Understanding Price Action Trading For Beginners: Traders use a wide range of strategies to take positions in securities that can generate profits while trading. There are a number of indicators used by traders to take positions in securities.
However, price action trading is a different approach as it is not based on any indicator but on the movements of securities to find entry and exit positions. Let’s get started with this article on Price Action Trading for Beginners. Continue reading to learn more.
What Is Price Action?
Price action is a trading technique that helps a trader to read the markets and take trades based on recent and actual price movements. It is an approach to predicting the price based on previous market movements. Price action trading is more suitable for intraday traders and swing traders.
What Does Price Action Tell You?
Price action can be seen and interpreted using charts that plot prices over time. Traders use different chart compositions and time frames to improve their ability to spot and interpret trends, breakouts, and reversals. Many traders use candlestick patterns instead as they help better visualize price movements by displaying the open, high, low, and close values in the context of bullish or bearish sessions.
In addition to the formations on the chart, many technical analysts use price action data when calculating technical indicators. The goal is to find order in the sometimes seemingly random movement of a price.
For example, a descending channel pattern formed by applying trend lines to a price action chart may be used to predict a potential breakout since the price action indicates that the bulls have attempted to break out of the channel on several occasions and have gained momentum each time.
Price Action Trading For Beginners Strategies
Price action strategies involve reading the psychology of market participants by watching price changes in the market. Here are some of the most reliable price action setups in the market:
1. Long Wick Candles
A candle in the market is depicted by a body and wicks. The body is the distance between the opening and closing prices, while the wicks represent the extremes (the high and low achieved). Long wick candles are a favourite for price action traders.
For instance, a candle with a long upper wick shows that in that period, buyers attempted to push prices higher by some distance, but sellers resisted the attempt and even managed to return prices close to the opening price.
With this information, a price action trader can back the sellers again in the succeeding period or can wait for confirmation. Either way, long-wick candles are a must-watch for price action traders.
2. Inside Bar After Breakouts
When breakouts occur, the challenge for traders is if it is genuine or fake. An inside bar breakout pattern is when one or more candles trade within the highs and lows of the large breakout candle, hence the name ‘inside’.
The psychology for the setup is that market participant are unwilling to give back any breakout gains and are ready to defend and back the new trend going forward.
3. Trendline Trading
Trendline trading involves the use of lines to establish the optimal points to enter trades in trending markets. In an uptrend, a trendline is drawn from a particular swing low to a subsequent one and then projected into the future.
Retracements to the trendline represent an ideal price point to join the uptrend. Horizontal trendlines can be used in ranging markets to map out support and resistance areas.
How To Trade With Price Action Trading Strategies?
It really boils down to learning to trade price action chart patterns from important levels in the market. Due to the repetitive nature of market participants and the way they react to different economic variables, the price action of a market tends to repeat itself in various patterns.
These reoccurring price patterns or price action setups reflect changes or continuations in market sentiment. By learning to spot price action patterns you can get clues as to where the price of a security will go next.
The next major step in trading price action is to mark the key chart levels where the price has taken support or resistance multiple times and look for candlestick patterns at these levels for confirmation.
No matter which strategy or system you end up trading with, having a good understanding of price action will improve your trading. Price action trading has the potential for making good profits but it is up to the individual to clearly understand, test, select, decide and act on what meets the requirements for the best possible profit opportunities.
That’s all for the article on Price Action Trading For Beginners, we hope you enjoyed reading the post. Happy Investing!
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