Price action trading has been of great interest and preferred by many traders. But mastering it will not be an easy feat if you haven't properly learned these tips.
Many people think that price action means candlestick patterns on the displayed chart. However, only learning candlestick patterns will not lead to profit consistency. Other factors include understanding the market trend's movement, the crucial area of interest, the behavior between buyers and sellers, and trading after there were enough confirmations to follow. Let's get to the further details below.
1. The Importance of Trend Lines
Before we discover how to see a trend, we need to know what we're looking for. It may appear overly simple at first glance, as markets can only move in one of the three directions: up, down, or sideways.
According to the traditional technical analysis, the highs (peak) are higher in an uptrend because buyers are in the majority and drive the price higher. Lows are also moving higher because buyers continue to buy the dips.
During a downtrend, lows are lower due to the seller surplus, and highs are lower due to buyers' strength not being enough to keep up with the selling momentum.
Channels and trendlines are some options to help determine a trend's direction, and they can also help you better comprehend range markets. While high-low price action analysis can be employed during early trend stages, trendlines are more suited for later trend stages because they require at least two (preferably three) touch-points to be drawn.
Trendlines are mainly used to spot any changes in established trends; for example, if the price abruptly breaks a trendline, it could signify the start of a new direction. Moreover, trendlines during ranges can help discover breakout scenarios.
2. The Area of Interest
Each person has their personal opinion to decide the crucial area of interest. These opinions include supply and demand zones as well as support and resistance areas. To start your journey as a price action trader, it is crucial to learn about support and resistance as most price analyses revolve around them.
When the price action reverses and changes direction, leaving a peak or trough (swing point) in the market, a support or resistance level is generated. In fact, support and resistance levels can carve out trading ranges, and they can also be seen in trending markets as the market retraces and leaves behind swing points. Specifically, support and resistance levels depict a trading range, in which the price is expected to bounce back from the upper and lower limits.
If the price breaks up past the old peaks and then retraces back down to test them in an uptrend, the previous peaks will operate as support. Conversely, when the price breaks down through previous levels and then retraces back up to test them in a downtrend, the old levels will tend to behave as resistance.
A price action trader's "best friend" is support and resistance levels. So it might be a high-probability entry scenario when a price action signal emerges at a crucial area of support or resistance. The critical level provides a 'barrier' beyond which we can place our stop loss. Because it has a high probability of being a turning point, a decent risk-reward ratio is usually developed at essential support and resistance levels.
3. Buyers and Sellers, Which One is in Control?
To understand the behavior of buyers and sellers, we need to understand the candlestick pattern . There are three main parts of the candlestick: The upper body displays the vertical line between the day's high and closing price (bullish candle) or the open price (bearish candle). The actual body displays the difference between the opening and closing prices. On the other side, a lower shadow displays the vertical line drawn between the day's low and the open (bullish candle) or close (bearish candle).
A bullish candle is a form of candle when the closing price is higher than the opening price. Conversely, a bearish candle is a candle when the closing price is lower than the opening price. If a bullish candle is formed, it means that the buyers are controlling the market. The same happens when the bearish candle is formed; it means that the sellers own the market.
4. Trade After Confirmations
Regardless of the market, time frame, or trading method, most traders attempt to buy at the exact bottom and sell at the very top. But where exactly is the bottom, and where exactly is the top? Currencies or stocks price can go as low as they want and far higher than anyone could have predicted, as we've all witnessed in the current market climate. So rather than attempting to pinpoint a bottom, which is frequently the cause of failure, a trader should rather wait for confirmation.
So, what is confirmation, and how do we make use of it? When an uptrend has dropped off to a suitable buy level, it will reverse and trades higher than the previous bar's high; this is known as a buy confirmation. On the other hand, a sell confirmation occurs when the price rises to a good sell level in a downtrend and then reverses and trades lower than the preceding bar's bottom. Regardless of the approach, we will buy or sell when we get confirmation.
If we trade without confirmation, we are just guessing where our buy and sell orders go. This speculation will be focusing on top-picking and bottom-fishing that will ultimately result in losses.
Price action is one of the most popular methods when someone decides to trade in the forex market. However, one needs to learn and apply the 4 rules above to become a successful price action trader.
Some traders prefer to use trading indicators to confirm price action signals. Some do not include any trading indicator at all. If you are one of those traders who prefer to trade with a clean chart, obeying the rules above may make it easier for you to trade price action signals without the help of any indicator.