What Is Price Action Trading: Best Forex Strategies and Tips | LiteFinance (2024)

This article deals with Price Action patterns, construction rules, and application to trading. You will learn about the best indicators to trade Price Action patterns and trading strategies for both newbies and professional traders.

Major takeaways

What is Price Action?

Price Action is an approach to trading based on a security’s price movements. Price Action patterns generate entry and exit signals. The Price Action system is one of the methods of technical analysis and is very popular among traders.

Judging by the name of the approach, we can guess that the price action strategy analyzes price movements and a trading decision is made based only on the analysis of the price chart. How can you analyze price moves?

One of the ways to represent the price movements is the Japanese Candlestick chart. This approach suggests each candlestick should represent a particular period, for example, 1 hour. Price Action trading strategies can take into account only chart patterns or candlestick formations without any indicators. Or, they can apply price action indicators as supplementary tools.

Many day traders focus on price action trading strategies to quickly generate a profit over a short time frame. Timeframes of H4-D1 are used to analyze general trends. In a shorter timeframe, the amount of market noise increases due to random price moves. In rare cases, the price action method provides ideal entry points in shorter timeframes.

Why do Traders Use Price Action?

Analyzing the structures formed by Japanese Candlesticks, one can discover particular patterns that are repeated from time to time. These patterns, with the correct approach, can be used to your advantage – to make money in the financial market.

Forex Price Action strategies are distinguished by their reliability and do not require any technical indicators. Price Action in forex is a form of technical analysis as it doesn’t consider fundamental factors, focusing on the price historical data. What sets Price Action apart from most forms of technical analysis is that it focuses on the relation of the current price of a trading instrument to its past performance rather than the values learned from the price history. Price Action takes into consideration the highs and lows of the price swings, trend lines, and support/resistance levels.

Advantages of Price Action:

• Patterns are straightforward and simple to interpret for beginner traders;

• Trading strategies do not usually require additional software (indicators);

• Price Action patterns do not repaint as they are based on closing prices;

• They represent solely the price movement without the interference of indicators;

• Price Action patterns are highly efficient when trading at strong levels;

• From a wide variety of patterns, a price action trader can choose the most suitable for a particular trading strategy ones.

Price Action in Forex

Price Action Forex strategies are suitable for medium and highly volatile assets, such as GBPUSD,EURUSD, and other major currency pairs. The Price Action trading system is also rather efficient in trading some majorcross rates.

I don’t recommend applying the Price Action patterns to trading minor cross rates or exotic currency pairs. Exotic currencies feature sharp unpredictable movements associated, for example, with the central bank’s interference or economic sanctions against a particular country.

If you trade price action patterns in stocks, you had better choose highly liquid assets. Use astock screener to select the shares based on the traded volume.

Price Action strategies in trading other instruments, such as cryptocurrencies or commodities, also have their particular features. The lower the liquidity for the instrument, the worse the Price Action patterns work out. It is necessary to follow the same recommendations and choose instruments with high liquidity. For example, for theBTCUSD pair, the Price Action method works perfectly, but for altcoins that are not in the TOP 100 by market cap, the method may fail.

Price Action signals

The most common Price Action signals include trading at the flat borders, rebounds from strong channel levels/Fibonacci levels, trading reversal patterns, and fractals.

To identify Price Action signals, you should first mark the basics of your trading strategy in the chart. I mean such elements as strong horizontal support/resistance levels, Fibonacci levels, price channel borders, and reversal patterns.

Next, explore the expected entry point by monitoring the price moves and discover a Price Action pattern that will determine the entry point and the stop-loss level.

Example of a price action signal at the flat border on the EURUSD. Date range16.06.2022 — 30.06.2022:

A step-by-step plan for trading strategy in the above chart:

1. I determine the upper border of the narrowing range based on two points.

2. I determine the lower border of the narrowing range based on two points.

3. I discover an inside bar pattern close to the upper border of the flat range on June 22.

4. Also, on June 22 at 19.00 terminal time, the price breaks out the inside bar downside. I enter a short trade according to this signal with a target at the lower border of the flat.

