Price action trading may seem difficult, especially for an amateur trader. Looking at the naked price chart and trying to make sense of the next price direction can be very confusing for those that don’t know what to look for.
But it doesn’t have to be that way if you know exactly what you’re looking for in the price action. In this piece, I’ll highlight what price action trading is, why price action is superior to indicators, and some of the things you need to know to successfully trade price action.
What is price action trading?
This simply means analyzing the market and making trading decisions by watching price movements only.
Why only price action?
- You can easily see what price is doing: the candle patterns and the price structures.
- You don’t need those lagging indicators that only indicate after the fact.
- Your chart is neat.
What you must know to successfully trade price action
It’s possible for you to accurately predict price directions and make good trading decisions if you can recognize:
- Important Japanese candlestick patterns
- Important price patterns
- Support and resistance levels
- Fibonacci retracement and extension levels
Important Japanese candlestick patterns
Some Japanese candlestick patterns can indicate potential price reversals, especially when they occur at important price levels, such as a support or resistance level. The most important ones you need to know include:
Important price patterns
Price often form structures or patterns, which you can learn how to identify and trade. Interestingly, most of these patterns give measurable profit targets. Some of the important price patterns you can learn include:
Head and shoulder: This pattern indicates a potential turn in the trend direction. It occurs after an uptrend when price fails to make a higher swing high; instead, price turns downwards and breaks the neckline — a trendline connecting the two preceding swing lows. When the opposite occurs after a downtrend, it’s called an inverse head and shoulder.
Triangles: There three types of the triangle pattern: symmetric, ascending and descending triangles. In the symmetric triangles, there’s rising swing lows and falling swing highs. The ascending triangle has similar swing highs and ascending swing lows, while the descending triangle has similar swing lows and descending swing highs.
Wedge: There two types — the rising wedge and the falling wedge. The rising wedge occurs when there’re steeply rising swing lows and gradually rising swing highs, leading to a structure that resembles a wedge. A rising wedge may indicate that price may soon turn downwards. The opposite is the case for a falling wedge where there’re steeply falling swing highs and gradually falling swing lows.
Double bottom/top: This is another strong price reversal setup. Price forms two similar swing highs after an uptrend or swing lows after a downtrend.
Flags and pennants: These patterns indicate that price may continue in the trend direction. They occur as small rectangle or triangle price structures after an initial swift price movement.