This allegedly magic analysis simply tells you to look at naked charts with candlesticks. However, there are 3 main analysis methods when it comes to price action.

Despite myths about its capability to project price movement shortly with high accuracy, price action only showed past price movements. In other words, using a price action pattern to predict the next price direction would only do you more harm than good. If that's the case, what's the secret recipe of this price movement analytic method?

Basically, there are 3 main ideas about price action that you need to know:

  1. Determining market conditions (trends)
  2. Spotting support and resistance areas
  3. Checking the supporting factors (time frame and news release)

So, to clarify all those points, we'll learn what price action is and how to use it correctly.

 

Price Action Trading Explained

Price Action involves studying the movement of prices for a particular instrument or currency pair, enabling traders to identify patterns and make informed decisions. Understanding that these patterns are subjective interpretations based on historical price data is crucial.

The success or failure of trading activities ultimately hinges on the impact of subjectivity on decision-making processes, which can lead to either profitable outcomes or losses. It's essential to remember that relying solely on price pattern signals without considering fundamental factors amounts to gambling with one's capital. A comprehensive approach incorporating technical and fundamental analysis is vital for successful trading.

 

Basic Application Of Price Action Analysis

Remember, Price Action is only one of many essential trading guides. It's not a final determining factor and should not be used alone.

So, what does it mean?

Price movements displayed on charts left marks by OHLC format (Open, High, Low, Close prices). Generally, price action can be used as a magnifying glass to help identify market conditions (trending or consolidating) and where resistance or support may affect price movement in a recurring fashion. Occasionally, you can use it as a reference before opening or closing a position.

 

Identifying The Market Conditions

Uptrend Downtrend Sideways

The market commonly branches out into two conditions: trending and consolidating (sideways). Price Action can help us to identify those conditions by checking their highs and lows.

That trending condition may also be either an uptrend or a downtrend. Higher highs (HH) and higher lows (HL) can recognize an uptrend. In contrast, a downtrend is spotted by its lower highs (LH) and lower lows (LL).

Having difficulties telling where HH, HL, LH, and LL points are because it looks like a zig-zag? If so, then it's consolidating market conditions (sideways).

Sideways Downtrend

Recognizing market conditions can aid traders in making a trading decision based on their trading style and risk management (e.g., a scalper may prefer to open a position at a trending position).

 

Identifying Resistance and Support

Second, you can use price action to highlight where key resistance or support is. Those key levels are vital in case of recurring market movement.

Support and Resistance

Look at candlesticks inside a red circle (first from the left). A peak is formed after a certain high, where a down-swing pulls back the price to the bottom support level. That first candlestick high marked a critical resistance level by its long down-swing (The price bounced back again from that point in the second red circle)

Now, you can look at the blue bar (first from the left). Prices bounced back every time they passed the key support level. The strength of such support level is confirmed by the second blue bar. Subsequently, a strong reversal signal is spotted in the blue circle.

An inside bar (dual bars) and pin bars (single bars) may form at those support or resistance levels.

 

Supporting Factors For Price Action

Once again, Price Action signals can not guarantee 100% accuracy. Other factors may contribute to it.

 

Time Frame

Candlestick bar occurrences are directly generated according to your time frame. An H4 time frame will plot out a single bar every 4 hours, while the daily time frame will only produce a single bar once daily. Therefore, the lower your time frame (below H4), the bigger the chance of a fake signal.

 

Forex Calendar (News and Event)

Market-moving news releases (NFP, GDP, Retail Sales, etc.) can be a double-edged sword for traders with price action references. Prices may fluctuate around it, and price action is a lagging indicator. It's simply a love-and-hate relationship between news traders and price action traders. Having a forex calendar to stay in touch with the hottest news would be best. However, you still need to check news and events to get a bigger picture (an outlook) of your targeted pair to ensure you're not catching a fake signal.

 

Conclusion

Even though price action analysis may seem deceptively simple, its application in live trading requires high expertise gained through time investment and a high level of awareness. It would be best to consider several aspects before reacting to a signal from price action analysis.

Don't let yourself down. At least you understand the basics of price action analysis from this article. You may develop a trading strategy based on price action dynamics from that point onward.