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Price Action Trading Strategy: The Ultimate Guide

A Price Action Trading Strategy helps find ideal entry and exit points depending on expert opinions, news announcements, or technical indicators. Instead, Price Action Trading Strategy is drawn from the currency pair’s trends and price movement in the market. In this article, we take a look at everything about the Price Action Trading Strategy.

What is Price Action Trading?

Price Action Trading is a strategy based on a currency pair’s price movement instead of indicators or technical analysis.

  • When the currency pair prices start increasing, it indicates that more and more traders are buying the pair. Price Action traders assess how aggressive the buying is and enter or long the market accordingly.
  • When the currency pair prices start decreasing, it indicates that more and more traders are selling the pair. Price Action traders assess how aggressive the selling is and exit or short the market accordingly.

How to read price action in forex?

Reading a price action in forex involves analysing the two significant waves in any currency pair’s forex chart.

  • Trending waves that follow a strong trend or momentum in either an upward or downward direction. They signal traders to go long during an uptrend wave or short during a downtrend wave.
  • Pullback waves refer to the temporary change in the prices against the current direction. During an uptrend, the currency pair prices pull back in the downward direction after recent highs, and during a downtrend, pullbacks occur with a temporary increase in the prices after recent lows.

By monitoring these waves along with the swing highs and lows of a currency pair, you can identify the market's direction. When the market is trending upward, the currency pair prices make higher highs and higher lows. But, when the market is trending downwards, the currency pair price makes lower highs and lower lows.

  • A continuous uptrend signals traders to enter long positions.
  • A continuous downtrend signals traders to enter short positions.

Top price action trading patterns

Continuation patterns

Price action continuation patterns like triangles, pennants and flags occur during a strong trend and continue in the same direction thereafter.

  • If the currency pair is trending upwards, the price action patterns signal that currency pair prices can break higher due to the continued uptrend.
  • If the currency pair is trending downwards, it signals that currency pair prices can break out lower due to the continued downtrend.

Reversal patterns

Price action reversal patterns like wedges, double top and bottom, and head and shoulders patterns occur when an opposite trend follows an uptrend or downtrend. When the currency pair is in an uptrend making higher highs and higher lows, then the recent low supported by a low swing high signals a trend reversal. When the currency pair is in a downtrend, making lower lows and lower highs, then the recent swing high supported by a high swing low signals an uptrend reversal.

The best price action trading strategies

Pin bar pattern

The pin bar pattern is a candlestick pattern with a long lower or upper wick which indicates either the low price or the high price being rejected. The pattern suggests that the currency pair price moves in the opposite direction in the presence of the wick.

  • If there is a long lower wick, the low price is rejected, and there is a bullish reversal.
  • If there is a long upper wick, the high price is rejected, and a bearish reversal is expected.

Inside bar pattern

The inside bar pattern is also a reversal pattern that consists of two candlesticks, where the inner bar is smaller in size than the outer bar. The inner bar always falls between the currency pair's high price and low price range. It gives traders ideal entry and exit points before a market reversal.

  • If the first candlestick is bullish, it indicates a bearish reversal.
  • If the first candlestick is bearish, it indicates a bullish reversal.

Breakout entry pattern

The breakout entry pattern refers to the price action that occurs right after a price hike or sudden price dip in the currency pair. It suggests that as a currency pair price spikes high, a retracement will occur, and the currency pair will either move below its support or above its resistance line. This allows traders to long the trade during an uptrend or short it during a downtrend.

How do you trade on price action?

  • Identify the existing trend in the market.
  • Identify trading price action opportunities based on the trend's strength. If there is a strong uptrend, place long orders and if there is a strong downtrend, place short orders. On the other hand, a weak uptrend suggests placing short orders due to an expected downtrend reversal, and a weak downtrend suggests placing long orders due to an expected uptrend reversal.
  • Monitor the market and the currency pair’s price action to understand the trend better and make further trading decisions based on the same.
  • Combine the Price Action Strategy with a forex price chart or indicator to confirm the trend’s direction for more successful orders.

Devise a Price Action Trading Strategy to analyse forex price movements today

Most traders prefer combining the price-based information about the currency pairs with technical indicators to confirm the market’s trend direction. Devise the ideal Price Action Trading Strategy and start trading with Blueberry Markets, the leading forex trading platform in Australia. Sign up for a live trading account or try a risk-free demo account.

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