Reading price action is the skill of interpreting raw price movements to understand market sentiment and predict future direction. Unlike memorizing candlestick patterns, true price action reading requires understanding the psychology behind each price movement and what it reveals about the balance of power between buyers and sellers.
The Language of Price
Every price movement tells a story. When you learn to read price action, you are essentially learning to decode the market's language. Price moves because of imbalances between supply and demand, and each candlestick captures a snapshot of that battle.
Key insight: Price action is not about memorizing patterns. It is about understanding why price behaves the way it does at specific levels and in specific market contexts.
Understanding Candlestick Psychology
Each candlestick reveals valuable information about market sentiment:
The Open
The open price shows where traders agreed to start the period. Gaps from the previous close indicate overnight sentiment changes or news events.
The Close
The close is the most important price. It represents where traders agreed to end the period. A close near the high shows buying dominance; a close near the low shows selling dominance.
The Range (High to Low)
The total range shows volatility and conviction. Wide ranges indicate high activity and strong opinions. Narrow ranges suggest indecision or consolidation.
The Body
The body (open to close) shows the net result of the battle. Large bodies mean one side dominated. Small bodies mean neither side won decisively.
The Wicks
Wicks are rejection signals. A long lower wick means sellers pushed price down but buyers rejected those prices and pushed back. A long upper wick means buyers pushed up but sellers rejected those prices.
Reading a Single Candle
A candle opens at $50, drops to $47, rallies to $52, and closes at $51.50.
This tells us: Sellers tried early (pushed to $47) but failed. Buyers took control and pushed higher. The close near the high confirms buyer dominance. This is a bullish candle.
Reading Market Structure
Individual candles matter, but context is everything. Market structure provides that context.
Swing Highs and Lows
Identify where price creates peaks (swing highs) and valleys (swing lows). The relationship between these points reveals the trend:
- Higher highs + higher lows: Uptrend - buyers in control
- Lower highs + lower lows: Downtrend - sellers in control
- Mixed pattern: Range or transition - neither side dominant
Trend Strength
Not all trends are equal. Read trend strength by observing:
- Impulse vs. correction: In healthy trends, impulse moves are larger than corrections
- Candle character: Strong trends have large-bodied candles in the trend direction
- Pullback depth: Shallow pullbacks indicate strong trends; deep pullbacks suggest weakness
Reading Price at Key Levels
The most important price action reading occurs at significant levels. Watch how price behaves when it approaches support, resistance, or round numbers.
Signs of Rejection
When price approaches a level and shows rejection:
- Long wicks poking through but closing back inside
- Small-bodied candles showing indecision
- Failed breakout attempts that quickly reverse
Signs of Acceptance
When price is breaking through a level:
- Large-bodied candles closing beyond the level
- Follow-through momentum after the initial break
- Previous resistance becomes support (or vice versa)
Critical Concept
A level is not broken until price closes beyond it convincingly. Wicks through a level often mean rejection, not breakout. Wait for the close before making trading decisions.
Reading Momentum and Exhaustion
Strong Momentum Signs
- Consecutive candles in the same direction
- Candles with large bodies and small wicks
- Each new high is significantly higher (uptrend) or each new low is significantly lower (downtrend)
- Pullbacks are brief and shallow
Exhaustion Signs
- Candles getting smaller despite price moving in trend direction
- Long wicks appearing against the trend
- Price slowing near round numbers or obvious levels
- Failed attempts to make new highs or lows
Reading Exhaustion
Stock rallies from $40 to $48 with strong green candles. At $48, you see:
First candle: Small body with upper wick. Second candle: Even smaller body, longer upper wick. Third candle: Doji with equal wicks.
This sequence shows buyers losing steam. Each attempt to push higher is met with selling. The trend is exhausting itself.
Practical Price Action Reading Framework
Step 1: Establish Context
Start on a higher timeframe. What is the overall trend? Where are the major support and resistance levels? What is the bigger picture?
Step 2: Identify Key Levels
Mark the levels where price has previously reacted. These are your decision points where price action signals matter most.
Step 3: Wait for Price to Reach Levels
Do not trade random price action in the middle of a range. Wait for price to approach significant levels where your analysis has meaning.
Step 4: Read the Price Action at the Level
When price reaches your level, observe closely. Is it showing rejection or acceptance? Are the candles bullish or bearish? Is there conviction in the move?
Step 5: Make Your Decision
Based on your reading, decide whether to trade, wait for more information, or stand aside. Not every situation requires action.
Common Price Action Reading Mistakes
- Ignoring context: A bullish candle in a downtrend at resistance is not necessarily bullish
- Over-analyzing: Looking for patterns where none exist. Sometimes price is just noise
- Timeframe confusion: Reading 5-minute candles as if they carry the same weight as daily candles
- Confirmation bias: Only seeing what you want to see to justify a trade
- Impatience: Acting before the candle closes or the pattern completes
Developing Your Price Action Skills
- Study historical charts: Go back in time and practice reading what price was telling you at each moment
- Keep a reading journal: Document your interpretations and whether they were correct
- Focus on one market: Each market has its own personality. Learn one deeply before spreading out
- Be humble: You will be wrong often. The goal is to be right more than wrong over time
Improve Your Price Action Reading
Pro Trader Dashboard helps you review your trades in context, so you can learn how well you read price action at key decision points.
Summary
Reading price action is about understanding the story that price tells through candlesticks and market structure. Focus on the close, read the wicks for rejection signals, and always consider context. The best price action reading happens at significant levels where the information is most valuable. With practice, you will develop an intuitive sense for what price is communicating, helping you make better trading decisions.
Learn more: Price Action Trading Basics and Price Action Patterns.