What is Price Action?
Price Action is the art of trading based on raw price data with no indicators, news, or fundamental data. Price Action does not utilize lagging indicators, trading systems or algorithms, instead the trader’s objective is to read the raw price and map out key market levels with the use of signals and patterns to provide clues to the future movement in price over time.
Keep it Simple!
The sole focus is on a market’s price action, and the principle amongst price action traders is that this price action reflects all the variables that influence a market and cause it to move. Therefore, the theory is that it is much simpler to just analyze a market and trade from its price action, rather than trying to decode and sort the many different variables affecting a market each day.
Price action patterns are the most important aspect of price action trading. These patterns provide a trader with strong clues as to what price might do next.
The “inside bar” pattern is a two-bar strategy in which the inside bar is smaller and within the high to low range of the prior bar and the low is higher than the previous bar’s low. Its comparative position can be at the top, the middle, or the bottom of the prior bar.
Inside bars can be traded in trending markets in the direction of the trend, which are typically referred to as an inside bar breakout pattern. They can also be traded counter-trend, typically from key chart levels, which are often referred to as inside bar reversals.
Tips: Play off Key Levels, Longer Consolidation = Stronger Breakout, The Trend is your Friend.
A pin bar pattern consists of one price bar, which signifies a sharp reversal and rejection of price. The pin bar reversal is defined by a long tail, the tail is also referred to as a “shadow” or “wick”. The area between the open and close of the pin bar is called its “real body”, and pin bars generally have small real bodies in contrast to their long tails.
The tail of the pin bar shows the area of price that was rejected, and the effect is that price will continue to move opposite to the direction the tail points. Therefore, a bearish pin bar signal is one that has a long upper tail, showing rejection of higher prices with the implication that price will fall in the near-term. A bullish pin bar signal has a long lower tail, showing rejection of lower prices with the implication that price will rise in the near-term.
Tips: Wait for Candle Close before Entry, 4hr/Daily Timeframe work best, Longer Tail signals a more significant reversal or rejection of price.
The Fakey pattern is a false breakout from an inside bar pattern. The Fakey pattern always begins with an inside bar. When price initially breaks out from the inside bar pattern but then quickly reverses, creating a false-break, and closes back within the range of the inside bar, we have a fakey pattern.
A Fakey pattern can have a pin bar as the false-break bar or not. The false break bar might also be a two-bar pattern where the first bar closes outside the inside bar range and then the following bar completes the false break by closing back within the range of the inside bar.
Fakey’s are important because they can help us identify stop hunting by “Smart Money” and provide us with a good clue as to what price might do next
Tips: Fakey’s work best in range-bound markets or against trend at key levels, stick to the daily chart when first starting.
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