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Top 10 Price Action Trading Books
Most trading books cover trading strategies that use a mix of candlestick patterns, chart patterns, and indicators. While they offer a rounded view of trading methods, they are inadequate for traders who want to focus on trading price action. Indeed, price action trading books are rare finds.
After some intense digging and reviewing, we have rounded up 10 solid price action trading books. They are not listed in any order. Pick one based on your current trading style and skill.
Clicking on the book images brings you through our affiliate links to Amazon product pages where you can read more reviews by other traders. The review score is taken from Amazon at the point of writing this article. Please buy through our affiliate links if you find this list useful.
1. Trading Price Action Series by Al Brooks
This series of three price action trading books has become an authority on price action trading.
Price action trading originated from the Dow Theory, and traders have discussed various price action trading techniques long before Al Brooks’ books. Although Al Brooks did not invent price action trading, he certainly created a point of reference for price action traders.
In his “Trading Price Action” series, he introduced terms like “second entry”, “trend bar”, “barb wire, and “M2B/M2S“.
While these price action concepts are definitely not unique and have been known by other names, Al Brooks has added great value by combining them into a comprehensive system of analysis and trading terms. The Wikipedia entry on price action trading is almost like a summary of these three tomes.
The subtitle of his books is “Technical Analysis of Price Charts Bar by Bar for the Serious Trader“. I agree wholeheartedly. You must be a serious trader. At least, you should be serious enough to plough through hefty books in which the writing style ranges from “detailed” to “convoluted”. However, if you are serious about learning price action trading, you will definitely find value here.
If you want to start with something easier on the palette, consider our other recommendations below.
2. Forex Price Action Scalping by Bob Volman
Bob Volman focuses on a specific price action trading style that is not suitable for everyone. He scalps small profits out of the forex market using the 70-tick time-frame.
The writing style is genuine. And compared to Al Brooks’ price action series, this price action trading book is highly readable. Moreover, he does not try to sell you an online trading subscription or a $999 proprietary indicator. To me, that is a huge plus for any trading book.
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While Al Brooks describes a system of analysis with less focus on exact trading setups, Bob Volman explains seven clear trading setups. Hence, if you are looking for precise trading setups for scalping, Bob Volman’s book is what you want.
If you want to acquaint yourself with his methods before deciding if you want to buy it, take a look at these forum threads.
Of course, without reading the book, these threads provide limited value. However, they offer perspectives from traders who have already tried his methods.
Update: Bob Volman published a new book on analysing price action on the 5-minute time-frame. Check it out – Understanding Price Action: practical analysis of the 5-minute time frame
3. Martin Pring on Price Patterns
Martin Pring calls this book “The Definitive Guide to Price Pattern Analysis and Interpretation”. He covers all the essential topics of price pattern analysis including:
- Support and Resistance
- Trend Lines
- Volume Analysis
- Break-out Analysis
- Chart Patterns
- Bar Patterns
The choice of topics is fantastic. This price action trading book gives you everything you need to start learning price action analysis. It is organized and concise.
It is not a book that teaches you how to trade with trading setups with a complete trading plan. However, it is one of the best for picking up price pattern tools that will help you trade profitably.
The book also comes a DVD that has a seminar given by Martin Pring on the latest tools for price pattern recognition. Great value.
4. Japanese Candlestick Charting Techniques by Steve Nison
After Steve Nison introduced Japanese Candlesticks to Western traders, the candlestick chart has become an essential feature of any charting platform and the default chart type of most traders. For many traders, life is never the same, and a lot brighter.
Candlestick charting adds a great deal of depth and variety to traditional bar patterns (like those covered in Pring on Price Patterns). Poetic names like Engulfing, Hammer, Shooting Stars are now commonplace among price action traders. Typical candlestick trading strategies include combining candlestick patterns with chart patterns and pivot points.
While information on candlestick patterns is easily found online for free, they are loosely organized and hardly comprehensive. For a reliable and organized way to learn candlestick charting, get Steve Nison’s book.
If you are happy with what you see in this book, take a look at Steve Nison’s other book, Beyond Candlesticks: New Japanese Charting Techniques Revealed .
5. Integrated Pitchfork Analysis: Basic to Intermediate by Mircea Dologa
Trend line analysis is a key price action trading tool. However, trend lines usually occupy at most a chapter of any price action trading book. Andrew’s Pitchfork is the only trend line trading method that has entire books written on it.
While Andrew had a unique way of drawing his trend lines, price action traders can adapt his trading techniques easily for traditional trend lines and price channels.
