Using price action as your first indicator in technical analysis

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Price action trading strategies are dependent solely upon the interpretation of candles, candlestiông xã patterns, tư vấn, & resistance, pivot point analysis, Elliott Wave Theory, và chart patterns<1>. It is often confused with Volume và Price Analysis (VPA), where volume is interpreted with the price action to paint a clearer picture of the stock’s story.

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In this post, we’ll examine a handful of the best price action strategies and patterns to help you develop your “chart eye”. We’ve sầu also put together a short video to lớn help with some of the advanced concepts we discuss. Please have a watch as a primer for the nội dung below.


Overview of Price Action Charts

When looking at some traders’ charts, it can be difficult to determine if you are looking at a stoông chồng chart or hieroglyphics. When you see a chart with too many indicators and trkết thúc lines, it is likely a trader trying to lớn overcompensate for laông xã of certainty. In other words, they may not understvà price action.

Here’s an example of some traders’ charts that look something lượt thích the picture below.


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Too Many Indicators

There are some traders that will have sầu four or more monitors with charts this busy on each monitor. When you see this sort of cài đặt, you hope at some point the trader will release themselves from this burden of proof.

Every trader has their own style, for sure. But at the end of the day, price is the final arbiter. And it would behoove sầu all traders khổng lồ learn how lớn read the tape.

Clean Charts

What if we lived in a world where we just traded price action strategies? A world where traders picked simplithành phố over the complex world of technical indicators & automated trading strategies.

When you remove all the clutter from the trades, all that remains is the price.

To see a chart minus all the indicators, take a look at the following image và compare it lớn the previous one:

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Price kích hoạt Trading Charts

At first glance, it can almost be as intimidating as a chart full of indicators. Like anything in life, we build dependencies and handicaps from the pain of real-life experiences. If you have been trading with your favorite indicator for years, going down to a bare chart can be somewhat traumatic.


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While price action trading is simplistic in nature, there are various disciplines. As mentioned above, the disciplines can range from Japanese candlestiông chồng patterns, tư vấn & resistance, pivot point analysis, Elliott Wave sầu Theory, and chart patterns<1>.

From here on, we will explore the six best price action trading strategies & what it means khổng lồ be a price action trader.

Price Action Trading Strategy Basics

Before we dive inkhổng lồ the price action trading strategies, you need to lớn understvà the four pillars of the price action indicator.

CandlesticksBullish TrendBearish TrendFlat Market

If you can recognize and understand these four concepts and how they are related khổng lồ one another, you’re well on your way.

Pillar 1 – Candlesticks

Candlesticks are the most popular form of charting in today’s trading world. Historically, point & figure charts, line graphs và bar graphs were more important.

Not khổng lồ make things too open-ended at the start, but you can use the charting method of your choice. There is no hard line here.

However, for the sake of not turning this inkhổng lồ a thesis paper, we will focus on candlesticks. The below image gives you the structure of a candlestick. To learn more about candlesticks, please visit this article that goes inkhổng lồ detail about specific formations và techniques.

Feel không tính phí to lớn download our candlestichồng reference guide:


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The key point khổng lồ remember with candlesticks is that each candle is relaying information, and each cluster or grouping of candles is also conveying a message. You have lớn begin khổng lồ think of the market in layers.

Pillar 2 – Bullish Trend

This is a simple tác phẩm to lớn identify on the chart, & as a retail investor, you are likely most familiar with this formation.

A bullish trend develops when there is a grouping of candlesticks that extkết thúc up và lớn the right.

Think of a squiggly line on a 45-degree angle.


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The key thing to lớn look for is that as the stock goes on to lớn make a new high, the subsequent retracement should never overlap with the prior high. This ensures the stoông chồng is trending & moving in the right direction. In other words, higher highs và higher lows.

Make sense?

Pillar 3 – Bearish Trend

Bearish trends are not fun for most retail traders. Shorting (selling a stoông chồng you bởi vì not own) is something many new traders are not familiar with or have any interest in doing. However, if you are trading, this is something you will need lớn learn to be comfortable with doing.


