Price Action Trading Explained

We have been getting a lot of questions from newer traders to price action on what is price action and how can one do price action trading.  What we are going to cover is the traditional definition of price action, how we approach it differently than others, and how can one trade price action in the forex market.

 

What is Price Action?

In the most traditional and technical sense, price action is simply price’s movement over time.  This could be on any time compression from the 1min up to the weekly chart.  Any price fluctuation for any instrument is a form of price action.  Price action trading is the science and art of trading these price fluctuations over time with little or no indicators.  By learning to read price action and price’s movement over time, one can;
-see where the institutional players are heavily involved
-where they are driving the market
-where are key support and resistance areas
-where to find precise entry and exits
-what is a key breakout
-how to catch reversals
-tops and bottoms
-get into trends
-what are impulsive vs. corrective moves
-what kind of market environment you are in
and more.

This is why learning to read price action can be a critical component of ones trading.

However, based on one’s approach to it, there are key differences in how one can trade it.

 

Various Ways to Approach Price Action

For the most part, all of the vanilla price action techniques you find out there are based upon patterns. Some of these patterns can be flags, triangles, double tops and bottoms, pinbars, inside bars, etc.  But if you are trading these patterns just because they are a pattern, then you are really failing to understand what price action is.

The proximate driver of price action is order flow which is the total summation of all buy and sell orders that are executed in the market.  It does not matter whether the market is moving because of a fundamental or technical reason.  Order flow is the most consistent force which causes the price action to change.

Because we do not have direct access to order flow, we have to learn how to read its sibling which is price action.  Price action has the fingerprints of order flow all over it. Since the most common driver of market movements come from order flow, then we have to learn how to read price action. This is how we approach it.

We trade price action strategies and patterns, but we do so with the key understanding that all price action is the result of order flow.  And since order flow is what moves the markets, then we have to learn how to read order flow through price action. This how you can take your price action trading to the next level.

 

Trading Price Action

Price action trading in the forex market is a learnable skill that anyone can do.  With the proper training, mentor and study, one can learn to trade price action successfully.  In the forex market, because it is such a highly liquid market, trading becomes a lot easier because as you have more liquidity, you have a more technically pure market. There are various ways to trade price action in the forex market and we will share one method while explaining the order flow behind it.  We will compare this to trading the pattern by itself and show you how it fails.

 

Trading Just the Pattern By Itself

An inside bar pattern is a common price action pattern whereby all of the price action (body and wicks) of a candle are inside the range of the previous candle.  Here is a picture below showing an inside bar pattern:

inside bar chris capre 2nd Skies Forex http://2ndskiesforex.com

Now inside bars can be traded as both reversal and trend continuation techniques.  If one was just trading the pattern itself without understanding the order flow behind it, one could be seriously misled into trading a lesser inside bar simply because it was a pattern.  Just because a pattern or formation shows up does not mean we want to trade it.  We will give you an example.

 

Not All Inside Bars Are Created Equal

Lets say it is 12hrs before a major announcement, or a friday, or a holiday of sorts. During such events, order flow diminishes as the institutional players leave the market until the risk events are over.  In these times, many inside bars can form since there is nobody in control of the market and no heavy liquidity or order flows.  If you were just trading inside bars because an inside bar showed up, you could be trading during a non-optimal time because the market will not take a direction till after the risk event. So this is one example of how trading a pattern because it shows up could be harmful to your trading.

This is why it is critical to understand the order flow behind the market and why the price action is forming the way it is.  This way you can determine who is in control (the buyers or sellers). You can determine if it is a powerful breakout or a false one. You can determine if the trend will likely continue or not. All of these are critical to trading price action and understanding how the order flow is creating such variables.

Below is a chart example of how not all inside bars are created equal and why you need to avoid some of them. Take a look at the chart below:

chris capre price action inside bars http://2ndskiesforex.com/

In this chart, you are seeing the price action from 9am EST up to 1am EST (a total of 18hrs).  Take a look at all the inside bars above. Here you have a total of 3 inside bars, yet they produced no special reaction. Price was stuck in a virtual 50pip range for over an 18hr period.

If you were just trading inside bars because it was a price action pattern, you would have had many false breakouts and likely many losing trades.  Now lets take a look at another example of how an inside bar can be used for a successful trade by reading the order flow behind it.

Taking a look at the chart below, we can see an inside bar forms after a very powerful with trend move. There could be several reasons for this but lets read the order flow behind it.

chris capre inside bar price action with trend http://2ndskiesforex.com/

1) Price has been climbing for 4 days in a row suggesting the buyers are clearly in control.
2) The last candle was a very strong candle and the largest in this move suggesting strong participation
3) The inside bar comes right at the parity level suggesting the market is respecting it
4) However, the selling in the inside bar is quite weak communicating the sellers have little sway
5) Thus, the buyers are likely to continue the trend after this weak push back

So empowered with all this information on learning how to read the order flow behind the move and inside bar, we can make a much more informed decision on trading this inside bar.  We can trade this as a with-trend continuation move knowing the buyers are heavily in control.  And as we can see, the market climbed for over 300pips over the next three candles.

 

In Summary

Price action in its most technical form is price’s movement over time.  This is for any instrument on any time frame from tick charts up to monthly charts.  All price action is the result of order flow which is the total summation of all buying and selling.  All the price movements we see on the chart are derivatives of order flow.  In other words, order flow is the cause of all price movement and its sibling is price action. Since we do not have access to aggregate order flow in the forex market, learning to read price action and the order flow behind it is key.