There are several books on Pitchfork analysis, but this one written by Dr. Mircea Dologa stands out. It is clearly written with a comprehensive scope and well-pitched for beginners who have never heard of the Pitchfork. Also, we could not help noticing the great reviews from well-known technical analysts like Chuck Lebeau and Dr. Hank Pruden.
6. The Ultimate Trading Guide
Being an ultimate guide, it is not surprising that this book has three authors: John Hill, George Pruitt, and Lundy Hill. This book is geared towards developing mechanical trading systems with price action behavior.
While the ending chapters on mechanical systems might not interest the discretionary price action trader, the bulk of the book focuses on price action behaviors like action/reaction, continuation, reversals, and support/resistance zones.
The topics include:
- Practical applications of the Elliot Wave Theory
- Specific bar patterns trading opportunities
- Channel trading
- Swing trading patterns
While its contents are put together in a piecemeal manner and it is by no means “ultimate”, there are many hidden gems within this price action trading book. Overall, it does an excellent job of deriving exceptional trading setups from price action. Traders looking for new trading ideas should find interesting stuff here.
7. A Complete Guide to Volume Price Analysis by Anna Coulling
I decided to include this book because many price action traders use volume in their price analysis. And notably, Al Brooks does not feature volume in his trading methods. Hence, this book is a great complement to the Trading Price Action series for traders who like to include volume into their trading.
This book is a concise work that covers everything you need to know about volume analysis. Anna Coulling’s description of how and why volume analysis works is easy to follow.
Although volume is a key ingredient in Dow Theory, most traders find it hard to truly understand the impact of volume in their trading. Most volume trading methods are obscure and difficult to implement.
In her book, Anna Coulling has managed to keep things simple and practical. This book is a real bargain for traders looking for their first book on volume analysis.
8. Encyclopedia of Chart Patterns by Thomas Bulkowski
Wondered if chart patterns are reliable?
Thomas Bulkowski’s encyclopedia tells you far more than that. Using solid market data and statistics, it presents:
- Chart patterns identification guidelines
- Success and failure rates in both bull and bear markets
- Optimal accompanying volume patterns
- Trading methods (including exits)
- Characteristics of failed patterns
While this book does not prescribe an exact trading strategy, it has more than enough facts and figures for you to build your own trading tactics and to have faith in the patterns you are seeing.
This book has no equal when it comes to a statistical study of price chart patterns.
9. Trend Qualification and Trading by L. A. Little
Identifying the trend or the lack of one is the cornerstone of successful trading. It applies not only to price action traders but to traders of all styles. Hence, it certainly deserves more attention than just a simple definition.
What L. A. Little attempted in his book is commendable. He constructed a framework to qualify trends and to find the best among them, using only price and volume. This idea of using price and volume to confirm trends is attractive to price action traders who want a minimalist trading style.
Price action traders commonly delegate the job of defining the trend to moving averages or simple trend lines. L. A. Little goes further and takes a hard look at the structure of trends to assess its quality. While the concepts are not revolutionary, the trend-oriented approach in this book is beneficial and offers a different perspective to trend trading.
10. The Art & Science of Technical Analysis by Adam Grimes
In case you are wondering why we included this book for price action trading, its subtitle is “Market Structure, Price Action, & Trading Strategies”, which really sums up its contents.
This price action trading book is extremely well-organized and packed full of sound trading ideas. After explaining the dynamics of market structure, it zooms in on uncluttered charts and explains clear trading setups while highlighting the “art” of trading. The section on practical trading templates is especially impressive. Rather than prescribing exact rules or staying away from specifics, he offers sound templates that you can use based on your own analysis.
Together with sections on risk management and an entire part geared towards “The Individual, Self-Directed Trader”, this book is one of the best complete guide for price action traders.
Are You Ready for Price Action Trading Books?
Before you jump into the deep end of price action analysis, remember that its roots are in technical analysis. Make sure that you have a solid foundation in technical analysis before delving into price action trading.
If you are already familiar with the basics of technical analysis and hope to hone your price action trading skills, go ahead and take your pick among the price action trading books above.
What Is Price Action? – Price Action Trading Introduction
What is Price Action? – Price Action Trading Explained
Price action trading is a methodology for financial market speculation which consists of the analysis of basic price movement across time. It’s used by many retail traders and often by institutional traders and hedge fund managers to make predictions on the future direction of the price of a security or financial market.
Put simply, price action is how price changes, i.e., the ‘action’ of price. It’s most easily observed in markets with high liquidity and volatility, but really anything that is bought or sold in a free market will generate price action.
Price action trading ignores the fundamental factors that influence a market’s movement, and instead it looks primarily at the market’s price history, that is to say its price movement across a period of time. Thus, price action is a form a technical analysis, but what differentiates it from most forms of technical analysis is that its main focus is on the relationship of a market’s current price to its past or recent prices, as opposed to ‘second-hand’ values that are derived from that price history.