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This formation is the opposite of the bullish trover. The trend is right the opposite: lower highs & lower lows.

Pillar 4 – Flat Market

Get ready for this statement, because it is big. In general terms, the market is in a flat trading range approximately 70% <2> of the time according to author Heikin Ashi Trader, which is the pen name of a trader with over 15 years of futures & forex experience.

Rarely will securities trkết thúc all day in one direction. You will mix your morning range within the first hour, then the rest of the day is just a series of head fakes.

If you can re-imagine the charts in these more abstract terms, it is easy khổng lồ size up a security’s next move quickly.


Flat markets are the ones where you can lose the most money as well. Your expectations và what the market can produce will not be in alignment. When the market is in a tight range, big gains are unlikely. The main thing you need to lớn focus on in tight ranges is to lớn buy low & sell high.

6 Price kích hoạt Trading Strategies

#1 – Outside Bar at Support or Resistance

For those unfamiliar with an outside bar, an example of a bullish outside bar is when the low of the current day exceeds the previous day’s low, but the stoông chồng rallies and closes above sầu the previous day’s high.

The bearish example of this would be the same cài đặt, just the opposite price action.


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Outside down day price action

Therefore, it’s not just about finding an outside candlestichồng và placing a trade. As you can see in the above sầu chart of NIO, it’s best to find an outside day after a major break of a trkết thúc. In the NIO example, there was an uptrkết thúc for almost 3 hours on a 5-minute chart prior lớn the start of the breakdown.

After the break, NIO finished with an outside down day, which then led to lớn a nice sell-off inlớn the early afternoon.


#2 – Spring at Support

A spring occurs when a stock tests the low of a trading range, only lớn quickly come baông xã inlớn the range and kichồng off a new trkết thúc. According lớn Jyên Forte, “springs, shakeouts, & tests usually occur late within the trading range và allow the market và its dominant players khổng lồ make a definitive sầu chạy thử of available supply before a markup chiến dịch will unfold.”1.

Volume can help when confirming a spring; however, the focus of this article is to lớn explore price action trading strategies, so we will zone in on the candlesticks alone.

The one comtháng misinterpretation of springs among muốn traders is the need to wait for the last swing low to be breached. Just khổng lồ be clear, a spring can occur if the stoông xã comes within 1% to 2% of the swing low.

Trading setups rarely fit your exact requirement, so there is no point in obsessing over a few cents. To illustrate this point, please have sầu a look at the below example of a spring cài đặt.


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Spring reversal

Notice how the previous low was never completely breached, but you could tell from the price action that the stock reversed nicely off the low. Thus, a long trade was in play.

#3 – Inside Bars after a Breakout

Inside bars occur when you have many candlesticks clumped together as the price action starts lớn coil into resistance or support. The candlesticks will fit inside of the high & low of a recent swing point as the dominant traders suppress the stoông xã to accumulate more shares.

In theory, it looks something lượt thích this:


To illustrate a series of inside bars after a breakout, please take a look at the following intraday chart of NIO.


This chart of NIO is truly quality because the stock had a breakout after the fourth or fifth attempt at busting the high. Then there were inside bars that refused khổng lồ give sầu baông xã any of the breakout gains. NIO then went on to lớn rally the rest of the day.

Please note inside bars can also occur prior khổng lồ a breakout, which may strengthen the odds the stochồng will eventually breakthrough resistance.

The other benefit of inside bars is that gives you a clean area of support khổng lồ place your stops under. This way you are not basing your stop on one indicator or the low of one candlestiông xã.

This is popular strategy, and for good reason. These quick pullbacks often forecast higher price movements.

#4 – Long Wiông xã Candles

The long wiông chồng candlestiông xã is another favorite day trading cài đặt. These are often called hammer candles, or shooting stars.

The thiết đặt consists of a major gap up or down in the morning, followed by a significant push, which then retreats. This price action produces a long wiông chồng. Often times, this price action is likely to be re-tested.

