Price Action Trading: The Core Principles

Filed under: Learn Forex Trading |

What I demonstrate in my “Daily Trade” commentary, if you have not worked it out yet, is essentially what we call “price action trading”. Now, although a lot, in fact, most of trading books tend to be quite complicated – there is good news. That is – trading does not have to be complicated. In fact, it really shouldn’t be. Perhaps writers of trading books have to go into great-complicated detail in order to fill it with enough material and to sound smart enough to be able to publish a book in the first place. But you can really boil down trading, particular price action trade, to just a few very simple core principles.

 

The most important element of price action trading is not the trading signals themselves. This might sound strange, but if you traded price action signals (such as engulfing patterns or pin bars) anywhere on the chart, then you would not be very profitable. In fact, you would probably make a loss. The most important element of the trading methodology that I employ is the horizontal levels of support and resistance. These can come from swing points, where price steps up and old resistance becomes new support; or it could be in a range-bound market where price keeps bouncing between two levels. Once you have learned to mark these key areas of support and resistance onto your daily charts, you can then start looking out for daily or intraday price action signals.

 

Price action signals are candlestick patterns that form over one, two, or three candles.

These include the pin bar, engulfing pattern, and inside bar breakout formation, to name just a few (please search previous articles for further information about these price action patterns).

 

The combination of a price action signal along with a strong area of support and resistance is what we call confluent signals. If you can add something else to the equation as well like a Fibonacci retracement area, then you have a very high probability trade setup. So these are the core principles of price action trade. Simple eh? More tomorrow…

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