Did you know that the price action trading strategy is one of the most commonly used techniques in the financial markets today? Whether you are a short-term or long-term trader, analyze the price of your securities is probably one of the easiest yet most powerful ways to gain an edge in the market.
After all, all trading indicators in the world are derived from price, so it makes sense to actually study, understand, learn from, and use price in your trading. This article covers everything you need to know about price action trading, explains what price action trading is, why you should consider using it in Forex, and is suitable for both beginners and experienced traders. We share 4 price action trading strategies.
What is Price Action?
The term “price action” is simply the study of price movements in a security. Traders using the price action trading strategy study past prices to try to identify clues as to where the market will move next. The most commonly used price action indicator is the price bar study, which provides details such as market opening and closing prices, high and low price levels over a given period of time.
The analysis of this information is at the core of price action trading. In fact, answering the question “What is price action?”, we can say that it actually studies the behavior of all buyers and sellers who are actively involved in a particular market. Therefore, analyzing what the rest of the market participants are doing gives traders a unique edge in their trading decisions.
The most commonly used price bars used as indicators of price action are called candlesticks. All trading platforms around the world offer candlestick charts, proving how popular price action trading is.
What is a price action indicator?
As explained above, we have found that price action is a study of the behavior of all buyers and sellers actively engaged in a particular market. The most commonly used price action indicators are candlesticks. Candlesticks provide traders with useful information such as market opening and closing prices, high and low price levels within a user-defined time period. Let’s see an example:
When viewing a security’s daily chart, the candlesticks above represent one day’s worth of trades. Both candlesticks provide useful information to traders.
- High and low levels tell you the highest and lowest prices of the trading day.
- A seller candle with a black or red body indicates that the seller has won the battle of the trading day. This is because the closing price level is lower than the opening price level.
- A buyer’s candle, shown with a white, or sometimes green body, indicates that the buyer has won the battle of the trade. This is because the closing price level is higher than the opening price level.
Using this simple candlestick setup is one of the first steps in creating a price action strategy. for example:
- after the seller candle, if the next candlestick keeps making new lows, it is a sign that sellers want to keep selling in the market. This weakness causes some traders to initiate short (sell) positions or hold short positions they already have.
- After a buyer’s candlestick, if the next candlestick keeps making new highs, it indicates that the buyers are willing to continue buying the market. This strength causes some traders to enter long (buy) positions or hold long positions they already have.
This type of price movement analysis is just one way of using candlesticks as a price movement indicator. However, candlesticks themselves often form patterns that can be used to shape trading strategies for price action. Before considering these patterns, let’s first look at where they work best.
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