In other words, price action trading is a ‘pure’ form of technical analysis since it includes no second-hand, price-derived indicators. Price action traders are solely concerned with the first-hand data a market generates about itself; it’s price movement over time.
- Price action analysis allows a trader to make sense of a market’s price movement and provides him or her with explanations that serve as way for the trader to build a mental scenario to describe the current market structure. Experienced price action traders often attribute their unique mental understanding and ‘gut feel’ of a market as the main reason for their profitable trading.
Price action traders make use of the past history of a market’s price movement, most typically focus on the recent price action of the last 3 to 6 months, with a lighter focus on more distant price history. This price history includes swing highs and swing lows in a market, as well as support and resistance levels.
A trader can use a market’s price action to try and describe the human thought process behind a market’s movement. Every participant in a market will leave price action ‘clues’ on a market’s price chart as they trade their markets, these clues can then be interpreted and used to try and predict the next move in a market.
Price Action Trading – Keeping it Simple
Price action traders often use the phrase “Keep It Simple Stupid” in reference to the fact that trading is something many people over-complicate by clouding their charts with numerous technical indicators and generally over-analyzing a market.
- Price action trading is also sometimes referred to as ‘clean chart trading’, ‘naked trading’, ‘raw or natural trading’, in reference to trading from a simple price action only price chart.
The simple stripped-down approach of price action trading, means there are no indicators on a trader’s charts and no economic events or news is used in making one’s trading decisions. The sole focus is on a market’s price action, and the belief amongst price action traders is that this price action reflects all the variables (news events, eco. data etc.) that influence a market and cause it to move. Therefore, the implication is that it’s much simpler to just analyze a market and trade from its price action, rather than trying to decipher and sort the many different variables affecting a market each day.
Price Action Trading Strategies (Patterns)
Price action patterns, also called price action ‘triggers’, ‘setups’ or ‘signals’, are really the most important aspect of price action trading, because it’s these patterns that provide a trader with strong clues as to what price might do next.
The following diagrams show examples of some simple price action trading strategies that you can use to trade the market.
- Inside bar pattern
An inside bar pattern is a two-bar pattern, consisting of the inside bar and the prior bar which is usually referred to as the “mother bar”. The inside bar is contained completely within the high to low range of the mother bar. This price action strategy is commonly used as a breakout pattern in trending markets, but it can also be traded as a reversal signal if it forms at a key chart level.
- Pin bar pattern
A pin bar pattern consists of a single candlestick and it shows rejection of price and a reversal in the market. The pin bar signal works great in a trending market, range bound market and can also be traded counter-trend from a key support or resistance level. The pin bar implies that price might move opposite from the direction the tail is pointing; as it’s the tail of the pin bar that shows rejection of price and a reversal.
- Fakey pattern
The fakey pattern consists of a false breakout of an inside bar pattern. In other words, if an inside bar pattern breaks out briefly but then reverses and closes back within the range of the mother bar or inside bar, you have a fakey. It’s called a “fakey” because it fakes you out, the market looks like its breaking one way but then comes back in the opposite direction and sets off a price movement in that direction. Fakey’s are great with trends, against trends from key levels and in trading ranges.
Trading with Price Action Patterns
Let’s look at some real-world examples of trading with price action patterns.
The first chart we are looking at shows us a bearish fakey sell signal pattern. In this example, the trend was already down, as we can see the overall downward track starting at the top left of the chart and falling as price moves toward the left side of the chart. Thus, this fakey sell signal was in-line with the overall daily chart downtrend, this is good. Trading with the trend generally gives a price action setup a better chance of working in your favor.
The chart below shows an example of a bullish fakey pin bar combo setup in the context of an upward moving market. Typically, when a market has a strong near-term bias, meaning it’s been moving in one direction recently and aggressively, a price action trader wants to trade in-line with that near-term momentum.
In this next example, we are looking at the inside bar trading pattern. This chart shows both a regular inside bar signal as well as an inside pin bar combo setup. An inside pin bar combo is simply an inside bar with a pin bar for the inside bar. These setups work very well in trending markets like we see in the chart below.
The last chart we are looking shows examples of the pin bar pattern. Note the large up moves that followed both of these pin bar buy signals. Also, note how these pin bars both had long tails in comparison to some of the other bars on this chart that you might identify as pin bars. Pin bars wit nice long tails like these two, and that are clearly protruding out from the surrounding price action, often are very good setups to trade.
