Price Action Trading

What is Price Action Trading?

Price action is the concept of using a day trading chart’s price movement, in terms of pattern and behavior, to find potential winning trades. Price action is often considered a simple and effective methodology because only price activitiy is used to make trading decisions. A trader using price action does not need advanced formulas, statistical models, or other complex resources. Price action strategies are also designed to potentially filter out losing trades. Many day trading courses and software programs exist for this purpose. These courses are designed to teach traders how to “read” price patterns in order to determine where and how to place a trade. For example, the trading courses are designed around using a chart’s price movement as the underlying factor to determine whether a potential winning opportunity is present. In addition, rules are taught for how to use price action as a basis to determine values for profit targets, stop losses, and risk management. Although profits cannot be guaranteed in trading, the ability to read price is paramount for successful trading. If a recent volatility spike has occurred as a result of a news event, perhaps the wisest investment approach is to wait to trade until relatively normal volume levels occur again. Using price action can be considered a more adaptive trading style compared to following strict rules, as price action takes into account current and recent price activity, which is dynamic.

Many day trading software charting platforms provide real-time displays of price action. NinjaTrader, TradeStation, thinkorswim, MetaTrader, and MetaStock are popular. Day trading charts generally use two axes: a horizontal (x) axis for time and a vertical (y) axis for price. Most trading platforms allow the user to customize chart time frames. For example, a trader can switch from looking at a five-minute chart to a daily chart. A very common method of visually representing price activity is the use of candlesticks. Candlesticks often appear as red or green rectangles. In some platforms, a single color is used, but candles are differentiated in how they are shaded. The reason for the different colors or shaded candles is because candlesticks are used to represent whether a candle closed higher than it opened. For example, on a five-minute chart, the candle begins plotting (opens) at 2660. At the end of the five minutes, the candle stops plotting (closes) at 2661. The trading platform recognizes the candle closed higher than it opened and therefore colors the candle green to represent the upward movement. Candlestick appearance is useful for quick human observation of price action.

When a day trading strategy is employed that recognizes specific price action patterns, traders often refer to the trading opportunity as a “setup.” Setups are taught in trading courses, webinars, trading rooms, and other formats. has a number of products that teach specific setups along with trade management, which is generally defined as rules to prevent loss once engaged in a trade. In addition to learned techniques, trading platforms are often equipped with the ability to use third-party software on charts. For example, NinjaTrader allows the importation of indicators. Indicators provide visual cues to assist traders in making decisions. In some cases, indicators provide signals that tell traders when and how to place a trade. These signals can perform calculations based on price action and then display advisories directly on the chart. The Atlas Line® software, ATO 2 software, Trade Scalper software, and others use price action for calculating signal locations and anticipated market direction.

Traders who want to succeed with price action are encouraged to practice. encourages the use of the NinjaTrader platform along with free live data. This provides a practice environment where real-time price data plots on the chart as though a live, real-money account is in use. In effect, traders can practice various trading methods and become familiar with placing orders. The NinjaTrader platform also has an Account Performance feature that produces a success report for simulated trading. Because day trading is risky, such practice may be a wise endeavor before exposing one’s finances to the markets.

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