Price Action Explained

Price action is a technique that helps you make trading decisions based on the price movement across time. It is mainly utilized by retail traders, institutional traders and hedge fund managers to predict the price of security or cryptocurrencies in the future. In simple words, price action is how price acts. Price action occurs when anything on the market is bought or sold and it’s more visible in markets with high liquidity and volatility.

Price action trading overlooks the underlying reasons that drive a market’s movement and instead focuses on the market’s price history, or how the price has changed over time. Price action is considered a kind of technical analysis, however, the main difference between price action and other kinds of technical analysis is that price action focuses primarily on the correlation between the current price and the past price of the market, instead of the ‘second-hand’ values taken from the price history. Price action trading, in other words, is a ‘pure’ kind of technical analysis since it does not use any second-hand, price-derived indicators. Traders that trade price action are only interested in the first-hand facts that the market provides about itself: price movement over time.

Price action analysis enables a trader to understand the market’s price movement and gives explanations that help the trader to mentally form a scenario to represent the current market structure. Experienced price action traders frequently credit their effective trading to their unique mental knowledge and “gut feel” of the market.

Price action traders usually look at the history of the price movement in a 3-6 months period and they prioritize distant price history. The price history can be swing highs, swing lows, and support and resistance levels.

Based on price movement on the market, traders will try to interpret human thought. As market participants trade, they will give price action clues, which can be used to predict the movement in the future.

Price Action Mindset

Price action is also known as ‘clean chart trading’, ‘naked trading’ which implies that traders depend solely on the price chart to make certain actions. However, there are lots of people who make it more complicated by cluttering their charts with multiple technical indicators as well as over-thinking about the market.

Precisely, there are no indications on a trader’s charts, and no economic events or news are employed in making trading choices when using the simple stripped-down technique of price action trading. The only thing that price action traders care about is the market’s price action, and they believe that price action represents all other factors such as news events, data, etc. that result in market movement. As a result, rather than trying to interpret and sift the many distinct elements impacting the market each day, it’s far easier to just assess the market and trade from its price movement.

Price Action Patterns

Price action patterns or price action ‘triggers’, ‘setups’ or ‘signals’ are the most important factors of price action trading since it gives traders strong clues about the price movement in the coming time.

Below are some price action patterns that you can learn to master your price action trading.

Inside bar pattern

An inside bar pattern is a two-bar pattern that consists of the inside bar and the preceding bar, often known as the “mother bar.” The inside bar is entirely confined inside the mother bar’s high to low range. In uptrend markets, this price action method is often employed as a breakout pattern, but it may also be used as a reversal signal if it occurs at a critical chart level.

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Pin bar pattern

A pin bar pattern is made up of a single candlestick that signals price rejection and a market reversal. The pin bar signal is effective in trending and range-bound markets, and it may also be used to trade against the trend from a critical support or resistance level. The pin bar indicates that price may move in the opposite direction of the tail since the tail of the pin bar indicates price rejection and a reversal.

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Fakey pattern

A false breakout of an inside bar pattern makes up the fakey pattern. In other words, you have a fakey if an inside bar pattern temporarily bursts out but then reverses and closes back within the range of the mother bar or inside bar. In other words, a fakey pattern happens if an inside bar pattern temporarily breaks out but then reverses and closes back within the range of the mother bar or inside bar.

Final Word

By reading this article, we hope you will have a better understanding of price action trading as well as remember some popular patterns of price action. However, these are only basic knowledge and there is a lot more for you to learn, especially when you apply them on the real market. Therefore, you should try to expand your understanding of price action trading, which helps you become a better trader.