5. On June 23, the trade is exited with a take profit at the lower border of the flat.

In this chart, we could also mark other Price Action patterns that show the strategy of trading at the flat channel borders. Entry signals appear on June 23, 27, and 28, 2022.

Let us look at another example, where Price Action patterns appear within a double bottom reversal candlestick pattern. The trading instrument is XAUUSD. The date range is 15.12.2021 — 28.12.2021.

1. First, I determine the short-term trend; it is upward. Next, a downward correction starts on December 17.

2. I identify a double bottom candlestick within this correction, it is marked with purple.

3. I define the resistance level, after the breakout of which upside, the double bottom pattern completes.

4. On the corrective move towards the broken-out resistance level, which is now the support level, I identify the railway track price action pattern.

5. After the railway track setup forms on December 22, I enter a buy trade. On December 28, the trade is exited with a take profit on the breakthrough of the low of December 17.

Price Action Trading Patterns

There are many Price Action chart patterns. They will always be relevant since, when using them, trading decisions are made based on the analysis of price charts and understanding the logic of chart movements. Let us get familiar with the best price actionspatternthat I also use in my trading.

Pivot Point Reversal (PPR) Forex pattern

Price action trading patterns are good in the way that they are simple to discover and trade. The next pattern is also easy to discover and trade. This is the price action forex set up Pivot Point Reversal or PPR.

This pattern consists of three bars. It is based on the pivot levels or strong support/resistance levels. It usually appears after a fast trend.

In a bearish scenario: the price is moving up and hits a new high. The next bar follows by making a lower high and lower low and closing below the prior day's low.

In a bullish scenario: the price goes down and hits a new low. The next bar’s low shouldn’t be lower than the previous low, and the bar should close higher than the previous high.

Therefore, there appears an entry signal. You can enter right after the signal bar closes, as the market has already signaled it is about to reverse. This is a reversal pattern. It is good to trade at the end of a correction opposite to a strong trend of a global degree.

A stop loss is put beyond the highest or the lowest point of the pattern. The examples of real trading charts are below:

Sometimes, you need to wait for quite a long time:

In the above example, the PPR pattern has formed in the resistance zone 1.0020 – 1.0010. Next, the price sharply falls, which yields a significant profit. In candlestick analysis, a similar pattern is called an evening star.

Dagger Price Action pattern

A dagger is a relatively new price action pattern. The signal appears quite rarely, but has a high statistical probability of working out. The pattern signals the trend continuation. The dagger pattern means using two timeframes for trading, a shorter and a longer ones. One could try the following combinations: W1 and D1, D1 and H4, H4 and H1. The shorter the timeframe, the more dagger patterns will appear, but most of them will be false due to the market noise.

Conditions of a buy pattern

1. A large bullish candlestick forms in the longer timeframe.

2. The next candlestick closes above the 50% Fibonacci retracement level of the first candle. The second candlestick should not close beyond the first one.

3. The shadow of the second candlestick should not break through level 61.8 of the same Fibonacci retracement.

4. In the shorter timeframe, a candlestick forms with the lower shadow equal to or longer than the candlestick’s body.

5. The trade is entered at the breakout of the “rebound” candlestick’s high.

6. A stop loss is set below the 50% retracement level in the longer timeframe.

7. A take profit is set according to your trading system or at a strong resistance level. Another option is to set a take profit at a distance two or three times longer than the stop loss.

Conditions of a sell pattern

1. A large bearish candlestick forms in the longer timeframe.

2. The next candlestick closes below the 50% Fibonacci retracement level of the first candle. The second candlestick should not close beyond the first one.

3. The shadow of the second candlestick should not break through level 61.8 of the same Fibonacci retracement.

4. In the shorter timeframe, a candlestick with an upper shadow equal to or longer than the candlestick’s body. I will call it a “rebound candlestick” that marks the price rebound from the resistance level.

5. The trade is entered at the breakout of the rebound candlestick low.

6. A stop loss is set above the 50% retracement level in the longer timeframe.

7. A take profit is set according to your trading system or at a strong support level. Another option is to set a take profit at a distance two or three time longer than the stop loss.

Important notes to trade a dagger pattern

The pattern appears quite seldom. That is why one one should act cautiously and filter patterns in the chart to meet the conditions specified above.

