Price action trading strategies are very popular among traders in the financial markets today.

Analyzing the price behavior is one of the easiest yet very powerful way of gaining a deeper understanding of financial markets.

It can be used by both short-term and long-term traders.

Most forex traders like using technical indicators to analyze the behavior of a security and make trading decisions.

What these traders don’t know is that all technical indicators are derived from the price.

This means that it makes sense for you to study the price, analyze it, master it, and use it when making your trading decisions.

If you didn’t know, it’s worth knowing that you can use the signals generated by the price behavior to create entry and exit signals for your trades.

Technical indicators normally tell traders of what is about to happen in the market.

However, financial markets such as forex are very dynamic, and any prediction about the future is only a possibility.

Always remember that forex is a game of possibilities.

This trading strategy works differently.

Instead of telling you what will happen in the future like technical indicators, algorithms, or fundamentals, it tells you of what the market is doing.

And if you master this trading strategy well, you increase your chances of becoming a successful trader.

In this article, I will be discussing the best price action trading signals.

Let’s start…

What is Price Action?

It simply refers to the study of the price movement of a security.

In this trading strategy, traders study the historical behavior of the price of a security in order to gain insights on the direction that the market may take in the near future.

The most popular indicator for this type of trading strategy is the study of price bars.

The price bars give traders details such as the open and the closing price of a market as well as its high and low price levels during a particular time period.

Analysis of such forms the core work of traders who use this trading technique.

So, this trading strategy can actually be defined as the study of the actions of buyers and sellers participating in a given market during a particular period of time.

When a trader analyzes the behavior of other traders in the market, both buyers and sellers, they can gain an edge about the market.

This can be of great benefit to the trader when making trading decisions.

The most popular price bars used by traders are the candlesticks.

Candlesticks are known worldwide and they are supported by most trading platforms, which is a proof of their popularity.

They can be used with much ease to analyze the price behavior, and they make this task easy for both beginners and experienced traders.

So, this trading technique helps a trader to read the market and make subjective trading decisions depending on the recent and the actual price movements, rather than by relying only on technical indicators.

It ignores the fundamental analysis factors and instead focuses on the past and recent price movements.

Although it doesn’t rely on the use of technical indicators, it doesn’t mean that traders cannot use it with technical tools.

Traders can still combine it with technical tools such as support and resistance levels to gain a deeper understanding of what is happening in the market.

Most short-term traders rely exclusively on the price behavior and the trends and formations extracted from it to make trading decisions.

The practice of technical analysis is a derivative of price behavior since it relies on past prices in its calculations that traders use to make informed trading decisions.

Price Action Trading Tools

The price behavior of an asset can be seen and interpreted using charts that can plot prices over time.

There are different chart compositions that traders can use to improve their ability to identify and interpret trends, reversals, and breakouts.

Most forex traders prefer using candlestick charts to visualize price movements by displaying the low, the high, the open, and the close values in the context of up or down movements.

Consider the figure given below…

price-action-trading-signals

The above figure shows both the seller and the buyer candlesticks.

The seller candlestick has been shown in red, although it is sometimes shown in black.

The buyer candlestick has been shown in green, although it is sometimes shown in white.

The candlesticks provide the trader with the following useful information…

  • The high and the low price levels gives the trader the highest and the lowest price levels reached in a trading day.
  • The body of the seller candle tells the trader that the sellers won the battle of the trading day. The reason is that its closing price is normally lower than its opening price.
  • The buyer candle tells the trader that the buyers won the battle of the trading day. The reason is that its closing price is higher than its opening price.

There are different candlestick formations used by traders who rely on this trading technique.

Examples include the engulfing pattern, harami cross, and three white soldiers.

How to use Price Action

Remember that this trading technique involves analyzing the behavior of all buyers and sellers participating in a market, hence, it can be used in different financial markets.

Examples of such financial markets include forex, stocks, stock indices, shares, bonds, and commodities.

Since the instruments in all these financial markets can be viewed on candlestick charts, it’s possible for you to use this price analysis trading technique on them.

However, this trading strategy is more suitable for forex traders because it gives them the following advantages…

  • The forex market is open 24 hours a day, five days a week, which is a true representation of all buying and selling across all the continents.
  • It has a large liquidity, which enables traders to trade in and out of the markets within nanoseconds.
  • Some forex pairs offer low spreads which can help keep the commission costs of the trader low.
  • Forex is a leveraged product, making it possible for traders to control large positions using a small deposit. This may mean big wins or big losses, hence, you have to trade responsibly.

Components of Price Action

This trading technique is made up of four components.

If you can recognize, understand, and know how they are related to each other, you will be on your way to becoming a successful forex trader.

Let’s discuss them…

#1: Candlesticks

As we stated earlier, candlesticks are the most popular types of charting today.

