Here’s an article that I’ve came across on the web couple of days ago. I personally found this very helpful since I’m into PA hope the fellow newbies find this useful as well. Happy sharing!
Price Action Trading Guide
If you are reading this then you made the wise decision to take your time and learn about Forex price action trading. By learning price action you will learn the most fundamental aspects of trading which will help your trading in the long run, even if you decide to not use it as your way to trade the market. So get your notebook out or open up notepad and begin taking notes. Feel free to bookmark this page for future reference or to read at a later time. Now let’s get started!
Introduction to Price Action
You may be asking yourself “What is price action?” and let me tell you. It is the most powerful yet simplest way to trade the market with success. It is a form of technical analysis and it uses candles on a chart which represents data. This data shows what the market has been doing for the specified time range. For example if it is a daily candle then it shows what the market did for that day. All economic data and global news that effect price in any way will be reflected on the price chart so it eliminates almost any use of following the news.
The main thing that separates price action trading from all other trading strategies is that it uses “clean” or “naked” charts. There are no indicators or anything confusing on your chart, the only thing that is there is raw price displayed as candles. This makes trading simpler and easier to read.
Clean and Simple Chart to Read
Before you continue I want to stress to you something. There is no “Holy Grail” when it comes to trading. I will say it again there is no “Holy Grail” system. No matter what you choose to help you trade there is nothing that will give 100% accuracy on every trade. I believe that if price action trading is utilized to its full potential that it is as close to a “Holy Grail” as you can find. It will take hard work and a lot of learning to get to that stage but if you willing to master price action trading then you will become a successful trader.
Price Action Candle Basics
The main tool of a price action chart is a candle. A candle is made up of a body, two wicks, a close and an open. The wicks represent the high and the low for the time of that candle. The body is the price movement from the opening price. The body size can differ on candles and depending on whether it moves up or down from its opening price will determine whether it is a bullish or bearish candle.
Candle Overview
When these candles are put onto a chart next to each other they create patterns that are trade-able and successful. This is the main concept behind price action trading.
Price Action Charts vs. Indicator-Stuffed Charts
Many of the charts today have indicators all over the place with confusing graphs and squiggly lines that make no sense at all to you. Everything that these indicators can do, we can do also just by reading the raw price which is represented by candles. All you need are the candles to make every trading decision you will ever make.
By using price action trading on clean charts you are eliminating any distractions and just focusing on the most important part, the price. As I said before and I can’t stress enough, raw price displayed on your charts is all you need to trade profitably. It makes trading easier, simpler and way less confusing. It is also a lot easier on the eyes to look at a nice, clean-looking chart instead of an overcrowded, confusing chart such as the one below here.
Ugly and Confusing Chart
See how that chart makes it almost impossible to trade off of. There are indicators all over the place and can you imagine having to learn what each of those indicators mean and how they work? Because being successful on one of these charts mean that you have to master everyone one of these indicators to make sure you are using them right. Wouldn’t be a lot easier to just learn and master one aspect of trading? Look at the chart below and do you see how much easier and less intimidating it is? Trading price action on simple charts is the most efficient and productive way to go.
Easy on the Eyes and Effective
The Power of Price Action
Now that you have learned the basics of price action trading and how much easier it is to trade with you can begin to learn the true power behind trading with price action. Below are all of the things that price action can do for you as a trader and how it can help you become a successful trader.
Identifies Trending Vs. Ranging Markets
Identifying if the market is trending or ranging is arguably the most important thing to know before making any trades in the market. You have to know whether nor not the market is currently trending or is ranging. the if you find it is trending you have to decide whether or not it is trending up or down. Knowing all of this information is beyond helpful when deciding to enter a trade or not. For example you don’t want to enter a trade long when the market is in a downtrend. This conflicts with itself and more times than not you are going to have a losing trade. Price action trading will make sure that you do not make this costly mistake.
Price action can identify a trending market or a ranging market in a very simple way. If it is making lower lows and lower highs then you know it is in a downtrend. If you look on the chart below you will see that the market is also in a downtrend. You can see that the high are lower than the previous highs. Also that the lows are lower than the previous lows.
Market in a Downtrend
The lower lows and lower highs almost make a stepping ladder down. This chart above is a great example of a down trending market. But you are probably telling yourself that,”Duh! of course that is in a downtrend. It is obviously going down” and yes you are right but this confirms that it is a downtrend.
