Successful Price Action Trading In 3 Steps
Price action trading has been a great interest of mine over the past few years. The first day I heard about the term “price action”, I became fascinated.
Unfortunately, I think both of those terms have become highly overrated these days. It’s as if every single successful trader out there uses some form of price action, which is right.
But for a long time, I associated price action solely with candlesticks patterns, which is a very typical newbie mistake…
Here’s what you most understand about the price action trading: When used right, it gives you access to high probability trade setups, that is because patterns in the price often reflect repeated human behaviors.
Before diving in, I do want to say that I am by no mean a price action trading expert. My current trading methodology allows me to understand what the price is doing and I take this into account prior to entering any trade.
I do not trade “zero-indicator charts” because I believe indicators are great to remain objective in a trading environment that can sometimes be overwhelming (especially when you trade and travel).
That being said, I use indicators for one reason only – to indicate. Nothing more.
Ultimately, I’m a believer that price movements can provide great clues for any trading decision.
How I Got To Learn Price Action Trading
As mentioned earlier, I used to think that price action only meant candlestick patterns. My early growth consisted of reading Japanese Candlesticks Charting Techniques by Steve Nison. No matter what “bad” some traders say about this book, I found it very interesting and definitely recommend it to any trader.
At one point, however, I began to understand that candlesticks alone wouldn’t allow me to stay consistent in my trading results. That’s when I came across the idea of using Support & Resistance areas. I struggled with those for a long time too until I figured out how to draw support and resistance zones.
I thought I had figured it out at that point…but again I was wrong. While I understood back then that candlesticks were the way to go, I was forgetting to look at a lot of things beyond that.
More recently, several guests on my podcast mentioned that they do not include candlesticks as part of their trading methodology. One trader I consider my mentor also pushed my thinking a few times by saying he was willing to enter trades without having any candlestick signal forming.
The main reason for this is that other factors are present on any chart to help traders understand what’s going on with the currency pair they’re looking at. Exploring those factors will be the #1 goal of this article.
So let’s jump into those 3 steps of successful price action trading…
1) Identify Areas Of Trading Interest
Whenever I think of entering any trade, the first thing I must see is the price of a specific currency pair being at a particular location. In other word, I don’t trade anywhere.
It’s a little bit like crossing a road, as I explain in the video below. You wouldn’t want to cross the road anywhere. You’re looking for a specific cross lane first.
People have various ways of calling areas of interest in trading. Some might identify patterns (i.e. triangles, head & shoulders, pennants, etc.) and pick areas at which trades can be entered. That would sound along the lines of:
“If price breaks this level, the pattern is valid.”
Some others call those areas of interest Supply And Demand areas. There exists quite a complete methodology about that topic.
Personally, I’ve always liked simple Support and Resistance areas. I do have a simple way to identify them to get a consistent result. I outline this in A Powerful Way To Draw Support And Resistance Zones.
I’m using a broad name here by saying “areas of trading interest”.
In any case, there are 2 reasons why you want to use areas of interest to place your trades:
- It is likely that there will be more activity in those areas.
- It enables you to enter your trades with a more favorable Reward-To-Risk.
However, be careful to stay simplistic in your identification of trading areas. A chart clustered with lines and patterns isn’t going to help! For more on this topic, check out the video below:
2) Getting A Feel For The Market
Remember when I said price action trading isn’t only about candlesticks?
This is where we are NOT going to use candlesticks in order to get a feel for how the market (i.e. your specific currency pair) is moving.
Getting a feel for the market means we must stop for a few seconds to try to understand the relationship between the buyers and the sellers.
Yes, but how?
“Who is in control of the market right now? Are the buyers or the sellers more aggressive?”
We look at things such as:
- Is there any one party that’s driving price movements (forming an uptrend/downtrend)?
- Has there been any sign of a possible reversal in the past price history?
- Are price movements exhausted? (marked by very small candlesticks at the top/bottom of a move)
- Are the breakouts in a trend strong? (marked by no fakeouts)
- How is price behaving at the area of interest? (going right through vs. consolidating vs. bouncing)
An example of chart where sellers recently tool the control:
3) Confirmation (or Not)?
No, you cannot simply look a little bit at the previous criteria and jump into price action trading without confirmation expecting the market to do as you thought.
You need to have a solid trading methodology.
However, the more losses we experiences at the early stages of our trading, the more worried and careful we become as traders. That might make us want to unnecessarily look for ‘confirmation’ in the market.
The truth is, nothing will ever be confirmed in trading and things will forever remain close to a game of probability.
Do We Need To Confirm Our Trades?
Kim Krompass, the woman behind the Price Action Trader Institute invites traders around her to give up the need for confirmation. As she mentioned on my podcast, a lot of traders use indicators because of a desire to be right and to confirm the validity of trade. I’ve seen this need for conformation multiple times myself.
We Aren’t Looking For Confirmation, But For Confluence…
In my current trading methodology, I find myself building confluence. That won’t confirm any trade, but it is likely to increase your win rate over time.
For instance, entering a buy trade only if the price goes above the high of the previous candlestick is a way to be a little more certain that the currency pair is ready to move in the right direction after a candlestick signal.
Waiting for an indicator to form a certain signal after you went through the previous 2 steps of this article is also a way to build up confluence.
If you want to see a recent example of confluence, check out the video below:
Price action is (and will probably remain) one of the most searched topic online when it comes to Forex trading. However, having a process to apply price action to your trading is absolutely essential. Whether or not you use the process highlighted in this article, I strongly suggest you to write it down in your own words. A good thing to do next might be grabbing the One Page Trading Plan template I have. That template has helped me and lot of trader structure our trading plan on a single sheet of paper. Oh, and it’s free!
Let’s keep in touch in the Facebook group! Are you a price action trader? What are the things you consider or find difficult on that topic? Comment below ⬇️