What is Price Action and how to work with it
Many traders cannot imagine technical analysis and trading in general without technical indicators, because it seems easier than trying to see any figures on the chart. However, it is often the "pure" chart of quotations can tell about the future trend in the market much more than a combination of even the most effective automatic tools, and this approach to market forecasting is called Price Action. We have already analyzed a simple candlestick pattern based on Price Action in this article. In this article we will explain to you in detail what it is, where this method of analysis is used and what its signals look like.
So, in fact, Price Action is not just an approach to market forecasting, but an entire separate category of technical analysis, which includes many patterns and ways to determine what happens in the market in the next moment. Literally, the word combination Price Action is translated as "price movement" and this is what all the patterns of this approach are based on - on the analysis of price movements over a certain time interval. The main feature of this method is that no technical indicators are used, because signals are given by the price in the form of combinations of candlesticks, or so-called "patterns.
The point is that history on the market is constantly repeating - the asset market regularly demonstrates certain behavioral patterns on the chart, which can almost certainly tell where the quotes will go in the next moment. A trader just needs to learn to see and apply them.
Where and how they use Price Action
This technique is applicable to any market and any financial instrument, that is, it is traditionally used as on retail forexas well as on fixed-term contracts. In this case, the patterns of Price Action are part of the arsenal of everyday tools of absolutely every professional trader and amateurs like you and me.
Many people think that in order to successfully analyze a "naked" chart of quotations it is necessary to memorize an inconceivable number of patterns. But this is not true. It is enough for you to learn to distinguish a few most guaranteed combinations of candlesticks and to constantly improve your work with them. Of course, the more price patterns you know, the better, but at first, a small number of the simplest patterns will be enough.
Price Action systems work only on the quotes chart in the "Japanese candles"This is the main condition for using this approach. It is also desirable that the chart itself is large and has a zoom function - this will allow you to better see a particular candlestick pattern and not to confuse it with anything else. In the example below, you can see a quote chart with these characteristics. It is provided on his platform Binomo:
Price Action Signals
So, with the help of regular repeating patterns, you can look for guaranteed entry points into the market. How to do it? We are not going to describe the most complicated price patterns, which are sometimes difficult to determine even for an experienced trader. At first we will describe the simplest obvious price triggers in case you don't fully understand what RA is and then we will move on to more complicated ones.
Below you can see trading signalwhich can be used if there is a trend in the market - this pattern is called the "inside bar" and it indicates the continuation of the trend:
You can also detect a trend reversal by using a pattern such as a takeover, which appeared on a market high. In the example below, you see a bearish pattern in the form of two differently directed candles, and the last of them engulfed the first candle:
You can also use PA principles to determine the trend in the market. Of course, you can do it just visually "by eye", but this approach allows you to clearly understand where the market is really going. If every new price lows and highs are higher than the previous ones, then the trend is upward, and if it is lower, then the trend is downward:
It is also possible to distinguish different kinds of graphical figures: triangle, rectangle, pennant and look for a place to enter the trade on the breakdown of the figure by the price. This approach is called trading on consolidation zoneswhich are regularly occurring in the marketplace:
Anyway, the price signals themselves are the most effective, and if you dig deeper into Price Action, you can easily do without technical indicators, or get extra signal confirmation when using indicator strategies.