The Price Action trading method is an important part of technical analysis. Retail traders use it across all financial markets and instruments because all you need for analysis is a chart, a few basic indicators, and the ability to read price movements.
To trade using this strategy, you need to study basic chart patterns, understand market structure, trends, and corrections, and determine support and resistance levels. Price Action can be supplemented with indicators, but they should not overload the market’s price chart. The main focus here is on analyzing the price, its movement, and chart patterns.
The article covers the following subjects:
Major Takeaways
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Price Action refers to observing the market and looking for recurring patterns on the chart, especially near strong levels, to open a trade with a high probability of profit.
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In a narrow sense, Price Action is a set of candlestick patterns, including Pin Bar, Railway Tracks, Closing Price Reversal, Pivot Point Reversal, Outside Bar, and Inside Bar patterns, etc.
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The main elements of price action trading strategies include market structure, key reversal points, trend identification, support and resistance levels, chart patterns, and false breakouts.
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Price Action trading is based on finding market inefficiencies and understanding the current market phase. Market participants should be able to identify structure, trends, and key levels, as well as know the basic trading patterns.
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To successfully apply price action analysis, you first need to study the strategy’s basic elements and then devote a lot of time to practice. Since chart analysis is largely subjective, you need to gain your own understanding of the market and hone your skills. For example, you can use a trading simulator.
What Is Price Action Trading?
Price Action in trading is a technique for analyzing the market by studying price behavior on a chart. The term Price Action refers to changes in an asset’s price over time.
In a broad sense, Price Action includes all chart patterns that traders use to analyze the market. For example, the Head and Shoulders reversal trade pattern, 1-2-3, Cup and Handle, and others. Some patterns signal a reversal, while others suggest a trend continuation. These patterns help predict market movements.
In a narrow sense, Price Action reflects a specific sequence of candlesticks that indicates a potentially profitable trading opportunity to enter into a long or short position. Such patterns can be either reversal or trend-following. Price Action traders often refer to them as setups. For example, Pin Bar, Railway Tracks, PPR, Inside Bar, Outside Bar, and others.
Price Action in Forex
Price Action in Forex is a market analysis approach that focuses on studying pure price movement, with minimal use of price action indicators. Traders focus on price behavior, market structure, trends, support and resistance levels, and candlestick patterns. It is believed that all important information is already reflected in the price, so its analysis helps to understand the current balance of supply and demand.
Price Action was originally designed for the stock market, but later became widely used in Forex trading.
This method is especially popular in Forex due to high liquidity and more pronounced price movements. Price Action analysis helps traders find optimal entry and exit points, assess market context and recent price history, and adjust to changing conditions.
The strategy’s efficiency depends on several factors, including the trader’s experience, ability to read candlestick charts, and discipline. Price action requires practice, observation, and an understanding of price behavior.
Essential Elements of Price Action Analysis
The key elements of Price Action analysis include support and resistance levels, trends and corrections, market structure, and reversal or continuation points.
Let’s take a look at each element of Price Action separately.
Support and Resistance Levels
Support and resistance levels are the cornerstone of technical analysis.
A key level represents a price zone on a chart where the market has previously displayed a strong reaction. While the reaction may vary, it typically falls into one of two scenarios:
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a key level remains intact, and the price rebounds from it;
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a key level is broken through, and the movement continues.
A tug-of-war between buyers and sellers often occurs near such zones. These points remain on the chart and help analyze future price behavior. Experienced traders identify these areas using historical economic data and label them as key levels.
As a rule, traders expect the price to show reactions near these zones. As a result, when the price rebounds or breaks through the key level, trading opportunities arise. Additionally, to increase the likelihood of a successful trade, traders look for a confirming chart pattern in this key area.
How to determine support and resistance levels:
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Look for key reversal points where the price has experienced a strong reaction.
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Pay attention to consolidations above or below the level, as they can help you more accurately determine the zone’s boundaries.
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The more times the level is touched and the more subsequent rebounds there are, the stronger it is.
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False breakouts often confirm the significance of the key level.
Trend Identification: Higher Highs and Lower Lows
Another important element of Price Action is trend identification.
An uptrend forms when highs and lows rise consistently. A downtrend occurs when significant highs and lows steadily decline.
Sometimes it can be difficult to identify a trend relying solely on a highs and lows strategy. In such cases, you can use a moving average as an auxiliary tool.
The following periods are usually used:
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18 — for a short-term trend;
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50 — for a medium-term trend;
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190 or 200 — for a long-term trend.
The indicator helps to reveal the general market direction and reduce the subjectivity of analysis.
Market Structure and Swing Points
The market structure is directly related to the trend. Technical analysts track the emergence of new highs and lows.
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If the extremes are consistently rising, the uptrend continues.
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If the extremes are falling, a downtrend is underway.
Sometimes, in an uptrend, growth slows down, after which the price falls and forms a lower low. This does not necessarily mean the start of a new downtrend. To confirm a reversal, at least two lower highs and two lower lows are required.
A situation where the price breaks through the previous sequence of highs and lows is called a break of structure (BOS).
The blue rectangle shows a break of structure on the USD/JPY chart.
After the BOS, there are three possible scenarios:
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It may turn out to be a deep correction within a larger trend.
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The trend may reverse.
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The market may enter a consolidation (flat) phase.
The key reversal point is:
The blue rectangle highlights the last high in the downtrend, which is the key reversal point.
As long as the price remains above (in an uptrend) or below (in a downtrend) this point, the primary direction remains intact. If the price breaks through the key level and consolidates above it, it could signal a possible reversal.
For example, a breakout of the last high in a downtrend often signals the beginning of an uptrend.
