How I Improved My PRICE ACTION TRADING In 2022

Price action trading is a very simple and reliable trading technique in the stock market, being a most popular trading concept price action trading is used in all time frames and all types of markets with an exceptional success rate.

Content

  1. What is price action?
  2. Trend and market structure
  3. How to identify trend
  4. Entry point, stop loss, and target point
  5. Risk management

WHAT IS PRICE ACTION

The key component of the price action trading is to identify the current trend of the market, and when the price may reverse its direction.

Every stock price repeated some unique trading pattern from time to time thus price action helps you to identify these patterns so that you can take a trade according to them.

As price action trading is not a very easy thing so you must pay great attention to the learning price action, once you understand the price action it is very easy to earn money from the stock market

below you will learn about the complete basics of price action trading, how the market reacts to price action and how you can use it in your trading.

TREND AND MARKET STRUCTURE

If you are a trader you might have heard many times that TREND IS YOUR FRIEND because it is true.

many successful traders follow price action trading to identify the price pattern, trading zone, consolidation, entry-level stop loss level, and many more trading activities.

below is the picture of the basic bull and bear price action structure which is the pillar of price action trading.

in price action trading, trend identification is the basic fundamental of any trading style once you identify the trend half of the analysis is done.

price action trading strategy

TREND is the series of strong moves followed by a small corrective move, this small corrective move must be lesser than the strong move, more the time taken by the corrective wave leads to a strong trend or momentum of trade.

when a market’s new high is greater than the previous high, and a new low is also greater than the previous low so new high will be a HIGHER HIGH and the new low will be a HIGHER LOW

Above picture, the market is forming a HIGHER HIGH, HIGHER LOW pattern thus when the market heading toward the upper side this trend is identified as UPTREND

when a market’s new high is lesser than the previous high and the new low is lesser than the previous low so new high will be a LOWER HIGH and this new low will be a LOWER LOW

PRICE ACTION TRADING STRATEGY

Above picture, you may see that market is forming a LOWER HIGH and LOWER LOW whenever the market makes this pattern is generally called the market is in a downtrend or heading to a new low

Now the point comes to mind that the market always does not form easy patterns like the above pic so how a trader will identify the correct high and low my advice to traders is to follow these points for the correct identification of new high and low

An impulsive move must be greater than its corrective move or double the corrective move

There should be the same degree of a wave for identical high and low and wave is the combination of impulsive move and corrective move

price action trading strategy

now you have learned all the aspects of trend identification once you identify the trend correctly, follow some rules for real-time trading.

below is some price action trading rule which helps you to increase the success rate of your trading and make you more profitable.

CONDITION: when the market is in an uptrend

ENTRY POINT (BUY) – BUY when the market crosses its last higher high and retest again

STOP LOSS – PLACE stop loss just below the last (recent) higher low

TARGET – EXIT when you got double your stop-loss

below the picture, you can see the market is in an uptrend once the market breaks a higher high point you will wait for a retest for your perfect and low-risk entry

once the market retest the breakout point take a buy trade and place a stop loss just below the recent higher low and ride the trade until the most recent higher low or wait until you double your target

as soon as the market breaks the most recent higher low exit the trade and wait for fresh entry or for trend reversal.

price action trading strategy

CONDITION – when the market is in a downtrend

ENTRY POINT (SELL)- when market cross last higher low, Retest and again cross new lower low

STOPLOSS -above retest point

TARGET – target must be double the stop loss

once you identify that market is already trending down make a plan to trade with the trend and wait for the low-risk breakout and retest the entry

below the picture, you can see the first market breaks the lower low and retrace to retest the breakout point then make a downside rally

place a sell order when the market retests the breakout point and plan your stop loss just above the lower high

if you are a risky trader, can take entry just after breakout confirmation but this trade will be riskier than retesting so plan according to your risk profile.

price action trading strategy

read also DOUBLE TOP : MOST UNDERRATED REVERSAL PATTERN

price action trading: how to trade reversal

Above you have learned about the trend following strategies now you will learn about how can you find the trend reversal trading opportunity and trade with them.


CONDITION – When the market is in a downtrend and reverses the trend

ENTRY POINT (BUY) -When the market crosses the last lower high, Retest and cross the newer high

STOP LOSS – Place stop loss below Retest point

TARGET – Target must be double your stop loss

price action trading strategy

Above the picture, you can see the market was in a downtrend then consolidate for a time and break the consolidation area, the red line indicates the resistance area for the consolidation phase.

the market fails to make a new low and breaks the redline resistance area and retests again the breakout area when the market reacts after the restest and makes a new high take a buy entry and place stop loss just below the resistance line.

once you have taken a trade trail your stop loss when the market heads toward the new high and follow the exit rule to maximize your profit.

Below the picture, the market is reversing its trend to a downtrend but before the trend change price was in an uptrend then consolidated for a period of time after that a successful breakout changed the current trend of the market.

price action trading strategy

.as you know price never changes suddenly until news flows there is a complete process which price must follow before changing its behavior.

so in price action trading when the price changes its trend from uptrend to downtrend it also follows the same process.

but in basic price action trading, you will learn only consolidation of the price which is the above chart, and after the price breaks the consolidation area it creates a new trend which is a new downtrend.

in advance price action trading when the price changes its direction price form some pattern like double top pattern, head and shoulder pattern, and many more.

Risk management and position sizing

you can learn many trading strategies, indicators, and charts but you may be profitable or may not be there is a holy grail of trading that has a hundred percent success rate which is risk management and position sizing.

proper risk management leads to a high winning rate of price action trading below is the complete guide to position sizing and risk management.

Rule:

there are a few rules which must have to follow by every trader

Rule No. 01: never lose more than two percent of your total capital in a single trade

Rule No 02: your risk to reward ratio must be more than 1:1

Rule No 03: Never use your full capital in a single trade use multiple options

let us assume you have an account with 100000 capital

If you want to buy a stock whose price is 100 with a stop loss of 98 then how many qty should you trade ?

your risk-taking capacity is 2% of your capital means 100000*2/100 =2000

your tradeable qty = your risk / your stop-loss, 2000/2 =1000

it means you can buy a maximum of 1000 qty in this selected stock

now let us see the benefits of risk management

assume your risk to reward is 1:2

in a whole month, you traded a total of ten trades following all rule

Your winning trade was 5 and losing trading was 5 let us calculate the profit loss for this scenario

your total loss = 2000*5 = 10000

your total profit = 4000*5 = 20000

final profit / loss = total profit – total loss , 20000 -10000 = 10000

means if your price action trading strategy is working with a 50 -50 winning rate then also you are making a profit of 10 percent of your total capital this is the real magic of risk management

key point :

  1. price action trading gives you a root map of market structure and psychology.
  2. made trend identification easy and very few indicators are required in price action trading
  3. market psychology understanding
  4. easy and profitable trading strategy for beginners also

Limitation:

price action trading works well when the market is trendy but as per market behavior, it moves in a trend of only 30 percent 70 percent of the time market moves sideways.

generate very few trading signals.

SEE ALSO

  1. double top chart pattern

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