Introduction to Price Action Trading Techniques
Price action trading is a trading approach that utilizes the analysis of basic price movement as a means for financial investment. It involves the study of historical prices to formulate technical trading strategies. Price action can be used as a standalone technique or in conjunction with an indicator. Fundamentals are seldom used; however, it is not unheard of to incorporate economic events as a substantiating factor.
Key Concepts of Price Action Trading
Before we delve into the various techniques of price action trading, it’s important to understand the key concepts that underpin this trading approach.
Support and Resistance
Support and resistance levels are horizontal price levels that temporarily halt or reverse the continuous price movement. They are the key levels where the forces of supply and demand meet.
Trend
Trends in price action trading are identified through a series of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend). It’s essential to identify the trend in the market, whether it’s upward, downward, or sideways.
Candlestick Patterns
Candlestick patterns are a form of technical analysis and they are used to forecast the market trend. They are a key tool for price action traders and are used in conjunction with other forms of technical analysis.
Price Action Trading Techniques
Now that we’ve covered the basic concepts, let’s look at some of the most effective price action trading techniques.
The Pin Bar
The pin bar is a single candlestick pattern that signals a potential reversal in the market. It is characterized by a small body and a long wick. The key to trading pin bars effectively is to identify them in areas of support and resistance.
Inside Bar
The inside bar is a two-bar pattern. The inside bar is completely ‘covered’ by the previous bar. When an inside bar pattern forms, it indicates a period of low volatility often followed by a significant breakout.
Fakey Setup
The fakey setup is a more complex price action trading pattern, but it can be very profitable if used correctly. It involves a false breakout from an inside bar pattern and can signal a potential reversal in the market.
Conclusion
Price action trading techniques offer traders a way to make sense of market movement and make informed decisions. While these techniques can be highly effective, it’s important to remember that no single trading method is foolproof. Traders should always use risk management strategies and consider a variety of factors before making trades. By understanding the key concepts of price action trading and mastering the techniques, traders can significantly increase their chances of success.
