What Is Price Action Trading Strategy and How Does It Work?

The way you make decisions when acting on the financial markets defines your trading strategy. If you prefer price charts as the dominating force to analyze trends and prices instead of exploring the fundamentals, you are probably an indicator trader, who uses seasonality, order flow, and other niche-oriented strategies that include price action trade as well.

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Price action trading is one of the simplest forms beginners might want to learn right from the start. Besides, it has proved to be one of the most effective techniques. If you only make your first steps in the financial market, learn what price action trading is and why it can be a good starting point.

Explaining the Price Action Strategy

The price action trade is simple to understand. It depicts the price of an instrument plotted over a specific timeframe. What's more, this technique comes as a technical analysis basis when trading commodities, stocks, and other instruments.

The key price action trading features you need to consider include:

  • The strategy shows the up and down security price movement over a specific timeframe.
  • Different traders may read charts in different ways depending on the strategy. A different overview makes it possible to make trends that are more obvious in price action trading.
  • Different technical analysis tools are calculated from the price action, which makes the strategy the basis for its formations and different chart patterns.

What's more, traders can project price action trading in the future to ensure better decision-making. The best thing is that you can test this strategy risk-free on MTrading demo account right now. Installation of MT4 is totally free and $5000 on demo balance allow trying any strategy without risking money.

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Types of Price Action Strategies in Forex Trading

As a rule, traders may choose from several types of price action trading depending on their own techniques and style. They generally include breakouts and candlestick strategies that apply to particular chart patterns.

Breakouts

Breakouts appear to be one of the most common strategies. It is pretty simple. A breakout may occur from various patterns that generally include:

  1. Rages.
  2. Triangles.
  3. Head and Shoulders.
  4. Flag patterns.

What you need to figure out is that the breakout itself does not ensure the price movement in the same direction. So, you actually get a new trading opportunity to act in the opposite direction. The size of the breakout may be different. All you need is to look for small consolidations to plan your strategy and trade to oppose the breakout. The strategy may have a huge profit potential if the price tends to move sideways.

Candlestick Strategies

This strategy is for chart fans. You need to take into account different types of charts form the price bar. For example, you can benefit from using price support and resistance levels when searching for ultimate trading opportunities. What's more, some support and resistance levels can happen again in the future especially if the price has already reversed in the past.

Tips to Use Price Action Trading Strategy

You should take price action trading as something obvious. It is not a trading indicator or a chart. It provides essential data that shows how the tools are constructed. The strategy mainly refers to swing and trend traders. They prefer opting for support and resistance levels to foresee the breakout instead of relying on Forex fundamentals.

However, even those traders are supposed to take into account other crucial factors that lie beyond the current or historical price. Those factors may include the volume or timeframes to come up with the most accurate trading data interpretation.

Price Action Trading Strategy Pros and Cons

The strategy is perfect for newbies while experienced traders combine it with other techniques to form an ultimate data source. However, price action trading is not perfect. It comes with its specific pros and cons you need to be well aware of.

Pros:

  • Easy to use – the strategy is easy and fast to learn. It does not require much exploration. Simply find an asset with price conditions that suit you or wait until those conditions occur naturally.
  • Entry and Exit Points – the strategy reveals some of the most favorable market exit and entry points. It appears to be more effective than some indicator-based instruments.
  • Comprehensive Data Source – traders generate the info in real-time by simply focusing on the price.

Cons:

  • Difficult to Automate – you will need to complete most of the actions manually. So, if you expect to have another intuitive trading robot by your side, price action trading is not for you. The good news is that taking manual actions is hardly a challenge for the majority of traders despite the level.
  • Trading Limitations – it does not show the future. The strategy only shows how the price has been acting until you entered the market. It can drop shortly once you have started to buy considering it was moving high for some time.

The Bottom Line

Despite some drawbacks, price action trading is a good strategy to get started. It helps new traders to read price charts as well as interpret data they provide. As a result, beginners are able to work out their own trading system that can be combined with seasonality, technical analysis, indicators, and other tools to make the financial market as transparent as possible.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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