Price action trading

Price action trading, as the name suggests, is a type of trading that relies upon reacting to price movements as they happen. The investor uses accumulated knowledge on past events to make an informed judgment on the likely path of the price of a particular security.

Key takeaways:

Where have you heard about price action trading?

As an investor, you may well have heard about price action trading when reading investment guides. You may also have come across price action trading in the more sophisticated financial media. Your financial adviser may have mentioned price action trading to you.

How to use price action

Using price action involves analyzing and interpreting the movement of price on a chart to make trading decisions.

1. Learn Candlestick Patterns: Familiarize yourself with common candlestick patterns, such as doji, hammer, engulfing patterns, and others. These patterns can provide insights into market sentiment and potential reversals or continuations.

2. Identify Support and Resistance Levels: Look for areas on the chart where price has historically struggled to move beyond (resistance) or where it has found support. These levels can act as potential turning points or areas of interest for traders.

3. Analyze Trendlines: Draw trendlines to connect higher highs or lower lows in an uptrend or downtrend, respectively. Trendlines can help identify the direction of the market and potential areas of support or resistance.

4. Use Price Patterns: Look for chart patterns like triangles, rectangles, or head and shoulders formations. These patterns can provide clues about future price movements and potential trading opportunities.

5. Consider Volume: Analyze the volume accompanying price movements. High volume during price breakouts or reversals can indicate strong market participation and increase the reliability of the price action signal.

6. Combine with Technical Indicators: While price action trading primarily focuses on price movement, you can also use technical indicators sparingly to complement your analysis. Simple moving averages or oscillators like the Relative Strength Index (RSI) can provide additional confirmation.

7. Define Entry and Exit Strategies: Determine specific criteria for entering trades based on price action signals. This can include breakouts, pattern confirmations, or reversal candlestick formations. Set clear stop-loss levels and profit targets to manage risk and secure potential gains.

Remember that price action trading requires discipline, patience, and continuous learning. Regularly review your trades to identify strengths and weaknesses in your approach and make necessary adjustments.

What you need to know about price action trading

Price action trading is a type of technical trading, taking positions in securities on the basis not of analysis of the prospects for the asset in question but of expected market movements.

Unlike much technical activity, however, it does not rely on studying price charts going back over a long period but of using some charts of recent movements while also looking in real time at volume of orders and price movements.

There is a range of price action trading, from almost instinctive, on-the-spot reactions to price movements to a style much closer to traditional technical analysis.

Find out more about price action trading

Price action trading relies on techniques that are the opposite of fundamental investment analysis. Learn about fundamental analysis here.