, review and learn from the errors made in trading.
• The key to sustaining operations is to know the dynamics of the market and be able to apply the lessons acquired.

FAQ

Conclusion

In fact, the trading technique known as “price action trading” is a robust approach that focuses a great deal on the basics while being guided by the price action of the market. As helpful as it is, it has its share of problems – it is subjective, and may take some time to master. Price actions therefore work when traders are able to master the patterns, remain disciplined and put in place a strong trading plan in a bid to achieve constant profitability. Paying particular attention to price action is no different from any other trading strategy, and it also needs commitment, time, and fine-tuning. If approached with the correct mentality and the right preparation, then price action can be a legal, perpetual trading strategy.