Professional Price Action Trading
People bang on about price action trading a lot. The reality is very few people actually understand what it is. What's even worse is a lot of those who claim to teach it only have a partial understanding.
People bang on about price action trading a lot. The reality is very few people actually understand what it is. What’s even worse is a lot of those who claim to teach it only have a partial understanding. There are more facets to understanding price action that most people don’t know and are never taught.
Do you want to learn the skills that’ll enable you to make consistent profits from the markets? Do you want to be able to learn and use profitable price action trading strategies?
Of course you do. That’s why you’re here.
I am going to teach you everything you need to know about price action in the markets. What qualifies me to do that? I am a professional trader who makes 99% of my trading decisions based around price action and have done so for years.
Let’s begin. You need to get focused and get in your ‘learning mode’. That’s because there’s plenty of detail for you to get stuck in to which you can apply straight away to your own trading.
Professional Price Action Trading - Contents
What is price action?
Price action is defined by the characteristics of movements in the markets. What does that mean?
Well, there are three ways I define it:
Price patterns
There are various patterns in the market (I’ll show you all the best ones later) that we can take advantage of. For example, take this double bottom based off support levels.
Price movement
Price movement is the ‘way’ the price moves when it forms the patterns. This is a big area people do not understand.
Look at the way this candle is moving in to our trading level. Most people won’t take any trading information from this, but for me it is telling me a lot (again, I’ll teach you more on that later).
Candle stick formations
The formation of candle sticks can give us a strong indication as to what the market will do next. We can use this to influence our trading decisions. When combined with the other aspects I’ve just described, it creates a seriously powerful trading combination.
There are so many candle stick formations. I’m going to teach you the ones that actually work and have a practical relevance in the markets.
You don’t need to learn an endless, confusing list of patterns to be effective.
Is price action trading profitable?
In a word, yes. Very much so. Once you spend time watching the markets you begin to develop a ‘feel’ for them. This basically amounts to intuition (pattern recognition and feedback) that you can develop to have a good idea what is going to occur next.
Having an understanding of what to look for provides objective corroboration to this process.
Trust me when I say this, price action trading is profitable.
What about technical analysis?
The charts above are the actual charts I used to make my trading decisions.
Notice something ‘unusual’ about them? They aren’t littered with technical indicators and technical analysis.
Yes, that’s right. I don’t litter my charts with loads of indicators. I know you are taught you need indicators. The truth is you don’t.
What is an indicator?
An indicator takes it data points from the Open High Low and Close of a candle stick (or bar chart – but who uses those over candle sticks?). That’s it.
If I can read price action correctly, both the patterns and movements, why do I need an indicator to tell me what I know is happening?
Do I need the standard 14 period RSI to be displayed to know when a market will be classed as ‘oversold or overbought’?
No, I don’t.
Do people trade successfully with indicators? Yes, but I am teaching you a system that works for me and I’ve been trading full-time and teaching others for some time now, so I’ll stick with showing you the things I know work.
The 5 essential price action patterns
These are the patterns that occur across most markets you need to know and learn.
Pattern 1: Support and resistance
As far as I am concerned, support and resistance is the foundation of trading. I take most of my trades based off support and resistance levels.
Support and resistance in the markets is where the market ‘turns around’ and sets up a level for us to work from.
Resistance is where the buyers are exhausted, and support is where sellers are exhausted.
The levels should be clear and obvious. The exercise I encourage people to undertake is to take a chart and mark-up support and resistance levels quickly, and instinctively.
They should jump out at you because if they are obvious then everyone is looking at them (and more likely they will work). You aren’t looking for something hidden with S&R.
Pattern 2: Double tops and double bottoms
Double tops and double bottoms are a staple of trading. They are based off the price doing what it did on a previous occasion i.e. reversing at the same level it did previously. The big question you may have is, “So how can I tell when a level will hold and when it will break?”
I will give you three steps to assess the likeliness of a double top and double bottom working.
Let’s look at a double bottom so you know the pattern. A double top is simply inverted. There is a distinct support level set which is then revisited to form the double bottom like this:
Here are the three things to consider when looking at a potential double bottom / top.
1) The rejection strength
The rejection wants to be an acute angle. It wants to be in and out of the level quickly to define a strong level. If the market goes in and out of a level quickly, what is it telling you? It’s telling you there are no more buyers / sellers (depending on the direction rejection) at that level.
2) The distance away from the level
The second key aspect to trading double bottoms is the distance the market moves away from the level. This is in terms of points for indices and pips for Forex and other markets.
The general rule is the more the better, but that’s also dependent on the time frame you’re trading. One of the best ways is for it to ‘look’ right. You’ll develop the ‘feel’ for this type of price action through simply knowing what to look for and seeing the patterns repeat.
