Price action trading

At its most simplistic, it attempts to describe the human thought processes invoked by experienced, non-disciplinary traders as they observe and trade their markets.

Hence, for these reasons, the explanations should only be viewed as subjective rationalisations and may quite possibly be wrong, but at any point in time they offer the only available logical analysis with which the price action trader can work.

It is commonly thought to be 90%, although analysis of data from US forex brokers' regulatory disclosures since 2010 puts the figure for failed accounts at around 75% and suggests this is typical.

This observed price action gives the trader clues about the current and likely future behaviour of other market participants.

Alternatively, the trader might simply exit instead at a profit target of a specific cash amount or at a predetermined level of loss.

[8] An experienced price action trader are adept at spotting multiple bars, patterns, formations and setups during real-time market observation.

Many other traders would simply buy the stock, but then every time that it fell to the low of its trading range, would become disheartened and lose faith in their prediction and sell.

[14] Support, Resistance, and Fibonacci levels are all important areas where human behavior may affect price action.

[15] It is considered to bring higher probability trade entries, once this point has passed and the market is either continuing or reversing again.

[17] On any chart, the price action trader tend to check to see whether the market is trending up or down, or confined to a trading range first.

If the trader looks at the chart at a lower time frame and check the price movement during that bar, it would appear similar to a range.

A quiet trading period, e.g. on a US holiday, may have many small bars appearing that require traders to look on a higher time frame to discern the pattern.

A small bar can also just represent a pause in buying or selling activity as either side waits to see if the opposing market forces come back into play.

Alternatively small bars may represent a lack of conviction on the part of those driving the market in one direction, therefore signalling a reversal.

Price action traders or in fact any traders can enter the market in what appears to be a run-away rally or sell-off, but price action trading involves waiting for an entry point with reduced risk - pull-backs, or better, pull-backs that turn into failed trend line break-outs.

Without practice and experience enough to recognise the weaker signals, traders will wait, even if it turns out that they miss a large move.

A Brooks-style entry using a stop order one tick above or below the bar will require swift action from the trader[20] and any delay will result in slippage especially on short time-frames.

[20] Such a failure is traded by placing an entry stop order 1 tick above or below the previous bar, which would result in a with-trend position if hit, providing a low risk scalp with a target on the opposite side of the trend channel.

H1s and L1s are considered reliable entry signals when the pull-back is a microtrend line break, and the H1 or L1 represents the break-out's failure.

[23] In a sideways market trading range, both highs and lows can be counted but this is reported to be an error-prone approach except for the most practiced traders.

This price action reflects what is occurring in the shorter time-frame and is sub-optimal but pragmatic when entry signals into the strong trend are otherwise not appearing.

These traders will place protective stop orders to exit on failure at the opposite end of the breakout bar.

So if the market breaks out by five ticks and does not hit their profit targets, then the price action trader will see this as a five tick failed breakout and will enter in the opposite direction at the opposite end of the breakout bar to take advantage of the stop orders from the losing traders' exit orders.

The price action interpretation of a bull reversal bar is so: it indicates that the selling pressure in the market has passed its climax and that now the buyers have come into the market strongly and taken over, dictating price which rises up steeply from the low as the sudden relative paucity of sellers causes the buyers' bids to spring upwards.

This movement is exacerbated by the short term traders / scalpers who sold at the bottom and now have to buy back if they want to cover their losses.

On occasion it may not result in a reversal at all, it will just force the price action trader to adjust the trend channel definition.

In the stock indices, the common retrace of the market after a trend channel line overshoot is put down to profit taking and traders reversing their positions.

A price action trader will trade this pattern, e.g. a double bottom, by placing a buy stop order 1 tick above the bar that created the second 'bottom'.

Consecutive bars with relatively large bodies, small tails and the same high price formed at the highest point of a chart are interpreted as double top twins.

This is favoured firstly because the middle of the trading range will tend to act as a magnet for price action, secondly because the higher high is a few points higher and therefore offers a few points more profit if successful, and thirdly due to the supposition that two consecutive failures of the market to head in one direction will result in a tradable move in the opposite.