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.