The signal candlestick in a shorter timeframe should form within the range of the next bar in the longer timeframe. For example, if the longer timeframe is D1, the signal candlestick in the shorter timeframe H4 should form during six candlesticks (6×4=24 hours) after the conditions in the longer timeframe are met. If the longer timeframe is H4, the signal candlestick in the shorter timeframe H1 should form during four hours. Otherwise, the pattern will be irrelevant. An additional confirmation will be a strong general trend corresponding to the trade you are going to enter (e.g. an uptrend for a buy trade).

Price action indicators

Good assistance in trading is provided by the price action indicators. It can be used by both newbies, and professionals, who are engaged in candlestick analysis. Indicators are one of the primary and necessary trading tools when you build a forex trading system.

Unfortunately, there is not such a free trading indicator that will indicate all the price action patterns. But there are a few forex price action indicators that discover the major and most common price action patterns. They can well be useful in the analysis of price charts and anticipation of the next price moves in Forex. Let us get familiar with them.

Pin Bar Indicator free

The indicator can be downloaded in the Market section in the MQL5 community. It displays pin bars in the chart.

The indicator displays all pin bars that can be discovered in the chart. Your task, as a trader, is to additionally filter the indicator signals, define the support and resistance levels, and the trendline; after that, you can trade the pin bar but only provided you follow the rules of your trading system.

You can use the default settings of the indicator, or you can modify the original values. The above screenshot displays the Pin Bar indicator, where the following parameters are set (see the figure below):

You can also change the signal colours as you like.

This price action indicator is a simple supplementary tool.

DI Simple Price Action Indicator

This indicator of price action patterns discovers simple setups in the chart and marks them. You can choose the option when only particular patterns are displayed.

The software can be free downloaded in the app store of the MQL5 Community.

The indicator determines the following patterns: Inside Bar, BUOVB (Engulfment), BEOVB (Engulfment), DBLHC, DBHLC, and Pin Bar.

If you are going to base your trading strategy on this indicator, you should apply supplementary tools to filter the signals of buy or sell trades. Any trading signal sent by the indicator should be traded wisely.

Railway Track indicator

As it is clear from the name. This indicator discovers a Railway Track pattern in the chart, the chart pattern I described before.

Railway Track is a reversal chart pattern that appears most often on the correction in the primary trend. So, you should trade this pattern at the end of the correction.

The indicator displays the reversal patterns as up or down arrows. It also displays the target profits as lines. To get it, choose in the settings the following option:

Show Target = True

Price Action Dashboard

The indicator identifies in the chart the following patterns: Price action: Pin-bar, Double bar, Vertical bar, and their combinations. This indicator is interesting because you can set the list of the instruments and timeframes tracked by the indicator to discover the patterns. When one of the above-listed patterns appears, you will see a notification that you may enter a trade in a particular direction according to a certain pattern. You can also adjust the indicator to send the notification to your mobile.

Let us have a look at the settings of the price action dashboard:

In the Dashboard Settings tab, you should type the symbols that should be analyzed by the indicator. Next, you need to specify the timeframes where you will track the patterns. Other settings refer to the visualization of notifications and alerts.

The indicator looks like this in the chart:

At the bottom, there is a dashboard where all the current price action patterns are displayed for the instruments that you specified to monitor in the settings. However, this indicator is worth attention of any trader. The Price Action indicator is here:

Download price action dashboard free

‎Fibonacci indicator

The Fibonacci indicator, also referred to as the Fibonacci retracement levels, is a basic tool included in most trading platforms by default.

The Fibonacci retracement is drawn on the chart from low to high (in an uptrend) or from high to low (in a downtrend). It indicates areas where the price may correct. The standard retracement levels for the indicator are: 23.6%, 38.2%, 50%, 61.8% and 100%. In a strong trend, the correction is usually shallow and often reaches only the 38.2% level. In most trends, the price corrects to the levels of 50% and 61.8%.

The above chart displays a moderate downtrend in the XAUUSD. Let us look at the first descending impulse that started on March 8, 2022, and finished on March 29, 2022. I attach the Fibonacci indicator to this wave. Level 100% is at the high of March 8, level 0% will be at the low of March 29. In an uptrend, level 100% will be at the low, and 0% will be at the high.

