What Is Price Action?
Price action is the movement of the price of a security (including stocks, indices, and currency pairs) over time. Price action is commonly used amongst traders that employ technical analysis to make predictions about where the market will go next, so they can capitalize on movements in the market.
A price action trader may use a combination of market structure, chart patterns, and even candlestick patterns in order to extrapolate where the price of a security is going to trade next, so they can enter the market long or short and profit off of the movement in price they are predicting.
Does Price Action Trading Really Work?
Yes! Price action trading is one of the most popular types of trading, because unlike using technical indicators, price action trading has proven to be a very statistically reliable form of conducting technical analysis and trading the markets.
While we’re not claiming that indicators such as moving averages, MACD, RSI, or the Ichimoku cloud indicators can’t work as a viable strategy for finding good quality setups in the market, they tend to work in only specific market conditions. Inevitably, most indicators are lagging indicators, meaning that they only provide delayed feedback and will only give buy or sell signals as price is setting up or after it’s already set up and moved.
Price action on the other hand lends itself well to traders who want to be dynamic in the market and want to be able to capitalize on market movements in both trending and ranging market environments.
At the end of the day, there are several different types of price action strategies, some of which perform better than others, and some that may even work well with technical indicators like the ones mentioned above.
How Can I Master Price Action Trading?
In order to master price action trading you’ll need to pick a trading strategy that makes sense of what is happening in the market in a way that you can understand it and trade it. Again, as a price action trader, you’ll rarely be using on-screen technical indicators and really the only “indicator” you’ll be using are the Japanese candlesticks that are in front of you.
Whether you want to trade a supply-and-demand strategy like the one that we teach at Phantom Trading, or you want to opt for a more traditional retail trading approach, it’s important that you stick with one strategy rather than hopping to a new one every few months.
By employing the use of naked charts and standard charting tools, you’ll have to develop the technical analysis skills and understanding of the aforementioned Market Concepts including market structure, liquidity, and chart patterns (trade setups).
Once you’ve spent a few months learning these skill sets, you can then take your technical analysis skills to the charts in a live market environment either by trading a demo account or a live forex account and you can start taking trades and collecting data to see whether your edge produces a positive return in the market.
Despite what some traders may tell you, everybody’s trading plan is inevitably going to be slightly different than the next trader’s plan, and the same goes for the actual execution of an edge or plan in the market. No two traders will be exactly the same or have the exact same thoughts.
On top of all of that mastering price action does not mean that you will be a consistently profitable trader. Trading psychology is the other critical component of becoming a master trader who can actually produce a steadily rising equity curve. Without adequate risk management or trade psychology skills, you’re unlikely to produce profits in the market without giving it all back.
How To Trade Price Action In The Forex Market
For learning how to trade price action in the Forex Market you’ll need to understand how Japanese candlesticks work. Without this fundamental skill in place, you may struggle to read price action in an effective manner. If you don’t already know how to read Japanese candlesticks, we suggest reading our beginner’s guide to forex trading first so you can build your chart reading skills first.
Remember, learning how to trade price action is much like learning a new language. Picture Japanese candlesticks as the basic building blocks of learning a language (learning to read individual words), whereas learning to analyze price action is almost like reading fully formulated sentences.
At Phantom Trading, we teach traders both new and old how to trade price action in the forex, indices, and commodities markets using a concept known as “supply and demand.”
Supply and demand trading is the idea that when a currency pair or exchange-traded equity is trading at prices that are relatively low to its historic prices, we’ll see an influx of buying (demand) come into the market and bid the price up.
On the flip side, if a currency pair or exchange-traded Equity are trading at prices that are relatively High to historic prices, we will see an influx of sellers (oversupply) come into the market and bid the price down.
This of course is a gross oversimplification of what trading the markets entails but, nonetheless it’s the core concept that we base our price action strategy around.
Forex Price Action Strategies
Chart Pattern Price Action Strategies
The first type of forex price action strategies that we’ll cover is traditional retail chart patterns. These types of strategies employ the use of popular retail chart patterns to predict or price that is likely to trade next. This includes the use of patterns such as double tops, double bottoms, head and shoulder patterns, ascending and descending triangle patterns (also known as rising and descending wedge patterns) to identify potential breakouts, bull & bear flag patterns as well as using the concept of support and resistance.
If you are already familiar with this type of price action trading, you’ll notice that pretty much every price action strategy overlaps or uses similar concepts in order to determine market direction and for looking for signals to enter the market.
Candlestick Pattern Price Action Strategies
Candlestick price action strategies make use of price action patterns that you can read by looking at how candlesticks form in a particular sequence. This involves analyzing the open, close, low and high of a series of candles to predict the market’s next move. The basic idea of using Candlestick patterns is that you’ll be able to predict moves in the market based on how price developed in the span of two to four candles on the respective timeframe you’re trading on.
Typically candlestick pattern price action traders use the mid or high timeframes to candlestick patterns. The benefit to this type of price action strategy is that it is simple compared to other strategies, however, it requires memorization of several candlestick patterns, and can sometimes be an oversimplified way of viewing the interaction between buyers and sellers in a market.
Break & Retest Price Action Strategies
Break and retest price action strategies consists of identifying a market that is in a trend, and attempting to get into the trend by entering the market as it’s pulling back and “retesting” a zone or level that has previously formed. This particular strategy relies heavily on markets that are trending rather than consolidating (or ranging), because you’ll be relying on the market’s momentum to get into a position that will continue moving.
This particular strategy is actually one of our favourites because we use a variation of break and retest price action strategies in trending markets as supply and demand traders at Phantom Trading.
The biggest benefit to trading break and retest price action is that you are simply looking for continuations in price as opposed to taking reversals which generally have a lower probability of playing out.
