Price action analysis work in most actively traded markets, as long as reliable price data is available.
Generally, price action traders favor the forex, futures, and stock markets. A significant proportion of price action traders are active in the forex markets.
Essential Price Action Trading Concepts
Price Patterns
There are dozens of bar patterns and candlestick patterns. Given the right market context, these patterns offer trading opportunities and are known as trading setups.
These are some popular price action patterns:
• Hikkake
• Engulfing Candlestick
• Inside Bar
Pin Bar
Market Swings Trending Up
Market Swings
Market prices move in swings. Price action trading interprets higher highs and higher lows as a uptrend, and lower highs and lower lows as a downtrend.
A notable theory on the behavior of market swings is the Elliot Wave Theory. It postulates an 8-wave pattern as a fractal of market movement.
Frost and Pretcher’s Elliott Wave Principle: Key To Market Behavior offers in-depth information on this theory.
For a price action trading strategy that demonstrates how to trade an engulfing candlestick pattern with the support of swing highs and lows.
Support & Resistance
Price action traders also project support and resistance levels using swing pivot points.
Support areas are likely to reject price upwards, and resistance areas tend to prevent the market from rising above it.
Support and resistance are core price action trading concepts. The key to successful price action trading lies in finding effective support and resistance areas.
Learn: Improve Your Trading With Support/Resistance
Trend Lines & Channels
Trend lines connect swing pivots to track trend, and serve as support and resistance.
In a bull trend, trend lines are drawn by connecting pivot lows. In a bear trend, trend lines are drawn with pivot highs.
By extending a parallel line from the trend line, we can form a trading channel that is useful for anticipating support and resistance areas.
Learn: How To Trade A Channel
Price Action Trading
2.5 Price Action Trading Methods
Most price action trading strategies make use of price patterns together with support and resistance areas.
The standard approach involves looking for a bullish price pattern at a support area for a long trade, or a bearish price pattern at a resistance area for a short trade.
Pure Price Action
Market Swings
Market prices move in swings. Price action trading interprets higher highs and higher lows as a uptrend, and lower highs and lower lows as a downtrend.
A notable theory on the behavior of market swings is the Elliot Wave Theory. It postulates an 8-wave pattern as a fractal of market movement.
Frost and Pretcher’s Elliott Wave Principle: Key To Market Behavior offers in-depth information on this theory.
For a price action trading strategy that demonstrates how to trade an engulfing candlestick pattern with the support of swing highs and lows.
Support & Resistance
Price action traders also project support and resistance levels using swing pivot points.
Support areas are likely to reject price upwards, and resistance areas tend to prevent the market from rising above it.
Support and resistance are core price action trading concepts. The key to successful price action trading lies in finding effective support and resistance areas.
Learn: Improve Your Trading With Support/Resistance
Trend Lines & Channels
Trend lines connect swing pivots to track trend, and serve as support and resistance.
In a bull trend, trend lines are drawn by connecting pivot lows. In a bear trend, trend lines are drawn with pivot highs.
By extending a parallel line from the trend line, we can form a trading channel that is useful for anticipating support and resistance areas.
Learn: How To Trade A Channel
2.5 Price Action Trading Methods
Most price action trading strategies make use of price patterns together with support and resistance areas.
The standard approach involves looking for a bullish price pattern at a support area for a long trade, or a bearish price pattern at a resistance area for a short trade.
Pure Price Action
Some traders use price action analysis exclusively. They adopt a minimalist approach and do not place any indicators on their charts.
These traders are well-versed in spotting price patterns and support/resistance areas.
Price Action With Volume
Another tenet of the Dow theory is that volume should increase in the direction of the trend and decrease when moving against it.
Hence, it is not surprising that volume analysis is a common addition to price action trading. Classical volume analysis combines volume patterns with chart patterns to evaluate the trading opportunity.
Combining volume with price action has also led to the development of volume spread analysis, which is based on Richard Wyckoff’s work on relationship between volume and the spread (range) of the bar.
Price Action With Indicators
Despite the emphasis on price analysis, many price action traders still find value in indicators.
The most popular trading indicator among price action traders is the moving average. It serves as a trend indicator and a dynamic support/resistance at the same time.
An example is Al Brook’s trading approach that uses a 20-period exponential moving average.
In Steve Nison’s books on candlesticks, he also included chapters on analyzing candlestick patterns with the help of trading indicators.
NEXT ARTICLE:
Beginner’s Guide To Reading Price Action
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