How to benefit from price action strategy

The price of any investment in financial markets is the most relevant, for any investor. May it be a share, commodity or currency pair, any shift in the price ensures either losses or profits. And for those traders whose focus remains on price, their requirement is to create price action strategies to garner the profits they desire.

A solid price action trading strategy will involve analysing the trending waves to decipher enter or exit positions. So, it is imperative to understand the mechanics behind price action and then create an effective strategy to be highly profitable.

Here, take a look at the techniques and indicators that can be used to benefit from the various price action strategies available. But before we go there, let’s understand what price action in trading is.

Price action in trading

In simple terms, price action makes an analysis of the performance of a particular security, be it shares, indices, commodities, or currency pairs, and anticipates how it might react in the future. For example, say you were trading an asset, and if your price action analysis predicts a rise in price, you are likely to take a long position, and if your analysis reads a drop in prices, you are likely to take a short position. To understand better price action trading, you need to learn to look at patterns and recognize key indicators that could affect your investments.

Why do forex traders prefer price action?

For those who practice forex trading, price action trading is extremely popular for a couple of reasons:

• The extremely liquid market allows forex traders to easily and quickly open and close positions.
• The forex market is constantly moving, and yet the market rarely experiences big highs and lows. This is perfect for new traders that want to try out forex trading with small trades before plunging to bigger trades.
• The market’s maturity ensures you can easily identify recurring patterns and trends.

The best indicators for price action trading:

Fibonacci retracements for support and resistance

Relative strength index (RSI) for momentum

Stochastic oscillator for identifying trend reversals

Strategies that can get you ahead

Price action trend trading

As the name suggests, price action trend trading is all about the study of trends. For new traders, this is a perfect trading tool and gives them an opportunity to learn from experienced traders who chase price trends when they occur.

• Open a ‘buy’ position to garner profits during upward trends (green)
• Open a ‘sell’ position to garner profits during downward trends (red)

Pin bar

Also known as the candlestick strategy due to its distinctive shape, the pattern of the pin bar represents the sharp reversal and rejection of a particular price, with the tail acting as an indicator to highlight the price range rejected. In a pin bar pattern, a price action trader watches how the price continues to move in the opposite direction to the tail and then makes a decision on what position (long or short) they need to make in the market.

Inside bar

In the inside bar, there are two bars – the inner bar and the outer bar. The chart pattern is designed to keep the inner bar smaller than the outer bar. As a two bar-strategy, it is used by skilled traders to predict if the inside bar is indicating a market consolidation or signals a shift in the market. The inside bar’s size and position stipulate whether prices are going up or down.

Steps to start price action trading:

Finding the right copy trading platform

Determining if the trader is legitimate

Making sure that you monitor your losses

Making sure that you monitor your losses

Making sure that you monitor your losses

Trend following retracement entry

Well, this price action strategy is as simple as it gets. All the trader is doing is simply following the existing trend. So, for instance, if the price is on a downward trajectory, with lower highs being consistently created, a trader might seek a short position and vice versa.

Trend following breakout entry

In this trend, the assumption is that when a price hike occurs, a retracement will likely follow. When the market moves beyond the defined support or resistance line, it is known as a breakout. This proves to be a signal to take a long position if a stock breaks above the resistance line or a short position if it goes below the support line.

A trading strategy is only as good as the person using it. Investors and traders have all shown the benefits of having price action strategies in place to make profits. But it is important to remember these chart patterns are indicators and require the trader to take into account fundamental factors, to have an impact on their trades.