Trading Price Action Patterns with Confluence
Trading with price action signals is not only about the signal itself, but it’s also about where the signal forms on the chart. Every pin bar, inside bar, etc. is not created equal. Depending on where a particular price action signal forms in a market, you may not want to trade it or you may want to jump on it without hesitation.
The best price action signals are those that form at ‘confluent’ points in the market. Confluence, simply means ‘a coming together’ of people or things. In the case of price action trading we are looking for an area on the chart where at least a couple things line up with a price action entry signal. When this happens, we say the price action signal ‘has confluence’.
In the chart example below, we can see a good example of a pin bar pattern with confluence. The confluence is that the pin bar has formed in the direction of an up-trending market and that it has formed at a support level in that uptrend. Thus, we have the confluence of the trend and the support level, together these things give the pin bar buy signal more weight than if they weren’t there supporting the signal. The more confluent factors a price action signal has behind it, the higher-probability signal it is considered to be.
I hope you’ve enjoyed this price action trading tutorial. You now have a solid basic understanding of what price action is and how to trade it.
Going forward, you should look to expand your price action trading understanding and knowledge as there is much more to it than is covered here.
For a complete education and in-depth insight into simple yet powerful price action strategies, as well as insight into the world of professional trading from an experienced trading veteran, checkout my price action trading course for more information.
Technical Analysis. How It Works?
In this blog we often discuss technical analysis and its peculiarities, providing you with strategies and explaining how the indicators work. Yet, not all traders, especially those who have just started exploring the financial markets, understand what technical analysis is and why it is important to use it. Yet, even those who consider themselves experts might find this article useful.
What is technical analysis?
Technical analysis is an attempt to understand and predict future price movements based on the past performance of the price action. As any prediction, technical analysis is not 100% accurate and can provide false signals. Nonetheless, this method aims to reveal the most likely outcome based on the current conditions.
Stocks, currencies, cryptocurrencies, commodities, indices and ETFs can all be subject to technical analysis. In other words, principles of technical analysis are universal and can be applied to any instrument/asset. More than that, all assets can be analyzed using the same tools (indicators).
Technical indicators menu and where to find it
How it works?
Technical analysis works for assets where the price is influenced by the law of supply and demand and doesn’t work for securities where prices are regulated otherwise (say, by political decrees).
Moreover, there are several assumptions that have to be fulfilled in order for technical analysis instrument to work properly.
High liquidity . The underlying asset has to be traded in sufficient volumes. Low-liquidity assets are easier to manipulate and harder to trade in general. Factors associated with low-liquidity trading make it unsuitable for technical analysis.
No artificial price changes . A stock split, being an artificial price change, does not affect the intrinsic value of the company at hand, yet it dramatically changes the stock price. Suchlike events cannot be addressed by technical analysis.
No extreme news . Certain events — like a terror attack and the demise of a company’s CEO — cannot be predicted by the means of technical analysis.
Price discount everything . Technical analysts believe that the price action fully reflects all publicly available information. In other words, all past events and announcements about the future ones have already been reflected by the asset price. The price, therefore, reflects the fair value of the underlying asset. This information is then used to predict the future.
Price movements are not totally random . There are periods when prices trend and periods of non-trending prices. Technical analysts believe that it is possible to identify trends, both short and long-term, with the help of indicators.
‘What’ is more important than ‘Why’ . What is the price and ‘What will it be?’ is usually the only questions technicians ask themselves. While fundamental analysis is concerned with the reason behind price fluctuations, technicians are not. To technicians, prices go up when demand surpasses supply, and that’s it.
How to use technical analysis in practice?
A lot of technical analysis specialists apply top-down approach, first evaluating broad indices, then separate industries, and only then moving to individual stocks. No matter what asset and on what timeframe you analyze, the steps you take will be approximately the same. First, you might want to identify the trend (e.g. Moving Average or Alligator). Then you might want to identify support and resistance levels, upper and lower boundaries than the price action cannot leave on a certain time frame (here a horizontal line can be of great help). Next you might want to identify the momentum (e.g. MACD or any other oscillator) and optimal entry/exit points. As a final step, you might want to compile all of the above-mentioned data and use it to make a prediction.
The price chart with Alligator, Awesome Oscillator and horizontal lines applied
Experts in the field of technical analysis consider the market to be explained by 80% psychology and only 20% logic. It is, therefore, important to learn to interpret signals you receive from the market but don’t be surprised that it takes time to learn and master technical analysis.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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Price action trading: the untold secrets
I know a lot of traders who try to become profitable using a multitude of indicators (or a combination thereof). Hell, it was my strategy for about a full year when I was starting out trading! It didn’t work for me. While indicators are not inherently bad, there’s a good chance that it didn’t work out for you too. If it did, a lot more than the 10% of traders that are said to be profitable in this business would make a killing, but they don’t.
