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What is Price Action and its Trading Strategy

What is Price Action and its Trading Strategy

What is Price Action

Price action trading is a way that people use to understand how prices change in financial markets. Imagine it like watching the dance of prices on a chart over time. This method is used by regular folks who trade, and even by big financial experts who handle large amounts of money, like in hedge funds.


Think of "price action" as the movements of prices – how they go up and down. You can see this happening most clearly when lots of people are buying and selling stocks in a market. Price action is like the heartbeat of the market, continually moving.


What's interesting about price action trading is that it doesn't care about all the complicated stuff that can affect markets, like news or company reports. Instead, it looks closely at how prices have moved in the past. This is called "technical analysis." But what sets price action apart is that it doesn't use any fancy math or formulas. It's all about looking at what prices have done recently.


In simpler terms, price action traders only focus on the raw data the market provides – the price changes over time. They don't use any second-hand tools or numbers that come from this data.


By looking at the history of a market's price movement, especially the most recent 3 to 6 months, and paying some attention to earlier times, price action traders try to understand what's going on in people's minds when they trade. Every time someone buys or sells something in the market, it leaves a mark on the price chart. Price action traders study these marks to guess what might happen next.


In a way, it's like trying to read the thoughts of the people trading in the market just by looking at the lines and shapes on a chart. Experienced price action traders even say that this method gives them a unique understanding of the market's mood and helps them make profitable trades. They pay close attention to things like the highest and lowest points prices reach and certain levels where prices tend to stop and turn around.


In a nutshell, price action trading is all about watching how prices move over time, without getting distracted by all the complex stuff that can affect markets. It's like learning to read the market's mind by studying its history on a price chart.



What is Price Action Trading?

Certainly! Price Action Trading is a way of making smart decisions when you're buying and selling things. Instead of listening to the news or what people think, you look at how the prices of things have been moving.


Short-term traders, who buy and sell things quickly, really like using Price Action Trading. They look at how prices are going up or down and try to figure out when it's a good time to buy or sell.


To do this, they use charts that show how prices change over time. These charts help them see patterns and trends in the prices of things.


But here's the tricky part: There's a lot of information out there, like special patterns in the charts or lines that show trends. It can be overwhelming, and it makes it hard to decide when to buy or sell things.



How can I Use Price Action in Trading?

Price action trading is like a game of "ups" and "downs." Imagine you're watching a roller coaster. If it keeps going higher and higher and then a little lower but still higher than before, that's a sign it's going up. But if it starts going lower and lower, it's on a downward ride.


Now, traders who use price action pay attention to these "ups" and "downs" in the price of things they want to trade. They do this to figure out where the price might be going. It's a bit like predicting the weather but for prices.


For example, if they see that the price keeps reaching higher points and then dips a bit but not as low as before, they think it's probably going to keep going up. So, they might decide to buy when the price is low (but not too low) and set a limit to sell it before it goes too low again.


It's a strategy that helps them make smart choices when buying and selling things in the market. Just like a roller coaster rider wants to get on when it's going up and get off before it goes down too fast!

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How to Master Price Action Trading?

Price action trading may sound complicated, but it's all about understanding how prices in the market move. While it can be challenging, especially for newcomers, we've got some practical tips that can help you improve your price action trading skills. No need for complex strategies or special tools – just follow these eight simple tips, and you'll be on your way to becoming a better trader.


1. Learn Price Action from Scratch

Many beginners make the mistake of diving into price action trading by memorizing complex patterns. But that's not the best way to start. Begin by understanding what a single price bar tells you. This foundational knowledge will help you make sense of various price action patterns later on.


2. Watch Price Action Swings to Follow the Trend

There's no quick path to becoming a profitable trader. To get better at price action trading, start by observing market swings. Higher highs and higher lows indicate an upward trend, while lower highs and lower lows suggest a bearish trend. Even when you're not actively trading, keep an eye on these swings to practice and improve your instincts.


3. Watch Out for Support and Resistance

Support and resistance levels are crucial for price action traders. Support is like a floor where prices tend to bounce up, while resistance acts like a ceiling, preventing prices from rising further. Identifying these levels can help you make informed trading decisions.


4. Make Full Use of Price Action Patterns

Price patterns aren't just entry signals but also valuable information about market conditions. Learn to differentiate between high-quality and low-quality patterns. A good pattern can help you enter and exit trades while limiting your risk.


5. Exploit the Confluence of Price Action Signals

Trading setups become more powerful when multiple factors align. Look for confluence – the coming together of various supporting factors – to increase your chances of success. A setup with confluence is often too good to resist.


6. Make Use of Price Congestion

Don't just focus on price movement; pay attention to periods of congestion or inaction in the market. Market congestion can provide opportunities for profitable trades, but you need to learn how to recognize and utilize it effectively.


7. Differentiate Trading Rules from Discretion

If you want to improve as a trader, you need a set of rules to guide your decisions. This will help you track your progress and understand when it's appropriate to trust your instincts versus following your rules.


8. Do Not Forget Your Exit Strategy

While many traders focus on entry strategies, don't forget about your exit plan. Price action can help you determine when to take profits by using chart patterns, support and resistance levels, or signs of market trend changes.

Implementing all these tips at once can be overwhelming. Take it step by step, starting with one tip and mastering it before moving on to the next. As you gain experience and confidence, you'll become better at reading price action and integrating these strategies into your trading approach.



