What Is Price Action Trading?
Price action trading means making trading decisions based on the movement of price itself, rather than relying on lagging indicators like RSI, MACD, or moving averages. Every indicator is derived from price. Price action traders skip the middleman and read what the market is saying directly.
The core philosophy: Price reflects all available information. If you can read price correctly, you don't need anything else.
Why Price Action Works
Every candle on your chart represents a battle between buyers and sellers. The open, high, low, and close tell you who won that battle and how decisively.
When you learn to read this language:
- You see shifts in momentum before indicators show them
- You identify potential reversal zones in advance
- You distinguish between legitimate breakouts and fake moves
- You understand market sentiment at any given moment
Indicators are derived from price. By the time an RSI crosses above 70, price has already made the move that triggered the signal. Price action traders see the shift happening in real-time.
The Building Blocks of Price Action
Candle Anatomy
A single candle tells you three things:
- Direction: Body color shows who won - buyers (green/white) or sellers (red/black)
- Momentum: Body size relative to the wicks shows how strong the move was
- Indecision: Long wicks on both sides show rejection - neither side could maintain control
A small body with long upper and lower wicks indicates a market in equilibrium. The bulls pushed up, got rejected. The bears pushed down, got rejected. Neither side won. This is indecision.
A large green candle with minimal wicks tells you something different: Buyers were in control from open to close. Sellers tried to push back, failed. This is conviction.
Body Size Analysis
Large bodies = strong conviction. The side controlling price is confident.
Small bodies = indecision or exhaustion. The prevailing side is losing momentum. This often precedes reversals.
When you see a series of large green candles getting progressively smaller: The uptrend is losing steam. Buyers are still in control, but less decisively. This warns of a potential reversal.
When you see a small body candle after a strong trend: The trend may be ending. Wait for confirmation of reversal.
Wick Analysis
Wicks represent rejection.
Long upper wick: Price moved up, got rejected, closed lower. Sellers defended that level. If this happens at resistance, it's bearish.
Long lower wick: Price moved down, got rejected, closed higher. Buyers defended that level. If this happens at support, it's bullish.
Small wicks: Price moved mostly in one direction. The controlling side faced little opposition. This confirms strength.
No wicks (marubozu): The controlling side dominated completely. Zero rejection. Maximum conviction.
Key Price Action Patterns
Pin Bars
A pin bar has a long wick on one side and a small body on the other. The long wick shows rejection of a certain price level.
Bullish pin bar: Long lower wick, small body at the top. Price tried to go down, got rejected, closed near the high. Buyers defended the lower price.
Bearish pin bar: Long upper wick, small body at the bottom. Price tried to go up, got rejected, closed near the low. Sellers defended the higher price.
The strongest pin bars occur at key support and resistance levels. The market tests a level, gets rejected violently, and reverses.
Inside Bars
An inside bar is completely contained within the previous bar's range - its high is lower than the previous bar's high, and its low is higher than the previous bar's low.
Inside bars represent consolidation. The market is taking a breath. Volatility is contracting.
After an inside bar, volatility expands. Price breaks out of the range. The direction of the breakout often continues.
Inside bars work best when traded in the direction of the overall trend. After a pullback in an uptrend, an inside bar can mark the resumption of the uptrend.
Engulfing Bars
An engulfing bar completely engulfs the previous bar's body - its body is larger and covers the previous bar's body.
Bullish engulfing: A green candle that engulfs a previous red candle. Sellers were in control, then buyers overwhelmed them and took control.
Bearish engulfing: A red candle that engulfs a previous green candle. Buyers were in control, then sellers overwhelmed them and took control.
Engulfing bars represent a shift in control. The side that was losing suddenly wins decisively.
Reading Market Context
Patterns alone don't work. Context matters.
A bullish pin bar at support after a downtrend: Potential reversal.
A bullish pin bar at resistance after an uptrend: Likely a fake signal. The market is overextended. Don't buy.
An inside bar in a strong trend: Continuation pattern. Expect trend to resume after breakout.
An inside bar in a ranging market: Meaningless. Wait for the range to break.
Always ask: Where is this pattern occurring? What's the overall market structure? What happened before this pattern?
Support and Resistance Through Price Action
Support and resistance aren't exact lines. They're zones where price has repeatedly reversed.
How to identify them:
Look for areas where price has reversed multiple times. Mark the zones where rejection occurred.
When price approaches a support zone in an uptrend: Watch for bullish price action - long lower wicks, bullish pin bars, bullish engulfing bars. These confirm the level is holding.
When price approaches a resistance zone in a downtrend: Watch for bearish price action - long upper wicks, bearish pin bars, bearish engulfing bars. These confirm the level is holding.
When price breaks through support or resistance: Watch for how it reacts. A clean break with strong candles in the direction of the break is legitimate. A break that immediately reverses with a rejection candle is a fake-out.
Trends Through Price Action
An uptrend consists of higher highs and higher lows.
