{"id":394775,"date":"2020-09-11T12:14:41","date_gmt":"2020-09-11T10:14:41","guid":{"rendered":"https:\/\/ftmo.com\/?p=394775"},"modified":"2023-09-26T14:15:31","modified_gmt":"2023-09-26T12:15:31","slug":"price-action-trading","status":"publish","type":"post","link":"https:\/\/ftmo.com\/en\/price-action-trading\/","title":{"rendered":"Price Action Trading: The COMPLETE Course for 2021"},"content":{"rendered":"

There are so many different trading strategies traders can utilize in their endeavours to be a successful trader. Price Action trading is probably the most popular trading approach among technical traders. But what really is trading a Price Action? Support and Resistance, Trendlines, Candlestick patterns, Fibonacci Retracement or Chart patterns are the most popular price action techniques traders use. This is<\/em>\u00a0exactly what we are going to cover in this trading course.<\/em><\/p>\n

What is Price Action Trading?<\/h2>\n

For most technical traders, we all start off on the hunt for a worthy system\/strategy that can prove to be profitable through the test of time, and throughout varying market conditions.<\/p>\n

When it comes to trading, there is no right or wrong strategy, but rather finding a strategy that works for you.<\/p>\n

What a lot of traders we talk to have in common is that after trying to trade with indicators, they tend to simplify their trading approach a move to price action trading.<\/p>\n

Price action trading simply means tracking prices\u2019 movements.<\/p>\n

Studying its recent and past movements, highs, lows, and information on all different time frames, in order to better analyze the price in current time and configure a plan for its future movements.<\/p>\n

The term “naked trading” means keeping your charts clean, free of indicators.<\/p>\n

The most important tools to use and things to pay attention to when it comes to price action trading are support and resistance levels, trendlines, candlesticks, chart patterns and Fibonacci levels.<\/p>\n

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Breakout and Reversal Price Action Trading<\/h2>\n

In June 2013, price on Gold fell to about $1200 after a severe downtrend. Price on Gold has never been that low since August 2008. Shortly after, price reversed and rallied up to $1430. 3 months later, we tested the $1200 level again in December 2013 and the price bounced again. Price hasn’t tested that level until another 10 months later in December 2014.<\/p>\n

It is not a coincidence<\/strong> that we see the price\u00a0coming and reversing at a price level over and over again. It is very simple logic.<\/strong> When the price drops to a level and reverses, it marks a reversal level<\/strong> on a chart. This is to be interpreted as buyers coming into the market and overpowering the sellers, driving prices up. The second time price drops to that level, traders have to ask themselves: ‘Buyers have come into the market at $1200 on Gold. Where is a logical price level to enter?<\/strong> Obviously, 3 months ago (first reversal) buyers did not allow the\u00a0price of Gold drop below $1200, so there should be traders waiting at $1200 again to go long, right?’ This thought proved to be right and price reversed off from our $1200 price level again… And again in December 2013.<\/p>\n

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Gold – Daily<\/p><\/div>\n

The graphical representation of this reversal level<\/strong> is the horizontal line drawn on the chart. Traders like to refer to it as Support<\/strong>, a price level where we can expect demand. On the other hand, we also have levels of supply, which traders refer to as Resistance<\/strong>. You can see a nice example of resistance below.<\/p>\n

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EURUSD – Daily<\/p><\/div>\n

This was an introduction to a very popular trading methodology: PRICE ACTION<\/strong>. Price action strategies are very popular among many traders as it has a very simple and logical reasoning behind it. Price Action Traders are usually happy with a naked price chart. No indicators\u00a0are required as the price is the purest information about an instrument.<\/p>\n

The thought process of a Price Action trader is the following:<\/p>\n

    \n
  1. Analyze past price movement to project demand & supply levels<\/li>\n
  2. Capitalize on the projections by looking for trading opportunities<\/li>\n<\/ol>\n

    One method to project supply & demand levels are, but not limited to, Support & Resistance (S&R) zones, Trendlines, Fibonacci ratios or Highs & Lows (H&L). In this Article, I will present you a few simple trading strategies using only S&R levels and basic candlestick patterns.<\/p>\n

    Conventionally, Price Action Traders will fall into one of the two main categories:<\/p>\n

      \n
    1. Reversal Trading<\/li>\n
    2. Breakout Trading<\/li>\n<\/ol>\n

      Reversal Trading<\/h2>\n

      Reversal traders project supply & demand levels and when the price hits these levels, they expect the price to reverse in their favour. In the following example, we will use candlestick patterns to confirm successful reversals.<\/p>\n

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      BTCUSD – H1<\/p><\/div>\n

      The chart above is on the BTCUSD hourly.\u00a0 We can spot the first high after a bull run. The second high was then confirmed by a bearish Pin bar<\/strong>. Notice how the Pin bar\u00a0doesn’t exactly respect the previous high, however, what we want to see is some signs of reversal. Now we have two established highs and with these, we will construct our resistance level. The reversal trader now waits for the price to test this level again, which did happen a third time. Of course, we do not want to enter blindly into the third test. We require some kind of confirmation to distinguish a simple price spike from an actual breakout. On the chart, we see another bearish Pin bar that confirms our reversal idea and we put a sell order below the bearish Pin bar.<\/p>\n

      Nevertheless, an idea for entry is not enough. A trader is required to have a solid trading plan<\/strong>, knowing when to get out. His idea will be proved wrong if price breaks the high of the Pin bar after the entry. In such a case, the Pin bar would be a false signal and our resistance level would have failed. If our idea is proven to be right, we will be looking for a probable Take-Profit level<\/strong>. The previous low is a good demand level, as traders decided to push the price up there. In other words, we expect buyers not pushing the price higher, not before testing the previous low as shown in the chart.<\/p>\n