Starting from March 30, the price started a correction, following which, it tested the resistance zone between the Fibonacci retracement levels of 50% and 61.8%. Next, a pin bar appears, following which, the downtrend resumes, and the price broke through the low of March 29. Note that the pin bar closed exactly under the level of 50%. It means this level was “protected” by sellers.

Fibonacci Trading Tip: Expect a corrective retracement greater than 50%. Then wait for the Price Action trading signals I covered earlier. After price tests the Fibonacci retracement levels and then forms a Price Action pattern, there is a good chance that the trend will continue and your trade will make a profit.

Relative Strength Index indicator (RSI)

The relative strength index (RSI) is a momentum used in technical analysis. RSI gauges the speed and strength of a security's recent price changes and shows if an asset is overbought or oversold. It allows a trader to enter trades on the correction counter the trend and make profits.

The Relative Strength Index (RSI) measures where the price is in terms of its 14-period price range. An asset is usually considered overbought when the RSI is above 70 and oversold when it is below 30. When the RSI is below 30, the price is in the lower area relative to where it traded in the last 14 periods. When the indicator is above 70, the price is in the upper zone relative to where it traded in the last 14 periods.

Traders often wait for price to exit these areas to confirm trades. When the market is actively growing and the RSI indicator enters the overbought zone, traders will wait for the indicator to go down from this area, and then consider selling a security on a correction. Conversely, when the market is actively falling and the RSI indicator enters the oversold area, traders will wait for the indicator to exit this area upwards, and then consider buy trades in the correction. The main idea of this approach is that the price in the market will always tend to an equilibrium state, balance.

Let us have a look at the gold chart in October-November 2021. Starting from October, the gold price was actively rising. At some point, the RSI reaches the overbought zone. On November 16, the indicator exits the overbought zone, and a PPR pattern forms in the daily chart. This signals a sell entry. Next, the price falls down to the support level.

The RSI trading tips: expect the market to enter the overbought/oversold zone first. Next, wait for the indicator to exit the zone and look for a Price Action signal to identify an entry point.

The RSI indicator is a basic tool present in most trading platforms.

Stochastic Oscillator

The Stochastic indicator is also used to determine the overbought and oversold states of the market. It is an oscillator present by default in most trading platforms.

The Stochastic can be used to define the trend pivot points or to confirm entry signals. It is used similarly to RSI. There are two lines on the Stochastic indicator: the Stochastic and the signal line. The signal line is a moving average of the Stochastic, so it moves more slowly.

The trader can monitor the Stochastic changes by watching its signal line. If a bidder plans to enter a sell trade, they should expect both Stochastic lines to exit the overbought zone. If you add the Stochastic oscillator to the previous chart with the RSI indicator, you will see that the stochastic gives the same information.

How to Trade Using Price Action

Trading with Price Action is not that complicated. Price action trading strategies can be used by both newbies and professionals. Traders love Price Action for its undistorted view of the market, as Japanese candlesticks reflect price action itself. Another advantage is that Price Action signals do not repaint in the chart over time.

To succeed in trading Price Action, you don’t have to study all existing price action patterns. Three or four patterns will be enough if trade them regularly.

Price action strategies work best in long timeframes, like weekly, daily, or four-hour ones. A shorter timeframe will generate more signals, but they will be less profitable.

To trade price action, one should have own trading rules and basic principles that determine trading behaviour at any particular moment.

The second essential thing is the support and resistance levels. The Price Action strategy generates entry signals, but it doesn’t provide exit signals. One can exit trades at strong support or resistance level. The key levels enforce the Price Action patterns if they appear near strong levels.

So, to trade profitably, a trader should be able to define the trend and mark strong levels in the chart. The key levels could be not only horizontal support and resistance levels, but also the price channel, the Fibonacci retracements, bank levels, margin zones, and what not.

Once a trade has mastered basic trading principles, he/she can start using Price Action patterns to discover the best entry points, stop loss value and reach the best Reward/Risk ratio.

It is best to work out the skills of trading with Price Action in the strategy tester with virtual money. In this case, the trader will be able to practice trading patterns at the comfortable speed of the tester, without the risk of losing real money. In addition, the trading simulator will allow you to consider the features of each pattern in different market states, trading flat or trending. It will also allow you to gain great experience by working in any historical segment of the market.

