When I came across, Price Action Trading (PAT), It was a mind blowing experience. I searched and found more studies and methods of Price action trading. I have gone through books, Interviews, Video lessons. Each of these assured me this is the best and simplest method in trading.
What is Price action trading or Price Action Analysis
Before going to the details, let us see how market works. How does a price move UP and Down?. How do they form a pattern?
Each price point is defined by a demand a supply for the stock or forex currency pair at a particular time point. If there are more buyers price will go up and if there are more sellers price goes down.
So what is Price action analysis. In simple words, we focus only on specific action of price at a particular time frame. In Price action analysis, primary focus is on how the price is reacting in a time frame or let me say in a particular candle. So in Price Action Analysis we do not go for all kind of indicators,instead we do check the price movements.
What is the pattern of every price movement or Price action
This is basic understanding of price movement. We can classify this move to two parts
1. Price moves in rally and consolidation.
Even each candle follows this pattern. Lets us take a 4 Hour Candle for example.
Let us just consider the green candle in first picture. It is 4 Hour candle. It is the same candle in second picture which is in smaller time frame chart of same price movement.
So price moves in Rally and Consolidation. The rally length and consolidation length varies. High bullish moves happens with long rally and small consolidation. Pin bar happens when it gets rejected back from the rally and when it comes back to nearly starting points.Red candle happens when opposite rally starts.
2. With the above moves it makes a wave structure and eventually slows down.
You can see if you combine each rally and consolidation it makes a wave pattern.
Now you have a basic idea of how a price moves. Let us find out why we need to concentrate only on price movements.
Why to use Price action trading analysis?
It is the simplest way to trade! Also anybody can read the charts if you got why price moves in a certain way. If you understand where and how support and resistance levels are created, what are the possible patterns suggest a price movement, then it is easy to act accordingly.
Biggest advantage of price action trading is that it avoids complications. Let us see a technical chart with full of indicators.
This is a chart with just three indicators. I have seen people using 6 to 8 indicators at a time. This is actually a clean chart comparably.
Let us see how a Price Action chart looks like
It shows only the support and resistance levels. Trend lines are optional. In my method I use trend channels and lines too.
A clear chart gives you more freedom to focus more on price action. Look at the candle and find out what it can be . Clear mind help you to take clearer decisions.
What do you need to start with PAT?
So what are the tools you need to start with a Price action trading? A clean chart. Nothing else. Eventually you can read the chart even without any support or resistance lines.
Now let us start how to analyse and what are the key parameters must be in your checklist before you go for a trade.
4 Important keys in PAT checklist
Do make sure all these four checks are passed before entering a trade.
Find out the trend direction. You can use multiple time frames and find the direction of market. For trend direction, you can even use Heikin ashi candles or Renko charts.
2. Levels . Support and Resistance levels.
Find out the resistance and support levels. We do mark the S/R levels at least in three time formats. For example, if you are trading in daily time frame, make sure you have marked Monthly, Weekly and daily resistance and support levels.
This is very important. Find out what the price is doing. Look at the patterns and candles, especially at major S/R levels.
Find out set ups like
4. Price channels and Trend lines
This is optional but very useful. You can do it while you are finding out the direction of the trend. You can recognize when price breaks the channels or trend lines. It will be added advantage for taking decision.
At last how to approach a chart technically
7. Set Target and Stop loss