Pure Price Action Trading - theory

In this article we will talk about a very interesting subject; price patterns. We will also explain how price patterns could be used for indicators-free trading. Choosing the right trading method is maybe the most important thing that new traders think about once they decide to start trading forex market. And when they do they would find out that the industry if full of trading methods and trading systems of all kinds and shapes for all trading goals and plans.

Sounds great? Yes it is, but for beginners, it could really be very confusing when they start trading price patterns. To get you to understand how forex trading works let’s try to say that it’s all about one thing : following market patterns. It doesn’t matter what that pattern is, and how you’re planning to see it or trade it. If there is a pattern, there is money to be made. It’s really that simple!

This idea is based on the old saying that "history tends to repeat itself". Once you choose a pattern and study it then master it, you can follow it and wait for it and use it and even build a whole system around it.

However, you should be very careful because you need to really work hard on the study part! And I mean that you have to search and track this pattern over historical data for as long as you can and understand the effect or market reactions to it.

But you don’t have to worry, this is already done for you. And if you will look in trading course and books you will find tons of profitable patterns to follow. Or even better, you can add two patterns or more to your trading system as confirmation signal. For example, let’s say that you are using a trend following strategy. You can simply add to that pin bar pattern or inside bar pattern for entry signals confirmation.

Another example, if you’re using a trend reversal strategy you can add a pattern like double top or double bottom to confirm your entry signal. The only thing you need to take care of is that you have to practice and test and test and practice for as long as takes! .. You must make sure that the pattern you choose works perfectly with your system. it doesn’t matter if it’s price action pattern, candle stick pattern or something different or new. The main concept is still the same, it must work in perfect harmony with all other elements of your strategy.

Price patterns could be used with almost all trading strategies and trading systems. From trend following to trading reversals to breakouts and even with trading the news…and the best part is that they are already tested and all details about them are available for you to use.

Let’s take an example of trading price patterns, or indicators-free trading; price channels. The trick here is to recognize and pick major support and resistance levels and draw 2 opposite trend lines. When the trend lines form a channel, wait for a breakout. This strategy requires no indicators and if done right, could be very profitable and allows you to trade any market, any pair, any time frame.

What you need to look for is simply a consolidation period, where price moves in sideways long enough to form a channel of opposite trends. One trend made by connecting support levels, and the other trend is created from connecting resistance levels.

Pure Price Action Trading

See the example chart above. When that happens, all you need to do is to wait for price to break any trend – up/down – and open a trade in the direction of that breakout.

Best Stop loss is the last support/resistance before the breakout, best target is next support/resistance after the breakout. You can also use Fibonacci levels if you know how to trade fibo levels.

Strength : It’s very easy and can be used any anyone anytime for any pair. no indicators and no complicated technical analysis skills required. Weakness: False entry signals or false breakouts could happen when the market is not stable enough – for example, news releases – and if the entry or breakout is not confirmed price could reverse back into the channel and hit stop loss or cause large drawdown.

Look for strong reversal signs before the breakout or entry point to confirm the signal. You don’t have to use any indicators but it’s still an option. For example : MACD divergence. Another option that you can also use is candle sticks patterns. For example, pin bars and inside bars. If you find a strong reversal pattern before the breakout – divergence , pin bar, inside bar – then take that trade. if not, then pass and wait for a confirmed signal.

Practice makes perfect, so if you like this strategy please use it on demo for a while until you master it. and after that you can use it on a real money account if you wish. Remember, it can be used with any market, not only forex market. That means you can use it with stocks and metals, like silver or gold. The sky is the limit here. Try different markets, pairs, time frames and stick to the one that produces best stable results for you.

Trading price action or indicators-free trading, requires that you take your time to build the necessary skills and learn from your experience. it’s not exactly the same as copying a specific set of indicators and follow the rules. Sometimes, with many patterns you will find that you personal interpretation and understanding affects your results more than the pattern itself.

Patterns and price formations that I recommend: Double tops and double bottoms, Triangles, Pin Bars, Inside Bars, Wolf wave, Divergence, Breakout candles, and Engulfing candlestick pattern.

There are many other patterns out there that you should definitely learn and understand, even if you don’t plan to use them. They will help you in your analysis efforts and improve your trading skills, and of course, will allow you to make more and more profits with less risk.

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