Price action trading strategies have been around for quite some time, and for good reason. But I find that many traders tend to confuse the term for what it really is.
So what is it, really, you ask? Let’s find out.
To truly understand the term “price action trading strategies”, we need to first break down each term. After all, it’s just a combination of the two terms, “price action” and “trading strategies”. So let’s start with price action.
What is Price Action?
I’ve covered price action in other lessons, so I’m not going to belabor the topic too much.
The basic idea behind price action is that we’re studying how the market moves relative to previous price movement.
Every day, week and month, the Forex market is paving its own road. This road can become our road map to future price movement, if we know how to read it. By studying the highs and lows of these previous days, weeks and months, we can develop a general idea of what price may do next.
Here’s a great example of how price can react to certain price action levels.
Here’s an AUDCAD daily chart. Notice how these key levels can act as boundaries. This can become our road map to future price movement, if we know how to properly identify these levels.
price action levels on audcad chart
It should be immediately apparent how these levels can be advantageous for us traders. I should note that not every chart will line up this perfectly. Thankfully we don’t have to trade every chart. That’s the great thing about the Forex market – we have a ton of currency pairs to choose from. This allows us to only trade the pairs that have the most obvious price action levels.
Why Does Price Action Work?
As technical traders, it’s important for us not to get too distracted with why something works. When I first started trading Forex in 2007, I was constantly trying to figure things out. Technical, fundamental, you name it. I would reverse-engineer anything I could get my hands on.
Having been through that experience, I can tell you that a far better use of your time is to practice identifying these levels on your charts. Let’s leave the in-depth analysis to the fundamental traders. 😉
But I suppose it couldn’t hurt to at least know the basics. And it may prove beneficial for some, so let’s briefly touch on why price action works.
The reason price action works, and works well, is because everyone is looking at the same chart, with respect to the same time frame of course.
A daily chart of EURUSD looks the same on my chart as it does to every other trader around the world. Statistics show that about $4 Trillion changes hands every single day in the Forex market. Now imagine how many eyeballs that works out to, all looking at the same chart. A lot!
As an example, those who use indicators (without using price action levels) can’t say the same because there are literally thousands of different indicators and indicator combinations. The MACD for example may only be used by 5% of those trading the same EURUSD daily chart. Of that 5%, maybe just 0.07% use the MACD combined with RSI.
You get the point, the variations are endless. Because the variations are endless, so is the outcome. In other words, the results aren’t as consistent as using price action levels, which are the same for everyone.
I will say that some brokers may show different open and close prices, but typically those differences are only a few pips. The major exception being the brokers who follow a New York close (5 day chart). Even then a key horizontal level or trend line on a specific chart will look the same as it does with any other broker.
Why does this matter? It all comes down to psychology. Have you ever been sitting in traffic and witnessed one driver get so frustrated that they pull out on to the shoulder to bypass the other cars? What happens immediately after? Other cars begin to follow their lead, right? This is because the majority of humans are followers, not leaders.
The same rule applies to trading Forex, or any market with decent liquidity. If a large percentage of traders have the same levels (or similar) on their charts, the odds of price action respecting those levels (traders following other traders) becomes infinitely greater. Those traders are just following the pack. And that’s okay! The Forex market is one place where it pays to be a follower and not a leader.
It’s important to note that price action levels work best in markets with high liquidity. This is why it works so well in the Forex market. Because of its high liquidity (highest in the world in fact) the Forex market produces some of the best price action levels of any financial market.
That about covers why price action works. Not so “brief” after all, I suppose. I must have had some pent up “reverse engineering withdrawal” since I haven’t done it for so long. Anyway, now that you have a better understanding of price action and why it works, let’s take a look at the term, trading strategies.
What is a Trading Strategy?
A trading strategy is a fixed plan with one goal – to achieve the most profits while using the least amount of risk. At least that’s the definition of a “good” trading strategy. Some examples of trading strategies include:
- Pin Bar
- Inside Bar
- Position trading
- Swing trading
- Momentum trading
The list goes on for miles, which is why so many traders spend years trying different strategies before they find one that works. Obviously I’m partial to pin bars and inside bars, which are based on price action. But there’s a simple reason why I’ve spent so much time and energy teaching price action trading strategies, because they just plain work!
Think of the trading strategy as the signal you look for before entering a trade. The criteria that must be met in order for you to put money at risk.
Every good trading strategy should be:
Definitive – The trading strategy should be precise and definable
Consistent – Consistently putting the odds in your favor
Verifiable – Every good trading strategy should have a proven track record
Objective – A solid trading strategy is based on what the market is doing, not what you think it should do
That about covers trading strategies. If it sounds straight forward, that’s because it is. Hey, nobody ever said this stuff was rocket science 😉
At this point, we’ve discussed price action and why it works. We’ve also covered what a trading strategy is and what a good strategy should consist of. Now it’s time to put it all together..
Price Action Trading Strategies
The price action trading strategies that I use and teach in my price action course consist of support and resistance levels (price action) combined with pin bars, inside bars and “pinside” bars (trading strategies).
Think of price action as where you should look for trades and your trading strategy as what you should trade
Here are two great examples of where and what we should be trading when it comes to price action trading strategies.
Pin bar price action trading strategy
Inside bar price action trading strategy
Although the combination of price action levels and the two trading strategies above are powerful, this shouldn’t be your only criteria for entering a trade. There are
several other confluence factors that come into play. However the price action trading strategies as illustrated in these two charts are a great place to start
Hopefully this lesson has helped to clarify any misconceptions about what price action trading strategies are and how they can be used. Just remember that every good price action trading strategy should be:
Definitive – The trading strategy should be precise and definable
Consistent – Consistently putting the odds in your favor
Verifiable – Every good trading strategy should have a proven track record
Objective – A solid trading strategy is based on what the market is doing, not what you think it should do
Your Turn
Do you use price action trading strategies? If not, do you think this style of trading could be advantageous? Feel free to leave your feedback in the comments section below. All comments on the subject are welcome!