Top Price Action Patterns Every Trader Must Know
There are many price action patterns. Some are very popular and often generate favorable results, while others are rarely used and offer little advantage in the market.
Practically speaking, it all boils down to three basic ideas: momentum, corrections, and false breakouts. This is why experienced traders usually stick to a few key patterns instead of learning dozens of formations.
Pin Bar Pattern
A Pin Bar is one of the most popular Price Action patterns. It is a candlestick pattern with a small body and a long shadow (wick), indicating a sharp reversal and rejection of the price.
A long shadow suggests the market attempted to continue its movement but reversed quickly. This may signal a reversal or at least a correction.
Where does the pin bar work best?
The pattern shows its greatest strength:
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at key support and resistance levels;
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after a strong impulse movement;
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in the false breakout zone.
Preferably, the candlestick body should be small, and the shadow should be several times longer than the body. The more pronounced this proportion is, the stronger the signal.
How to trade pin bars
Most often, Price Action traders enter:
Stop losses are usually placed beyond the candlestick’s shadow.
Red arrows indicate bearish pin bars, blue arrows highlight bullish pin bars.
Remember that pin bars appear frequently, but not all of them are suitable for trading. A professional approach involves selecting only high-quality setups.
Pay attention to the following:
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A strong level at the point where the pattern is formed.
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A shadow should be several times longer than the body.
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Open trades in the trend’s direction or at the trading range’s boundaries.
The most reliable Price Action setups form near key market areas. Additional confirmation can be provided by multiple factors coinciding, such as support or resistance levels, the exponential moving average (EMA), Fibonacci levels, or swing range boundaries.
For example, a pin bar in the EMA21 area or in the crossover zone of EMA21 and EMA190 may be more valuable than a pin bar formed in some random part of the chart.
Head and Shoulders Reversal
Head and shoulders is a classic reversal pattern that appears after a sustained uptrend and often signals a change in price direction.
The pattern consists of three peaks:
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Left shoulder.
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Head — the highest peak.
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Right shoulder — usually lower than the head and approximately at the level of the left shoulder.
The lower part of the pattern consists of the neckline, which acts as a support line. A break below the neckline confirms the pattern. Following this, there is an increased likelihood that the uptrend will end and a downtrend will begin.
There is also a mirror image of this pattern, known as the inverse Head and Shoulders. It appears after a downtrend and suggests a trend reversal.
The reliability of the pattern is usually higher if:
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the shoulders appear relatively symmetrical;
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the pattern takes a long time to form;
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the price moves with strong momentum after breaking through the neckline.
The profit target is often determined as the distance between the head and the neckline, projected in the direction of the breakout.
False Breakout (Fakey) Pattern
A false breakout is a popular price action pattern. It is always considered in conjunction with a support or resistance level. The essence of the pattern is that the price breaks through the key level, then quickly reverses.
A false breakout can appear both at the end of a trend and after the completion of a correction.
How the pattern is formed
First, the price tests the key level. Next, a breakout occurs — a movement beyond the level, where traders’ stop-loss orders placed beyond the extremes are often triggered. After that, the price reverses.
This scenario is often accompanied by a sharp impulse in the opposite direction, which can be seen as a strong candlestick or a series of candlesticks covering a wide price range.
False breakouts often form familiar candlestick patterns.
Essential trading rules:
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Pay attention to the breakout of the key level.
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Wait for the price to return to the level.
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Find a confirming candlestick pattern (Pin Bar, Engulfing, PPR, etc.).
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Open a trade in the direction of the reversal.
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Place a stop-loss above the high or below the low of the false breakout.
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Follow the rules of risk management.
Price Action Trading Strategy
Price Action trading encompasses the patterns and elements we discussed above, but is not limited to them. It is a comprehensive approach to market analysis.
Step 1. Determining Market Structure
First, define the market structure by marking key highs and lows on the chart.
For trading using Price Action, it is most common to use higher timeframes:
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weekly (W1);
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daily (D1);
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4-hour (H4).
You can analyze several financial instruments simultaneously.
Step 2. Trend Identification
After plotting the structure, determine the existing trend. It can be:
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upward trend;
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downward trend;
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sideways (flat) trend.
For example, if the price breaks through a key high and settles above it, the trend may be turning upward. Additional confirmation comes when the price breaks through the next high.
Step 3. Marking Key Levels
After identifying the trend, mark key support and resistance levels. It is in these zones that patterns are most likely to form.
In an uptrend, focus on:
Sometimes, during a correction, new levels form closer to the price — these should also be taken into account.
Step 4. Finding Entry Point
When the price approaches a key level, wait for a confirming Price Action signal. For example, a False Breakout, Pin Bar, or Engulfing.
If a false breakout with a bullish engulfing pattern occurs at the support level, it may signal an opportunity to open a long position.
Stop-losses are usually placed:
Step 5. Position Management
The first take-profit order is often set at the nearest resistance level.
Part of the position can be kept open in the market and monitored until the selected risk/profit ratio is reached, for example, 1:3.
Thus, the Price Action trading algorithm is as follows:
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Determine the market structure.
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Identify the trend.
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Mark key levels, including dynamic ones, such as moving averages.
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Wait for a pattern to appear.
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Open a trade in accordance with risk management principles.
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This approach can be used to analyze any instrument in any market.
Conclusion
The Price Action strategy is based on analyzing price movements over time. During these movements, trends, market structure, support and resistance levels emerge, which create trading opportunities.
Price action trading requires spotting patterns on the chart and grasping price behavior. Traders use false breakouts and candlestick patterns to determine entry and exit points in the market.
Remember that mastering this strategy requires time, practice, and discipline.
Price Action Trading FAQs
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