This guide will assess the best price action entry signals for trading. As a trader, your fundamental goal is to purchase securities that are about to increase in price and sell securities that are about to decrease in price. Over time, consistently making the right trading decisions will help you continue to build your wealth.
One of the most common problems faced by new traders is that they often hope their “gut instinct”, or “special knowledge” will help them identify profitable trades. A “futuristic” stock like Tesla (TSLA) might seem like it’s about to increase in price and, oftentimes, it does. But when using a relatively short-term approach to trading, as price action trading typically requires, it is not enough for a stock to “seem” like it’s on the verge of improving. You’ll need to have a reason to believe this change is about to occur. With regards to Tesla, someone who bought the stock at $449.39 on September 21, 2020, would be disappointed to find the stock drop to about $380 just two days later.
Price action traders focus on how price has recently been moving because more often than not, recent price movements will be the most reliable predictors of near-future price movements. They look beyond their gut instinct and, instead, search for tangible indicators that demonstrate a positive change is statistically more likely to occur.
Price action trading strategies can be applied in pretty much every market and can also be used during both bullish and bearish market conditions. However, for these trading strategies to be effective, you will need to develop a reliable set of entry signals that consistently deliver. Though the best price action entry signals for you will depend on the specific dynamics of your trading setup (time frames, risk preferences, asset classes, etc.), below, we will discuss five of our personal favorites.
1. Elliott Wave
Originally introduced by Ralph Nelson Elliott, the Elliott Wave Theory suggests that prices typically move in predictable “waves”, rather than continuous price trends. During an extended bullish rally (which could take place over several months), the price will continue increasing with impulse waves, while also decreasing with corrective waves.
When an Elliott Wave pattern is present, it will look as if the price is alternating between taking ten steps forward, followed by taking three steps back (these numbers are arbitrary). With distinctive price action movement, it will be up to the trader to determine when the switch between increasing and decreasing has occurred and to adjust their positions accordingly. In this sense, Elliott Wave trading is somewhat subjective. Still, understanding how these patterns unfold can help price action traders gain a unique edge.
2. Bollinger Bands
Bollinger Bands are a useful technical indicator for traders that are hoping to identify a security’s specific price range. Now, as we have discussed before, relying entirely on a single technical indicator (mechanical trading) can be dangerous. However, incorporating Bollinger Bands into a broader price action trading strategy can still be very beneficial. This is especially true in the forex marketplace, where the possible price range of most major currencies is relatively contained.
Bollinger Bands plot two standard deviations of price movements, which theoretically should capture about 95 percent of all price action. As the bands become wider, this suggests that the price action has become more volatile. When the price approaches the edges of the bands, trend reversals are likely to occur.
3. Moving Average Convergence Divergence (MACD)
The Moving Average Convergence Divergence (MACD) is among the most popular indicators for gauging a price’s current momentum. As one might guess, price trends with stronger levels of momentum are typically less risky than price trends that are barely moving (even if the direction of the trend is still clear).
The most useful component of the MACD chart—constructed using 9, 12, and 26 day EMAs—is the histogram found at the bottom. This histogram represents the difference between the black and red lines, which occasionally experience crossovers. If a crossover has occurred, this may signal that a trader should enter either a position when the momentum is increasing or exit that position when the momentum is decreasing.
4. Andrews Pitchfork
Introduced by Dr. Alan H. Andrews, the Andrews Pitchfork is constructed using three pivot points—usually, these pivot points correspond with real-world events (such as the announcing of a new trade deal) or market corrections.
Once the three pivot points have been identified, traders will be able to project five lines: the median line, the upper median line, the upper warning line, the lower median line, and the lower warning line. If price action is somewhat stable and the pivot points were adequately selected, traders will then be able to identify the range of probable near-future price movements. As price moves towards the lower two lines, traders will typically enter into a position, whereas prices moving towards the upper two lines means it’s probably time to sell.
5. Market Geometry
Markets, in general, can be very chaotic—but even in this chaos, identifiable patterns often emerge. While the existence of these patterns is not what causes the price to move, the strong geometric patterns found in nearly every speculative market can help traders reduce the risk of entering into specific positions.
Generally, there are three hidden elements in the geometry of markets you’ll want to keep an eye out for. The first two elements are waves (like the Elliott Wave) and pitchforks (like the Andrews Pitchfork). The third element is Fibonacci ratios. The brilliant Leonardo Fibonacci discovered these ratios in the 1200s and they can be found throughout the natural world (even explaining why a snail’s shell is shaped the way it is). In markets, the Fib ratios used the most are 0.382, 0.5, 0.618, and 0.786. When one of these ratios emerges in a price chart, traders should consider taking action.
Conclusion – Best Price Action Entry Signals & Indicators
Trading is inherently risky and anyone who hopes to successfully outsmart the market as a whole (which is why you became an active trader) will need to count on signals indicating they should change their position. Though you will want to do some experimenting before risking any capital, using each of these five signals can be very beneficial for price action traders.