Top Price Action Trading Strategies

We have curated some of the top price action trading strategies for you which will help you get started in your trading journey:

1. Head and Shoulders Trade Reversal: Imagine a surfer catching a big wave. In the stock market, traders use a technique called the "head and shoulders trade reversal" to catch trends. When they see a pattern that looks like a head and shoulders, they know it's time to act. They can either buy when they see green uptrends (like catching a wave going up) or sell when they see red downtrends (like catching a wave going down).

2. Pin Bar: Think of a pin bar as a special-shaped candlestick. It's like a sign that says the price might change direction. If the pin bar has a long tail downside ( shape like alphabet "T" ), it's like a signal that says prices might go up soon.

3. Inside Bar: This is a two-bar strategy, like a pair of siblings. The little bar stays inside the big one. When this happens, it's like the stock market is taking a little rest. But sometimes, this can trick you into thinking the market will change. Skilled traders can figure out if it's just a rest stop or a real change.

4. Trend Following Retracement Entry: Here, traders simply go with the flow. If prices keep going down, they might sell. If prices keep going up, they might buy. It's like joining a parade and going in the same direction.

5. Trend Following Breakout Entry: Imagine a stock breaking through a barrier, like a runner sprinting past a finish line. Traders watch for this and decide to buy if the stock is going up or sell if it's going down after the breakout.



Advantages of Price Action Trading

Let's talk about why using price action trading methods can be really helpful, especially if you're interested in the Indian stock market. These methods have some good things going for them:

1. Simple and Popular: Price action trading is a favorite way to figure out and make trades in the Indian stock market. It's pretty well-liked.

2. Price Tells the Story: These methods work on a cool idea – they say that the way prices move already tells us everything we need to know about a stock. And if we understand this, we can guess where prices might go in the future.

3 .No Complicated Stuff: You don't need to be a math genius or understand fancy computer programs for this. Price action methods keep things simple. They don't rely on tricky indicators or computer algorithms.

4. Raw Data: Instead of getting caught up in all those complicated things, price action looks at the actual prices of stocks. This means you're just looking at the numbers that show how much a stock is worth.

5. Easy for Beginners: Even if you're just starting to learn about stocks and trading, you can get the hang of these methods. They're not too hard to understand and put into practice.

6. Efficiency Matters: Price action methods are built on the idea that the stock market is pretty efficient. That means prices already include all the important information.

7. Spotting Patterns: With these methods, you can pick out patterns and trends in how prices move. When you see these patterns, it might give you a clue about what prices will do next. And that can help you decide when to make a trade.

So, if you're interested in the stock market and want a simple way to figure out when to buy or sell stocks, price action trading methods might be your thing. They're like reading the story that stock prices are telling you



Disadvantages of Price Action Trading

Price Action Trading is a way of trading stocks or other things where you look at how the prices have been moving. It sounds good, but there are some problems with it that you should know about:

1. Confusing Signals: When you use Price Action Trading, it can sometimes give you different signals depending on how long you look at the price. This can be really confusing, especially for people who are new to trading. For example, you might see one thing that says it's a good time to buy, but someone else might see something else that says it's time to sell. So, you have to be really careful.

2. Wrong Signals: Price Action Trading doesn't always give you the right signals. Just like any other strategy, it can make mistakes. You won't make money every time you use it, so you have to be ready for that.

3. Not Many Chances: With Price Action Trading, you don't get a lot of chances to make trades. You have to wait for the perfect moment, and that doesn't come around very often. So, it's a waiting game, and you need a lot of patience.

4. Hard for Beginners: If you're new to trading or looking at charts, Price Action Trading can be really hard to understand. It's like trying to read a secret code in the way the prices move, and that's not easy.


So, when you're thinking about trading in the stock market or anywhere else, remember what famous investor Howard Marks said: "There's no magic formula for being on top." You have to figure out what works best for you. You can choose between Price Action Trading or another way of trading with indicators. It's all about what suits you and your style.



In conclusion, Price Action Trading is like learning to read the story that stock prices are telling you. It's a simple and popular method for understanding when to buy or sell stocks in the market. Here's the deal: Price action methods focus on the actual prices of stocks, not complicated math or fancy computer programs. This makes them accessible even for beginners.

But, like anything, it's not without its challenges. Price Action Trading can sometimes give confusing signals, making it hard for newcomers. Plus, you don't get many chances to make trades, so patience is key.

Remember, there's no one-size-fits-all strategy in trading. It's about finding what works best for you – whether it's Price Action Trading or another method with indicators. So, dive in, learn, and figure out your own way to ride the market's waves.


Que 1. Is price action trading profitable?

Ans: Yes, you can become a profitable trader using price action trading strategies as have many across the globe. However, learning price action is a time-consuming process and you must first focus on learning rather than earning to become profitable in the longer run.


Que 2. Is price action trading better than indicator-based trading for beginners in the stock market?

Ans: Since price action is a tough art to master and is time consuming, it has been seen that indicator-based trading is better for beginners in the stock market.


Que 3. How to read price action charts?

Ans: To read price action charts, you must focus on two important factors - price direction and volume. If the price of a stock is directing towards a bullish movement and the volume justifies the price movement, it means there is conviction in the market. However, if the price is in a bullish trend without volume, it means there is conviction among the investors.


Que 4.What is the best price action time frame for intraday trading?

 Ans: Generally, 15 minutes or 30 minutes are considered the best time frames for intraday trading using price action. However, advanced level traders have been seen using the 5 minutes time frame as well.

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