Price Action is a type of trading that allows traders to observe and study the current trading market. This will help you predict market trends and make assumptions/decisions based on current (and real) price movements.

Price action trading is the purest form of trading that eliminates any turbulence. It's not predicting, it's about reading the trading market.


SO IS PRICE ACTION TRADING BETTER THAN OTHER TYPES OF TRADING?

It is hard to say! Determining whether one trading is better than the other depends on what type of trading suits your personality.

Another element of trading is capital management. It is not how many trading systems you have, but how you use it.

However, it is undeniable that Price Action trading is probably the easiest to grasp at first, but also for that reason that is the most difficult to master. Here are the key points that a price action needs to address in order to be proficient in price action trading:


SUPPORT AND RESISTANCE

Support is the level at which demand is very hefty, so it does not allow prices to fall.

Resistance is a level where buyers are hesitant to continue buying because the price has gone too far and is too expensive.

Here is an example of the H4 bracket chart of the EURUSD pair.
As you can see we have a support line, a resistance, and a support area turned into resistance in the middle of the chart. In this example, we have 3 clearly defined levels that act as signals for price action traders. Usually, when support and resistance are used, traders use additional candlesticks as confirmation signals. Let's find out what candles are and how they are used with price action!


JAPANESE CANDLES

So, what are candles?

The candle is a thin vertical line, visible for the trading range of the time period. The wide bar on the vertical line indicates the difference between the opening and closing prices.


In the example above, the white candle in the left corner shows the bullish candlestick. In the right corner, there is a black candle. denotes a bearish sentiment.

There are many different types of candles. They are used by price action traders to read the market and make better trading decisions. Such as:
In the example above, we have two of the most popular candlestick patterns - up / down engulf and inside bar. What price action traders are looking for is a confirmation signal with support/resistance levels.

As you can see from the example above, the first bearish engulfing candlestick pattern appeared just below the resistance zone. After that, prices started to go lower and lower.

On the other side, the pattern inside bar forms above a support level. The combination of candlesticks and support and resistance is probably the most famous technique for rigorous price action trading.

Some traders claim that indicators can improve trading results, but for them, they can be just a great addition, nothing more. So, are indicators really necessary after all?


TECHNICAL INDICATOR

While price action trading does not acknowledge the use of indicators, it is important that we still have to mention a few of the well-known indicators in order to take a more objective look. Some of the most popular trading indicators are MACD, RSI, Stochastic, Bollinger Bands, ATR.


TIME FRAME

The timeframe plays an important place in the mindset of every price action trader. As a rule of thumb, the higher the time frame, the more accurate the signal. Another very common saying is that the lower the timeframe, the more noisy the signal, the less accurate it is.

In my opinion, the best way to use timeframes in action is confluence. In other words, use a timeframe to get the signal and a lower timeframe to find a more accurate entry point. Usually, people often combine the Daily and H4 framework.


IS THE INSTRUMENT YOU TRADE IMPORTANT?

One of the more common questions among beginner price action traders is which tool is right for newbies?

Whether you start with EURUSD or AUDUSD doesn't make a huge difference. For some trading methods, it is easier to pick an instrument and master it. But for Price Action traders, what is more, important is not the instrument, but the trend and the confirmation of the price action.

You need to wait for the right setup at the right time. This comes with practice, but if you are just starting out, you should trade on a Demo account before switching to a real account!

Don't forget, the trend is the trader's friend, so one of the first factors to successful trading is to identify the main trend first and try to stay with it!


TREND IDENTIFICATION

The best scenario for entering into a profitable trade would be:
  • There is an established trend.
  • There is a correction to the previous support/resistance level.
  • Get price action signals.
Imagine the above points with a chart of GBPUSD:

And now, when zoomed in, you'll see more clearly where the price action confirmation comes in:

You can clearly see in the figure above that there is an Inside Bar pattern that provides confirmation for trend trading. After this pattern appeared, the price began to fall and go lower.


SO WHEN THE MARKET GOES SIDEWAYS, WHY?

Statistics show that trading markets go sideways about 80% of the time. So one thing to keep in mind here is that if you are trading in a sideways market, your target should be much lower and more realistic.

Ideally, you should always find ways to trade the trend.


WILL PRICE ACTION TRADERS USE OTHER TOOLS TO MATCH PRICE ACTION?

Price Action trader will have different trading techniques. It's hard to really narrow price action down to just black and white squares. Some of the more popular techniques are:
  • Use price action analysis in conjunction with Fibonacci levels.
  • Use price action with moving averages.
  • Price action traders also use another tool and level, also known as a pivot point.

PATIENCE WILL BE REWARDED

For price action traders, it is important for them to be patient. Trading opportunities will always be there, but trading capital is your scarce resource and your only asset. That's why the best way to win this game is to be patient!


THE ROLE OF CAPITAL MANAGEMENT


There's no denying the crucial role of Capital Management in successful trading!

Two traders who use the same trading system and have different approaches to capital management are likely to have significantly different results. As a general rule, a trader should never risk more than 2% of his or her capital on a trade. The other important thing is the time you spend on profitable trades and the speed at which you get out of losing trades!


EPILOGUE

Trading is a long journey. The purpose of this article is to summarize important topics from the world of price action trading. If we had to summarize price action transactions in 5 bullet points, they would be:
  • Clean up the chart.
  • Support and resistance.
  • Candle.
  • Tendency.
  • Time frame.