In general, trading Price Action patterns comes down to the following steps:

1. Define the current trend you are going to trade.

2. Mark the key support and resistance levels in the chart.

3. Expect the price correction to the strong levels.

4. Monitor the chart reaction to these levels test and expect a price action pattern in the needed direction.

5. Enter a trade according to the pattern.

6. Set a stop loss according to the pattern.

7. Set a take profit according to the basic principles of your trading system. Appropriate options are the take profit is two or three times bigger than the stop loss, the nearest support/resistance level, at the border of the price channel, and so on.

Trading Strategies With Price Action

Price Action as a trading method should be used in combination with other trading strategies that will give a clue where in the chart one should look for a pattern and in what direction to enter a trade.

Many traders use price action in conjunction with simple horizontal support and resistance levels, as well as moving average indicators, to determine the trend.

Other popular combinations to trade with price action are the Fibonacci levels, and price channels, VSA analysis, margin zones, option levels, indicators-oscillators.

The Price Action method is good because it can be combined with almost any strategy and any timeframe. You can use Price Action for both positional, medium-term trading, and scalping. Some traders combine fundamental analysis with price action by highlighting significant news and waiting for a pattern to form after the news is released.

Below, I will cover several popular Price Action strategies.

Price Action Scalping

Can I combine scalping and Price Action? Yes, definitely.

Using Price Action, you can spot profitable trade entries with a good Reward/Risk.

Of course, one should learn scalping basics to trade with this strategy successfully. Scalping suggests trading in short timeframes, from five minutes to one minute, holding trades for a short time and closing with a small profit. That is why a scalper should be flexible and easily adjust to the changing market conditions and shift from buying to selling quickly.

To trade Price Actions scalping, one should:

1. Define support and resistance levels.

2. Know Price Action setups.

The strategy mainly employs the trend continuation patterns. Since the price moves in the shorter timeframe usually occur within the trend in the longer timeframe, it is more profitable to trade in the trend direction than to open positions on the trade reversals.

I recommend the M5 timeframe. To trade in the M1 timeframe, a trader needs more experience and skills. Furthermore, the minute time frame features much price noise and suggests entering numerous trades in a short time, which add psychological stress. The M5 timeframe provides time to think over and plan trades. One could apply all Price Action patterns covered above, but they should be traded at the levels marked in the 5-minute timeframe.

Chart layout

Let us take the EURUSD chart as an example. First, we mark key levels based on the most recent price moves. So, the last two hours will be suitable for analysis to discover important levels.

To mark the levels, one should consider the price highs and lows, followed by a reversal. Horizontal levels are drawn along with these highs and lows. However, a level is not a particular price value; it is rather a zone in the chart, so you should consider both the candlestick shadows and closing prices.

Look at the strong support and resistance levels in the five-minute EURUSD chart below:

As you see, a level can be both a support and a resistance. If the resistance is broken out by the price upside, it becomes a support. In the above chart, I drew key levels for the local EURUSD uptrend.

Search for a pattern

One should look for Price Action patterns only when a strong level is broken out and the price is corrected. Look for an entry signal on the correction after the retest of the broken-out level. Let us have a look at an example:

In the above chart, the first pin bar has formed after the price broke out level 1.04441 upside and corrected back to this level. The pattern is reliable, so it can be traded.

The second pin bar appears below the support level of 1.04572. This pattern can’t be traded, as the candlestick closes below the level. The price breaks out the level, but it can’t consolidate below and goes back to the broken-out level.

After that, on the right side of the chart, the price again tests the level of 1.04572 and breaks it out with consolidation. Level 1.04572 again becomes resistance, from which the PPR pattern forms (the rightmost part of the chart). Such a pattern can be traded.

Trade entry

Below, there are general rules to enter a trade in the price action scalping strategy:

1. Enter a trade when a price action occurs at the strong level.

2. A stop loss is set beyond the strong level. Stop-Loss size is 3-5 pips. In some cases, a stop loss could be 10 pips. The stop-loss size depends on the asset volatility. If the price chart is moving sharply, and the moves are quick and long, the stop loss should be bigger. If the price is moving rather smoothly, set a standard stop loss of 3-5 pips.

