Price Action Trading Need to Know

If you want to be a profitable trader in the world of commodities, the stock market, Forex, cryptocurrencies, or anything in between, then one thing that you definitely want to know all about is price action trading.

In case you don’t know what price action trading is, it is defined as the movement of the price of the security plotted over a certain amount of time period price action is therefore what forms the basis of all technical analysis for currencies, stocks, and everything else.

Many short term traders even rely exclusively on price action as well as the formations and trends that can be extrapolated from price action analysis. Many short term traders rely solely on price action and are very profitable doing so.

Moreover, using price action is a great way to make trading decisions, but you do of course have to know what you are doing. What we are here to do today is to provide you with everything that you need to know about price action trading in order to start trading profitably with this method.

Price Action

Price Action and Moving Averages

If you are trading price action, the knowing all about moving averages is very important. The most important thing that you need to know is that trending markets will always usually revert back to moving averages.

For example, if there is a very strong trend, it will revert back to the 20 moving average. In a moderate trend, usually rivers to the 100 moving average. In a very weak trend, it reverts to the 200 moving average.

On that same note, you also need to be aware at all times which moving average is currently being respected by the market. This is because if a moving average is very low, it means that a market is trending strongly, but if a moving average is very high, then it signifies that there is a weak trend going on.

Longer Ranges and Stronger Trends

Something that is important for you to know is that the longer ranges are the stronger trends are. You can rest assured that when a range starts to expand, it’s a strong sign that the market will move in the direction of the said expansion.

Keep in mind that everybody who looks at shards can see when arranges expanding, and most people will always want to short the resistance. Now, what you need to know is that if the price trades above a point of resistance, then anybody who placed short trades will get squeezed.

Keep in mind that you want to wait for a decent amount of time to capture big market movements. However, you might not have the time to wait, but the following tips will help take care of that.

 

Using Support and Resistance In Price Action Trading

If you plan on being able to identify areas of value that will allow you to place trades, then you need to know all about support and resistance. You do always want to buy low and sell high, but you therefore need to be able to identify what is high and what is low.

This is what support and resistance helps you do. If you are looking to buy low, these are areas of support, and if you are looking to sell high, these are areas of resistance. Keep in mind that there is also such a thing as dynamic support can resistance, which is when support and resistance levels move along periodically with the price. Moreover, you usually always get dynamic support in an uptrend and dynamic resistance in a downtrend. You can also easily identify a variety of moving average as using support and resistance.

Do keep in mind that if market has a strong trend, the price might not always pull back towards support and resistance, but rather towards the dynamic support and resistance lines. Also remember that trading price action with support and resistance will always provide you with a favorable risk to reward ratio, especially when compared to ranging markets.

The Story of False Breakouts

In case you don’t know what a false breakout is, this is when a price breaks a line of support and resistance, but then closes back within the same range. This is an absolutely great place to place a trade if you are a price action trader, because you have the ability to then take advantage of all of the traders who get trapped in their trades.

Here, if you short a false breakout, you can expect all of the other traders to cut their trades, which will then just further fuel the price decline of that market. Therefore, when you short a false breakout, you stand to make huge profits.

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Know Narrow and Wide Range Candles

Something else that you need to know about when it comes to price action trading are both narrow range candles and wide range candles. When it comes to narrow range candles, or in other words candles that all happen in the same narrow range, you can rest assured that some explosive market movement will occur.

On the other hand, when you see wide range candles, which are formed due to imbalances of buying and selling pressures, they indicate that there is hidden support and resistance in the market. Just never trade narrow range candles and wide range candles in isolation. You want to use other technical analysis tools to confirm the direction that you then want to place your trade in.

 

Always Trade with Trends

When you see a trend, your best chances are to trade in the same direction as the trend. You always have a way better profit potential when you place trades in the direction of a trend rather than against a trend. Obviously though, this means that you need to be able to identify trends.

 

Continuation Patterns in Ranging Markets

Continuation patterns are patterns that look like pennants, flags, and triangles. Simply put, never trade on any of these continuation patterns in a ranging market. These patterns should only be traded in a trending market.

 

Identifying When a Trend Ends 

If you want to be successful at price action trading you also need to know when a trend is ending. If you see that respected moving average is broken, that a trend line is broken, or that the structure is broken, it signifies that trend is ending. If you see two or even all three of these happening at once, you can rest assured that trend will come to an end.

Price Action Trading – Final Thoughts

At the end of the day, price action is one of the most important things that you need to know in order to be a profitable trader. With the tips that we have provided you with above, your life as a price action trader should be much easier and more profitable.

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