The reason for this is that many traders will enter these positions late, which leaves them all holding the bag upon reversal. Once they are shaken out, the counter pressure will be weak comparatively, and the stoông xã typically goes up again. This usually leads khổng lồ a push back to the high.

Let’s look at a few examples:


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Long wick price action trading example 1

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Long wichồng price action trading example 2

Are you able lớn see the consistent price action in these charts?

Notice after the long wicks NIO printed a handful of insider bars in either direction before breaking out or breaking down. After this break, the stock proceeded in the direction of the new trend.


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#5 – Measuring Length of Intraday Swings

Have you ever heard the phrase, “history has a habit of repeating itself”? Well, trading is no different.

As a trader, it’s easy khổng lồ let your emotions, và more specifically – hope, take over your sense of logic. We tkết thúc to lớn look at a price chart và see riches right before our eyes.

Well, that my friend is not always the reality. Let’s build on this thought.

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In the world of trading there are often dominant players that consistently trade very specific securities?

These traders live sầu and breathe their favorite stock. Given the right màn chơi of capitalization, these select traders can also control the price movement of these securities.

Knowing this, what can you do khổng lồ better understand the price action of securities you are not intimately acquainted with on a daily basis?

A good place lớn start is by measuring the price swings of prior days.

As you persize your analysis, you will notice comtháng percentage moves will appear right on the chart. For example, you may notice that the last 5 moves of a stock were all 5% to 6%.

If you are swing trading, you may see a range of 18% to 20%. Bottom line, you shouldn’t expect stocks to all of a sudden double or triple the kích cỡ of their previous swings.

Sure, the market is limitless & can produce outlier days. However, it’s better khổng lồ play the odds with the greakiểm tra chance versus swinging for the fences. Over the long haul, slow and steady always wins the race.

Example

To further illustrate this point, let’s go lớn the charts.


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Measure the Swings

Notice how NIO over a 2-week period experienced many swings. However, each swing was on average $1-$2. While this is a 5-minute view of NIO, you’ll see the same relationship of price on any time frame.

As a trader, do you think it would make sense to expect $5, $10, or $15 dollars of profit on a day trade? At some point, the stoông chồng will make that sort of run, but there will likely be more $1-2 moves before that occurs.

To that point, if you can trade each of these swings successfully, you get the same effect of landing that trang chủ run trade without all the risk and headache.

#6 – Little to lớn No Price Retracement

Without going to lớn deep on Fibonacci (we’ve saved that for another post), it can be a useful tool with price action trading. At its simplest khung, less retracement is proof positive that the primary trkết thúc is svào và likely khổng lồ continue.

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Smaller retracement

The key takeaway is you want the retracement khổng lồ be less than 38.2%. If so, when the stochồng attempts to lớn test the previous swing high or low, there is a greater chance the breakout will hold and continue in the direction of the primary trend.

This is especially true once you go beyond the 11 am time frame. This is because breakouts after the morning tend to fail. So, in order lớn filter out these results, you will want lớn focus on the stocks that have consistently trended in the right direction with smaller pullbacks.

Using Time khổng lồ Your Advantage

Trading comes down to lớn who can realize profits from their edge in the market. While it is easy to lớn scroll through charts và see all the winners in hindsight, it is much more difficult in real time. The market is one big game of cat & mouse.

Between the quants and smart money, false setups show up everywhere.

As a price action trader, you cannot rely on other off-chart indicators to provide you clues that a formation is false. However, since you live sầu in the “now” and are reacting lớn directly what is in front of you, you must have sầu strict rules lớn know when to get out.

With this in mind, in lieu of a technical indicator, one helpful tool you can use is time.

Just lớn be clear, the chart formation is always your first signal, but if the charts are unclear, time is always the deciding factor.

On a personal note, in a recent study of all my winning trades, over 85% of them paid in full within 5 minutes.

If you have been trading for a while, go baông xã and take a look at how long it takes for your average winner to play out.


How to Protect Against the Head Fakes (False Setups)

Let’s reviews a few head nhái examples khổng lồ get a feel for what we are up against in terms of false setups.