3. A take profit should be about three times bigger than the stop loss. Differently put, the reward/risk ratio is 3/1.

4. The trade is exited with either a stop loss or a take profit. If the price is not going in the needed direction immediately, it is not a reason to exit a trade manually.

The examples of the trades entered at the levels discovered in the previous section are explained below.

1.The first pin bar suggested an entry level of 1.00429, the stop loss is 1.04399, and the take profit is 1.04519. The trade yields 9 pips with a potential loss of 3 pips.

2. The second pin bar is not taken into account.

3. The third pattern (PPR) provides an entry level of 1.04507 and a stop loss at 1.04593. The exit price is at 1.04247. As a result, the trade yielded 26 pips with a potential risk of 8.6 pips.

In this case, it took some time for the trade to work out. The price do not always go in the needed direction right away. In this situation, one should always observe the rule that the trade is exited either with a stop loss or a take profit. Furthermore, the PPR pattern formed in a wide range, which also takes the pattern some time to work out.

Important notes

When trading the price action scalping strategy, a stop loss is set not according to the pattern rules, but beyond the support or resistance level. So the price could move up and down before it starts trending in the needed direction.

It should be born in mind that the M5 timeframe refers to short timeframes with a lot of market noise. It often happens that as a result of this noise, the price forms several different Price Action patterns near the level, sometimes touching it, sometimes going beyond it. If you put a stop loss with some margin per level, you can avoid its false signals.

You should remember that one should used sufficient lot size to enter a trade in scalping, as the main target is to make a profit of a few pips and exit the trade. Therefore, scalpers use high leverage. In this case, along with the potential profit, the potential risk also increases. That is why it is essential to set a stop loss and do not move it.

Combination of Price Action and VSA analysis

The combination of Price Action patterns and VSA analysis can serve as a profitable trading system. With fundamental analysis, you can define the trend direction and the stage of the market cycle (trend or consolidation). However, only technical analysis will enable you to mark the levels in the chart. That is why I recommend you to apply both types of market analysis in trading.

The Price Action analysis studies the types of candlesticks and their combinations to reflect the actions of market makers at the key support and resistance levels. The Volume Spread Analysis method analyzes, in addition to candlesticks patterns, the volumes of traded liquidity in the market, which allows a trader to additionally filter out a potential trade entry and reduces the likelihood of a loss. Both types of analysis primarily consider the price chart movements. With a combination of these two approaches, you can get the most out of trading.

To apply combinations of Price Action patterns and VSA analysis, it is required to reveal the main essence of volumes in the market. Richard Wyckoff, the founder of the VSA method, identified several stages of the market:

1. The first phase is accumulation. This phase features the fight, the struggle, between buyers and sellers.

2. In the second phase, the price breaks out the resistance or support, accompanied by rising trading volumes. Next, following the retest of the level, the general trend develops. In some cases, there forms an intermediate volume accumulation phase in the trend direction.

3. Next starts the distribution phase. It is characterized by the closing of large positions, after which a reversal occurs, and another group of traders makes a profit.

A strategy, based on the trading volumes and price action patterns, suggests entering trades when the market exits the phases of accumulation and distribution. The signals are filtered using traded volumes.

The market stages look like this, according to Wyckoff:

How the VSA and Price Action trading strategy works

First, one could add vertical volumes to the price chart and use them together with the price action patterns.

For example, if earlier a trader used a pin bar pattern after a level retest, now this pattern can be backed up by analyzing the traded volume. Practice shows that a pattern formed with large volumes in the market has a higher probability of working out than a pattern that is not supported by volumes. An example of this approach is posted below:

• The first Pin-bar for a rebound from the level was formed on falling volumes. We do not take into account such a signal, especially before the closing of the American session.

• The second Pin-bar was reinforced by a surge in volume. While not the most ideal pattern, the high volume and the inability to break through the resistance level make for a great trade entry.

• The third Pin-bar formed on falling volumes, which tells us about the need for further monitoring of the market. As it turned out later, the resistance level was broken out.

Let’s have a look at the example of the broken-out level retest and combine Price Action patterns with the VSA based on the same principle as above.

