If you occasionally surf the Internet, it can be difficult to tell whether you are looking at a chart diagram or hieroglyphs. When you see a chart with many indicators and trend lines, a trader is likely trying to overcompensate for lack of certainty.
We have even seen some traders who will have four or more monitors where the charts on each monitor are so busy. When one sees such a setup, one hopes the traders will eventually free themselves from this burden of proof.
What if we lived in a world where we only traded price action? A world where traders prefer simplicity to the complex world of technical indicators and automated trading strategies.
When you remove all the clutter from the trades, all that’s left is the price.
Clear price chart for price action trading
At first glance, it can be almost as intimidating as a chart full of indicators. Like everything in life, we build addictions and disabilities from the pain of real-life experiences. When you’ve traded your favorite indicator for years, going down to a bare chart can be a bit traumatic.
Although price action trading is inherently simple, there are different disciplines. Disciplines can range from Japanese Candlestick Patterns, Support & Resistance, Pivot Point Analysis, Elliott Wave Theory, and Chart Patterns.
This article examines the top six price action trading strategies and what it means to be a price action trader.
A brief explanation of price action
Price action means interpreting and analyzing the market using price charts. Thanks to the price development and candlestick formations, it is very likely to find out in which direction the market can go and where there are many buyers or sellers. This can save you from mistakes and support trading strategies.
What does price action consist of?
Before we dive into the strategies, let me first remind you of the four pillars of price action trading:
- Candlesticks
- Uptrend
- Downtrend
- Flat market / sideways phase
If you can identify and understand these four concepts and how they relate to each other, you are on the right track.
Candlesticks
Candlesticks are the most popular form of charting in the trading world today. Historically, scatter and figure charts, line charts, and bar charts were the important ones of their time. To avoid making things too complicated in the beginning, you can use the charting method of your choice. There is no hard line here. However, to avoid turning this into a thesis paper, we will focus on candlesticks.
In the world of finance, there are a lot of complicated terms and technical indicators that can be confusing for the layman. However, there is one tool that is relatively simple to understand and can be a powerful tool for analyzing price action: the candlestick.
What are candlesticks?
Candlesticks are graphical representations of price movements over a certain period of time. Each candlestick typically represents one day, although candlesticks can be constructed for any time frame (e.g., 5 minutes, hourly, weekly).
The candlestick’s body represents the opening and closing prices during that time period, while the wicks represent the high and low prices.
There are several different types of candlesticks, each with its own meaning. For example, a bullish engulfing pattern occurs when a small candlestick is followed by a large candlestick whose body completely engulfs the previous candle’s body. This is considered a bullish signal, as it signifies that buyers are beginning to overwhelm sellers.
The Different Types of Candlesticks
There are many different types of candlesticks, each representing different price action and telling their own story. Some common patterns include:
Bullish Engulfing: A small candlestick is followed by a large candlestick whose body completely engulfs the previous candle’s body. This is considered a bullish signal, as it signifies that buyers are beginning to overwhelm sellers.
Bearish Engulfing: The inverse of a bullish engulfing pattern – a large candlestick is followed by a small candlestick whose body is completely engulfed by the previous candle’s body. This is considered a bearish signal, as it signifies that sellers are beginning to overwhelm buyers.
Doji: A Doji occurs when the open and close prices are equal or very close to each other (i.e., there is very little difference between the two). This signifies indecision in the market and can be either bullish or bearish, depending on context.
Hammer: A hammer occurs when the open price is near the low price, and the close price is near the high price (i.e., there is a long wick on either side with very little difference between them). This signals buyers have overwhelmed sellers and is considered a bullish reversal signal.
Conclusion
The most important point to remember about candlesticks is that each candle carries information, and each group or grouping of candles also carries a message. You have to start thinking of the market in layers.
Candlesticks may seem intimidating initially, but they’re pretty simple to understand once you know what you’re looking for. By checking for key patterns, you can get an idea of where prices might be headed next – giving you an edge in your trading or investing decisions.