Gradually though, I started to change the way I approached trading and immersed myself in price action trading. By now, price action is my main way of trading and my Trade Advisor students can attest to how effective it is.
But… Price action is a whole other beast.
Different species. Stands apart from all the other technical analysis tools.
And a lot of traders don’t understand how to trade it.
It’s understandable though.
It’s not an indicator in the traditional sense. You can’t read price action in the unambiguous way you can know if the RSI indicator has crossed the 70 mark. It’s the reason beginning traders flock to indicators you can quantify easily. RSI, MACD, Stochastic, ATR. The list could go on. While these indicators have their use, they’re not something I solely base my trading ideas on. Most of them are lagging and just plain not working as a trading strategy.
Believe me, I’ve built trading robots based on about every popular indicator (or combination of indicators) you can find. It’s a trap for beginning traders and every single one of them loses money on it.
Instead, learning about price action is the best way to become a profitable trader.
And I’m going to tell you the price action secrets that matter. The ones you need to make the best trades. But first, we need some background.
Table of contents:
Price action trading introduction
What exactly is price action trading? Wikipedia defines it like this:
The concept of price action trading embodies the analysis of basic price movement as a methodology for financial speculation, as used by many retail traders and often institutionally where algorithmic trading is not employed. Since it ignores the fundamental factors of a security and looks primarily at the security’s price history — although sometimes it considers values derived from that price history — it is a form of technical analysis.
That’s a pretty incomprehensible description though. Forget it.
Here’s my definition of price action:
Price action trading is a trading methodology that uses the movement of price as input for making trading decisions. It allows you to tell a story of what the price is doing and make higher probability trades based on that story. It is a form of technical analysis.
Notice how I said you can tell a story about the price. I believe that is one of the most important skills you can have as a price action trader and we’ll get back to this later on.
This is how a price action chart usually looks:
Notice how clean this looks? No indicator windows, only pure focus on the price. Once you’re used to this charting view, you will start to realise the power of price action.
As opposed to this (what I refer to as indicator madness):
Ok, this one might be the other extreme I’m not even sure I can still see the price on this! But you get the idea.
Another way to look at it is that price action does away with all the clutter that is usually associated with indicators. The only thing you’re left with is a clean, or “naked” chart. That doesn’t mean you can’t use a moving average or draw support and resistance lines. However, the movement of the price will always be paramount and it is that price movement that you’ll be able to read and understand soon enough.
Basics of price action trading
As we mentioned, price action trading revolves around only using the price of the security to make informed decisions on what the market might do. But that doesn’t mean we can’t look at it in different ways! The first step in price action trading is to familiarise yourself with candlesticks.
Here are two examples of candlesticks.
The red one shows the price going down (and is said to be bearish) and the green one shows the price going up (and is said to be bullish). While the red and green colours are by no means required, it is common to show candlesticks like this as this makes it easy to recognise the direction of the market.
What makes candlesticks so different from let’s say line charts, is that each candlestick shows a wealth of information about what the price has done in a certain time period. Just from one candlestick, we can make up the open price, close price, highest price and lowest price. This makes candlesticks one of the most effective ways to display the historical and current price of a market.
If you want to know more about candlesticks, I would recommend that you pick up a copy of [amazon asin=0735202011&text=Japanese Candlestick Charting Techniques by Steve Nison]. Steve is regarded as one of the grandfathers of western candlestick analysis and his book contains a wealth of information on what it takes to use candlesticks in your trading.
Now that you know what a candlestick is, let’s move on to the good stuff: candlestick patterns.
Candlestick pattern analysis
Candlestick patterns are one of the pillars of price action trading. Basically, candlestick patterns are groups of one or more candlesticks that exhibit a specific pattern. Candlestick patterns are so powerful because they often convey what the market has done. This in turn gives us clues what the market might do.
To get you started, there is an overview of commonly used candlestick patterns (courtesy of Joe Marwood):
As you can see, some candlestick patterns are said to be bullish and others are said to be bearish. Even other candlestick patterns indicate indecision. Usually, candlestick patterns tell a story. They might show us that the sellers first tried to push the price down, grinding lower. All of a sudden though, buyers regained control and in an instant, pushed the price up with a force that is much stronger than what was seen before (three line strike).
It tells us who is in control, and therefore is a powerful way to analyse the market.
Chart pattern analysis
The next step in price action trading is to look at charts as a whole. While candlestick patterns can show us inflection points, it is useful to take a step back and look at the entire chart.
