What is Price Action Trading?
Price action means the movement of a security’s price. Studying the price action helps traders understand the market and make decisions regarding a specific instrument. Traders pay attention to recent and current price movements in order to predict what it is going to be in the future. It is also helpful in identifying a current trend.
When analyzing the price action, a trader actually learns what other traders are doing. Why would one need to know the train of thought of other market players? Because the supply-demand ratio justifies the price of an instrument. Thus understanding the price action can enhance a trader’s own strategy.
What is a Price Action Indicator?
In order to analyze what is going on in the market, traders refer to price bars. The price bars help identify the opening and closing price of a market as well as its highs and lows throughout a given time period. A very popular type of price bar is a candlestick. Candlesticks are very convenient when checking the market’s opening and closing prices as well as the high and low price levels for a defined time period.
Traders tend to use price bars in combination with other technical tools, including support and resistance levels.
Let’s look at two common types of candles, illustrated above.
The seller candle is commonly called a bearish one. We say it is a bearish candlestick if the closing price is lower than the opening price. The real body of the bearish candle is usually either black or red. The top of the bearish candle’s body reflects the opening price, while the bottom shows the closing price. The vertical lines coming from the candle body are called "shadows" (also referred to as "wicks" or "tails"). These shadows represent the highest and the lowest price of the period.
The real body of a buyer (bullish) candle is either white or green. You can observe a bullish candle when the closing price is higher than the opening price. The bottom of the bullish candle shows the opening price, and the top of it shows the closing price.
When observing the overall picture of price movements on a chart, it is easy to notice specific patterns. These patterns are extremely helpful in identifying the future of a price direction. Thus, recognizing patterns also helps make sound trading decisions.
Price Action Interpretation
It is clear now that price action says that price is the king. Looking at a price chart, a trader makes assumptions about the trend. Here objective data is supplemented by a trader’s interpretation. For example, our trader observes a consistent growth on the chart and concludes a bullish trend. Then the trader thinks of how to use the existing situation in the market in his/her favor. It is called identifying opportunities. Suppose the trader concludes that the price is about to reach its peak and is about to reverse. He/she decides to go short. If his/her prediction is right, it will bring profit. If not, it means a loss. Thus, any situation on the chart is rather ambiguous. The more experience you have, the more likely you are to interpret the chart correctly.
Is Price Action Trading Profitable?
Trading based solely on price action can bring a profit. A record of recent price movements indeed can tell a lot about its behavior in the future. Thus, if interpreted correctly, a trader can take advantage of the data from price charts and generate profit.
At the same time, we are inclined to believe in a holistic approach to trading, which involves using several technical indicators and attention to fundamental data. Some people would say that fundamentals don’t matter, giving examples of events that haven’t influenced the market or influenced in a way that contradicted predictions. We believe these are the exceptions that prove the rule. The charts may be right but economic turbulences may dictate otherwise and radically change the course of action. This is why we recommend you subscribe to our daily newsletters that will help you stay tuned for the major economic events that may affect the instrument you are trading.
Price Action Trading Strategies
Price action is an extremely useful tool for building a trading strategy. Thus there are a few forex trading price action strategies mainly built on price move data. Let’s see how we can trade price action in a simple strategy.
The Hammer Pattern Strategy
A hammer pattern is called so due to the form of a candle that resembles a hammer (see the picture below).
This pattern represents a bullish signal or, in other words, the inability of bears to bring the price any lower. So it implies the likelihood of the market’s growth.
Entry point: It is advisable to enter a trade when one of the following candles breaks the high of the hammer candle. The high of the second hammer candle (January 18, 2021) is 1.3597. Thus, we enter a trade when the price gets to 1.3598.
Stop-loss: One good level for a stop-loss is the low of the hammer candle. We set a stop-loss for an occasion if no buyers enter the market until the price declines. This is why we do not set stop-loss too close to the entry price. As the first hammer candle’s low is at 1.3519, we set a stop-loss at 1.3518.
Exit point: We have a few options to close a trade in profit. The first one is to set a trailing stop. The second one is to wait until the price gets to a resilience level. And lastly, exit on a close of a candle when the trade is in profit. Let’s assume we exit when the price hits 1.3709.
The result: Opening a trade at 1.3598 and setting stop-loss at 1.3518, we bear a risk of 80 pips. Trading a 0.1 lot implies that if the price returns to the entry level, it will hit the stop-loss. This would make the overall loss $80. If the market traded up to the target price, we would close with a profit of $111.
Test the Strategy Using Demo Account
If you have never traded before and feel interrogated by the idea of losing money, the best advice for you is to open a teaching account on JustMarkets. Take some time to get used to the platform’s interface, learn its functionality, and place a few orders to check the strategy you have just read about. It is risk-free as no deposit is required. Learn by practice but don’t lose while learning!
If you aren’t new to forex trading, we encourage you to open a real account on JustMarkets and benefit from splendid trading conditions, including but not limited to 0% withdrawal fee, low spreads, and good leverage opportunities. Don’t hesitate and have the best trading experience with JustMarkets.
Price action serves as a basis for a number of forex strategies. In order to understand what is going on with the price in a defined period of time and predict its future movements, traders refer to technical charts. One of the most convenient forms of charts is the candlestick chart. Understanding charts and price patterns will contribute significantly to your positive trading results.