- For the beginner who is looking for simple trading strategies or to simplify his trading, in both cases it is advisable to learn Price Action Trading.
- There are lots of trading strategies that you can learn in the market, but learning price action will help you to develop an understanding of market behavior and different market states.
- Price action trading seems natural to some trader, while most of the traders will find it difficult to understand the basic logic of price action.
To learn a Price Action Trading Strategies, one can simply follow five steps as given below.
1. Real Nature of Price Action:
- Most of the traders who jump into learning price action will end up with disappointment, because of the complex nature of price action trading, You should only learn from an expert.
- To be a successful price action trading one must look at price action for what it is, and not on his opinion of the price.
- After you have learned and understood the logic behind the price action trading, you will come to know that trading with price action is simple and easy.
- Price action trading does not guarantee you profit, trading is much more than just predicting direction.
- For example, let us consider you are trading with technical indicators and having an over trading behaviors that cause you loss. After learning price action trading you will still have the same problem. You are overtrading in both cases.
- Price action trading might help you to improve your analytical skill, but it won’t solve your problems rising due to your wrong mind-set.
2. Learn the Basics of Price Action Trading Strategies:
- The best way to learn price action trading is to go slowly from bottom to top.
- You can learn the basics of price action from the concept given below.
- Bar open, high, low, and close.
- Concept of support and resistance.
- Swing low and high.
- Candlestick body and bar relation.
- Dow theory
- There are many more complex forms of price action analysis present they are as follows.
- Chart patterns (like head and shoulder)
- Candlestick chart(engulfing candlestick)
- Volume candle
- Renko bar
- Volume price analysis
- Elliot wave theory.
As shown in the chart, you can see the earlier swing low is acting as a support to price.
Whatever concept or theory of price action trading you study, you should try to understand the crowd psychology behind it and before trading, you must backtest it.
3. Replace your Indicators:
After learning the basics of price action tools, you can see how correlating price action is with the technical indicators.
You can replace every indicator which you are currently using in your analysis by following steps below:
- Write down the technical indicators you are currently using in your analysis.
- For every indicator note down its purpose, what kind of information it provides you.
- See if you can achieve the same purpose with price action.
- Remove the indicator.
By removing the indicator from the chart you can see the chart more clearly and actually can sense what market is going to do. If you can get the same information form price action analysis why use an indicator.
As shown in the example, the trend line is indicating that the short term trend of the market is in an upward direction, the same information is shown by 50-MA.
Can you identify the market trend?
- If you can spot a clear trend in the market with a naked chart, then you can remove your indicator.
- If you are not comfortable with pure price action, it is better to keep an indicator on the chart but focus more on the price component.
- Over time as you improve your price action skills you will use fewer indicators.
- You must focus on price action as it is your primary tool, and use indicator for confirmation when you are unsure.
- If you are unsure about your trading tools, you will remain confused as you can’t decide which tool to trust (price action or indicator).
4. Form a Price Action based Strategy:
After learning the basics of price action, you should focus on constructing a price action based trading strategy that is suitable to your psychology and mindset.
Steps for constructing a price action based strategy.
- Keep it simple:
You should use only that price action trading method which you can understand, don’t try to follow different concept, focus on mastering one concept.
- Stick to same trading style:
Follow the same trading style which you were following with indicator based system, if you were trading momentum breakout with a technical indicator, now you will use price action based to spot the breakout in momentum.
- Keep only one indicator:
Majority of trader has a favorite indicator, if you are unsure about your trading decision-based price action then you can keep one indicator, remember your main focus should be on price action and you use indicator for confirmation purpose only.
As shown in the example, price break the resistance line after the formation of the double bottom, which is confirming the possible trend reversal, no indicator will give you such an insight into the market.
Remember it is just the beginning of your price action based trading system, your system will have several negative points which you can overcome by applying a filter based on price action itself.
5. Testing your Price Action based Trading System:
- We have started learning price action by looking at price patterns and other concepts of price action.
- However, price action trading is an art, as it is very subjection in nature. You can only develop your skills through continuous practice by observing the market in real-time.
- For being a professional trader you must develop an intuition as a trader, watching live price action and patiently waiting for your setup is the best way to trade.
- By observing the live market you will find when your strategy is working and when it doesn’t.
- You need to note down each trade and the reason why your strategy failed.
- So by monitoring your losing trade you can find the drawback of your trading system and overcome them by modifying the trading system.
Price Action Trading is not an exact science, setup tend to fail more often than you can imagine but if you could develop understating of market behavior you will be able to apply several price action filter so that you can filter out weak setup, over a long run price action will surely help you in developing an understanding of the market. Learning price action and developing a trading system is a long process but if you are dedicated to the process you will surely succeed.
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