• In the first case, there was a test of the support level on small volumes. Despite the fact that the level was held and the price increased further, it is not recommended to trade such a pattern.

• The second test of the level ended with a doji candlestick with a long lower shadow, which means that sellers can’t break out the level downside. This candle can also be interpreted as a Pin-bar, and an increase in volume indicates a potentially profitable trade, entered according to this pattern.

The Price Action + VSA strategy allows you to avoid traps when trading from horizontal levels. If the Price Action pattern is formed on small volumes, then it is better not to trade such a formation, since there is a high risk of a loss as a result of the level retest on high volumes. A serious struggle between sellers and buyers around a significant level is always supported by an increase in volumes.

• The example above shows two patterns for the Euro futures (6E). The first Pin-bar pattern formed around the resistance level 1.14420 on a small volume. The volume on this candlestick did not go beyond the average volumes taken over the past day.

• However, the second Pin-bar pattern was formed on rising volume, which clearly stands out from other volumes on the same day. The next bearish candlestick brings the price back below the resistance level, providing a good entry point.

If a trader had entered a sell position on the first pattern, they would have received a stop loss in just a few hours. And the trader who opened a position on the second pattern held the trade till the next day when the buyers made another attempt to break through the level. As a result, the level was held, and the price dropped to the support level of 1.14035.

Let's consider another way to apply the Price Action and VSA strategy. This strategy enables one to analyze the trend state, its direction, speed and strength. The candlestick range is considered, as well as their patterns and traded volume.

Summary

When large traders act in the market, they leave traces. These traces are reflected by the traded volume. Analyzing the VSA, a trader sees what trades were entered by the market maker. In combination with price action patterns, the strategy indicates the trend direction.

The combination of VSA and Price Action is a fairly simple but profitable trading strategy that works in all markets where you can see the real traded volume and helps to filter out unreliable signals.

Price Action and margin zones

Price Action patterns suggest entering trades at strong levels. The strong levels could be determined by the margin requirements zone or margin zones.

General rules

To cut it short, the general rules of the strategy look like this:

1. Margin zone drawn counter the trend is the zone, where one should look for a trade entry in the trend.

2. Margin zones are drawn based on the key highs and lows in the chart. The highest and the lowest points in the chart are the reference points.

3. The zone of ½ size refers to the border of the short-term trend. As long as this zone is held by buyers or sells, the ongoing trend will continue.

4. The trade is entered in the margin zone according to a Price Action pattern.

5. Take profit is set above the local high or below the local low.

6. Stop Loss is set beyond the margin zone at some distance, so that the Reward/Risk ratio for the trade is ≥ 3.

How to calculate margin zones

• The inside border of the margin zone is calculated according to the formula: Maintenance Margin / Minimum Price Fluctuation.

• The outside border of the margin zone is calculated according to the formula: Initial Margin / Minimum Price Fluctuation.

All data is taken from the exchange where the futures contract for an instrument is traded. The most popular exchange for calculating zones for currency pairs is the Chicago Mercantile Exchange (CME Group).

If you need to calculate the fractional zones 1/2 and 1/4, then the values ​​obtained above, according to the formula, are divided by 2 or 4.

How the strategy works

To trade the Price Action + Margin Zones strategy, you should follow the steps below:

1. Define the trend.

2. Expect a correction towards the margin zone.

3. Discover a price action pattern.

4. Enter a trade according to the pattern.

5. A Stop Loss is set beyond the margin zone or according to the Price Action pattern (if the pattern is in a wide trading range).

6. A Take Profit is set beyond the local high or low, where the correction started. A part of the profits could be taken at the intermediary support/resistance levels.

How to define a short-term trend using margin zones

For a short-term trend, according to the method, a zone equal to half of the range that we obtain in the calculations is responsible. Let's denote it by the fraction ‎1/2.

To determine the short-term trend for an asset using margin zones, one should open the one-hour chart. Next, you need to expand the chart to full screen and market the highest and the lowest points. Margin zones should be built from the high or low that appeared in the chart earlier.

• If you see a high formed first, you draw a ½ zone down from this high.

• If you see a low formed first, you draw a ½ zone up from this low.