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In each example, the break of support likely felt like a sure move sầu, only to lớn have your trade validation ripped out from under you in a matter of minutes.

Protection

There are many ways you can protect yourself against these head fakes.

For starters, don’t go hog wild with your capital in one position. Make sure you leave yourself enough cushion. This way you don’t get antsy with every bar that prints.

Also, let time play lớn your favor. There is an urge in this business khổng lồ act quickly. However, there is some merit in seeing how a stoông chồng will trade after hitting a key support or resistance level for a few minutes.

If you think bachồng khổng lồ the examples we just reviewed, the security bounced baông chồng the other way within minutes of raiding stop losses and trapping traders.

Where to lớn Place Your Stops

One thing to consider is placing your stop above sầu or below key levels. Since you are using price as your means to lớn measure the market, these levels are easy khổng lồ identify.

Another easy way to lớn vày this as mentioned previously in this article is to lớn use swing points. A more advanced method is lớn use daily pivot points.

You are probably thinking, “but this is an indicator.” Well yes and no. Unlượt thích other indicators, pivot points do not move regardless of what happens with the price action. They are essentially support and resistance lines.

So, let’s see how you can use pivot points to lớn avoid getting caught in false signals.

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Using Pivot Points khổng lồ avoid false breakdowns

Notice how the price barely peaked below the key pivot point and then rallied bachồng above sầu the resistance level. In order khổng lồ protect yourself, you can place your stop below the break down màn chơi to lớn avoid a blow-up trade.

Another option is to place your stop below the low of the breakout candle. Some traders such as Peters Andrew even recommends placing your stop two pivot points below. <4> This may not work for the risk averse trader, but it can work for some.

This is honestly the most important thing for you lớn take away from this article – protect your money by using stops. Do not let ego or arrogance get in your way.

Benefits of Price kích hoạt Trading

Price action traders are the Zen traders in the active sầu trading world.

These people believe the human brain is more powerful than any machine.

Please vì chưng not mistake their Zen state for not having a system. The price action trader can interpret the charts và price action to make their next move.

Processing Data

For starters, there isn’t as much information to process, so you can focus on the chart action.

Secondly, you have no one else khổng lồ blame for getting caught in a trap. Don’t bother emailing the guru with the proprietary trade signal that had you on the wrong side of the market.

The biggest benefit is that price action traders are processing data as it happens. There is no lag in their process for interpreting trade data.

Chart Patterns

By relying solely on price, you will learn khổng lồ recognize winning chart patterns. The key is to identify which setups work and to commit yourself khổng lồ memorizing these setups.

The next key thing for you to vày is to traông chồng how much the stoông chồng moves for & against you. This will allow you lớn set realistic price objectives for each trade. You will ultimately get to a point where you will be able khổng lồ not only see the cài đặt but also when to exit the trade.

Some Challenges

Price action traders will need lớn resist the urge lớn add additional indicators to lớn your system. You will have sầu lớn stay away from the lathử nghiệm holy grail indicator that will solve all your problems when you are going through a downturn.

The real challenge is that it’s extremely difficult to trade purely on price. It’s not something you can just pick up và start doing right away.

You need lớn think about the patterns listed in this article và additional setups you will uncover on your own as stages in your trading career.

First, learn khổng lồ master one or two setups at a time. Learn how they move and when the thiết lập is likely lớn fail.

This, my friover, takes time; however, get past this hurdle and you have achieved trading mastery.

To further your retìm kiếm on price action trading, you may want to look into lớn some courses like the ones offered at Wyckoff Analytics.

In Summary

Price action trading strategies can be as simple or as complicated as you make them. While we have covered 6 comtháng patterns in the market, take a look at your previous trades lớn see if you can identify tradeable patterns. The key thing for you is getting to a point where you can pinpoint one or two strategies.

To start, focus on the morning setups. The morning is where you are likely to lớn have sầu the most success. Avoid the lunchtime & over of day setups until you are able khổng lồ turn a profit trading before 11 or 11:30 am.

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To chạy thử drive trading with price action, please take a look at the Tradingslặng platsize khổng lồ see how we can help.