IntroductionWhile day trading can provide an exhilarating rush, it is important to have a solid plan in place. To generate returns during a single trading day, active traders employ a range of strategies to take positions on assets or stocks. Technical analysis of price charts provides day traders with various indicators to assist them in determining their trading positions. In contrast, price action trading is distinct in that it does not rely on technical analysis. Rather, it centers on comprehending the price movements of an underlying stock or asset with the aim of identifying entry and exit positions.
Defining Price Action Trading StrategyIn trading, the study of price action involves examining the historical performance of a security, commodity, index, or currency to forecast its future movement. Based on their analysis of price action, traders may take a long position if they anticipate a rise in price, or short the asset if they expect a decline.
To effectively engage in price action trading, it is essential to analyze patterns and identify key indicators that can influence investment decisions. Traders can use various price action methods to predict market movements and achieve short-term gains.
Top 6 Price Action Trading Strategies
Trend Trading
The majority of traders base their trading decisions on price trends, and they employ various techniques to monitor and follow trends in market prices. This trading strategy is particularly beneficial for novice traders as it enables them to learn from more experienced traders. By utilizing the trend trading strategy, traders can benefit from taking short positions during downtrends and extended positions during uptrends.
Candlestick Strategy
The Candlestick Strategy, also known as the pin bar strategy, is so named because of its visual resemblance to a candle with a long wick. The pin bar pattern serves as an indicator of price rejection or reversal. The wick represents the price range that investors rejected, and it is assumed that the price will move in the opposite direction of the wick. Based on this assumption, traders can determine whether a long or short position in the market will be profitable.
Inside Bar
The inside bar trading strategy is based on two bars, where the outer bar is more significant than the inner bar. The inner bar is situated within the low and high range of the outer bar, and its formation usually occurs during market consolidation. However, an inside bar can also indicate a potential turning point in the market. Experienced traders recognize the trend and determine whether the formation of the inside bar signals a turning point or just a continuation of consolidation.
Trend after a Retracement Entry
In the price action trading strategy of trend-following, traders simply follow the prevailing trend. If the price is consistently creating lower highs and in a downtrend, traders may consider short-selling. Conversely, if prices are in an uptrend, traders may consider buying in. This strategy is based on the belief that the trend will continue, and traders aim to benefit from the momentum of the market.
Trend after Breakout Entry
A breakout occurs when the market moves outside a defined support or resistance line. This trading strategy assumes that significant market movements will result in a price spike, followed by a retracement. Traders can study signals to determine whether to take a short position if the stock is trending below the support line or a long position if it breaks above the support line and trends upwards. This approach aims to capitalize on the momentum generated by the breakout, potentially leading to substantial gains.
Head & Shoulders Reversal
Market volatility is common, characterized by frequent ups and downs. A head and shoulders pattern is a visual representation of market movements, taking the shape of a head and shoulders on charts. In this pattern, prices in the market rise, fall, and then rise even higher before reaching a lower high and dropping modestly. This price action trading strategy is popular because it is relatively easy to identify an entry point and set a stop loss to capitalize on a temporary peak. Traders can benefit from this strategy by taking advantage of the predictable price movement in the market, potentially leading to profitable trades.