What you have to know is that each candlestick relays information, and a grouping or a cluster of candles conveys a message.

#2: Bullish Trend

It is easy for any trader to identify a bullish trend in the market.

A bullish trend is formed when a group of candlesticks extend up to the right.

It is an indication that buyers are in control of the market.

#3: Bearish Trend

It is the opposite of a bullish trend.

It is formed when a group of candlesticks extend down to the right.

It is an indication that sellers have taken over control of the market.

#4: Flat Market

The market is in a flat trading range approximately 70% of the time.

It is rare for a security to trade in one direction all day long.

Note that you can lose much money in a flat market.

The reason is that the market behavior will not align with your expectations.

When the market is moving in a tight range, it is unlikely for you to make big gains.

So, when the market is moving in a tight range, your target should be to buy low and sell high.

Price Action Trading Strategies

Each trading strategy requires three different elements namely why, how, and what.

The “why” gives you the reason as to why you should trade a particular market.

Here, you need to use price patterns.

After analyzing the price properly, you will get to know what is most likely to happen next, whether the price will go up or down.

The “how” determines the mechanics of your trade.

It defines the way that you trade.

You have to know the price levels for your entry, exit, and where to place your stop losses and the profit target.

Remember that forex is a game of probabilities, so, you must ensure that your trading account is protected once you enter into a trade.

This calls for you to place stops in your trade so that you can automatically exit the trade once the market begins to move against you.

The “what” determines the outcome of your trade.

It is what you need to achieve from the trade.

It can be a short-term or a long-term trade.

It is all about how you manage your trade to profitability or how you manage the trade if the outcome you get is not what you expected.

Now, here are the different strategies that you must master as a forex trader…

#1: The Hammer

The hammer candlestick is formed at the bottom of a downtrend and it acts as a signal that a bullish trend is about to begin.

So, the preceding bearish move is about to reverse into a bullish move.

The bullish hammer candlestick is very popular on forex charts and it’s characterized by a small body and an extended lower wick.

This acts as a confirmation for rejection of lower prices.

You can also find the inverted hammer on your chart, which is an upside-down bullish hammer.

Consider the graphic given below…

the-hammer-price-action-pattern

The above figure shows the bullish hammer candlestick.

It shows that sellers are trying to push the market to a new low.

However, these sellers are not strong enough to stay at the low, so they decide to bail on their positions.

Due to this, the market rallies back up, causing buyers to also step into the market.

Both the open and the close price levels should be in the upper half of the candle.

Although it’s possible for the close to be below the open, a stronger signal is sent when the closing price level is above the opening price level.

Consider the chart given below…

the-formation-of-bullish-hammer-candlestick

The above chart shows the formation of bullish hammer candlesticks on the price chart of a forex pair.

The hammer candlesticks have been pointed to by black arrows.

The formation of each of these hammer candlesticks was an indication that there is a potential bullish move in the market.

The second hammer candlestick from the left as marked on the chart was formed after a bearish move.

After the formation of this candlestick, the bearish move reversed and a bullish trend begun.

So, the bullish hammer candlestick was a signal that the bearish trend is coming to an end.

All the other three candlesticks were formed at a time of an uptrend.

They all acted as a signal that the current bullish trend will continue for some time.

So, how do you trade this pattern?

Here is how…

Entry Point

The best time to enter the market is when the next candle manages to break the high of the hammer candle.

Consider the chart given below…

bullish-hammer-candlestick -pattern

The above chart shows the point at which you should enter the market when trading the bullish hammer pattern.

The entry point has been marked in green on the chart.

This comes after the next candle breaks the high of the candle.

From the chart, a bullish move begun immediately after the formation of the hammer candlestick.

A trader who had entered a long position will benefit from the subsequent rise in the price of the forex pair.

Stop Loss

After entering the trade, you should not leave it unprotected.

You need to protect your trading account from being wiped in case a market reversal happens.

This calls for you to place a stop loss order to help you exit the trade automatically immediately this happens.

The best position to place the stop loss is just at the low of the hammer candle.

The market may trigger the entry point, but more buyers may fail to enter into the market, which is an indication that the market may need to go lower to look for more buyers.

This will result into a consolidation period in the market

This is an indication that the stop loss should not be placed too close to the entry point, otherwise, it will be triggered unnecessarily and make you exit the trade prematurely.

Consider the chart given below…

Hammer-pattern-stop-loss-placement

The above chart shows the position where you should place your stop loss when trading the bullish hammer candlestick.

This position has been shown by a small, red, horizontal line marked as Stop Loss.

The stop loss has been placed a distant from the entry point to prevent it from being triggered unnecessarily.

If the market reverses and begins to move in a bearish direction, the stop loss will be triggered and you will automatically exit the trade.