The only downside to break and retest strategies is that they don’t necessarily perform well in markets which are ranging. That being said, we also consider this one of the best price action strategies because it is more forgiving, and offers a less steep learning curve compared to the other strategies.
Fibonacci Retracement Price Action Strategies
Fibonacci retracement price action strategies are very similar to break and retest price action strategies except you will be looking for retracements in the market based on a single leg or move in price action, and using Fibonacci retracements to determine levels in which to buy or sell from, depending on the market’s direction and trend. Again much like break and retest price action strategies, this one is relatively simple and has a short learning curve compared to some of the other strategies we’ve mentioned here in this guide.
Breakout Price Action Strategies
Breakout price action strategies in a way are the opposite of traditional retail chart pattern strategies because breakout traders typically are looking to enter the market as it is “breaking out” of a consolidation (range), or level that was previously holding. This price action strategy is very similar to break and retest strategies in that they rely heavily on volume and momentum picking up in the market to catch trades.
The only downside to breakout price action strategies is that sometimes the market has false breakouts which can trick these types of traders into entering positions only to be stopped out as price goes against them.
This doesn’t mean that breakout price action strategies are necessarily bad, but they are generally more susceptible to price manipulation than some of the other aforementioned strategies.
Supply & Demand Price Action Strategies
Supply and demand price action strategies combine many of the concepts discussed in the other price action strategies mentioned in this guide, but also introduces the concept of supply and demand zones, liquidity, and attempts to make sense of things like orderflow in the market to recognize when price action is being manipulated.
Supply and demand price action strategies, which are sometimes referred to as smart money concepts (SMC) involves using a very logic heavy approach to deciphering price action. As opposed to looking for simple chart patterns, supply and demand traders actively analyze the markets by using market structure, momentum, and liquidity to identify “traps” in the market in which other retail traders fall into.
The downside to supply and demand price action strategies is that it has one of the steepest learning curves of all of the strategies, however, it could be argued that this type of price action trader possesses some of the deepest understanding of the markets compared to those who trade the aforementioned strategies. Additionally, supply and demand price action strategies have proven to be very lucrative, considering traders tend to get manipulated out of their positions less, have higher strike rates, and make more +R on average than those who trade other strategies.
How Do I Read Price Action?
Reading price action is a matter of either memorizing and identifying chart patterns, candlestick patterns, by reading things like momentum based on how the candlesticks print out, or by conducting an in depth analysis of multiple timeframes to determine the market’s direction and identify levels to take trades from.
In the following section of this guide, we’re going to cover how we at Phantom Trading approach reading price action by using technical analysis to get an understanding of the market we’re in and how we can approach looking for trades within it.
Market Structure (Trends)
The first step is to identify the basic direction of the market by marking out market structure on multiple timeframes starting from the higher timeframes (Daily, 4-Hour), down to the mid to low timeframes (15-Minute, 5-Minute). By doing this we can get a sense of both the overarching trend that a market is in, as well as the shorter-term “orderflow” or internal market structure to get a sense of what price might do from an intraday perspective.
Next we’ll be looking for pools of liquidity in the market in the form of equal highs / lows (support and resistance zones), trendlines, and major swing points. The general rule here is that if there is a prominent high or low, expect there to be liquidity sitting above or below it. If there is a clear level of supply or demand, a chain of supply or demand that has been chaining for way too long, or a trend line that is just too clean, expect a lot of liquidity to be resting above or below these areas.
The purpose of identifying liquidity pools in the market is to look for and anticipate where price action may be manipulated by institutional traders to “grab” the liquidity (in the form of resting stop orders) which is at these key levels.
By identifying where liquidity is sitting in the market, not only can we avoid taking positions in which we may have a high probability of being “swept” out of, but we can also use it to determine the market’s direction by looking for “liquidity traps”
Supply & Demand Zones (POIs / Points of Interest)
Last but not least, as a supply and demand trader, you’ll need to identify zones of supply and/or demand (also known as POIs, or “Points of Interest”) that you expect to hold or you expect a reaction out of. Identifying zones that have a high probability of holding and producing a reaction is a matter of combining concepts like market structure, orderflow, and liquidity to avoid zones of supply or demand that just aren’t likely to hold.
What Is The Downside To Trading Price Action?
One of the downsides to trading price action is that it can be quite intimidating for traders who are brand new to reading charts to grasp all of the concepts and build all of the skills they need to decipher the price action in the particular market they’re trading.
Unlike using technical indicators, reading price action requires traders to think logically about the price action in front of them and to derive trade signals from their technical analysis of that price action as opposed to relying on the indicator to give them a signal to enter the market.
Ultimately when you are starting out with trading price action you may experience a sense of overwhelm or decision fatigue because price action trading can involve manual analysis and a lot of decision-making, depending on the strategy you choose to trade.
Despite the fact that there is a steep learning curve associated with learning how to trade price action, we would argue that it’s a more robust way of approaching the market rather than relying on lagging indicators paired with a shallow understanding of how markets work to give you the signal to enter a buy or sell position.
Forex Price Action In Conclusion
In conclusion, price action trading is one of the most popular ways to trade markets from around the world whether you are trading currency pairs, indices, stocks, or commodities for one simple reason. It’s reliable.
The reason why we teach supply and demand price action trading at Phantom Trading is that we consider our strategy one of the most lucrative and profitable ways to trade the markets. Now of course, that doesn’t mean that it’s easy… in fact, learning to trade price action strategies is objectively harder than their indicator-based counterparts, but we believe it’s worth the extra effort in the long run!
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Robert Castillo – Currency & Commodities Trader,
Financial Analyst, Writer & Editor.
Robert is a funded trader based out of Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading he enjoys producing music, mixed martial arts, and riding his motorcycle in the summer.