You generally want to go with the trend on your trades and for beginners only trade when there is a trend clearly defined. This will make you a much more successful trader.
Determining a ranging market can be a lot trickier and harder to identify. They are basically a range of candles that stay inside a certain price range. As you can see on the chart below the candles stay in the range. I have put a box around the range and this is one of the best ways to find a trading range.
Market That is Ranging
You want to try to avoid trading in these sorts of market conditions because they are unpredictable. You want to have the trend in your favor when trading and not have to guess which way it is going. By simply suing price action trading you can easily determine if it is a trend or if it is a ranging market. You do no need any indicators to show you this, all you need is price action.
Finds Support and Resistance Zones
Support and resistance zones are EXTREMELY important to trading price action. Support zones are areas where the price has fallen to but once it got to the support zone it went back. It acted as a cushion for the price. Resistance zones are areas on the chart that the price has come up to and rejected and the price is pushed back down. These are the main things to find before you enter a trade. By finding support and resistance you will find “hot zones” as to where you should enter trades.
Many people find these zones in different ways but the easiest and most reliable way is to find zones on the chart that price has rejected numerous times before. The best ones are when the zone has acted as both support and resistance in the past. The more touches the zone has the more strong it becomes.
Support and Resistance Zones
By using price action candles you are able to find support and resistance zones easily and this is vital when trading the market. Without support and resistance you would have no logical area to enter and exit trades.
Trade Setups With Price Action
This is the main part of price action trading, the trade setups. Trade setups are basically patterns in the market that have repeated themselves over and over again thousands of times which we can use to predict where the market is going next.
Trade setups provide a signal that either tells us to buy or sell. Some setups are more successful than others but all are useful if used correctly. These next couple of setups are some of the more common ones you will find and also some of the best you will find.
Pin Bar
The pin bar is one of the most successful setups in price action trading. It is easy to spot on a chart and it is usually a high probability trade. A pin bar normally starts a trend reversal as the chart above shows.
Engulfing Bars
An engulfing bar setup is another great setup to trade. It is also another reversal pattern that is easy to spot. As you can see on the chart the candle full engulfs the previous candles and this makes it a valid engulfing bar setup.
Inside Bar
An inside bar setup in price action trading can be a very powerful signal. The setup can either mean the current trend is going to reverse or that the current trend is going to continue. This is a more advanced setup but if mastered it can be a very profitable trade.
These three Forex price action trade setups are some of the most common ones but they are also three of the best. They are all really easy to spot and easy to learn. These are not the only three setups that you can trade by a long shot. There are countless trade setups in price action and the best way to go is to master one setup at a time and perfect it. Then move onto another setup.
Price Action Trading With Confluence The Key to Successful Trading
Price action trading with confluence is going to be the most important thing you will ever learn when trading. This part is vital if you want high probability trades and to be a winning trader. The basic definition of confluence is the meeting or gathering of two or more things. This is exactly what it means in trading also.
You want to trade when two or more things line up in your favor. For example you are in an uptrend, at a support zone and then a bearish price action setup occurs on that support zone. This would be an example of trading with confluence. See how there are more than two things in your favor for that trade?
The more things that are in your favor the higher probability that it will be a successful trade. Below is a great example what trading with confluence.
As you can see above it is in a downtrend so that means we are looking to sell this pair. Then you wait until price moves to the support and resistance zones. Once it is in the zones you watch for a price action trade setup to occur in that zone. If it is a bearish setup then we take the trade. On the chart you can see two pin bars on the support and resistance zone and then an engulfing bar also on the zone. All three of these setups are bearish which makes all three a valid price action trade.
The more reasons that you have to take a trade the better the trade will be. It’s like having evidence, the more evidence you have the sure you are about your decision. The same thing occurs in trading price action.
Conclusion
If you have made it this far then you should have the general ideas and concepts behind price action trading. Remember that these here are just the basics of price action and that there a lot more to learn than just this stuff to become a successful trader. But to become a master you first have to know the basics and this is a great place to do that.
I hope that you have enjoyed this guide on price action trading and hopefully you have learned a few things that could help you. Price action trading takes practice to get good at just like anything else but if you put in the work you can become a profitable trader.