What is Price Action Trading?

  •  7 min
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  • 05 Oct 2023
What is Price Action Trading?

Key Highlights

  • Price action traders focus only on the past price history provided by a chart, ignoring other elements, including technical indicators, news or outside forces.

  • Some important characteristics of price action trading are trading according to the prevailing trends and identifying repeated chart patterns.

  • Price action trading helps traders establish flexible trading frameworks and doesn't require tracking the news continuously.

  • Price action trading can be time-consuming because it involves manual charting and extensive data analysis. Moreover, the strategies are subjective and different traders may use them differently.

  • Some of the notable price action trading strategies include the Inside Bar Pattern, Pin Bar Pattern, and Fakey Pattern.

Before comprehending price action trading, it is essential to know what price action is in trading. The fundamental change in the price of financial assets is known as price action. Price changes occur throughout the trading hours. As a result, time plays a significant role in the price action. Supply and demand have a major role in determining an asset's price. The two have different relationships. The tug of battle between supply and demand never ends. A dynamic curve that determines asset prices is the supply-demand curve. The price decreases when the supply is greater. On the other hand, when demand is more, the price increases.

Having understood what price action is, let's now see how to trade it. Price action trading is a successful trading strategy where traders make judgments based on the movement of prices displayed on charts. It does not depend on complicated indicators or take into account outside causes and just concentrates on price history. Price graphs show how traders have behaved generally in the market.

You may create a dependable method as a price action trader that regularly reaps rewards across a number of trades. You may adjust your strategy in price action trading to suit your preferences. You may trade numerous markets, employ various periods, and even use price action for quick transactions.

As we analyse various price action tactics, systems, and patterns, keep these three points in mind:

1. Price action trading overlooks other aspects In price action trading, you only consider the chart you are looking at. You ignore complex aspects like fundamentals and instead focus on trends, patterns, and possible trade settings. Trading what you see is more important than making predictions about the future.

2. Price changes depending on trends Once a pattern has developed, it is more likely to stay that way. Keep in mind that "the trend is your friend." Your chances of success rise if you trade as per the current trends.

3. History gets repeated Trading using price action includes analysing chart patterns that depict earlier market movements. Since they consistently display comparable price behaviours, these patterns have been employed for more than a century. You can analyse trader behaviour and improve your trading judgments by comprehending these patterns.

Gaining a solid understanding of these fundamental price action trading concepts can help you develop your market analysis skills.

Price action trading offers the following advantages.

1. No need to use indicators A lot of novice traders, especially, think that more indicators are necessary for effective trading methods. This approach is flawed. You may create profitable trading strategies with price action trading with little to no indicator use.

Furthermore, price action strategies do not involve any research. Hence, they are easy to apply. This trading strategy is applicable to a wide range of trading instruments, such as stocks, bonds, derivatives, commodities, foreign currency, etc.

2. Create effective trading frameworks By using price action trading, you may create trading frameworks that function well in a variety of market environments. You may create a strategy for when to hold your market positions and purchase and sell. Frameworks are created by tracing lines on charts or using other patterns (such as candlesticks and other patterns) generated on the charts.

3. There is no fundamental analysis Another advantage is that you don't have to keep track of important news. This is because price movements determine all of your trades, and price movements alone determine how news affects prices.

The following are some limitations of price action trading.

1. It is Time Consuming In order to validate trading techniques, price action trading needs much too much data and time. There are instances where the chosen strategies don't work. Additionally, because you cannot automate price action patterns, you must manually chart them out, which may take some time.

2. Price Action trading is arbitrary. What works for you in trading might not work for other traders. It is the same with price action trading. Two traders could approach trends and charts in different ways. Different ways of thinking could make you doubt this trading strategy. Follow a framework to determine whether to purchase, sell, hold, or remain away from the market to prevent this.

Here are the top seven price action trading methods using indications from price movement.

1. Inside Bar Pattern A two-bar design known as an inside bar pattern consists of the inner bar and the preceding bar, sometimes known as the "mother bar." The mother bar's high to low range entirely encloses the inner bar. In moving markets, this price action method is frequently utilised as a breakout pattern. However, if it develops at a significant chart level, it may also be used as a reversal signal.

2. Pin Bar Pattern A pin bar pattern, which comprises just one candlestick, signifies price rejection and a market reversal. The pin bar signal performs well in markets that are trending, range-bound, or that may be traded against the trend from a critical support or resistance level. The pin bar suggests that the price may move in the opposite direction to the way the tail is pointing since the pin bar's tail indicates price rejection and a reversal.

3. Fakey Pattern A false breakout of an inner bar pattern makes up the fakey pattern. In other words, you have a fakey if an inside bar pattern momentarily reverses and closes back inside the range of the mother bar or inside bar. It's referred to as a "fakey" because the market appears to be breaking one way before turning around and moving in the opposite direction, which causes a price movement in that direction. Fakey patterns work well in trading ranges, against trends from critical levels, and with trends.

Conclusion

Any trader, regardless of degree of expertise, may gain from using a price action trading technique. It is a powerful strategy based on analysing the price movements rather than complex indicators. Overall profitability rather than individual trades is the priority of Price action trading. The biggest benefit is that it gives traders the flexibility to adapt their strategies to different markets, timeframes and trading objectives. Yet, it can be a bit time-consuming. Moreover, the results may vary for different individuals.

FAQs on Price Action Trading

Interpreting price activity may be quite subjective. One trader can recognise the price movement as a bearish downtrend, while the other trader may think it indicates a potential short-term reversal. An asset's previous price movement does not guarantee its future price movement.

Price action trading in equities and forex currency trading functions similarly. Price charts are able to track market movements, volume readings, and momentum indicators on both marketplaces. The foreign currency market's maturity makes it simpler for traders to spot recurring trends and patterns.

Price fluctuation is a major focus for swing traders. It becomes challenging to identify lucrative possibilities if prices stay the same. Swing traders may recognise the up and down oscillations through price movement and execute trades accordingly.

To read price activity, use reliable charting software. Websites and apps of reputed brokerages like Kotak Securities frequently provide charting functionality.

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