This is the most common form of trading amongst professional traders. Price Action trading involves analysing just the raw price data on a clean chart. Price Action traders have key patterns they are looking for at logical level in the market. More on this can be found in the following chapters.
What is Price Action Trading System?
Price Action trading is a method that is commonly used by professional traders. Most professional Forex traders use a very logical system that is not complicated, whereas most amateur Forex traders are hung up looking for the “Holy Grail” system that will bring them all their riches overnight. Price Action is a system that is very logical and has clear rules in place. Instead of using indicators that cannot adapt to different types of markets, price action involves the trader making trades based of key signals forming in the market.
What is Price Action?
Put very simply;
“Price action trading is the skill of being able to read the price and make trades on any chart, in any market, in any time frame and without the use of any indicators at all”
In very basic terms Price Action illustrates in a way that a Trader can see exactly on a chart, what a certain pair did for a particular time frame. For example the individual candle sticks or bars will show how high the pair went, how low the pair went and also the open and closing prices. Most charting platforms can produce candle sticks and bars for time frames varying from 1 minute to 1 month.
Another way to think about it is, Price Action is everything humans are doing and how they are trading, shown in a chart form.
This basic explanation of Price Action is not subjective. What I see on my chart is exactly what another Trader will see on their chart, providing they are using the same charting equipment.
Below are two charts side by side. On the left we have a clean chart that is showing just the price or price action. This is the price action information a price action trader uses for their trading. The chart on the right is a chart full of indicators. This chart is clearly very messy and confusing. To use price action all we need is a clean chart with just the raw price and nothing else. NO indicators!
How Can Traders Use Price Action to Profit?
Price Action traders are using the information gained from the price action chart to make their trading decisions. Price action traders have key signals they are looking to present in the market for them to make a trade.
Price action traders are using information they can see in the price such as:
- Is there a trend?
- Is there a range?
- Is price at or near a support and resistance level?
- Has price formed a key reversal signal indicating the market is going to move?
Using the price data the price action trader can plot the key supply and demand level on their charts. They can also identify when price is about to either break out or reverse, and use this information to take profitable trades.
What Are The Type of Trades Price Action Traders Take?
Price Action traders are constantly assessing price for any signals they could use to take a trade or manage open trades. Price action traders use key candlestick patterns at key areas on their charts to enter into trades. One example of a price action signal is the Pin Bar.
The Pin Bar is a reversal signal that can be found on any chart and on any time frame. A Pin Bar is a powerful price action signal that is made up of 1 candle. Pin Bar’s can be used to pick both long and short trades (buy or sell) and will often be the signal to change the current trend.
A Pin Bar must have:
– Open and close within previous bar
– Candle wick minimum 3 times the length of the candle body
– Long nose protruding from all other bars (must stick out from all other candles)
Below is an example of a bearish Pin Bar
Not all Pin Bar’s are created equal. Price Action traders use more than just the last candle to decide whether to take a trade or not. The whole price chart is information that the trader will take in when deciding to make a trade or not. The very best Pin Bar’s will be traded when they are with the obvious trend and at key support or resistance levels in the market.
Below is an example of a Pin Bar at a key resistance level.
What Else do Price Action Traders Use?
As we said above Price Action is more than just looking at the last candle to make a trade. Successful price action traders use the whole chart to make trading decisions. Price is always telling us something and learning how to use that information is critical.
When trading with the trend, traders are looking to take trades in the direction of the current trend. Whilst a very simple strategy it is quite often overlooked by many trades. You would most likely have heard saying such as “The trend is your friend until it bends” and this is very true. The best trades will be found when trading with the trend.
In the Forex markets solid trends are not always available. The majority of the time you will find the market ranging which just means there is not an obvious trend one way or another. For price action traders this does not matter because whether the market is trending or ranging there can still be great trades to be played.
To identify trends in the market with price action is very simple. When looking to trade with the trend we only want to be trading with the very obvious trends. If the trend isn’t obvious then chances are it is not a very strong trend and we may need to look for other trades such as range trades.
The reason a clean chart is so important is because we need to be able to see what price is doing. This is critical when looking for trends. Notice in the clean raw price chart below, price is clearly trending higher. This is a very obvious trend and the only trades to play in this market are to buy and trade in line with the trend.
Support and Resistance
Even more important than the trend direction, is key support and resistance levels. The reason support and resistance is so important is because that’s what the rest of the market is also looking at. Forex is the best market in the world for support and resistance working over and over. Whilst these support and resistance levels will not always hold, they will very often act as key levels to make profitable trades from.
Price Action traders are constantly looking for key support and resistance levels to trade from. A simple look at any Forex chart will show you just how often these levels are respected.
To make a successful trade, price action traders need to plot these support and resistance levels. When price then gets to these levels it is about waiting for price to make a signal for entry.
Below is a chart example of obvious support and resistance levels:
Below is an example of how a trader can use these support and resistance levels to make a trade. The chart shows a Pin Bar that has formed at a key support level. Price then rejects the support level and moves higher.
Video of Live Price Action Trading
Below are two videos that were made whilst I was trading live price action setups. These videos both highlight the simple and logical price action setups that are part of the trading strategy.
Pin Bar Trading From Key Areas
Live Price Action Trading on 4HR Charts
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