price action

What is a price action strategy?

deltafx writer 18 July 2021

After a relative familiarity with the Forex market and analytical methods, everyone is looking for the best way to properly analyze future market movements. This will help them to open or close trading positions at the right time. However, technical analysis has a special value among different methods for the prediction of the market future. Undoubtedly, this market analysis has different types, and people choose one according to their different trading strategies. Price Action can be considered as the simplest strategy in technical analysis. It has an important role in recognizing price movements and predicting future market trends.

What is Price Action?

Price Action is a method that predicts the future trend of the market by analyzing the price movements of the market in specific time periods. Thus, traders and some institutions predict the future direction of the prices and increasing or decreasing the price of a particular asset.

It is better to consider that this strategy is suitable for markets with high price fluctuations and liquidity. Price Action ignores fundamental analysis and uses only technical analysis to identify future market movements according to the price history in a specific time period. This makes Price Action distinct from other methods and strategies. Traders always leave footprints (signs) based on their performance on the price chart. Therefore, by analyzing and interpreting these signs, we can guess the next movement of the market.

For example, increasing the price of a stock indicates that investors have bought it. Next, they evaluate price movements based on willingness to buy and consider historical charts and price performance at a particular time. They also consider information such as supply, demand, trading volume, speed and size of trades.

Price Action Measuring Tools

Just like any other strategy, Price Action has its own measurement tools. For example, the trend line, the candlestick patterns and support and resistance levels are considered as the most popular tools. Traders use these tools to assess market movements accurately and broaden their horizons and strategies.

Candlestick

Candlestick

The candlestick chart is the most common model among the forex charts. It is a graphical representation of price movements in the form of candlesticks that represent the highest and lowest price or opening and closing price. The most famous forms of this chart are Engulfing Pattern, Hammer, Doji.

Trend line

An asset or product can be traded over a day depending on the continuation of a trend. Traders refer to these fluctuations as “bullish trends” when the price action strategy indicates a price increase. “Bearish trends” refer to the situation in which the strategy indicates a price decrease.

Resistance and support

Traders use support and resistance lines and levels to identify the best trading positions. Support and resistance zones refer to a place on the chart where prices change their direction after reaching specific price levels.

Price action trading strategies

Since using price action patterns are necessary to determine future price trends, they are considered very important for trades. In the following, we are talking about the important patterns.

inside bar pattern
inside bar pattern structure

Inside bar pattern

This pattern indicates a kind of interruption in the price trend due to its shape and structure. This temporary interruption occurs when the market is less volatile. Based on what you see in the picture, this pattern has two candlesticks. The primary candlestick is called the mother, and it is bigger than the secondary candlestick (the high and low are above the secondary candlestick).

Always use the daily timeframe when you are trading based on this pattern. In smaller timeframes, such as four-hour or one-hour, there are many inside bars that increase the likelihood of error due to rapid and temporary market movements.

Outside bar pattern
in Outside bar pattern the primary candle is smaller than the secondary candle

Outside bar pattern

This pattern is directly on the opposite side of the inside bar. Therefore, it occurs when the market is volatile. Obviously, the structure indicates that the primary candlestick is smaller than the secondary candlestick (the high and low are below the level of the secondary candlestick).

When using this pattern, make sure that the outside bar completely covers the ceiling and floor of the original candlestick. Identifying and tracking consecutive candlesticks over a long time can guide you in finding market turning points.

Pin bar pattern
Pin bar pattern

Pin bar pattern

At first glance, the name of this pattern confuses you, but you should know that “pin” stands for “Pinocchio”. The reason for choosing this name is its appearance, which has a structure similar to Pinocchio’s nose. In a general evaluation, the candles are arranged separately. This pattern indicates that Price Action traders are about to face a potential reversal trend in the market. The structure of the Inside Bar pattern is such that in the ascending position (Bullish Pin Bar), we see a long shadow at the bottom of the candle and in the descending position (Bearish Pin Bar), we see this shadow at the top of the candle.

In this case, traders have to trade carefully. Because this pattern creates long shadows and temporarily crosses the support and resistance levels, causing wrong predictions. Ultimately, traders may lose their money.

Conclusion

Price Action is one of the simple, accurate and practical products of technical analysis. But before using this strategy, you must specify your goal. The important point in this market is that past price movement does not necessarily lead to continuing the same trend. Trained and experienced traders always avoid this trap, but the emotional and inexperienced traders are can easily fall into this trap. Ultimately, you should know that using more analytical tools will increase the credibility of your prediction.

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