Price Action: What It Is and How Stock Traders Use It

However, there are still a lot of misunderstandings and half-truths circulating that confuse traders and set them up for failure. In this article, we explore the 8 most important price action secrets and share the best price action trading tips. On the other hand, in a downtrend, the indicator can serve as a resistance level, where a price rally can reverse — a bearish reversal candlestick pattern here can be a good trade signal. Price action strategies strip back trading dashboards to the core. While most brokers provide various indicators, a chart with just price data can tell its own story. The best place to start on how the methodology has developed is a Tick Data price chart.

  • This chart of NIO is truly unique because the stock had a breakout after the fourth or fifth attempt at busting the high.
  • Over the years, it became a large buzzword in the trading world as it is being marketed by most people selling courses as a “secret” way to profit from retail traders.
  • Since price action trading is an approach to price predictions and speculation, it is used by retail traders, speculators, arbitrageurs and even trading firms that employ traders.
  • Price action trading strategies are dependent solely upon the interpretation of candles, candlestick patterns, support, and resistance, pivot point analysis, Elliott Wave Theory, and chart patterns[1].
  • If you have been trading with your favorite indicator for years, going down to a bare chart can be somewhat traumatic.

Please note inside bars can also occur prior to a breakout, which may strengthen the odds the stock will eventually breakthrough resistance. To illustrate a series of inside bars after a breakout, please take a look at the following intraday chart of NIO. Notice how the previous low was never completely breached, but you could tell from the price action that the stock reversed nicely off the low.

How to trade price action from confluent points in the market:

There are several ways in which you can trade reversals, which all involve looking for specific candle formations at key turning points. Price action traders can look to trade reversals at key support and resistance levels, at Fibonacci retracement levels and strategic pivot points. Understanding price action trading involves looking at patterns and identifying the key indicators that might have an impact on your investments. There are a number of different price action methods that many traders use to predict market movements and make short-term gains. Reflects all variables affecting that market for any given period of time, using lagging price indictors like stochastics, MACD, RSI, and others is just a flat waste of time. Price movement provides all the signals you will ever need to develop a profitable and high-probability trading system.

Running with the price action trend, which started in March 2020, would have been a profitable trade. Selling at the peak in February would have optimised returns but gone against the principle of running winners. Closing out a winning position just because it’s high could have happened at many points in the preceding months and meant the trader left some money on the table.

If the market is trending, the best thing you can do is to only trade in the direction of the trend. Similarly, a false downward breakout at the lower boundary of a ranging market can create the spring pattern and lead to a profitable trade to the upside. So, when trading a ranging market, you should be cautious about breakouts. This is especially true if the range is prolonged or narrowing. Some of them are reversal patterns, while others are continuation patterns. But the more the number of reversal signals, the stronger the price reversal will be and the higher the odds of a favorable outcome.


Whatever is the case, understanding the stage of the market will help you know the best strategy that suits the market at that point. Examples are pin bars, inside bars, engulfing bars, piercing and dark cloud, morning or evening star, tweezers, and many others. What matters is to understand your trading tools and know how to effectively utilize them. This is not an offer to buy or sell any security or interest. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). There are no guarantees that working with an adviser will yield positive returns.

Every time the price reaches a support or resistance level, the balance between the buyers and the sellers changes. Whenever the price reaches resistance during an upward trend, more sellers will enter the market and enter their sell trades. If the price reaches the same resistance level again, fewer sellers will wait there. The resistance is gradually weakened until the buyers no longer encounter resistance and the price can break out upward and continue the upward trend. For example, you might have two investors adopting a price action trading strategy with the same stock.

Don’t use tight stop losses

You’ve just learned what price action trading is all about, and how you can use it and to get a “feel” for the markets including price action trading with Forex. In short, a Shooting Star is a bearish reversal candlestick pattern that shows rejection of higher prices. In short, a hammer is a bullish reversal candlestick pattern that shows rejection of lower prices. And that’s not all because traders who missed the breakout will want to short the markets which increase the selling pressure. This information has been prepared by IG, a trading name of IG Markets Limited.

What do ‘pure’ or ‘naked’ price action mean?

If the Bitcoin example price appears to be heading upwards – price action is bullish. The below chart shows the Tick Data of the same market just a few minutes later, and the mood has turned; and by just noting the price points, it can be seen that price action is now bearish. If you’re interested in day trading, Investopedia’s Become a Day Trader Course provides a comprehensive review of the subject from an experienced how to trade price action Wall Street trader. You’ll learn proven trading strategies, risk management techniques, and much more in over five hours of on-demand video, exercises, and interactive content. Price action refers to the pattern or character of how the price of a security behaves, typically in the short run. Price action can be analyzed when it is plotted graphically over time, often in the form of a line chart or candlestick chart.

However, for the sake of not turning this into a thesis paper, we will focus on candlesticks. To learn more about candlesticks, please visit this article that goes into detail about specific formations and techniques. Candlesticks are the most popular form of charting in today’s trading world. Historically, point and figure charts, line graphs and bar graphs were more important.

There are three key lessons you should learn from the concept of trade expectancy. The reward-to-risk ratio is the result of your entry, stop-loss, and profit-taking decisions. After all, you only have paper profits until you exit from your winning trades.

My you be blessed and continue to share your valuable knowledge with us. Trading is still in its in my country Zim such that you rarely find mentors, and thank for being one to many of us . Keep it up Rayner, really appreciating the free nuggets you been giving. My losses were well, little compared to all the account I blowed up before. This is probably the longest time my real account have ever withstand! Although I am at -9% I am optimistic that by following all the principles of trend following, I am waiting patiently for that day just like how your trade with USDJPY.

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