Traders have different ways of analyzing the markets to find trading opportunities. Some make use of fundamental analysis, which is the study of economic variables and other factors that may affect the intrinsic value of the security, but many of us focus on technical analysis and simply analyze the historical price action to know when to buy or sell the security
What does price action analysis mean?
Price action analysis is the study of historical price movement alone — without using technical indicators — to identify patterns that indicate trading opportunities in the market. It is a method of analyzing a market by focusing solely on the “raw” price movement.
Trading based on price action analysis implies using an indicator-free price chart and basing all your trading decisions on the price patterns that signal trading opportunities.
So, if you want to practice price action trading, the first thing to do is to strip your charts of all indicators and get a “clean” price chart with only the price bars in a color you like. Here’s an example of my daily chart setup on the GBP USD:
Now, compare it to the price chart below, which is covered with some of the most popular indicators traders use.
You will probably agree that it is easier to trade with an indicator-free chart. To hide the natural price action of a market with messy and confusing indicators makes no sense.
Why use price action analysis
The price bars reflect all the factors — economic, sentiment, and technical variables — that can affect the price movement of the security. Since everything is reflected on the price chart, you may be able to predict where the price will move next by studying the previous and present price movements.
So, instead of trying to analyze many economic variables each day — which is nearly impossible anyway —you can simply learn to analyze the price action and use the various price action patterns to identify trading opportunities. The interesting thing about price action analysis is that it can be used to trade any financial market since it only makes use of the “core” price data of the market.
While some technical traders like to use different indicators in their analysis, we, price action traders, don’t bother much about indicators, because all indicators are derived from previous price movements. We know how to study the raw price movements to spot our trade setups, instead of trying to confuse ourselves with messy secondary data.
But I don’t say that we should not use indicators at all; in some situations, they can be used as confluence factors.
What price action setups do you use?
There are many price action patterns traders use, such as the hammer, shooting star, engulfing bars, etc. However, we don’t need to trade all of them. All we need is a handful of effective price action patterns that offer high-probability trade setups.
From all my years of trading the markets, I have learned the price patterns that provide an edge in the markets. I have used them to create a price action strategy that offers high-probability entry and good exit. However, out of respect for my paid members, I won’t share them here. You can get them in my trading course.
Now, let’s consider a very common price action pattern.
Take a look at the chart below. You can see the market was trending down and then reversed after the formation of the hammer pattern, also known as the pin bar price action setup. The hammer pattern is a bullish reversal setup that tends to work quite well. It shows that the initial selling pressure has been overcome by buyers who forced the session to close around the level it opened. Notice that the market reversed after the formation of this pattern. However, I don’t recommend trading this pattern alone; other factors need to align for the trade setup to be valid.
How to trade with price action setups
The right way to trade the price action patterns is to have them form a confluence with other important factors in the market. Those important factors include the trend, key market levels (support/resistance levels), and maybe, some popular reversal chart patterns, such as double top/bottom, head and shoulder, and triple top/bottom. But I also look out for the footprints of institutional traders as they try to trap retail traders in a “false breakout move”.
Now, let’s take a look at that chart with the bullish pin bar again to see the confluence factors that are present. Take a look at the chart below:
You can see that the market was in a downward trend but, then, formed a clear double bottom, which is a bullish reversal chart pattern. The double bottom already shows that level is a support level — the price reserved at that level on two consecutive occasions.
So, we have the chart reversal pattern, the support level, and a bullish pin bar (which basically shows that the bulls are not only defending that level but are showing greater strength than the bears) at a confluence. These three factors are enough for an aggressive trader to make a trade.
But if you study the setup further, you would notice that other supporting factors would convince even the most conservative trader to make a trade. take a look at the chart below:
Can you see that the pin bar didn’t just bounce off the support level but actually broke it on a lower timeframe but got sharply rejected to form the pattern you see on this timeframe? Breakout sellers would have gotten trapped by that price movement — this is what we call the smart money breakout trap. You will learn more about this bank breakout trap in my trading course.
Going further, if you had attached the Bollinger Band to the chart, you would notice that the support level corresponded with the lower band. So, we can say that the pin bar also got rejected below the lower Bollinger band, which is another confluence factor. See the chart below:
In all, we have the following confluence factors for this trade:
- A double bottom pattern
- A support level
- The lower Bollinger band
- The smart money breakout trap
- A bullish pin bar price action that acts as the trade trigger
Please note that this is just an example of how you can trade with price action; it is not quite enough to make you consistently profitable. There is a whole lot you need to learn, but don’t worry; I am here to assist you all the way. With my trading course, you will learn all you need to achieve the trading success you desire, but you have to put in the effort to apply what is in the course. If you think you deserve to succeed in trading, revitalize your trading journey today with this trading course.