Keys to Developing an Effective Price Action Trading Strategy

Price Action Trading is one of the most effective ways for traders to accurately predict price changes and stay ahead of the slow-reacting market. Price Action Trading can be utilized in seemingly all speculative markets, including the forex market, the stock market, the cryptocurrency market, and countless others.

What is Price Action Trading?

Price Action Trading is an approach to trading that prioritizes looking at recent price movements to determine where the price is most likely to move. By understanding common behaviors, patterns, and price trends that can be found across all markets, traders can execute their positions with a greater sense of precision.

Naturally, where the price stands in the status quo and how the price has been moving will directly affect where the price will be soon. Price Action Traders use a variety of different tools and techniques to improve their trading outcomes, including market geometry, technical indicators, probability simulators, and others.

By taking the time to develop a price action trading strategy, you can decrease your exposure to risk and increase the likelihood of earning strong returns. We recommend developing a price action trading strategy on paper, using TradingView, MetaTrader4, or other platforms, before risking any actual money.

Though becoming a successful price action trader will require time and practice, it is still something that almost anyone with patience can do. Below, we will discuss some of the most valuable keys to developing a price action trading strategy.

The Keys to Price Action Trading

1. Using the MACD Indicator

The MACD Histogram is an extremely useful tool for traders that want to confirm the strength and existence of an ongoing price trend. A Moving Average Convergence Divergence (MACD) plots both the 12-period and 26-period exponential moving average, helping to amplify current price movements. When the lines cross over one another, a trend change is likely about to occur. Following the signal line will make it easy to know when to open or close a position.

2. Pitchfork Trading

Trading pitchforks help traders identify the likely range of near-term price action movements. A pitchfork trading tool can be used to draw three distinct lines using turning points for reference. Two of the most commonly used trading pitchforks are the Andrews’ Pitchfork and the Schiff Pitchfork. When price breaks outside the pitchfork range, a major swing is likely to be underway. Traders should adjust their positions accordingly (depending on their risk tolerance).

3. Monitoring Fibonacci Levels

Fibonacci ratios can be found throughout our world, appearing in everything from markets to flowers to everything in between. When the opening of a Fibonacci sequence can be identified in price action, traders can often accurately predict where the next turning point might be. Using Fibonacci trading theories, price action appears to be much less “random” and much predictable. These ratios are one of the most important components of market geometry.

4. Multiple Time Frame Analysis

Time is a variable that can directly affect the performance of any trading strategy. For example, day traders and long-term investors will likely utilize very different approaches to the market. By implementing multiple time frame analysis, traders can have a more comprehensive understanding of the market and identify a wider range of possible trading opportunities. Once you have determined the trading time frames the work best for you, you should consistently utilize them to decrease variability.

5. Candlestick Charts

Candlestick trading charts are much more useful than ordinary, single price charts. A candlestick chart plots the price of the underlying asset over time, including its high, low, opening, and closing prices for each period. This helps traders not only identify price changes, but also monitor relevant factors such as volatility, resistance, elasticity, and others. We recommend using a candlestick trading chart whenever possible.

6. Expanding Triangles

Price action traders will inevitably want to know how the high points and low points that come with each price swing are relatively changing over time. For example, when the lows keep getting lower while the high points remain the same, this suggests that a breakout price swing is likely to occur. Using an expanding triangle trading strategy can help illustrate these dramatic movements and help traders react ahead of the market.

7. Take Profit and Stop Loss Orders

Trading psychology, as we’ve discussed before, can cause traders to irrationally make decisions caused by fear or greed. Holding onto positions for too long or choosing to exit positions too early can cause us to miss out on easy profit opportunities. Issuing stop loss and take profit orders can help traders combat the risks of trading psychology by locking in their wins and cutting their losses. We believe these orders should be issued with every position, even the “safe” ones.

8. Tracking Volatility

In the world of price action trading, volatility is associated with increased exposure to risk and the increased possibility of earning strong returns. Finding ways to track volatility will help traders find conditions that match their risk preferences and also better interpret price action. Volatility trackers help us determine whether recent price action is “noise” or represents a meaningful change in value. Volatility often accompanies lasting price swings, which is why it is one of the first variables that active traders will consider.

Conclusion

There is not one universally “best” way to execute a price action trading strategy. Your personal preferences, your trading restraints, your favorite markets, and risk tolerance will all affect whether opening or closing a position will be in your best interest. However, even with all this being said, it is clear that price action trading can be incredibly effective. By keeping these important keys to trading in mind, you can achieve desirable trading outcomes.

Want to learn more? Read another Price Action and Income blog on price action trading strategies.

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