Price action trading is about reading what the market is doing, so you can deploy the right trading

strategy to reap the maximum benefits. In simple words, price action is a trading technique in which a
trader reads the market and makes subjective trading decisions based on the price movements, rather
than relying on technical indicators or other factors.

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.[1][2][3][4] Price action is simply how prices
change - the action of price. It is most noticeable in markets with high liquidity and price volatility, but
anything that is traded freely (in price) in a market will per se demonstrate price action.

Price action trading can be considered a part of the technical analysis, but it is highly complex compared
to most forms of technical analysis, and it incorporates the behavioural analysis of market participants as
a crowd from evidence displayed in price action - a type of analysis whose academic coverage isn't
focused in any one area, rather is widely described and commented on in the literature on trading,
speculation, gambling and competition generally, and therefore, requires a separate article. It includes a
large part of the methodology employed by floor traders[5] and tape readers.[6] It can also optionally
include analysis of volume and level 2 quotes.

A price action trader typically observes the relative size, shape, position, growth (when watching the
current real-time price) and volume (optionally) of bars on an OHLC bar or candlestick chart (although
simple line charts also work), starting as simple as a single bar, most often combined with chart
formations found in broader technical analysis such as moving averages, trend lines and trading ranges.
[7][8] The use of price action analysis for financial speculation doesn't exclude the simultaneous use of
other techniques of analysis, although many minimalist price action traders choose to rely completely on
the behavioural interpretation of price action to build a trading strategy.

Various authors who write about price action, e.g. Brooks,[8] Duddella,[9] assign names to many
common price action chart bar formations and behavioral patterns they observe, which introduces a
discrepancy in naming of similar chart formations between many authors, or definition of two different
formations of the same name. Some patterns can often only be described subjectively, and a textbook
pattern formation may occur in reality with great variations.

Credibility

There is no evidence that these explanations are correct even if the price action trader who makes such
statements is profitable and appears to be correct.[10] Since the disappearance of most pit-based
financial exchanges, the financial markets have become anonymous, buyers do not meet sellers, and so
the feasibility of verifying any proposed explanation for the other market participants' actions during the
occurrence of a particular price action pattern is exceedingly small. Also, price action analysis can be
subject to survivorship bias for failed traders do not gain visibility. 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.

The implementation of price action analysis is difficult, requiring the gaining of experience under live
market conditions and prior knowledge of "market states." There is every reason to assume that the
percentage of price action speculators who fail, give up or lose their trading capital will be similar to the
percentage failure rate across all fields of speculation. 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.[11]

Some skeptical authors[12] dismiss the financial success of individuals using technical analysis such as
price action and state that the occurrence of individuals who appear to be able to profit in the markets
can be attributed solely to the Survivorship bias.

Analytical process

A candlestick chart of the Euro against the USD, marked up by a price action trader.

A price action trader's analysis may start with classical price action technical analysis, e.g. Edwards and
Magee patterns including trend lines, break-outs and pullbacks,[13] which are broken down further and
supplemented with extra bar-by-bar analysis, sometimes including volume. This observed price action
gives the trader clues about the current and likely future behaviour of other market participants. The
trader can explain why a particular pattern is predictive, in terms of bulls (buyers in the market), bears
(sellers), the crowd mentality of other traders, change in volume and other factors. A good knowledge of
the market's make-up is required.

Price action patterns occur with every bar and the trader watches for multiple patterns to coincide or
occur in a particular order, creating a set-up that results in a signal to enter or exit. Individual traders can
have widely varying preferences for the type of setup that they concentrate on in their trading.

Al Brooks, a price action trading author, is capable of naming price action formations and provide a
rational explanation for the observed market movement for every single bar on a bar chart, regularly
publishing such charts with descriptions and explanations covering 50 or 100 bars. He admits that his
explanations may be wrong, but states that his explanations allow the trader to build a mental scenario
around the current 'price action' as it unfolds.[8]
Implementation of trades

The price action trader will use setups to determine entries and exits for positions. Each setup has its
optimal entry point. Some traders also use price action signals to exit, simply entering at one setup and
then exiting the whole position on the appearance of a negative setup. Alternatively, the trader might
simply exit instead at a profit target of a specific cash amount or at a predetermined level of loss. This
style of exit is often based on the previous support and resistance levels of the chart. A more
experienced trader will have their own well-defined entry and exit criteria, built from experience.[8]

An experienced price action trader are adept at spotting multiple bars, patterns, formations and setups
during real-time market observation. However, a chart can be interpreted in multiple different ways,
which may lead to discrepancy of interpretations between two traders, despite using the same method
of analysis.

Most price action authors state that a simple setup on its own is rarely enough to signal a trade. There
should be strength in the direction of the trade that a trader is thinking of taking and at least two
reasons to enter the trade.[8] When the trader finds that the price action signals are strong enough, the
trader tend to continue to wait for the appropriate entry point or exit point.

During real-time trading, signals can be observed frequently while the bar is forming, and they are not
considered ultimate until the bar closes at the end of the chart's time frame. An entrance of a trade
based on signals that have not been finalized is known as an early entrance and is considered to be risky
since there is a possibility that the market may move in the adverse direction, and when the bar has
formed, the ultimate signal does not agree with the trade direction.

[8]Brooks recommends price action trader to place the initial stop order 1 tick below the climax price of
the adverse direction and if the market moves as expected, moves the stop order up to one tick below
the entry bar, and once the entry bar has closed and with further favorable movement, will seek to move
the stop order up further to the same level as the entry, i.e. break-even.

Brooks also warns against using a signal from the previous trading session when there may be a gap past
the position where the trader would have had the entry stop order on the opening of the new session.
Poor entry points may significantly alter the risk-to-reward ratio for the trade, and therefore, the trade
should not be taken.[14]