Okay, so first things first. Let’s answer the burning question: What is Price Action Trading?
In short, as the name suggests, Price Action (PA) is about looking at the price of a financial asset first and foremost. You do not pay much attention to any technical indicators or fundamental analysis of market moves.
Price action traders focus primarily on the price of securities for their reading and trading of financial markets. They make their trading decisions based on what the price is doing, and only that. Experienced traders of PA can predict future price movement with an uncanny accuracy!
Understanding Price Action Trading
Your first task is to learn what PA trading is and to understand it. Then you will learn to read it and trade it. It takes some time, but be patient with yourself. This is an exciting journey and the trading results can be spectacular if you stick it out.
Let’s cover some key concepts first.
Key Concepts of Price Action Trading
This unique way of trading rests on the following concepts.
Market Structure
Financial markets all move in similar patterns. Whether you are looking at the one minute price chart of the ES futures or the daily chart of Bitcoin, you will see similar impulse moves and similar pulllbacks. You will see trends continuing and trends reversing. You will see the market trading in tight and wide channels, and even getting stuck in trading ranges.
The way the market moves is referred to as market structure or the market cycle. A key part to understanding PA relies on your ability to see and identify which stage of the market cycle is currently unfolding as you trade.
Price Action Patterns
There are certain price action patterns that you can study and identify quickly to see what is going on in the market. These include but are not limited to:
- Breakouts,
- Trend channels,
- Trading ranges,
- Bear and bull flags,
- Major trend reversals (including double tops and double bottoms and other reversal patterns),
- Final flags,
- Wedges,
- Mother bar,
- Pin bar pattern,
- Head and shoulder patterns and other shoulders patterns,
- Cup and handles, and
- Triangles.
We will cover all of the above and more in great detail elsewhere on the site.
Support and Resistance Levels
Another very important aspect to cover is support and resistance.
These key levels are where falling price movements might find some support or rising price movements might find some resistance. They could be areas of potential reversal.
Typically these levels are identified by important previous price levels on the chart — like previous swing highs or swing lows — or where the price meets trend lines and trend channel lines.
At these levels it becomes very important to watch for potential breakouts or false breakouts while considering the lines that you draw on the chart as essential tools to help you make informed decisions.
But yes, these levels on the chart offers great trading opportunities.
Advantages of Price Action Trading
If you think about it from first principles, price action trading allows you to see what part of the market cycle is currently playing out, and then to trade appropriately for that “market mood.” This is the main advantage.
PA traders typically also use naked or clean charts with no distracting technical indicators (except maybe one moving average — which I do not even use). Such naked charts allow the trader to clearly see important chart levels, like support and resistance, and to also see earlier as price patterns are forming on the candlestick charts.
Limitations and Risks
Here are a couple of limitations to keep in mind.
1. Time-consuming: Trading in this way takes time. First, it will take a period of time to learn the principles of PA. Then you will need to learn how to read the price as it is unfolding. After this you will spend some time learning to trust the price moves that you read as you learn to trade in this way. This takes time like all things in life that are truly worthwhile.
2. Subjectivity: PA trading requires you to make some subjective decisions. You cannot rely on a hard and fast set of fully discretionary rules, and you cannot remain perfectly objective. You need to make some decisions and back yourself. I am mentioning this carefully as a limitation, as I have learned that intuition plays a large part in trading and the necessary subjectivity that this brings can greatly enhance your trading results.
3. False signals: As with any approach, there will be false price action signals and you can get some of the calls you make wrong. It is also possible to get simultaneous conflicting signals. This is a normal part of trading. In his book Best Loser Wins, trader Tom Hougaard deals with the concept of learning to accept losses and moving on swiftly. This is important if you want to experience the power and freedom that successful trading offers.
4. Loose stops: In PA you need to use well-defined stop levels to ensure your trading math works out. You need to keep your win probability and risk to reward ratio healthy, and if market conditions include hard and fast price moves, adhering to such price levels can mean loose stops and small trading sizes. That being said, it is still one of the most lucrative ways to trade.
5. Accuracy: If you are not careful in considering all options of what is playing out in front of you, you might get some aspect of your market analysis wrong. For example, if you misread what the market is doing, you could be drawing trend channel lines incorrectly and that could cost you money.
Remember, no market approach is perfect. And everything has its limitations, but from more than a decade of experience I have learned that this approach to trading is superior to all others depsite the risks and limitations mentioned above.
How to Get Started with Price Action Trading
First you need to learn what price action is. That is what this page is trying to teach you.
Next, you will learn how to read price action trading.
And then you will learn how to trade price action trading.
Once you have done that, you will be ready to test your new-found skills on a paper trading or demo trading account, and after that on a small real-time trading account or a small funded trading evaluation.
Learning Resources
I am hoping that you will trust me in helping you to get started with PA trading. I believe in what I am building here, and I believe in my unique approach to PA with a healthy dose of intuition built in. Also, this website will teach you all of the amazing side-discoveries and price action strategies that I uncovered in my years long learning journey.
