An Introduction To Price Action Trading Strategies - Imp

An Introduction to Price Action Trading
Strategies
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By SHOBHIT SETH
Updated Jun 25, 2019
Price action describes the characteristics of a security’s price movements.
This movement is quite often analyzed with respect to price changes in the
recent past. In simple terms, price action is a trading technique that allows a
trader to read the market and make subjective trading decisions based on the
recent and actual price movements, rather than relying solely on technical
indicators.
Since it ignores the fundamental analysis factors and focuses more on recent

and past price movement, the price action trading strategy is dependent
on technical analysis tools.
[ Many day traders focus on price action trading strategies to quickly

generate a profit over a short time frame. For example, they may look for
a simple breakout from the session's high, enter into a long position,
and use strict money management strategies to generate a profit. If
you're interested in day trading, Investopedia's Become a Day Trader
Course provides a comprehensive review of the subject from an
experienced Wall Street trader. You'll learn proven trading strategies,
risk management techniques, and much more in over five hours of on-
demand video, exercises, and interactive content. ]
Tools Used for Price Action Trading

Since price action trading relates to recent historical data and past price
movements, all technical analysis tools like charts, trend lines, price bands,
high and low swings, technical levels (of support, resistance and
consolidation), etc. are taken into account as per the trader’s choice and
strategy fit.
The tools and patterns observed by the trader can be simple price bars, price
bands, break-outs, trend-lines, or complex combinations
involving candlesticks, volatility, channels, etc.
Psychological and behavioral interpretations and subsequent actions, as

decided by the trader, also make up an important aspect of price action
trades. For e.g., no matter what happens, if a stock hovering at 580 crosses
the personally-set psychological level of 600, then the trader may assume a
further upward move to take a long position. Other traders may have an
opposite view – once 600 is hit, he or she assumes a price reversal and hence
takes a short position.
No two traders will interpret a certain price action in the same way, as each
will have his or her own interpretation, defined rules and different behavioral
understanding of it. On the other hand, a technical analysis scenario (like
15 DMA crossing over 50 DMA) will yield similar behavior and action (long
position) from multiple traders.
In essence, price action trading is a systematic trading practice, aided by

technical analysis tools and recent price history, where traders are free to take
their own decisions within a given scenario to take trading positions, as per
their subjective, behavioral and psychological state.
Who Uses Price Action Trading?

Since price action trading is an approach to price predictions and speculation,
it is used by retail traders, speculators, arbitrageurs and even trading firms
who employ traders. It can be used on a wide range of securities
including equities, bonds, forex, commodities, derivatives, etc.
Price Action Trading Steps

Most experienced traders following price action trading keep multiple options
for recognizing trading patterns, entry and exit levels, stop-losses and related
observations. Having just one strategy on one (or multiple) stocks may not
offer sufficient trading opportunities. Most scenarios involve a two-step
process:
1) Identifying a scenario: Like a stock price getting into a bull/bear phase,

channel range, breakout, etc.
2) Within the scenario, identifying trading opportunities: Like once a stock is in

bull run, is it likely to (a) overshoot or (b) retreat. This is a completely
subjective choice and can vary from one trader to the other, even given the
same identical scenario.
Here are a few examples:
1) A stock reaches its high as per the trader’s view and then retreats to a
slightly lower level (scenario met). The trader can then decide whether he or
she thinks it will form a double top to go higher, or drop further following
a mean reversion.
2) The trader sets a floor and ceiling for a particular stock price based on the
assumption of low volatility and no breakouts. If the stock price lies in this
range (scenario met), the trader can take positions assuming the set
floor/ceiling acting as support/resistance levels, or take an alternate view that
the stock will breakout in either direction.
3) A defined breakout scenario being met and then trading opportunity existing

in terms of breakout continuation (going further in the same direction) or
breakout pull-back (returning to the past level)
As can be seen, price action trading is closely assisted by technical analysis

tools, but the final trading call is dependent on the individual trader, offering
him or her flexibility instead of enforcing a strict set of rules to be followed.
The Popularity of Price Action Trading

Price action trading is better suited for short-to-medium term limited profit
trades, instead of long term investments.
Most traders believe that the market follows a random pattern and there is no
clear systematic way to define a strategy that will always work. By combining
the technical analysis tools with the recent price history to identify trade
opportunities based on the trader’s own interpretation, price action trading has
a lot of support in the trading community.
Advantages include self-defined strategies offering flexibility to traders,

applicability to multiple asset classes, easy use with any trading software,
applications and trading portals and the possibility of easy backtesting of any
identified strategy on past data. Most importantly, the traders feel in-charge,
as the strategy allows them to decide on their actions, instead of blindly
following a set of rules.
The Bottom Line

A lot of theories and strategies are available on price action trading claiming
high success rates, but traders should be aware of survivorship bias, as only
success stories make news. Trading does have the potential for making
handsome profits. It is up to the individual trader to clearly understand, test,
select, decide and act on what meets his requirements for the best possible
profit opportunities.

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What tools are used for price action trading?

What tools are used for price action trading?

What are the steps involved in price action trading?

What are the steps involved in price action trading?

An Introduction to Price Action Trading

Since it ignores the fundamental analysis factors and focuses more on recent

[ Many day traders focus on price action trading strategies to quickly

Tools Used for Price Action Trading

Psychological and behavioral interpretations and subsequent actions, as

In essence, price action trading is a systematic trading practice, aided by

Who Uses Price Action Trading?

Price Action Trading Steps

1) Identifying a scenario: Like a stock price getting into a bull/bear phase,

2) Within the scenario, identifying trading opportunities: Like once a stock is in

Here are a few examples:

3) A defined breakout scenario being met and then trading opportunity existing

As can be seen, price action trading is closely assisted by technical analysis

The Popularity of Price Action Trading

Advantages include self-defined strategies offering flexibility to traders,

The Bottom Line

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