Beginners Guide to Price Action PDF
Price action refers to the behavioural pattern of the price of an instrument (commodities, currencies, stocks, cryptocurrencies, etc.) over a certain period. These price actions are mostly represented through the use of charts.
Price action trading, on the other hand, can be referred to as the process in which the traders use the price action data to analyze and speculate the potential or future direction of a particular instrument (commodities, currencies, stocks, cryptocurrencies, etc.). The traders are able to use the price movements and historical data shown on the chart to predict the future positions or direction of the market without the use of advanced trading indicators.
Understanding Price Action Trading
One of the most basic aspects of price action trading is the use of charts, and there are three types of price charts used in price action trading:
Bar charts are used to represent specific periods for trading. They provide more price information than line charts but not as much as the candlestick chart. Each bar chart represents one day of trading and contains the opening price, highest price, lowest price, and closing price for a trade. A dash on the left is the day’s opening price, and a similar dash on the right represents the closing price. Colours are sometimes used to indicate price movement, with green or white used for periods of rising prices and red or black for a period during which prices declined.
Line charts are used to detect a currency’s long-term patterns. They are the most basic form of chart for forex traders. They display the currency’s closing trading price for the periods provided by the user. A line chart’s trend lines can be utilized to develop trading strategies. For example, you may utilize trend line information to spot breakouts or changes in trends for increasing or falling prices.
A line chart, while informative, is often utilized as a starting point for additional trading research.
Candlestick charts are price indicators used in financial trading to represent the price movement of a financial instrument over a period of time. It also shows a clearer picture of price action and what is going on in the market. They are also a fundamental aspect of price action analysis. Imagine the price of an asset as a series of candles. Each candlestick reveals important information about price movement.
Another important aspect of Price action trading is analyzing trends. Trend simply means the general direction of price movement and it is a vital aspect of price action trading as it helps the trader better understand the current market direction helping ascertain the most likely position to take in the market.
The trendline strategy utilizes the trendline as either support or resistance. A trend that goes on for a while tends to form a channel. In an uptrend, you have the higher highs (H.H) and the higher lows (H.L), while in a downtrend, you have the lower highs (L.H) and lower lows (L.L).
Uptrend: Higher highs and higher lows characterize an uptrend.
Downtrend: Lower highs and lower lows indicate a downtrend.
Sideways/Range: When prices move within a range, it’s a sideways or ranging market.
Trendlines and Their Significance
Trendlines help visualize trends. Drawing them connects the lows or highs in an uptrend or downtrend, respectively. As shown in the diagram above, drawing your trendlines also helps you in identifying the diagonal support and resistance levels. They can also be called pullback and continuation levels.
Trading with the Trend vs. Countertrend Trading
- Trading with the trend is less risky, as it follows the prevailing market sentiment, which is always better than going against the market flow. This is especially true for retail traders, as they don’t have the ability or the financial capacity to drive the market in their direction.
- Countertrend trading seeks to profit from trend reversals but is a lot riskier and is only beneficial for institutional traders and institutions with a large liquidity deposit.
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Beginner Guide to Price Action PDF Download
Trading generally requires a lot of techniques, experience, and expertise, as several factors lead to successful trades. These factors range from technical analysis to the market fundamentals to traders’ sentiments and economic conditions.
Most traders are, therefore, overwhelmed on many occasions while trading the market that they fail to cope with the market noise as they are unable to filter this noise out but rather get carried away by the endless buzzing sounds of charts, price movements, and so on that they end up losing themselves first before losing their equity.
This is one of the major reasons we give in-depth trading articles here on Dipprofit to help guide traders on their journey and provide them with as much information and knowledge as they need to make their trading journey easier, more focused, and more successful.
We have also taken this a step further by making our articles easily accessible to our readers. Ensuring that our educational articles can be downloaded and used for further learning and research.
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To look up my article in which I gave a step-by-step approach to my price action trading strategy, making use of some practical illustrations to explain this strategy, you can click here now.
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