I also hope to illustrate many of the important concepts to grasp in my videos on the PriceTradewr.io YouTube channel. There, we will dig deep with video price action analysis.
Other good resources include books and courses by Al Brooks. I have studied Al’s work in depth, and I believe he is heavy on theory and light on practice, but he is a great teacher. Sadly, most of my friends find him a little boring to tolerate.
Practice and Simulation
It is very important to practice with a trading simulator to master price action trading.
We live in a wonderful era. With fast, reliable internet access and access to software and tools that our predecessors could only have dreamed about, we have it made in many ways.
One example is TradingView charting software. This wonderful tool allows you to go into Bar Replay mode and select a day or period on your trading instrument to practice trading the simulated PA.
I plan to do much of this on YouTube channel to bed down important concepts in your trading arsenal. We will spend hours looking at chart patterns and “waste” many evenings and weekends in our study of price movements.
Trust me, it will be fun, and so so worth it in the end!
Developing a Trading Plan
And then, before you start, you will need a trading plan. But again, don’t worry… I have you covered.
When you are done studying PA with me (right here, on this free website) you will have a clear plan for how to approach the market and how to trade. You will have clear guidelines and a price action trading strategy.
Your plan will enable you to identify breakouts, trend channels, and ranges, and you will have novel, innovative approaches to trade each of these stages of the market cycle. You will be ready for any of the price action signals.
All you will need are your clean charts and your awesome trading skills!
Techniques for Effective Price Action Trading
Next let’s turn to some specific techniques that help price action traders achieve consistent profitability.
Reading Candlestick Patterns
A key technique is reading candlestick patterns. If you find yourself looking at the screen and predicting a potential trend reversal, you will know you are turning into a pro PA trader.
You will become the only trading tool you need, and price history will be your best friend! You will see patterns unfolding and be able to take optimal entries.
An important thing to master is line breaks. And this happens when the closing price of a candle is on the other side of the line than the rest of the candles.
Analyzing Market Trends
A solid part of any price action trading strategy worth its salt is the ability to analyze and trade market trends.
Consider the four most important stages of the market cycle:
- Breakouts (very strong downward or upward trends),
- Tight trend channels (strong moves in the trend direction),
- Wide trend channels (market still moves with current trend, but there is opportunity to make profit long and short), and
- Trading ranges (horizontal price channels).
Three of those four has the word trend in them. So a lot of PA trading has to do with trends, and your analysis of these trends will be an important part of solving the trading puzzle.
Thankfully I spent the first five or six years of my trading journey as a trend trader, so again, I have you covered! Stick with me, I’ll make you profitable! 😉
Utilizing Time Frames
It is important to understand what is going on in larger timeframes when you are trading.
Let’s say the daily chart is in absolute freefall, and I get a long entry just after open on the 5 minute chart, it would be invaluable for me to be aware of what is going on on the daily chart to determine important aspects of my trade, like: trade size, stop loss placement, and whether the trade is a good idea to start with.
It would also be pretty dumb to go long on the 5 minute chart right below an important swing high level from last month, right?
Always do your technical analysis on higher timeframes first to ensure you have the complete picture.
Integrating Price Action with Other Trading Strategies
As mentioned, for a long time at the start of my trading career I was a trend trader. So, the switch to being a price action trader was not always easy. I caught myself over and over again reaching for trend trading strategies where having a subjective, intuitive PA approach would have been the right answer.
For this reason, I want to caution you against trying to integrate PA with other strategies. You will eventually see the truth, and the truth is that nothing is as accurate as intuitive price action trading.
So, try and resist the temptation to bring your favorite old strategy or indicator into this new world. The price action trading strategy that I teach here will be sufficient for your needs.
And also keep in mind that PA works equally well regardless of trading style: like day trading or swing trading, and regardless of trading instrument like futures trading or forex trading.
I am a day trader who trades the ES futures, but you can use what you learn here regardless of your style or instrument. We will cover specific considerations for all these divergent approaches in detail.
Conclusion: Mastering Price Action Trading for Success
And that concludes our exploration of “What is price action trading?” I hope that I have answered that question sufficiently.
I am here to help and serve you. The content on this site and on my YouTube channel is free for you to explore and learn from. I will share various technical analysis tools and go into depth about all the important chart patterns.
If you take your forray into PA trading seriously, you have the most incredible potential to prosper. So, please take it seriously! The materila here will be helpful to beginner traders, experienced traders, and even well seasoned traders!
Read the articles here. Watch the videos. And practice… I had to do the same when I started, but boy-oh-boy am I glad I did. Over time you will find your technical analysis, trading decisions, and price action strategies improve.
You can follow the trading results I am achieving on the day trading results page. Hopefully, one day soon, you will be able to achieve the same results by following the same approaches!