3) The time away from the level
We want the market to stay away from the level for a reasonable amount of time. Again, this would be dependent on the time frame you are trading. If the market returns to the level too quickly then it hasn’t sufficiency rejected it.
Here is the same double bottom with these three components marked-up.
Pattern 3: Price action wedging
Pattern two is dealing with sideways markets. Sideways market turn in to trending markets and we need to identify when a market is likely to turn in to a trending market.
Here’s a difference between a trending and sideways market.
Let’s look at wedging and also teach you how to identify when a market is likely to change from sideways from trending.
Look at a sideways market where we expect to see double tops and double bottoms:
Now look at wedging price action.
Spot the key differences? Let me label the key components and then explain them.
The market isn’t swinging from top to bottom. Every time the sellers (or bears) take charge when the market goes down, they are ‘running out of steam’ earlier on each occasion, which is why the higher-lows are being made.
This is for an upside wedge. Invert it for a downside one with lower-highs. created.
The next aspect is looking for multiple tests of the level. The more times it is tested (with higher-lows / lower-highs), the more likely it is to break.
The third thing we are looking or are shorter intervals between the re-tests of the level.
Want to see this in action?
If you’re looking for a trading strategy based off wedging price action, then check out this breakout strategy video. There’s also a blog piece on it here if you want to read about it, too.
If only price action trading was as simple as reversals and breakouts on simple patterns.
That’d be far too easy. It’s not, we have to deal with the so called ‘fakeouts’. The name being a shortened versions of ‘false breakouts’. Getting these wrong can be very costly if you lack discipline as a trader.
So what is a fakeout?
See how the market has broken above the level before it fades back down? This is called a ‘bull trap’ (where buyers are sucked in to a new zone before getting hammered). The reverse is a ‘bear trap’ where the sellers become upset.
A lot of beginner traders would make the mistake of going long here. Even worse if they have poor trading discipline they would likely hold on to the trade and get themselves in to serious trouble with their trading account.
There are two practical aspects with this price movement we need to consider.
- How to avoid getting suckered in and being on the wrong side of a fakeout
- How to trade a fakeout properly (most people don’t know this)
There’s a reason I am teaching you these in a specific order.
Remember previous patterns
Remember the double tops / bottoms and the wedging price action. If the price action looks more like the double tops and bottoms then it’s more likely to fakeout. If it’s wedging the it’s more likely to be breaking out and not faking out.
See how the market is swinging from one major level to the other. This is a sideways market and less likely to breakout, thus more likely to fakeout.
Where as when we are wedging and, in this instance, the sellers are losing their strength to sell the market down, we’re more likely to breakout.
Fakeouts are incredible for Forex
This is one of my favourite price action patterns for trading the Forex markets. In fact, I have a specific strategy for it.
Guess what’s it’s called? ‘Forex false breakouts’ and here’s the video for it. There’s also a blog here if you’re interesting in having some reading to back it up.
Pattern 5: S&R inversion
S&R inversion is support becoming resistance, and resistance becoming support.
What does that look like?
Once a level is set and broken, it if often retested from the other side. This happens time and time again. So much so that when I am teaching trading students, I will call the strategies and ‘breakout A’ and ‘breakout B’.
I’m not going to address things like stop loss placement in this article, but I’m sure you can appreciate how patterns like the above could influence your stop loss placement. If you get long on a breakout A you may wish to place your stop below where the potential B would be, for example.
This pattern occurs time and time again. Look out for it on the market you trade or at looking to trade.
Price action movement
You’ve learnt the essential price action patterns. What you’re going to learn now will build upon that.
We need to look at how price moves in to levels and out of levels. This is especially important when looking at scalping and really short-term trading.
This isn’t something often taught and even when it is, it’s greatly misunderstood.
If you can understand these price movements, you’ll develop an extra level of finesse with your trading that’ll allow you to generate more profit and as importantly, minimise losses when you need to take them (yes, you need to learn to take losses if you want to be a profitable trader).
You’ve learnt the essential price action patterns. What you’re going to learn now will build upon that.
We need to look at how price moves in to levels and out of levels. This is especially important when looking at scalping and really short-term trading.
This isn’t something often taught and even when it is, it’s greatly misunderstood.
If you can understand these price movements, you’ll develop an extra level of finesse with your trading that’ll allow you to generate more profit and as importantly, minimise losses when you need to take them (yes, you need to learn to take losses if you want to be a profitable trader).
The stall
Let’s have a look at this candle stick movement here closely.
Look how the market stalls at the orange line (an anticipated scalping support level).
What is this telling us? It’s telling us there’s a transition between the sellers and buyers. It tells us that the sellers are running out of momentum and the buyers (bulls) are starting to take over.
Being able to recognise the difference what the market does going in to the level (it moves quickly) vs what it does when it get to the level (slows down and stalls) allows you to judge the likeliness of a level holding.
