Price action is one of the trading methods pursued by many traders. However, understanding Price Action correctly is not easy. For traders who are new to price action, it will be very easy to get confused because in general, if you do not know how to analyze price action, it will be very confusing and highly subjective.

In this article, I would like to guide you traders with a few techniques applied to Price Action analysis. These techniques are both simple and can help traders better understand Price Action on charts.

A little reminder about price action trading

Price action trading or price action trading is a trader based on reading price charts to predict the future direction of the market without resorting to technical indicators. However, there are a few simple tools that are still used such as trendline, fibonacci,... but mainly candlestick charts.

Understanding the market's price action

One of the key things in understanding market price action is understanding the current market structure. And here is a simple step to help traders understand the structure of the market and then combine them to trade price action.

Step 1: Supply and demand zone – important support and resistance level

The first step is to mark important price zones on the chart. Specifically, it is the support resistance level. In these areas, a large number of buy and sell orders exist. So they can also be understood as supply and demand zones.

The identification of key support resistance levels should be done on large timeframes such as D1, W1. You can find highs and lows that have been tested and respected by price many times in the past and then draw a horizontal line to mark them. As shown below

In addition to horizontal support and resistance levels, there are also many other technical levels that you need to keep in mind. As:
  • Psychological support and resistance levels: for example, the round number area is one of the psychological price levels that many traders pay attention to.
  • Levels on Fibonacci Retracement.
  • Levels on the Pivot Point indicator.
  • Dynamic support resistance levels: this level can be determined by the moving average indicator.
  • Trend lines or price channels can also be used to identify support and resistance.
  • Support and resistance levels confluence: for example a trendline confluence with horizontal support and resistance. Confluence support and resistance levels are more important and stronger than independent supports.
Step 2: Market Trend

Our second step is to determine the direction of the market. Trade setups that are in line with the trend will have a higher probability of success.

For an uptrend, the market will have a structure that creates higher peaks and troughs than the previous peak and trough. And in contrast to the downtrend, the market will make the following peak and trough lower than the previous peak and trough. If the market doesn't move in one of two ways, the market is not trending, moving sideways or consolidating.

Once you have determined the direction of the market, you just need to apply trading techniques to follow that trend.

Step 3: Identify a chart pattern or candlestick pattern – Market Sentiment

The above 2 steps are for you to grasp the overall picture and structure of the current market. However, in order for you to participate in the market, you must understand the psychology of participants through identifying candlestick patterns and charts. You can then buy when you determine that the buyer has the upper hand, or sell when the seller is in control.

Candlestick patterns and price patterns can help you determine this. There are two types of patterns that are reversal and continuation patterns. Inside:

Reversal patterns include the following common patterns
  • Price reversal patterns: head and shoulders, bullish wedge in an uptrend or bearish wedge in a downtrend, double top, double bottom, triple top, triple bottom, triangle pattern...
  • Reversal candlestick patterns: pinbar, engulfing, morning star, evening star, dark cloud cover, rail road track,....
Continuity patterns include the following common patterns
  • Continuity price patterns: rectangle pattern, bullish wedge in a downtrend or bearish wedge in an uptrend, flag pattern, triangle pattern, pennant pattern, ..
  • Continuity candlestick pattern: 3 black crows, 3 soldiers, marubozu,..
Combine 3 steps together

Take a look at the EURAUD H4 chart below, and we will apply it step by step to each smooth chart we trade:

Step 1: Technical resistance levels are identified by the yellow horizontal resistance on the chart combined with the red trendline creating a strong support level.

Step 2: The current market trend is bullish. However, at the end of the Uptrend appeared a bearish reversal head and shoulders pattern, showing that the market has a correction. At the same time a bearish structure appeared.

Step 3: A rising wedge pattern appears in an uptrend (reversal pattern) showing that buyers are not strong enough to push the price higher. After the wedge is broken, the right shoulder of the head and shoulders pattern is formed. The neckline breakout presents a nice short position opportunity. Also, a strong bearish candle (marubozu) confirms the sell setup and profit target is right at the confluence support identified in step 1.