What is the Price Action?

What is the Price Action Trading?

 

Trading through the so-called “Price Action” means to exclusively focus the analysis on the graphical part of the price, leaving tens of oscillators that sometimes are abused in an exaggerated way to the edge.

A chart without any indicators is the starting point for any trader who decides to use the Price Action. Prices and future graphic configurations will determine the choices of trading.

The great advantage of this style of investment is the fact that in this way we avoid monitoring thousands of variables and indicators every day, while we can focus on the behaviour of prices that charts can transmit.

The technique of Price Action Trading can be used on any time frame and on each market, although the Forex appears to be the ideal end-use candidate. Compared to markets such as equities or commodities, the liquidity in the forex makes the exchange rates quite efficient at any time of the day and the continuous movements of volatility create the conditions to attend the creation (and possibly the reversal) of different trends over even a single day.

To start trading we will not need many types of Price Action. We will just try to stay simple and humble in outlining our action plan gradually beginning to approach this trading style.

First of all, we will have to create a clear chart, clean and, above all, readable. Then we will prefer different colours candles for ups and downs (black and white will do fine); here is one as an example.

price action trading chart

 

By comparing this kind of chart that only contains the price movement with the same chart but full of various indicators or oscillators, we immediately notice how the eye of the trader may be disturbed by the presence of these additional elements.

chart with indicators

 

Charts like the one presented above probably can include oscillators in opposite conditions to what would prove to be the signal generated by the price action. But this is logical; if we think, for example, to an oversold situation of the oscillators, the market probably has a bearish trend. While signals from the Price Action should be used in the direction of the trend, oscillators in these situations would dissuade the entrance as they consider the market too stressed.

In this way, the trader is waiting for price action signals which hardly could arrive simultaneously with indicators and prices. For not always being late, and not to be too often out of the business or in order to avoid continuous false signals generated by the trading system based on oscillators, it is therefore necessary to clear our chart from all these indicators that disturb our price vision.

Instead, what we really need to do is focus on those repetitive behaviours of the market that offer a high probability of success in the trade. By setting the rules and checking how a certain assed moved in the past when the Price Action started, the trader will be able to minimize the risks of trading.

Each trader can customize the Price Action models according to his own experience, but certainly and purely by example, there are some who find a greater appeal and acceptance in the trading arena. Among these we can find those figures called Pin Bar, Fakey and Inside Bar.

Streams of words have been written on these types of Price Action, but what we want to do now is simply to show the convenience and clarity to adopt this type of strategy in the trading plan.

Even if every trade should be made in the direction of the main trend, the chart below shows how the Inside Bar provides continuation signals of the upward without the help of technical confirmations by the oscillators. As the Inside Bar is a figure represented by a candle contained in the range of the previous candle, it represents a moment of thought for the market, but at the same time a compression of the volatility, a spring ready to move probably in the direction of the main trend.

eur chart inside bar

 

Prior to this type of analysis, it is necessary to determine what the direction of the main trend is. In order to do so, we will have to establish objective criteria that allow us to establish with certainty those boundaries without running the risk of being ambiguous. A good method may be to consider a market phase in which we can find rising (bullish trend) or falling (bearish trend) tops and lows as a trend.

Not all areas of a chart, however, are identical for importance and weight of the Price Action signal. When an Inside Bar or a Pin Bar is realized, it must always be contextualized within a series of historical prices. If the price expresses a certain behaviour in the vicinity of significant support or resistance lines, then its weight in the trading strategy should be considered in greater way with respect to an isolated signal outside of supports / resistances that we have previously identified as relevant.

Also in this case, a previous detailed mapping is necessary for the most interesting price thresholds if the Price Action occurs in their graphic territory. The following chart shows how the opening of a trade in a key area of support / resistance combined with a price pattern, greatly increases our chances of success.

chart price action

 

This first article was aimed to provide a framework of what we mean by the Price Action and what the basic rules to follow in order to exploit the benefits of this trading technique are. Like any trading activity, simplicity, objectivity, a wise money management and compliance with certain rules greatly elevate the chances of success. The Price Action then has the immense advantage of allowing the trader to focus only on price movements, deleting the disturbing elements generated by the sometimes excessive use of technical indicators of mathematical derivation.

The design of a weekly, daily or hourly bar or candle expresses many concepts on the psychology of the market and improving the ability to read these messages can give us great satisfactions in the future.