So what are the practical uses for you learning this price movement?
- If there is no stall and the market doesn’t hold, then you take no trade.
- If there is a stall and the level holds, then you can take a trade.
- If there is a stall and the level holds, you can place (where appropriate) a stop loss just below the low / high (depending on direction).
Momentum in to the level
This may sound similar to what I just explained, but it’s different.
This is not about what the price action does when it gets to a level, it’s about what is is doing on there way there.
I’m going to use the same example again but I want you to focus on a different aspect of the price movement. Focus on how quickly the market moves in to the support level we are looking to trade.
Look how quickly it gores in to our level. This is what we want.
New traders find this quite a surprise. A common trading adage is ‘don’t be afraid to stand in front of a moving train’.
When you think about it it doesn’t make sense, but it’s a saying you may hear and this is what it means. We want the price to move in to our levels quickly.
The more it drifts, the less we’re interested in the market. Drift suggests lower volumes of trading activity and lower volumes make the market less technical.
Look at this drift and the highlighted parts:
Compare the strong price action that hits the level above the ‘strong momentum’ level with the price action that drifts in to the same level. It becomes more of a 50/50 as to whether the level will do what we want (whether that be break or hold), and since we’re probably wanting greater than 50% odds for our strategy, this simply won’t do.
We can judge momentum by the length of candles and the time it takes them to get in to a level. The first level hit took 30 minutes or so, whereas the second took a couple of hours.
Have a look at your own charts and markets and compare the different types of momentum in to a level and the result.
Candle stick price action
There are many candle stick patterns / formations and names. I’m not going to get in to loads of them because I think most of them are a waste of time so I’m only going to show you the really important ones you want to be using to make price action trading judgements.
The hammer
Hammer / shooting star / inverted hammer, I’m not that bothered about specific names depending on whether they are bullish / bearish etc. This formation is for reversal trading where we expect the market to turn back around from its current direction.
Just learn this shape the way up in the diagram and when it’s inverted and once you’ve looked at it we’ll discuss the labels.
When the market hits our level we want a quick rejection – remember when I spoke of the transition of sellers to buyers (when going long)? That’s what this candle indicates. The second thing we are interested is that for the candle’s duration (it could be a 1-min, 5-min, hourly etc), we want it to spend most of the time towards the top (if long) and then form the pattern.
Here’s a looped example to show you what I am talking about:
This trade then went on to do this, which is exactly what was indicated by the price action.
Marubozu
Another candle I want you to consider is the Marubozu. Now this fat candle looks like this:
What is this telling us? It’s telling us there is really strong momentum in the market. In this case it is showing us the market is bullish. Of course it can be inverted when there is strong downside momentum as we will see when we look at the animated example.
One thing I will point out is that I am not too bothered about there being no wicks whatsoever. Yes, technically there should be to be called a ‘Marubozu’ but if we have nearly all candle body and a decent length, then it means the same thing.
So why are we interested in these candles? Because they help give us confidence we are entering a new trading zone. The hammer candle was indicating a reversal trade, the Marubozu indicates we are breaking out.
Let’s have a look at an example:
See how we are again building on earlier lessons? Look how the market is wedging in to the level. It then breaks with a Marubozu candle.
This is what went on to happen:
Conclusion
So we have three aspects to price action trading you’ve learnt to develop your price action trading.
- Price action patterns
- Price action movement
- Price action candlesticks
Once you start to apply this you’ll see that price action trading is profitable.
Want to know more about us? Have a read about our live trade room.
If you enjoyed this article, please share.
Three Top Articles
Which trading strategies make the most profits?
Our inbox is always full of inquiries wanting to know what are the best trading strategies and roughly two thirds of these inquiries will mention one of the 3 P’s. These aren’t the famous marketing 3 Ps – Promotion, Position and Price, the 3 P’s we always get asked about are Pips, Points and Profit.
Which DAX 30 trading strategies work?
The DAX 30 is the premier index of the German stock market – the Frankfurt Stock Exchange. The index is the amalgamated stock prices of the top 30 companies and includes big, world-renowned brands you will have heard of such as BMW, Allianz and Adidas. On spread bet and CFD brokers the Dax may be also be called Germany 30.
The top 10 trading tips for trading success
Right then, the top 10 trading tips!
At Trade Room Plus, each of us has come through a trading knowledge journey. We’ve come from knowing nothing, through failure and loss and on to consistent profitability and running a live trade room.
really great work Simon, one of your best blogs
Thanks Rob.
Great article, thanks Simon
Thanks Anne.
Simon, thanks for this post, excellent. The looped videos are so useful, really emphasise the point.
Brilliant price action info
Thanks Malcolm.
Thank you very much for this beautiful article. I really enjoyed reading this. I appreciate your thoughts and ideas. Well done. But don’t you think trading strategies should up to date with the flow time.