Important Price Action Trading Rules
If you plan on becoming a profitable trader, one of the things that you need to know all about is price action trading. If you don’t know what price action trading is, it’s something very valuable that will come in very handy for your trading journey.
In case you don’t know, price action is defined as the movement of a securities price that is plotted over time. Realistically speaking, price action is the basis of all technical analysis for currencies, commodities, stocks, and more.
There are even many short term traders that virtually rely on price action alone, as well as formation and trends that are extrapolated from price action. Yes, price action is of course a great way to make all of your trading decisions.
However, there are some price action trading rules that you need to know about and follow closely in order to be successful. Below, we have a list of the most important price action trading rules that you need to know in order to be successful when trading this way.
Price Action Trading Rules
The price actually trading rules that we are about to discuss are nothing overly revolutionary or groundbreaking. However, the following price action trading rules are extremely important for you to know.
As a newbie trader, you probably have no idea what these rules are, so we want to cover them in their most basic form. These are the basics of price action trading that you need to know in order to be a successful price action trader.
Moving Averages Matter
When it comes to price action trading, remember that markets in strong trends will usually always revert back to the moving average line. If there is a moderate trend, irreverence to the 100 moving average, in a weak trend it revert to the 200 moving average, and in a strong trend it revert to the 20 moving average.
Keep in mind that you always need to know which moving average is being respected by the market at any given time period also remember that if a market is strongly trending, the value of the moving average is going to be lower than in a market that has a weak trend.
Longer Rangers and Stronger Trends
Keep in mind that if a range starts to greatly expand, it is an indication that the market will move in the direction of that expansion. Remember that everybody who looks at charts can see that arranges expanding, and they will then want to short the resistance.
Other people might want to try to trade the breakout. Just remember that if the price trades well above the point of resistance, then all of the people with short positions are going to get squeezed. This means that waiting for a fairly long amount of time to capture big market movements is a good idea.
You might not want to wait for so long to capture big market movements, but when it comes to price action, there are ways to identify big price movements in a short amount of time.
Pay Attention to Support & Resistance
In order to identify areas of value that you can trade from in price action trading, support and resistance comes in very handy. You always want to buy low and sell high, and in order to identify what is low and what is high, support and resistance is what you should use. When you want to buy low, these are the areas of support that you are looking for, and if you want to buy high, it is the areas of resistance that you are looking for.
For price action trading, knowing what dynamic support and resistance is also comes in handy. Dynamic support and resistance are one support and resistance lines move along with the price. When there is a strong uptrend, you usually see dynamic support, and when there is a strong downtrend you usually see dynamic resistance.
Using support and resistance as well as dynamic support and resistance is a good way of identifying moving averages. Do keep in mind that if a market is in a strong trend, the price might not always pull back towards the horizontal support and resistance lines, but rather towards dynamic support and resistance. Creating support and resistance is also a good way to give yourself an advantage by providing you with a good risk to reward ratio.
Keep False Breakouts in Mind
Something that you always need to pay attention to are false breakouts, which is when a price breaks support and resistance lines, but then closes back within the same range that they broke out of. For price action traders, this is a great place to place a trade.
You can take advantage of all of the other traders who become trapped in their trades. Therefore, when it comes to price action trading, you want to short a false breakout. This is because other traders are going to close their trades due to the false breakout, but this will then just further decline the price. If you short a false breakout, you stand to make a huge profit.
Pay Attention to Narrow Range Candles and Wide Range Candles
One thing that you need to know for price action trading is that if you see narrow range candles, they usually always indicate that there is explosive price movement on the horizon. If candles are all within the same narrow range, a big movement is probably going to happen.
However, on the other side of the equation, if you see wide range candles, they’re formed due to imbalances of buying and selling pressure, and they signify that there is hidden support and resistance in the market. Just remember that you never want to trade these in isolation, but rather in conjunction with other trusted technical analysis means.
Always Trade in the Trend Direction
In terms of price action trading, you always want to look for trends, and you want to trade with the trend not against it. Trading against a trend is a great way to lose money. Your profit potential is always bigger if you trade with the direction of the trend. however, this does mean that you need to know how to identify a trend.
Continuation Patterns in Trending Markets
If you see continuation patterns such as penance, triangles, or flags, then be sure to only trade these within trending markets. If you see that a market is within a range, then you never want to trade any of these continuation patterns.
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Knowing When a Trend Ends
In order to engage in proper price action trading, you also need to know when a trend ends. If you see that the structure is broken, if a trend line is broken, or a respected moving average is broken, it is a signal that a trend is ending. If two or even three of these signs happen at once, you can rest assured that a trend is going to end soon, if it has not already.
How to Trade Price Action – Final Thoughts
Of course, there is still a lot more that you need to know about price action trading. However, the tips that we have provided you with here today are definitely great starting points. That said, we do recommend seeking further education on price action trading if you truly want to master it. Remember that price action trading is a great way for you to make money in a fairly easy way.
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