Trending and ranging markets
When we look at the entire chart, it will give us clues as to the direction of the market. Do we have a trending market? Is the market staying flat most of the time, or it is ranging between an upper and lower boundary? A useful way of determining the direction of the price is to look at the highs and the lows that the market is making:
On the left side, we can see that the price is making higher highs (H) and higher lows (L). The market is therefore said to be in an uptrend. On the other hand, if the price is making lower highs and lower lows, the market is said to be in a downtrend.
If the price stays between an upper boundary and lower boundary, the market is said to be ranging. It’s not making higher highs and higher lows or lower highs and lower lows. Instead, it is more or less going sideways:
Now let’s get into the nitty gritty of price action trading with why price action might not yet work for you.
Top 3 reasons why price action isn’t working for you
I often believe it’s useful to look at why something doesn’t work. You’ll get more out of looking at your losing trades than at your winning trades since you’ll be having a clearer picture of what went wrong. Using the same approach to price action, let’s have a look why you might be currently struggling with price action trading:
1. You can’t measure price action
Price action can’t be measured in absolute values. You can’t say price action is now at the 70 level, so it’s time to sell! Beginning traders feel more comfortable with something they can put a number on, which is why they avoid price action and go for the indicators.
Price action describes the market sentiment for a currency pair. It’s not measurable in one value, but instead tells a whole story about buyers and sellers and gives you a much more complete picture of the current market situation.
2. You ignore the context of price action
You might have read about price action patterns like a pin bar. A lot of traders usually forget to mention one thing though. Depending on where the pin bar shows up, the same pin bar can both be a sell signal and a buy signal. Even more, some pin bars should completely be ignored if they happen in the wrong place!
We’re going to cover the context of price action setups when we get to my top secrets, keep on reading!
3. You trade price action in isolation
Price action should be a tool in your trader’s toolbox. But that doesn’t mean it should be the only tool! While it is possible to purely focus on price action, years of trading have taught me that it is better to combine it with other types of market analysis. It will increase your win rate considerably. I will discuss this in my price action secrets below.
My 10 price action secrets
Through years of price action trading, I’ve found that some things work better than others. I’ve completely modelled my trading style to reflect this, but I realise it’s not always easy for beginning traders to pick up on those subtleties. That’s why I want to save you a lot of time and go over what I believe are the most important price action secrets you will want to know.
These are the tips that will take you from price action beginner to being able to employ a solid and profitable price action strategy.
1. Multi-candle patterns are more reliable
The more candles a specific pattern contains, the more reliable it usually is. 3 candle patterns are better than single candle patterns. 30 candle patterns are usually better than 3 candle patterns.
Here’s an example:
Patterns like head and shoulders, double and triple tops are among my favourites, exactly because of this reason. They consistently result in higher probability trades, which is what we’re all after. It doesn’t mean that a good pin bar setup won’t work, it just means there’s a higher probability of having these multi-candle setups resulting in a winning trade.
2. Wait for confirmation
Confirmation means that instead of entering when the pattern completes, it’s often helpful to see if the price will follow through. To make sure that I get confirmation, I enter just a little bit above or below the pattern, depending on which direction I suspect the price will go. This way, you can avoid fake-outs where price reverses on you, leaving the inexperienced traders in the cold.
Seasoned traders know to wait for confirmation.
Also don’t get into the habit of entering trades before the pattern completes. It’s tempting to want to enter when the last leg of a head and shoulders pattern is almost complete as you would get a better price, but it’s just as likely that the price reverses before the price action pattern completes, leaving you with a loss instead of the result you hoped for. Waiting for pattern completion shows patience, which is a personality trait every trader should have.
Here’s an example:
Here, we can see an uptrend where suddenly, price seems to stall a little bit. It consolidates sideways until quite a large pinbar shows up. Now you could do two things: jump in immediately or wait and put a sell stop a few pips below the low of that pinbar.
These are the candles that follow:
As you can see, price didn’t hesitate and made a move higher. The impatient trader would have opened the order and very likely have its stop loss hit for a loss. The pro price action trader however would find that his sell stop would have never been hit and didn’t have lost any money.
Now which scenario do you prefer?
3. Know where to place your stop loss
Knowing where to place an order is just the beginning. Where do you place your stop loss? Fixed pips stop loss levels are hardly a good approach since the market volatility can change and every trade should be looked at within the context of the recent market history. There are a few strategies to place stop losses like a boss, and I’m going to share them with you.
Stop loss above the price action
This is the easiest (and in many situations the best) option. When you see a price action pattern, you take the high of that pattern, add a few pips (± 5) and place your stop loss there. This is a good strategy because many times, the price will not go further than the high or low that the price action pattern created.