In trading the forex market, we can trade price action patterns by themselves, but we can easily see how dis-empowering this is. Patterns by themselves are meaningless unless we can read the price action and order flow behind it. When we can read the order flow, we can determine where the institutional players are buying and selling, the speed of buying and selling, where are key support and resistance areas, when the market will continue the trend, when it will reverse and when key breakouts are happening. All of these are critical to trading price action so our goal must be to learn how to read price action and the order flow behind it.

For those of you wanting to learn how to read price action and the order flow behind it, take a look at our Advanced Price Action Trading Course where you will learn rule-based price action systems to trade the forex market.

Please remember to leave your comments below and to ‘Like’ and ‘Tweet’ to share the article. 

Buddhist, Trader and Philanthropist

Chris Capre, Founder of 2ndSkiesForex, is a professional trader who specializes in trading price action. His blog attracts 150,000+ monthly readers across 110+ countries, including; Australia, USA, Singapore, UK, Canada, & Germany. To discover more about Chris’s Price Action Strategies, visit his Price Action Course page.

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Discussion

11 Comments on the article

  • pigbat - December 4, 2011 2:53 pm

    Still not clear on “order flow.” The article describes it as the “total sum of all buy and sell orders executed in the market.” What seems opaque is the motivational structure within the order itself, e.g., UBS buys yen, a secondary bank shorts it, a hedge fund goes both ways, a third bank bets against it. I guess you could say price action represents that “order flow,” but, in a perfect world it would be nice to understand exactly who the players are and why they do what they do in certain circumstances. Then you wouldn’t have to be on the other side of the fence, guessing. Still, article was good.

    • Chris Capre - December 4, 2011 4:19 pm

      Hello Pigbat,

      You bring up some poignant issues. To give an alternate or amplification on the definition of order flow;
      expanding on what I already wrote, it involves all players in the market, the total summation of all the buy and sell orders from all around the world. This creates either an equilibrium, or an imbalance (i.e. bullish or bearish) whereby the price responds to this balance or imbalance, hence creating price action which is the price fluctuations that are the result of this order flow.

      Its important not to think about this as a perfect world because the market is both order and chaos so that would not apply. Furthermore, I think it would be a wasted effort to try and understand all the players and why they are doing what they are doing because there are soooo many players in this market who are in it for various reasons, using thousands of different strategies, so its a futile and fruitless venture to try and understand all of the ‘why’s behind them. What is more important is learning to read the balance in the price action and find opportunities to be trading it. There are many ways to do this without any ‘guessing’. And even if you did know all the players at any one moment (10′s of thousands, up to several million), if I gave you 10,000 different reasons for why people bought or sold the euro at that moment, would you be able to make sense of it?

      My guess is not, but if I give you patterns which are repeatable with a strong degree of success based on the underlying principles in creating a balance or imbalance in the order flow, then you can make money regardless of the why which will always be for a kaleidoscope of reasons.

      Just my thoughts on the matter

      Kind Regards
      Chris Capre
      Twitter; 2ndSkiesForex

  • Nandarani - December 4, 2011 10:09 pm

    No need to reply to this one, Chris! This is just praise of the way the website is set up…. I have not spent time here since initially recognizing my own interest in your work, but now that it’s getting closer to signing on, I’m here. Finding signs on the right hand side when I’m watching a video or reading an article, of a proposed next move, is much appreciated. I know there is a lot to find. I’ve not seen any other site set up like this, nor such an uncluttered one where the master trader stands ready to reply in a short time and lend a hand. The site is a seamless extension of you. My eyes and brain are comfortable with this particular shade of blue, and white print.

    • Chris Capre - December 5, 2011 9:17 am

      am really glad you are finding the new site helpful as we put a lot of time in it to be the most engaging site for developing traders so thank you for the kind words

      cc

  • SHANKAR - December 6, 2011 3:47 am

    Please send me through my e-mail some videos
    of great interest relating to ADVANCED Price Action
    Strategies in order to enable me to take
    a decison to join in your course.

    • Chris Capre - December 6, 2011 4:11 am

      Hello Shankar,

      All my videos are on my site and you can view them as much as you like. Here is a link to some of the top articles and videos on Advanced Price Action.

      Feel free to peruse them and then let me know what questions you have.

      Kind Regards
      Chris

  • Jonah William - April 16, 2013 4:59 am

    Very good expose on Price Action. Picked some helpful tips. Please, do you have a free ebook of your Price Action course for download? Thanks man, you are a bomb!

    • Chris Capre - April 16, 2013 5:09 am

      Hello Jonah,

      Glad you liked the article and found the information helpful.

      I don’t have a free eBook of my Price Action Course which is a paid course. That would defeat the purpose of offering a paid course while having a free eBook out there.

      I have some free eBooks which you are welcome to download either by signing up for my newsletter, or signing up through my facebook page.

      Hope this helps.

      Kind Regards,
      Chris Capre

  • seyedmajid masharian - July 20, 2013 8:51 am

    hello
    that is an excellent article
    thank you so much dear chris

  • seyedmajid masharian - July 20, 2013 8:55 am

    hello dear chris
    i just compare your article with my real time charts and
    think what happened?
    real time charts are confirming your article as well
    i will buy your price action asap.
    thanks again my dear friend
    seyedmajid masharian

    • Chris Capre - July 20, 2013 9:44 am

      Hello Seyed,

      Yes, when you learn to read price action, they work across several time frames, instruments and environments.

      But glad you liked the article and looking forward to working with you as well.

      Kind Regards,
      Chris Capre

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