Trading in the financial markets is complex, and knowing price action trading strategies is necessary to be profitable. It does not matter whether you want to become a long-term or short-term trader or are interested in trading stocks or forex.
Knowing how to analyze price direction is one of the best ways to gain a foothold over others in the market. With every transaction index in the world based on price, experts believe that learning, understanding, and using price action can help you in your trading journey.
Price Action Explained
Price action analysis involves studying the past price movements of any asset to gain insights into its future market prospect. Traders utilizing price action trading methods delve into historical price data to detect potential signals indicating possible market movements for a particular asset.
Analyzing price bars or candlesticks is the most common analysis tool among the various indicators used in price action analysis. These graphical representations provide valuable information, including the opening and closing prices and the highest and lowest price levels reached within a given timeframe.
At the heart of price action trading is examining past data, which forms the foundation for making informed trading decisions. Price action delves into the intricate dynamics of all market participants, including buyers and sellers.
By diligently analyzing the behaviors and actions of other market players, traders can gain an edge over their peers regarding their trading strategies and choices.
What Is Forex Price Action Trading?
Price action trading can be readily used in any financial market, whether forex, stocks, shares, commodities, stock indices, or bonds. Traders can use the candlestick chart for thorough analysis and implement a trading strategy that suits them.
The forex market presents unique advantages for price action traders because it runs for 24 hours and has significant liquidity, leverage, and low spread. Consequently, it is no wonder that price action is the more popular of all financial market trade instruments.
The 4 Price Action Trading Strategies
To successfully use a trading strategy, users must meet the three fundamental requirements that will ensure the effective implementation of a method. They are the why, the how, and the what.
The “why” implies the reason why a trader is choosing a specific market, the “how” determines the manner a trader carries out a trade, and the “what” signifies the outcome of that particular trade. Once a trader gains clarity on the above, they can implement any of these four trading strategies:
- The Hammer Strategy
- The Shooting Star Strategy
- The Harami
- Scalping
The Hammer Strategy
The hammer price action pattern depicts an optimistic signal, indicating a greater likelihood of the market ascending rather than descending. This pattern finds its utility primarily within up-trending market directions.
The Shooting Star Strategy
This pattern usually depicts a bearish signal, suggesting a greater probability of the market declining rather than advancing. This pattern finds its significance mainly when the market is on a downtrend.
It represents the hammer’s reverse pattern, indicating a bearish sentiment.
The Harami Pattern
The Harami price action shape, also known as an “inside candle formation,” is a two-candle pattern that reflects the market’s indecisiveness. This pattern holds particular relevance in breakout trading strategies.
It occurs when one candle forms within the high-to-low range of the previous candle, signifying a potential period of uncertainty in the market. A Harami pattern is a valuable tool for traders seeking to identify potential breakout opportunities in the market.
Scalping
Several forex price action scalping strategies exist in intraday trading, but they suit traders’ preferences differently. But scalping, which involves frequent execution of ultra-short-term trades throughout the day, usually requires additional filters to trade price action setups effectively.
It is worth noting that price action analysis is one of the strategies traders use to exit, enter or stay away from the market.