What is price action and how to trade price action

 What is price action and how to trade price action

Price action trading is based on pure analysis of the market patterns, trendlines, candlesticks, etc. When you trade price action, you don’t use indicators because the trading with price action is based on the natural movement of the market. Indicators are somewhat useful to help you with finding potential trend direction.

But price action doesn’t require any indicators to do analysis, and your decisions are made on charts. Price action is the most recommended way to analyze the market and find potential trades in the market.

Price action in Forex

Before entering trades, first, you need to analyze the forex market. With price action, you can analyze the market in detail and open trades of forex currency pairs based on your market analysis.

To analyze the price action in the charts, you need to know how to do technical analysis. And price action can help you find the right entry price and most importantly it helps you by analyzing potential reversal change against your trade.

With price action analysis, you can predict potential market price movements and enter the trades based on your analysis. Price action will help you determine the bullish or bearish trend by analyzing the market in multiple timeframes.

You can also use trendlines or channel patterns to help you with analyzing the trend. The right way to identify potential market movements is by using multiple factors of price action that can help you with your analysis. This involves finding market patterns, switching to different timeframes, drawing trendlines, etc.

However, price action is not a magic analysis that always will work to find the correct market movement based on your analysis. The market can move against your trade even if you have the technical analysis done correctly for that trade.

You cannot predict the market always and it’s recommended to secure your trade with stop loss in case your trading analysis doesn’t go well or any economic important events occur. 

Price action examples

The image examples below will give you a better understanding of some price action examples. We also have shown some examples of how to trade the price action.

Support and resistance

Support and resistance are the most common and used in price action. Support and resistance act as continual or reversal movements on forex trading. When the support level on a currency pair breaks, then the next scenario for that trade would be a bearish momentum, since the support has been broken.

Or if the resistance is broken, then the potential scenario for that pair would be a bullish market movement. Let’s take a look at the chart below shown in the image. The image chart below shows the chart of the forex currency pair EUR/USD on the daily timeframe

The number 1 on the image, it shows the first support created at 1.07850 level. Then the price went up for some pips and created the first resistance at 1.09918 level (see number 2 in the image).

support

After creating the first resistance, the price went down and retested the support level at 1.07850 and didn’t break the support (see number 3 in the image). 

Then, the price went up for some pips again and didn’t break the resistance at 1.9818 level and created another resistance (see number 4 in the image). Price went down and retested the support at 1.07850 again and created another support zone after not breaking the support (see number 5 in the image).

resistance

And based on this movement of the market, we could have traded by buying and selling the EUR/USD on support and resistance levels.

Trend lines

Trendlines on forex are very powerful tools to identify bullish or bearish trends. With trendlines, you can detect the market movement and upcoming potential trends. Trend lines are drawn by finding the wick and drawing it to the next tops or bottom wicks.

Trend lines can help you by finding support and resistance levels on the uptrends or downtrends.

Below on the image, we have a bearish trend line drawn on the GBP/USD pair with the 1-hour timeframe.
trendlines

Trendline starts from number 1, by connecting the trendline with the wicks of the candles that are known as tops. As you can see from the image, we have a bearish trend. The trend line on the image chart shows the support and resistance levels too.

Number 1 on the chart, shows the beginning of a bearish trend. And numbers 2, 3 show the continuation of the bearish trend which could give you an opportunity to short the market

Stop-Loss

Entering on trades can be easy but finding the right entry or trade can be challenging. And for this, you have to use stop-loss always as it protects your account balance by minimizing the loss. 

Below on the image, we have the GBP/NZD forex currency pair on a 1-hour timeframe. The yellow line at 2.049995 is the entry price of the buy order. Below the buy order with a white line, we have set the stop loss about 50 pips.

price action stop loss

The stop-loss is set below the support zone because if the support is broken then our trade is automatically closed. And that’s what has happened, the price has broken the support and activated the stop loss at 2.04472.

With stop-loss, we have protected the account balance by closing the trade with only 40 pips loss. If we wouldn’t place the stop-loss and if the stop-loss price would have been placed below the support zone, then we would have lost 100 pips or more.

Take Profit

Take profit helps you by taking profit on the trade on the selected price value. With take profit, you can secure the profit on your trades. If you’re sleeping, traveling, or doing any other activity, you probably can’t access your trading account.

When you activate the take profit, your order would be automatically closed when the market price reaches the price of the take profit you’ve chosen.

Below is the USD/CAD forex currency pair on the 4-hour timeframe and a double top pattern. The sell order (entry price) is at the 1.41501 level with the yellow line. Take profit price is set at 1.40303 with the white line.

And the reason why we entered the take profit price there, is because of the support and bottom of the double top pattern.

double top price action

Placing the take profit at the nearest support or resistance zone is important. And the price has reached the support at our take profit level and we have closed the trade with 119 pips.

Multiple timeframes

Finding the right timeframe to trade, depends on your trading style. But by trading the price action you can switch different times for a better analysis of the market.

If you’re a scalp trader, you need to look at shorter timeframes with 1 hour, 30 mins, 15 mins, 5, mins, 1 min, or 30 seconds. Scalping can be stressful as you have to react faster to market movements, compared to swing trading. With scalping, you need to look at the lowest timeframes possible to find scalp entries.

For swing trading, you need to look at the higher time frames. Swing can be less stressful but waiting hours or days for your trades to reach your target can be anxious. To find the right entry, you need to look at different time frames such as 1hour, 4hours, or daily timeframe.

With swing trading, you can react to markets much faster by saving your account balance in case your trade analysis is not going as you planned. 

Switching to different time frames can be very helpful in your entries. If you decide to go short or long, you can use different timeframes and find the right entry. For swing orders, you can switch to shorter timeframes and spot any market patterns or support and resistance zones.

And by spotting these, you can enter your trades on the best entry prices and adjust the stop loss or take profit based on the timeframe you’re looking for.

axi trading

Summary

In this article, we showed you how to read the market patterns, support, resistance, identify bullish or bearish trends, trendlines, etc. And the price action can help you read the chart in-depth and also it can help to trade the currencies with better entry prices.

But the best way to do your technical analysis based on price action is to combine price action factors together such support, resistance, trendlines, market patterns. You can switch to different time frames so you can find better entries on the market, identify the trend of the market, etc.

Price action can be analyzed on different trading platforms MetaTrader 4, MetaTrader 5, cTrader, etc. But we recommend studying the market with price action and technical analysis is with TradingView. With the TradingView platform, you can analyze the charts with many advanced tools and features. Other platforms allow you to analyze the market and there’s nothing wrong with that.

But platforms like MetaTrader lack some features and tools. And they’re more suited to analyze price action in a simple experience. TradingView offers a better experience with its advanced platform as it’s one of the most used platforms to analyze the forex market. 

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