How to confirm:
- Swing highs are progressively higher
- Swing lows are progressively higher
- Pullbacks are shallow (don't retrace deeply)
- Bullish candles are larger than bearish candles during legs up
- Volume expands on up moves, contracts on pullbacks
A downtrend consists of lower highs and lower lows.
- Swing highs are progressively lower
- Swing lows are progressively lower
- Rallies are shallow
- Bearish candles are larger than bullish candles during legs down
- Volume expands on down moves, contracts on rallies
When you see the structure breaking: Higher lows becoming lower lows in an uptrend, or lower highs becoming higher highs in a downtrend, the trend may be reversing.
Entry Triggers
Price action analysis gives you the context. Entry triggers tell you when to act.
Pullback Entries in Trends
In an uptrend:
- Market makes a higher high
- Pullback begins
- Wait for pullback to a support zone or moving average
- Watch for bullish rejection: long lower wick, pin bar, or engulfing bar
- Enter when price breaks above the rejection candle's high
In a downtrend:
- Market makes a lower low
- Rally begins
- Wait for rally to a resistance zone or moving average
- Watch for bearish rejection: long upper wick, pin bar, or engulfing bar
- Enter when price breaks below the rejection candle's low
Breakout Entries
When price consolidates in a range, volatility compresses. Eventually, price breaks out.
Don't enter on the initial break. Wait for confirmation.
After the break:
- Watch for a retest of the broken level
- Look for rejection of the old level (price held as support becomes resistance, or vice versa)
- Enter on the rejection when price moves back in the breakout direction
This catches the real move after the fake-outs get shaken out.
Common Price Action Mistakes
Mistake #1: Trading Patterns in Isolation
A pin bar forms. You take the trade. It fails.
Why? You didn't consider context. The pin bar was in the middle of a range, not at a key level. There was no reason for reversal.
Patterns must occur at logical locations - at support or resistance, after a trend, at key market levels.
Mistake #2: Ignoring the Overall Trend
You see a bearish engulfing bar and short. But the market is in a strong uptrend. You get stopped out as the trend resumes.
Counter-trend trades have lower probability. Always know the larger trend. When in doubt, trade with it, not against it.
Mistake #3: Early Entry
You see a rejection candle forming and enter immediately. Then the candle changes shape by the close, and it's no longer a valid pattern. Or the market ignores it and continues.
Wait for the candle to close. Patterns must be confirmed by the close. Entering before close is gambling, not trading.
Mistake #4: Trading Every Pattern
You see a pin bar and trade it. Then an inside bar and trade that too. Then another pin bar.
More trades don't equal more profits. Overtrading destroys edges. Trade only the clearest patterns at the best locations.
Quality over quantity.
A Simple Price Action Strategy
Here's a complete strategy using only price action:
Timeframe: Daily or 4-hour charts
Trend identification: Mark swing highs and lows. If higher highs and higher lows, uptrend. If lower highs and lower lows, downtrend.
Setup (uptrend):
- Market makes a higher high
- Pullback to a support zone or the 21 EMA
- Price action shows rejection: long lower wick, bullish pin bar, or bullish engulfing
- Enter when price breaks above the rejection candle's high
- Stop loss below the rejection candle's low
- Target the previous high or a 2:1 risk-reward ratio
Setup (downtrend):
- Market makes a lower low
- Rally to a resistance zone or the 21 EMA
- Price action shows rejection: long upper wick, bearish pin bar, or bearish engulfing
- Enter when price breaks below the rejection candle's low
- Stop loss above the rejection candle's high
- Target the previous low or a 2:1 risk-reward ratio
Rules:
- Only trade in the direction of the larger trend
- Only trade from key levels (support/resistance, moving averages)
- Wait for candle close before entering
- Risk 1% or less per trade
- Skip trades if the pattern isn't clear
Why Price Action Beats Indicators
Indicators lag. They're derived from past price. By the time they signal a move, part of that move is already over.
Price action is real-time. You're reading what the market is doing now, not what it did in the past.
Indicators can be optimized to backtest perfectly but fail in live trading. Price action is based on market psychology, which doesn't change. Buyers and sellers behave the same way they did 100 years ago.
Indicators give false signals in choppy markets. Price action lets you read market condition - trending vs. ranging - and adjust accordingly.
The Learning Curve
Price action takes time to learn. You'll need to:
- Study candlestick formations until you can instantly recognize them
- Practice marking swing highs and lows to identify structure
- Watch how price reacts at support and resistance
- Learn to distinguish between retracements and reversals
- Develop patience - wait for the right setup, don't force trades
Start on higher timeframes (daily, 4-hour). The patterns are clearer and noise is lower. As you improve, you can move to lower timeframes for more precise entries.
Paper trade first. Practice reading price action without risking real money. When you can consistently identify and trade the patterns, go live.
The Bottom Line
Price action trading removes the crutch of indicators. It forces you to read what the market is actually saying, not what a lagging calculation is telling you.
Every professional trader understands price action. Many use it exclusively. It's the foundation of all technical analysis.
Indicators can be useful. But they should supplement price action, not replace it. Learn to read raw price, and everything else becomes clearer.
The chart is telling you a story. Learn the language.