Price action trading is one of the purest forms of technical analysis. Instead of relying on lagging indicators, price action traders focus on what the market is actually doing right now. In this guide, we will break down everything you need to know to start trading with price action.
What is Price Action Trading?
Price action trading is a methodology that bases all trading decisions on the price movements shown on a chart. Traders who use this approach believe that price itself contains all the information needed to make informed trading decisions. Rather than using indicators like moving averages or RSI, price action traders read the raw price data.
Key principle: Price is the ultimate indicator. Everything that affects the market, including fundamentals, news, and sentiment, is already reflected in the price movement.
Why Price Action Works
Price action trading has stood the test of time for several reasons:
- No lag: Unlike indicators that are calculated from past prices, price action shows you what is happening right now
- Universal application: Price action works on any market and any timeframe
- Clean charts: Without cluttered indicators, you can see the market structure clearly
- Flexibility: Price action can be combined with other analysis methods
The Building Blocks of Price Action
1. Candlestick Anatomy
Before you can read price action, you need to understand candlesticks. Each candlestick shows four pieces of information:
- Open: Where the price started during that period
- Close: Where the price ended during that period
- High: The highest price reached during that period
- Low: The lowest price reached during that period
Reading a Bullish Candle
A green or white candlestick means the close was higher than the open. The body shows the range between open and close, while the wicks (shadows) show the high and low extremes.
- Long body = strong buying pressure
- Small body = indecision
- Long lower wick = buyers stepped in at lower prices
- Long upper wick = sellers pushed price down from highs
2. Support and Resistance
Support and resistance are the foundation of price action trading. Support is a price level where buying interest is strong enough to prevent further decline. Resistance is a price level where selling interest is strong enough to prevent further advance.
Identifying Key Levels
Look for areas where price has reversed multiple times:
- Previous swing highs and lows
- Round numbers like $100, $50, $25
- Areas with heavy trading volume
- Gap levels that have not been filled
3. Trends and Ranges
Markets move in two basic states: trending and ranging. In a trend, price makes directional progress. In a range, price bounces between support and resistance.
- Uptrend: Higher highs and higher lows
- Downtrend: Lower highs and lower lows
- Range: Price oscillates between defined levels
Essential Price Action Patterns
Pin Bars (Rejection Candles)
A pin bar has a small body and a long wick that shows rejection of a price level. When a pin bar forms at support or resistance, it often signals a reversal.
Inside Bars
An inside bar is completely contained within the range of the previous candle. It shows consolidation and often precedes a breakout. Traders watch for the breakout direction to enter trades.
Engulfing Patterns
An engulfing pattern occurs when a candle completely covers the body of the previous candle. A bullish engulfing at support suggests buyers have taken control. A bearish engulfing at resistance suggests sellers have taken control.
How to Trade with Price Action
Step 1: Identify the Trend
Before taking any trade, determine the overall market direction on your chosen timeframe. Trading with the trend increases your probability of success.
Step 2: Find Key Levels
Mark the significant support and resistance levels on your chart. These are the areas where you will look for trade setups.
Step 3: Wait for a Signal
Be patient and wait for a clear price action signal at your key level. Do not force trades. Let the market come to you.
Step 4: Manage Risk
Always use a stop loss placed at a logical price action level. Calculate your position size based on the distance to your stop.
Trade Example: Pin Bar at Support
The stock is in an uptrend. Price pulls back to a previous support level at $50.
- A bullish pin bar forms with a long lower wick showing rejection of the $50 level
- Entry: Buy above the pin bar high at $51
- Stop loss: Below the pin bar low at $49
- Risk: $2 per share
- Target: Previous high at $55 for a 2:1 reward to risk
Common Price Action Mistakes
- Trading every pattern: Not every candlestick pattern is a trade. Context matters.
- Ignoring the trend: Counter-trend trades have lower probability.
- Missing key levels: Patterns are most powerful at significant support and resistance.
- Overcomplicating charts: Keep your analysis simple and focused.
- No patience: Waiting for quality setups is essential.
Tips for Practicing Price Action
- Start by studying historical charts to identify patterns in hindsight
- Practice on a demo account before risking real money
- Keep a trading journal to track what works and what does not
- Focus on one or two setups until you master them
- Review your trades regularly to improve your pattern recognition
Track Your Price Action Trades
Pro Trader Dashboard helps you analyze your trading performance. Track your win rate by setup type, see which patterns work best for you, and improve your price action trading over time.
Summary
Price action trading is a powerful skill that takes time to develop. By focusing on raw price movement, support and resistance levels, and candlestick patterns, you can make trading decisions without relying on lagging indicators. Start with the basics, practice consistently, and keep refining your approach.
Ready to dive deeper? Learn about reading price bars or explore swing highs and swing lows.