In the above example, you see two margin zones. If you look from left to right, the first of them was the border of a short-term uptrend, and the second - the border of a short-term downtrend.

The red horizontal levels are the closing levels of the American trading sessions. If the American session closes below the border of the uptrend, then the trend changes to a downtrend. If the American session closes above the border of the downtrend, then the trend changes to an uptrend.

Actually, the Margin Zones strategy is a little more complicated than described here, but even if a trader builds margin zones from any strong highs and lows, and then looks for Price Action patterns in the area of ​​these zones in the direction of the current short-term trend, such trades will yield good profits.

The best forex price action strategy

What is the best price action strategy? Price action patterns are traded differently in different market situations. Each situation requires a different price action pattern. I think that a trader, who takes a decision to trade price action patterns, should be able to handle different setups, know how they are formed and how to trade price action patterns. A good tool there will be any of the price action indicators described above. But do always remember that you can’t trust 100% in any technical indicator. Reasonably filter the signals delivered considering the general market situation and the price chart. This way, you will clearly see the price movements, and the sentiment of big traders.

Price Action Trading vs. Indicators Trading: Which is More Profitable?

Each trading strategy has its pros and cons. The Price Action strategy is easy to learn and does not require additional indicators to work, thus reducing the trader's costs for additional software. In addition, this strategy allows you to analyze the price chart without distortion, which most indicators give. Thus, when trading with Price Action, we see the price movement in its purest form, and the patterns give us an idea of the actions of large traders.

Indicator trading strategies somehow ease the work of a trader, making calculations automatically. They greatly simplify the chart analysis. displaying the analyzed data in a convenient form on the screen. Thus, the trader has visibility, which helps to discover patterns in the chart and make profits. However, all indicators have a common drawback, they show a derivative price value, which can distort the real picture of the market. It is hardly possible to find a reliable indicator of future results. Behind the multitude of indicators, a trader may not see the price action, and the price is the essence of the market. Many professionals believe that price chart is the most reliable indicator.

I compared Price Action and Indicator strategies in the table below.

Does it make any sense to use price action patterns in trading?

There is no universal answer to this question. Everything depends on your trading style and personality. If something suits one trader, it may not suit another. I don’t think there is any forex trading strategy suitable for all investors. Having read this article, you should first decide if you like such an approach to the price chart analysis or not. If you feel like trying to trade price action forex strategy, learn more about this topic, study other price action patterns and their combinations, read articles and watch training videos and follow the example of professional successful traders, who trade price action patterns.

But I can say for sure, it is good for every trader to know the basic Price Action patterns. They are the basics of trading, and who knows when you will need this information.

Conclusion

This article has covered the fundamental principles of the Price Action trading strategy. It should be noted that the technique is simple and universal. With Price Action, you can trade in any market and any timeframe.

There are a large number of Price Action patterns from which a trader can choose the most suitable for themselves and their trading style. You should not try to learn all known combinations immediately. It is enough to master a few Price Action patterns and work them out as much as possible.

There are reversal patterns and trend continuation patterns, so one can trade with the trend or in the correction. With the help of reversal patterns, one could project the momentum end in advance and enter trades in the new trend at the best prices.

Based on existing Price Action strategies, a trader can create an own trading system. This system will include a set of unified rules, under which the trader will make profits. You can combine various strategies with the Price Action technique for the best effect.

To facilitate the search for patterns, you can use the indicators described in the article. However, you cannot rely solely on indicators. They can send false signals, so each signal from the indicator should be filtered. At the beginning of trading, indicators will help the trader understand how the main Price Action patterns look like and how they are formed, but in the future, it is better to abandon indicators and gain experience in identifying patterns independently.

I should note that Price Action is not a trading system, but only a method of trading. With the help of Price Action, you can assume further short-term price movement and determine the entry point as well as the level for placing a stop loss. However, the exit point, as well as the zones of potential price reversal or trend continuation, must be determined using other tools, for example, horizontal support and resistance levels, Fibonacci levels, or trading volumes.

It is up to you whether to apply the Price Action technique in your trading, but you should still know the main patterns since, at a certain controversial moment in the market, it is the knowledge of Price Action patterns that will help you make the right decision.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.