The struggle of many traders within the active trading world is rooted in a sea of complexity, overwhelmed by the indicator and tool options. That challenge is understanding how to read price action without getting caught up in too much complexity.
Price action trading is a robust and simple trading strategy that evolves in relation to the motions of an asset over time; it is anything but purely stringent. This gets rid of excessive clutter from indicators and tools and is purely dependent on raw data of price initiated into a trading decision. The concept is based on the belief that all market information gets incorporated into price characteristics.
In this article, we will show you three killer price action trading strategies to help improve your trading skills. With these strategies, you’ll be better equipped to make good decisions and capitalize on market opportunities. The strategies that follow will present the novice trader with a solid foundation and the experienced trader seeking refinement with new techniques for their approach.
What is Price Action Trading?
Price action trading, on the other hand, is rooted in analyzing the price of an asset independent of extraneous indicators or trading tools. It, instead, makes use of raw price data driving the trading acts. The stick or thrust of price action trading lies in the following core assumptions:
- Indicators are actually redundant as price movements themselves are enough to make a trading decision.
- Consistency of Behavior: Traders tend to behave rather consistently, regardless of prevailing market conditions; therefore, price movement is an information-rich characteristic.
Key Concepts in Price Action Trading
- Price Movement: The amount by which the price of an underlying asset changes within a particular period, determined by the imbalance between buyers and sellers.
- Market States: Second, the price action trader must understand the various market states, which include trends, consolidations, and chart patterns.
TOP 3 Price Action Trading Strategies
1. Trend-Following Strategy
What is Trend Following?
Trend following is based on trading in the direction of the general market trend. Knowing and following the trend can let traders make profits on extended price movements.
How to Implement the Trend Following Strategy:
- Identify the Trend: Look for a series of higher highs and higher lows, which define a bullish trend, or lower highs and lower lows that define a bearish trend.
- Look for Pullbacks: Take entries during pullbacks or retracements within the context of the existing trend. Pullbacks happen when price makes a temporary move in the opposite direction of the trend before it continues its original path.
- Stop Loss and Take Profit: A stop loss to place below the swing low in case one is going long or to look above the swing high in case one is short. Plot your take profit target based on your desired ratio of risk to reward, stating at least a 1:2 or 1:3 ratio.
- Example: In an uptrend, wait for a pullback to a support level. Once the price then shows signs of bouncing back, enter your buy order with stops below the support level. Target higher resistance levels for your take profit.
2. Breakout Trading Strategy
What is Breakout Trading?
Breakout trading takes trades on the occasion that the price of a trader breaks out of a consolidation zone or helps catch a new trend that starts after the breakout.
How to Execute the Breakout Trading Strategy:
- Spot Consolidation: Look for a period in which the price is range-bound or consolidating; it shows a period of massive indecision in the market.
- Wait for a Breakout: Open the trade when the price moves above a resistance mark or below a support mark.
- Setting the Stop Loss and Take Profit: The stop loss has to be a bit outside of the consolidation zone. Your take profit target, on the other hand, is determined by the breakout direction and usually your risk-to-reward ratio, which hopefully you have at least 1:2.
- Example: If it is consolidating between support and resistance, you will need to place a buy order once the price breaks above the resistance level. Place the stop loss below the consolidation zone and target profit based on the direction of the breakout.
3. Chart Patterns Strategy
What are Chart Patterns?
Chart Patterns are the formations, depicted by changes in the price movements on a chart. It can indicate either a possible reversal or continuous trend. Some commonly used chart patterns include classic ones, such as the head and shoulders, triangles, candlestick patterns like the doji, or the engulfing pattern.
Implementing the Chart Patterns Strategy:
- Pattern Recognition: Recognize classic types of head with shoulders pattern, flags, pennants, and candlestick configurations, which can predict what prices may do next.
- Confirm the Pattern: Make sure the pattern is formed and confirmed by more price action signals.
- Execute the Trade: Take positions as soon as the pattern gives the signal. For instance, sell beneath the pennant in order to go short in the event of a bearish pennant, while leaving stops above the pattern.
- Sample: In a bearish pennant, after the initial throbbing falling, the price consolidates in a pennant shape. That is when the investor will place in a sell order just below the pennant, having his stop-loss line above the pattern. In this case, valuating want to happen on the potential move distances as determined by pattern.
Conclusion
Price action trading is a simplified way to trade, taking its view solely from price action. The use of those three killer strategies will empower you: trend following, breakout trading, and chart patterns in your trading will lead one to great decisions.
To become proficient in price action trading, you would need to practice regularly and study different market conditions. In fact, the recognition of trends, consolidations, and chart patterns will be something that will become more natural to you in due time and from experience.
Price action trading is powerful, but awareness should not totally disregard economic events that affect price movements. Many economic reports can easily swing the market into a high volatility level, so it’s better to use price action with the understanding of such market fundamentals.
By integrating these strategies into your trading routine and continuously refining your skills, you’ll be well-equipped to navigate the complexities of the market and capitalize on profitable opportunities.
