In today’s article, I want to spend some time talking to you about price action trading. Price action trading is very popular with forex traders but I know there is a lot of confusion out there, ( especially with beginning traders ) as to what price action trading actually is and more importantly……what it isn’t. In the article, I’ll show you some examples of popular price action trading strategies people use to trade the markets with, and I’ll also explain to you why price action trading is a far superior trading method to trading with indicators. On-top of that, I’ll give you my understanding of what price action trading is, along with some useful links you can use to learn more about trading with price action.
I hope you enjoy the article. Remember if you have questions, leave them in the comment section at the bottom of the page.
What Is Price Action Trading ?
To begin, I think it’s best if I explain to you what I believe price action trading is, because there are many different interpretations found online of what price action trading is and a lot of these differ from one another so I just want to give you my take.
Price action trading is a method of market analysis which focuses on analyzing the current and past market prices to formulate ideas about which direction the market is going to move in the future. The main variable price action traders will concentrate on when trying to determine which way the market is going to move, is the market price itself. They don’t use any indicators or third party tools in their analysis of the market. To them the current and past market price contains all the information they need to make an informed decision about where the market is likely to move.
Some traders can get mixed up into thinking that technical analysis and price action trading are two different methods of analyzing the market. They’re not. Price action trading falls into the technical analysis discipline of trading due to the fact that most price action traders will primarily use a price chart to make all of their trading decisions. Technical analysis is where you make a prediction about which direction the market is likely to move in using nothing but a chart, therefore any trader who is using a chart to try to find out where the market is going to move, is a technical analyst whether they realize it or not.
Due to the similarities in name, a lot of traders also feel like there is a difference between price action trading and supply and demand trading.
Again, there isn’t. Supply and demand trading falls into the category of price action trading because of the fact supply and demand traders are using the market price to make all of their trading decisions. Supply and demand zones themselves are drawn from past price points and traders will often use common price action patterns to enter trades at supply and demand zones, so really there is no actual difference between the two, it’s just supply and demand trading is in-itself a price action trading strategy.
Which Price Action Trading Strategies Should You Use ?
Knowing which price action trading strategy you should use depends solely on what kind of lifestyle you currently have. If you’re someone who is not a full-time forex trader, then it’s not going to be possible for you to trade some price action trading strategies, due to the fact they require you to be in front of the computer during the day.
I think one of the best, and probably most popular price action trading strategies, is looking for pin bars to form at levels of support and resistance. Pin bars are a very simple price action pattern that form in the market all the time, as soon as you know what a pin bar looks like you’ll be seeing them appear on your charts everywhere. The reason pin bars form is because the bank traders are either placing trades to make the market reverse or taking profits off trades they’ve already got placed. Support and resistance levels are points in the market where the price has turned multiple times in the past. The idea is if the market has turned at the level in the past, it might want to turn there again in the future. So what price action traders will do is watch for pin bars to form when the market encounters a support or resistance level, because the appearance of a pin bar at a level of support or resistance is a signal the market might be getting ready to move away from the level.
Before this bullish pin bar appeared, the price action trader would’ve already had the support level marked on the charts as a point where the market could potentially reverse, based on the fact there had been a number of occasions in the past where the market had fallen into the level, reversed and started moving higher. When the market begins to fall towards the support, the price action trader will be watching closely to see if a bullish pin bar appears, because if it does he knows it’s a strong signal the market might be about to move higher.
The price eventually falls into the support level and produces a bullish pin bar, at which point the price action trader would enter a buy trade with his stop loss below the low of the bullish pin, just in case the pin does not end up working out as he expected. As you can see from the image, a short time after the bullish pin bar has formed the market begins to move up. The price action trader is now at a profit on his buy trade and will close it when he feel’s like the market is no longer going to continue moving higher.
I hope you can see from this small example just how simple trading pin bars at support and resistance levels really is, all you need to do is take some time learning what pin bars look like and learning how to draw support and resistance levels on your charts. Once you’ve done this, you have a versatile trading strategy which you can use to trade the markets with.
What makes trading pin bars at levels of support and resistance such a versatile trading strategy, is that you can adapt it to suit whatever your lifestyle needs are. If you’re not a full-time trader or have work commitments during the day, you’re still able to use it as your trading method because pin bars and support and resistance levels appear on all time-frames in the market.
Here’s another image of a pin bar, only this time instead of looking at a bullish pin bar which formed at a level of support, we’re looking at a bearish pin bar that’s formed at a level of resistance. The main difference between these two images is that the bearish pin bar you can see in the image above has formed on the daily chart of EUR/USD, whereas the bullish pin seen in the previous image formed on the 1hour chart of AUD/USD. Because the pin has formed on the daily chart, it means it takes a whole day for the pin bar to actually form in the market, when the day comes to an end at 12:00pm GMT (or 10:00pm GMT if you use New York close charts) a new day begins and any pin bar which might have formed for that day now becomes valid for trading.
Because it takes a whole day for a pin bar to form on the daily chart, it means someone who is not available during the day can still successfully trade pin bars at levels of support and resistance because they can take their trades at the end of the day.
I hope this article has given you a decent understanding of what price action trading is. I know there are a lot of people out there who may want to learn more about the “trading pin bars at levels of support and resistance” strategy I mentioned during the article, so I’ve left the links to a few additional articles below which should help you understand the method better
Also, I’ve put the link to download the New York Close version of MT4 below so each trading day terminates at 22:00pm instead of 24:00pm. I’m just want to make it clear that I’m not affiliated with the trading broker who offers these charts in any way, so please make sure you do your proper research about them if you want to use them as your own broker.
Thanks for reading, please leave any questions in the comment section below.