Price Action Analysis :

Price action describes the characteristics of a security’s price movements. This movement is quite often analyzed with respect to price changes in the recent past. Price action analysis is the act of studying, reading and interpreting the price movement of a market over time, which involves the use of raw price charts to trade the market (no indicators). By learning to read the price action of a market, we can determine a market’s directional bias as well as trade from reoccurring price action patterns or price action setups that reflect changes or continuations in market sentiment.

Since it ignores the fundamental analysis factors and focuses more on recent and past price movement, the price action trading strategy is dependent on technical analysis tools.

In simpler terms it can be defined as price action analysis is the use of the natural or “raw” price movement of a market to analyze and trade it. This means, you are making all of your trading decisions based purely on the price bars on a “naked” or indicator-free price chart.

How it works

All economic variables create price movement which can be easily seen on a market’s price chart. Whether an economic variable is filtered down through a human trader or a computer trader, the movement that it creates in the market will be easily visible on a price chart. Therefore, instead of trying to analyze a million economic variables each day, Make Use of price action analysis because this style of trading allows you to easily analyze and make use of all market variables by simply reading and trading off of the price action created by said market variables.

Price action analysis can be used to trade any financial market, since it simply makes use of the “core” price data of the market. However, the Forex market, mainly due to its deep liquidity which makes it easy to enter and exit the market, and also because the Forex market tends to have better trending conditions as well as more volatility which makes for better directional trading and allows price action trading to really shine.

Applying price action analysis in trading

You can trade effectively from a few time-tested price action setups. There really is no need to try and trade from 25 different price patterns, the Forex market moves in a relatively predictable fashion most of the time, so all we need is a handful of effective price action entry setups to give us a good chance at finding and entering high-probability trades.

The first thing you need to do to apply price action to the trading, is to strip your charts of all indicators and get a “clean” price chart with only the price bars in a color you like. We choose a simple blue and red price chart. Here’s an example of a daily chart setup on the EURUSD:

From looking at the above chart, you will get a clean and simple price movement with natural price action of a Forex market. We have a solid method to trade based only on price movement (price action analysis), it only makes sense that we would use that instead of trying to analyze messy secondary data like indicators (All indicators are derived from price movement).

Price action trading signal

Next, let’s discuss how we can use price action analysis to find entries into the Forex market from a raw price chart. In this price action method consists of a handful of very specific price action entry triggers that can provide you with a high-probability entry into the market. Essentially, what we are looking for is reoccurring price patterns that tell us something about what the market might do in the near-future.

In the chart below, we are going to look at a particularly good price action signal for trading with trends; the inside bar strategy.

In the example chart below, we can see one price action trading signal that we are commonly using in trending markets; the inside bar setup:

Using price action analysis in identifying the markets trend

You may come across many different indicators designed to tell you what the trend of a market is. However, the most time-tested and trusted way for determining a market’s trend is simply to look at the daily charts and analyze the market’s price action. To identify a downtrend, we look for patterns of lower highs and lower lows, sometimes annotated by “LH and LL”. To identify an uptrend, we look for patterns of higher highs and higher lows, sometimes annotated by “HH and HL”.

In the example chart below, we can see examples of a downtrend, an uptrend and an uptrend changing to a downtrend:

How to trade with confluence in price action signal?

When we say  “trading with confluence”  means when things come together or intersect. Thus, when we are looking to “trade with confluence” we are trying to put together an obvious price action signal with a significant level in the market. There are different factors of confluence that we can watch for, but in the chart below we have used price action setups that formed at key support and resistance levels in the market; support and resistance are each a factor of confluence.

Conclusion

In this article you will get a basic overview of what price action analysis is and how to use it in the markets. A lot of theories and strategies are available on price action trading claiming high success rates, but traders should be aware of survivorship bias, as only success stories make news. Trading does have the potential for making handsome profits. It is up to the individual trader to clearly understand, test, select, decide and act on what meets his requirements for the best possible profit opportunities.