The drawback of this approach is that depending on the pattern, your stop loss might be quite large. A large stop loss means a smaller R:R, so you’re taking more risk to get the same reward. Nevertheless, in many cases, this is a valid approach. Have a look at this bearish engulfing bar, where you would place the stop loss a little bit above the pattern.
Stop loss half-way the pattern
When the pattern is so large that it’s realistically not possible to put your stop loss above the pattern, this could be another option.
It often happens with pin bars with a very long wick. It is riskier than our previous option though, since there is more of a possibility that the price will actually retest certain levels, as long as it stays within bounds of the pattern. But taking into account R:R, this can still be a good approach.
4. Always look for confluence
This is absolutely one of the most important secrets you have to know about. Confluence is everything.
So you’ve found a sweet price action setup. Great! Now make sure it has confluence, meaning that it coincides with other valid signals that support your trading idea. Here’s a triple top and previous high confluence:
These signals can come from a multitude of sources, but here are a few that I sometimes use in my trading:
- Price action pattern happens at a meaningful support or resistance zone
- Divergence on RSI
- The pattern happens at a fibonacci retracement level
- The pattern happens at a pivot point
- It’s a break and retest setup
The very simple rule is: the more confluence you can have, the better the setup is.
5. Tell a story of what happened
Every chart tells a story. It might be a story of clear direction or a story of messy back-and-forth battling between buyers and sellers. In a similar way, we can talk about clean price action vs messy price action. It is up to the trader to find the story and better understand what the market might do.
From this chart snapshot, we can create our story:
The buyers were initially in control and pushed the price quite high. Eventually, they hit a resistance zone and had trouble keeping the price at this level. Sellers regained control and violently pushed price back down. But the buyers won’t just give up! In the second wave, they move the price back up until – you guessed it – sellers blocked their path and regained control.
This goes on for a couple of times and is characterised by lots of strong up and down moves, lots of candles with long wicks combined with candles with large bodies and – most importantly – a general lack of clear direction. You can define some resistance and support zones, but the price action is rather messy and it is not something I would trade.
Let’s go about creating our story again:
Clearly, in the left part of the chart snapshot, the buyers are in control. We see large green candles pushing upwards with very little counterweight from the sellers. There is a slight pause on the way up, this is what we would call a consolidation. The buyers catch a break, so to speak. After this consolidation period, we again see a strong push upwards. Candles are mostly defined by large bodies and relatively small wicks.
Now I want you to focus on the sequence of 4 candles at the top of the structure. At some point, we can see a large bullish candle, followed by a small bearish pin bar followed by a rather large indecision candle (the one with the long upper and lower wicks) and finally a strong bearish candle. This should already ring the alarm bell.
Let’s go through it step by step: the large bullish candle is a so-called exhaustion candle. The reason this candle is the largest of them all is that at this point, the most buyers finally are aware of this uptrend and so the most buyers are in the game. The imbalance between buyers and sellers is the largest here.
Next we see that at some price level, sellers start to push the price down, but don’t yet succeed (the bearish pin bar). There are still too much buyers that believe this will go higher, so it takes some more time. The next candle is what you could call an indecision candle candle, but I would call it the squeeze candle. Buyers are “squeezed” to keep their position and a lot will sell at a loss. At the same time, sellers see the price going down and are more convinced they are on the right side of the move. There is no victor yet and the battle continues until the last candle, where we see a strong move down and the sellers take control. The tide has turned and they will push the price further down.
What would you prefer to trade? The first or the second scenario?
I know what story gives me the most confidence on the direction of the price.
Clean price action and being able to tell a convincing story about what price is doing will help you in making better trading decisions. While it may take some time to be able to read charts like this, it is done purely by interpreting price action.
6. Find the major inflection points
Inflection points are areas that mark the beginning of a fundamentally different behaviour of the price. They are the big spikes indicating rejection of a certain price level, the turning points in the direction of the market. It’s characterised by a big concentration of buyers and/or sellers. It’s where the big moves happen. Inflection points often form a part of your support and resistance as well, and you will see that a lot of those inflection points regularly line up to be at the same price level.
These points (or areas) are important because there will be a lot of buyers and sellers looking at them. Lots of buyers and sellers will have orders close by that will trigger. Stop losses and take profits will be around these levels. It is therefore important that you keep an eye on these levels. But how do you find them?
Let’s look at an example:
Basically, all areas where one of the following happens:
- A major spike
- A lot of increased activity
- A major turning point in price direction
It takes some experience to know what the important inflection points on a chart are, but usually, the larger the spike or the stronger the move, the more important the inflection point will be. These points can line up with other inflection points to form support and resistance zones, which brings us to the next item.