This will save you from incurring a loss.

Profit Target

There are different ways through which you can exit the trade.

You can choose to close the trade on the close of the candle if the trade is in profit, or use a trailing stop loss, or target resistance and support levels.

The use of a trailing stop loss is recommended.

The reason is that it keeps on shifting its position whenever the price moves in a direction that favors you.

After each move, the trailing stop loss locks in the profits that you have earned so far, and in case a market reversal occurs, you will automatically exit the trade.

This gives you an opportunity to earn more profit provided the market keeps on moving in a direction that favors you.

#2: The Shooting Star

The shooting star pattern is a bearish signal that acts as an indication that there are high chances of the market moving lower than higher and it is normally formed on down trending markets.

See it as the opposite of the hammer pattern.

Consider the figure given below…

shooting-star-candlestick-pattern

The above figure shows how the shooting star pattern looks like.

It is characterized by a long upper shadow/wick, a small real body near the low of the day, and little or no lower shadow.

This type of candlestick is formed at the top of an uptrend.

The pattern acts as an indication that the buyers are pushing the market to a new high.

However, they are not strong enough to stay at the high, hence, they choose to bail on their positions.

Due to this, the market falls lower, causing sellers to step into the market.

Both the open and the close price levels should be in the lower half of the candle.

It’s possible for the close to be above the open but a strong signal is sent when the close is above the opening price level.

Consider the chart given below…

shooting-star-candlestick-pattern

The above chart shows the formation of the shooting star pattern on the price chart of a forex pair.

The shooting star pattern is the red candle pointed to by a black arrow on the chart.

As you can see, the pattern has been formed on the top of an uptrend.

The formation of the shooting star pattern was a signal that the bullish move had come to an end.

The reason is that the shooting star candle marked the beginning of a bearish move.

When you analyze the open, high, the close, and the low of the pattern, it suggests that a move lower is most likely to occur.

And for sure, a move lower followed the formation of the chart pattern.

However, this is not always the case, hence, you have to trade it carefully.

Here is how to trade this pattern…

The Entry Point

The best position to enter the market is once the market manages to break the low of the shooting star candle.

Consider the chart given below…

shooting-star-entry-pattern

The above chart shows the position at which you should enter the market when trading the shooting star pattern.

The entry point has been shown using a green arrow marked as Entry Point.

This is the point at which the next candle managed to break the low of the shooting star candle.

This acts as an indication that the current bearish move may continue for some time, hence, it is time for you to enter a short position.

The bearish move continued for some time after the formation of the shooting star, hence, any trader who entered a long position will make a profit.

Stop Loss

The ideal position to set your stop loss is just above the shooting star pattern.

However, make sure that the stop loss is placed at a distant to prevent it from being triggered unnecessary.

The price may move a bit up to look for more sellers, and this will result into a consolidation period.

If the stop loss is placed too close to the shooting star candle, it will be triggered unnecessarily and you will exit the trade prematurely.

Consider the following chart…

shooting-star-entry

The above chart shows the position at which you should set your stop loss when trading the shooting star pattern.

This position has been shown using a red horizontal line marked as Stop Loss.

A closer look at the chart shows that the stop loss has been placed a distant enough from the shooting star.

This gives room for the occurrence of a price consolidation so that the stop loss is not triggered unnecessarily, causing you to exit the trade when it is too early.

If the price makes a reversal and begins to move in a bullish direction, the stop loss will be triggered and you will exit the trade automatically.

This will protect your profits from being wiped out of your trading account.

The Profit Target

There are different ways through which you can exit the trade.

For example, you can exit on the close of a candle if the trade is in profit, using a trailing stop loss, or by targeting the support and resistance levels.

Using a trailing stop loss to exit your trade may help you make more profit since it will keep on shifting its position whenever the price moves in your favor.

The shifting will lock in the profits that you have earned so far, and in case the market reverses, you will automatically exit the trade.

Your profits won’t be wiped out.

#3: The Harami

The harami candlestick is considered to be a reversal pattern.

It sends the signal of indecision in the market and is mostly used for breakout trading.

It can also be referred to as an “inside candle formation” since one candle is formed inside the previous candle’s range, from high to low.

It is made up of two patterns.

It can be bullish or bearish.

It is formed after a downtrend.

A bullish harami is a signal that a bearish trend is coming to an end.

Whenever you see it on your chart, just know that the price can reverse anytime into a bullish trend.

You can then take the right action, which is to exit your short position and enter into a long position.

A bearish harami on the other hand is a signal that a bullish trend is coming to an end for a bearish trend to begin.

It is formed on an uptrend.

Anytime you see it on your chart, just know that the market is about to reverse.

You can then take the right action, which is to exit your long position and enter into a short position.