      This trade setup has a very good RRR and we see<\/strong>, that the previous low was almost ignored. Nonetheless, our Take-Profit has a clearly defined logic and we should not change our trading plan based on one single trade.<\/p>\n

      Breakout Trading<\/h2>\n

      Breakout traders expect S&R levels to fail. According to our previous explanation in the previous article, Support is a level of high demand and Resistance is a high level of supply. But what if these levels fail?<\/p>\n

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      USDCHF_H4 Chart<\/p><\/div>\n

      In this example, we are on the USDCHF 4-hourly. The price made two lows, establishing a support level<\/strong>. On the third test, we saw a bearish candle closing below our support. This is the first signal that the support level has failed and that the price might want to head lower. However, in order to increase our chances of success, traders often wait for a retest of the broken support. We can see the retest after the breakout on the chart. When price touched the broken support, it printed a bearish engulfing candlestick pattern. This is our confirmation for the breakout and we would enter at the low of this pattern. Stop-Loss<\/strong> is then set above highs of this pattern. This is a very good entry and Stop-Loss placement.<\/p>\n

      However, now we have a problem. In order to set our Profit Target, we would have to look for the next support level. However, there are no data on the higher timeframes to find such levels. As an alternative, we can use another tool to project our demand levels, the Fibonacci extension tool.<\/strong><\/p>\n

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      USDCHF_H4 Chart<\/p><\/div>\n

      Here we see our trade in the bigger picture. On the left side, there is no price action, therefore, we cannot draw any S&R levels. By using the extension tool in our MT4 platform<\/strong>, we connected the start of the previous impulse with the end of the previous impulse, back to our retracement level. On the chart, you see lines projected and we now have two options to exit our trades. You may choose to exit at the 61.8% extension or the 100% extension. There is no right or wrong in trading. Some traders like big wins, others like a lot of wins.<\/p>\n

      Candlestick Patterns<\/h2>\n

      Candlestick patterns are one of the most common price action techniques.<\/p>\n

      There are literally hundreds of different candlestick patterns you can find online.<\/p>\n

      Do you need to know all of them? Of course not.<\/p>\n

      We have picked the most common and important ones you should know.<\/p>\n

      They are easily spotted on Japanese candlestick charts.<\/p>\n

      What are Japanese Candlesticks?<\/h3>\n

      Japanese Candlesticks<\/strong> belong to the most popular methods of technical analysis.<\/p>\n

      Searching for specific candlestick patterns was first used in the 16th century in Japan at the rice exchange.<\/p>\n

      These were the very beginnings of technical trading.<\/p>\n

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       <\/p>\n

      The Benefits of using Candlestick Patterns while trading Price Action<\/h3>\n

      Among the greatest\u00a0advantages of candlestick patterns\u00a0<\/strong>are their simplicity and informational value.<\/p>\n

      After a brief familiarization, the trader can quickly analyze market developments and determine what is happening in the market.<\/p>\n

      Are buyers stronger than sellers, or vice versa? Can we expect the trend to cease, or on the contrary, could it gain in strength again?<\/p>\n

      In fact, candlestick patterns can reveal the psychology of traders.<\/p>\n

      Various candlestick shapes can suggest whether it is buyers or sellers who are stronger. A typical example can be seen on the graph below.<\/p>\n

      Long Day Bullish Candlestick Pattern<\/h4>\n

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      Starting with the easiest one, Long Day Bullish Candlestick.<\/p>\n

      Long Day Bullish Candlestick consists of just one candle with a long body and short wicks.<\/p>\n

      This candlestick usually shows strength and it can be used as a “breakout” candle at the beginning of a trend.<\/p>\n

      Traders don’t use Long Day Bullish Candlestick as entry or exit signals, but more as a confluence with their ideas.<\/p>\n

      Long Day Bearish Candlestick Pattern<\/h4>\n

      \"\"<\/p>\n

      Long Day Bearish candlestick is represented by a big sell candle body and small wicks.<\/p>\n

      It signals a weakness in the market and the fact we should start looking for the possible start of a downtrend.<\/p>\n

      Long Day Candlesticks are simple. They can give you clues what might happen next, but as we mentioned before, they should not be used as entry and exit signals alone.<\/p>\n

      Short Bullish Day Candlestick Pattern<\/h4>\n

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      The short bullish day candlestick is an easy to spot pattern. It consists of one candlestick.<\/p>\n

      Short day candlestick is defined by its length.<\/p>\n

      How short the candle must be? This is not 100% defined, so you should always use your discretion and review past trading periods to have a comparison.<\/p>\n

      Short day candlestick is not used as an entry\/exit signal.<\/p>\n

      Short day candlestick pattern signals the fact that price stayed in the range during a trading period and we can expect an expansion soon.<\/p>\n

      They can be found in the larger patterns providing relevance.<\/p>\n

      Short Bearish Day Candlestick Pattern<\/h4>\n

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      This is the opposite of a Short bullish day candlestick.<\/p>\n

      Same as his bullish colleague, this candle is common but not so worthy on its own.<\/p>\n

      You should always wait to spot it in a larger context and think about what are buyers or sellers trying to achieve in current market conditions.<\/p>\n

      Bullish Marubozu Candlestick Pattern<\/h4>\n

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      Very simple and powerful candlestick pattern is called Marubozu.<\/p>\n

      Spotting Marubozu candlestick is one of the easiest things you can do.<\/p>\n

      It signals with a real long body without an upper or lower wick.<\/p>\n

      Bullish Marubozu candlestick shows us one pretty obvious thing, the buyers stepping in the market.<\/p>\n

      There are two situations where you can make a trading decision with bullish Marubozu candlestick:<\/p>\n