7. Identify key support & resistance zones
Support and resistance (or S&R for short) are terms used to denote areas where price reverses at its lowest point (support) and highest point (resistance) on a chart. Often, these zones are “tested” multiple times as traders look for increased buyer and seller activity around these levels. It’s important to note that support and resistance are usually not thin lines, but rather zones. This example should make things clearer:
The stretched out green rectangles represent support and resistance zones. Support indicates a lower level and resistance indicates an upper level. The green arrows show where price approached a resistance zone and (sometimes sharply) reversed. The red arrows show where price approached a support zone and reversed. Also note that sometimes the same zone can be resistance but then become support after price has broken through it (and the other way around).
Trending support & resistance
Support and resistance levels do not have to be horizontal either. Here is an example of support and resistance in an uptrend:
As you can see, the lower and upper boundaries are here defined by a rising channel. At some moments, price protrudes the cannel but always comes back. Again, these boundaries are more like zones than specific lines (but it’s not easy in TradingView to draw rising zones ).
Dynamic support & resistance
Finally, support and resistance can also be defined by dynamic lines, for example using moving averages or Bollinger bands boundaries (see, it’s not forbidden to use indicators – just know when they’re useful).
Here’s an example of dynamic resistance (note that price can still pierce through it sometimes, it’s not an exact science):
Support and resistance are of importance since they are often areas of increased buyer and seller activity. Price is more likely to react to such levels, giving us opportunities to enter the market.
Market reaction to support and resistance levels
I’ve found that horizontal support and resistance lines are usually more reliable than trend lines and dynamic S&R, but this depends on the situation and the amount of times a specific support or resistance level has been tested.
On the one hand, the more times a level of support & resistance has been tested, the more people will have eyes on that level so it will hold more easily. On the other hand, you have to consider the amount of buyers and sellers for a certain level. Every time a specific level has been tested, less buyers and sellers will be left to keep the level intact for the next time. This means that after a few tests, price might eventually break through it after all.
All of these things should be considered when defining your support and resistance. The more you do it, the better you will get at it.
8. The best price action is clean to the left
When you look at a price action setup on a chart, you will find that the best setups are usually clean to the left. What I mean by that is that ideally, the candles that precede the price action setup haven’t been around the same price levels that your price action setup is in.
This chart shows a head and shoulders setup with a lot of “white” space to the left. For the past 30 or so candles, the market hasn’t touched the price levels the head and shoulders pattern is in. The reason professional traders prefer these kinds of charts is because when the price hasn’t been trading at the current levels for a while, it’s likely that there are less traders having pending orders on these levels, which in turn will make the price action pattern more meaningful.
9. Avoid price action in narrow ranges
Price action in narrow ranges is often less meaningful than when price makes a new high or low, or at least goes to a level that hasn’t been touched in a while. In narrow ranges, there is often too much buyer and seller activity going on to make some price action setup valid. This is similar to the previous point about having charts that are clean to the left of the price action, but expands on that.
A better approach could be to wait for a range breakout and look for price action setups there. A good way to measure if the price is in a narrow range is by using Bollinger bands. If the bands contract a lot, there is less and less volatility and price might be ranging. On the other hand, if the bands expand again, you will often see price trending or making bigger moves:
Also know that the longer price is in a narrow range, the more likely it is that price will be trending afterwards.
10. Context is everything
Depending on where a price action setup occurs, you should interpret it differently. The same pin bar could be bullish or bearish, depending if they show up at the bottom of a downtrend or top of an uptrend, respectively. Not all patterns are also worth taking if they are not preceded by the right price action and happen at the levels that are in one way or the other of significance. This significance usually comes from confluent signals, which is the topic of secret 10.
This next chart shows exactly what I mean. There are multiple pin bars on the way up, but they’re not really meaningful as they don’t occur at levels that are significant. It’s clear that every single one of the pin bars lacks follow through and instead of a reversal, price keeps grinding higher. Keep in mind that the context of price action is everything.
Employing price action strategies is one of the most fundamental and powerful ways for a trader to become profitable. At the same time, it’s often not well understood and there are a quite a few misconceptions about it. In this guide, I’ve exposed some of the secrets to make price action work for you, providing you with examples to get the most out of your journey into the price action trading world.
It might take some time to get used to, but I believe price action trading is one of the best ways to understand markets. This doesn’t even only apply to forex, but a trader who understands price action can apply this to all kinds of financial markets such as futures, stocks, commodities and more. It’s about describing and understanding what’s at the core of every market.
If you want to know even more about how I trade using price action and want to learn a proven trading strategy, consider joining my Trade Advisor trading program. This price action program is made for traders who want to take their trading to the next level.
Good luck becoming a successful price action trader!
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