Consider the figure given below…

harami-candlestick-patterns

The above figure shows how the bearish harami and the bullish harami patterns look like.

The bearish harami is formed when the high to low range of the seller’s candle is formed within the high and the low range of the previous buyer candle.

Since there has been no continuation to create a new high, the bearish harami sends the signal of an indecision in the market which can cause a breakout to occur in a bearish direction.

The bullish harami is formed when the high to low range of the buyer candle is formed within the high to low range of the former seller candle.

Since there has been no continuation to create a new high, the bullish harami is an indication that there is an indecision in the market and this can cause a bullish breakout to occur.

the-harami-pattern

The above chart shows the formation of the bullish and the bearish harami patterns.

These two have been shown by small, black, horizontal lines that have been marked as Bullish Harami and Bearish Harami.

So, how can you trade the bullish harami?

Let me show you…

First, you have to identify the bullish harami pattern, which is characterized by a buyer’s high and low range that is formed within the high and the low range of the previous seller candle.

Next, enter the market one pip above the high of the previous candle.

Your trade should remain protected, hence, you have to set a stop loss.

The ideal place to set your stop loss is one pip below the low of the previous candle.

This way, your profits will remain protected from being wiped out in case the market makes a reversal.

Placing the stop loss one pip below the low of the last candle will also leave room for your trade to breathe.

Use a one-to-one reward to risk when setting the profit target, meaning that you should target the same amount of pips that you are risking from the entry price to the stop loss price.

In case the trade isn’t triggered by the open of a new candle, simply cancel the order.

However, if the trade is triggered, just leave it in the market until you reach your profit target or until the stop loss order is triggered by a market reversal.

Consider the chart given below…

Harami-pattern-stop-loss

The above chart shows how to trade the bullish harami chart pattern.

The entry point has been shown in green and marked as Entry Point.

This has been placed just above the high of the previous candle.

A stop loss order has been added to protect the profits earned by the trader.

The stop loss has been added just below the low of the last candle.

This has been shown using a small, red line marked as Stop Loss.

The profit target has been set above the entry point and shown in black line marked as Profit Target.

If the opening of the next bar does not trigger the order, feel free to cancel the order and look for another trade.

However, in our case, the price kept on moving in a bullish direction even after hitting the profit target.

This means that we are sure that the order was triggered.

After hitting the profit target, the trader will exit the trader, hence, he will miss out on making additional profits.

That’s why it’s recommended that you use a trailing stop loss instead of setting a profit target.

It shifts its position whenever the price moves in a direction that favors you.

This will lock in the profits that you have earned so far so that they are not wiped out in case the market reverses.

The stop loss order was set a pip below the low of the previous candle.

This will prevent it from being triggered unnecessarily by price consolidations, which may cause you to exit the trade when it’s too early.

#4: Forex Price Action Scalping

Forex traders have access to a variety of price action scalping strategies.

However, trading setups from this strategy require more filters since the trader is required to take multiple short-term trades many times in a day.

One of the best filters is to find the markets that are in a trend.

This filter helps forex traders to determine the participants who are in control of the market, whether the bulls or the bears.

You can use moving averages (MAs) for this.

The moving averages are technical tools added on top of the price to reflect the price behavior.

You can choose the period that you want for a moving average.

Note that you can add multiple moving averages, each representing a different period on the same price chart.

Since your goal will be to find short term moves, use faster moving averages like 20-period and 50-period moving averages.

These will help you get clear insights into the behavior of the price.

Consider the chart given below…

Hammer-shooting-star-pattern

The above chart shows the 20-period and the 50-period moving averages added to the price chart of a forex pair.

Other than the two moving averages, two chart patterns have been identified on the chart, the shooting star and the hammer candlesticks.

The two have been shown using black arrows and marked accordingly.

The shooting star pattern was a signal that a bearish move is about to begin.

So, it’s the right time for the trader to enter a short position.

If the trader was in a long position, he should leave immediately, otherwise, he may incur a loss.

The hammer pattern was a signal that a bullish move is about to begin.

If the trader was in a short position, it’s time to exit and enter a long position, otherwise, the trader may make a loss from the subsequent price increase.

Conclusion:

This is what you’ve learned in this article…

  • Price action trading involves the use of pure price behavior to make trading decisions.
  • The trader analyzes the past behavior of the price of the forex pair so as to anticipate the future behavior of the forex pair price.
  • This trading technique saves the trader from using technical indicators which obstruct and leave a small space for the price.
  • This way, traders get a clear view on the behavior of the forex pair price.
  • Technical indicators are derived from the underlying price behavior.
  • This means that the use of technical indicators only means adding more variables to your trades.
  • There are different strategies that you can use when trading using this trading technique.
  • It’s up to you as a trader to master these trading strategies and put them into action when running your trades.