Price action is the trader’s understanding of the chart without using indicators. It is the backbone of trading. Price moves due to buyers and sellers who drive the market up or down. And understanding price action trading strategy will greatly improve your trading journey.
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The Secrets of Price Action Trading Strategy
Now, who moves the price? You would be surprised that your trading, no matter how big your account, does not affect the market in any significant way. About 80% of all trading is done by around ten financial institutions worldwide. These institutions own assets worth billions of dollars; therefore, they dictate the direction of the market. Your duty as a retail trader is to spot those areas where the big institutions place their trade and make money from it.
The chart has three forms of price action; sideways price action area, aggressive initiation activity, and strong rejection area; these are one of the strongest assets for price action trading strategy.
Sideways price action area
Do not be fooled by sideways price action by thinking that there is no trading there. For Big institutions to enter large positions without altering the trend, they act as small investors placing many small positions in the market. This is the only way they can slowly and secretly accumulate their positions. If they go to buy, for instance, the EUR quickly and aggressively, they can cause a trend already, and in this case, the trend won’t favor them because they will not have fully entered their large position at the prices they want. When the price movement begins, there is limited time to enter positions.
Big institutions use sideways price action in preparation to build a trend, then open large positions before the trend picks up. If you want to confirm that a big institution is causing sideways price action, combine your analysis with volume indicators to know the trading volumes during this sideways movement. If there is more volume than usual, then that’s your confirmation.
Aggressive initiation activity
Aggressive initiation occurs when buyers or sellers try to push the price in their favor. This activity often occurs after sideways price action. When big institutions are done building their positions in a sideways area, they start aggressively buying or selling to make a trend or price movement. That way, if successful, they are always profitable. These big institutions need to set their positions before the big trend because there is little time when the trend forms.
You can confirm if the institution’s positions are long or short after the trend begins.
Strong rejection areas
This is also known as price reversal. Strong rejection occurs when prices are being pushed by, let’s say, buyers then meet aggressive sellers who push the price lower and result in a trend reversal.
The rejection area is very important since the prices are likely to be defended if it goes back there again. The rejection area forms a new support/resistance zone.
These three price action strategy formations are very important in your trading career, and they form the basics of my trading. Let me show you the strategies I use.
Some Price action trading Strategies
Strategy 1: Support becoming resistance or resistance becoming the support
This can be used as a stand-alone strategy and come in handy in my trading.
To spot it and use it:
- To spot this setup, you will have a zone where prices jump from and do not break beyond this point. This indicates that there is a point of support or resistance. To ensure that this is a strong support/resistance line, price will test that zone at least thrice or more
- After marking your support/resistance point, wait for the price to break past this zone.
- Even if the support/resistance point was broken, it is still important to our trading. The place where the breaching happens is the spot marked by high trading volume from either the buyers or sellers. This area will be defended again when the price comes near; this is how resistance becomes support and support becomes resistance.
- When you get your new support/resistance points, wait for the price to come back to that level and set up your position.
- Use this strategy for one-day or 30-minutes timeframes.
- In a downtrend, when the support becomes the resistance point after the prices break past it, wait for the prices to come back to the new resistance point and enter a short position from there.
Strategy 2: open drive
The open drive strategy works well when there is a strong price movement towards one direction, and it occurs after sideways price action or during the start of a trading session.
If open-drive forms following sideways price action, it means that either strong buyers or sellers were setting up positions in the sideways price action to start aggressive selling or buying to form the trend.
If an open drive occurs at the beginning of a trading session, you know the market’s direction.
It is important to note where the aggressive buying/selling started. If strong buyers are driving the open drive, then an upward trend forms and the first buying candle formed is strong support.
If a strong downtrend forms, the candle at the beginning of the trend becomes the resistance.
In a downtrend, for instance, when you spot the beginning of an open drive, you need to wait for a few candles to form below the open drive to make sure that the sellers indeed pushed the prices lower. Wait for the prices to come back to the level where the open drive started, your resistance level, and enter your position from there.
Strategy 3: AB=CD
This is a strategy that is based on market psychology rather than big institutions influencing the market.
The basics behind this strategy is that the market moves in waves (highs and lows). These highs and lows are A, B, C, and D.
- The distance from the first and second swing points is A and B
- C is formed when there is more than 50% retrace of the distance from A to B, but the retrace must not go past point A
- The D forms at the same distance from C as A is to B. The pattern is named AB=CD. AB has a similar pip distance to CD. You can measure the distances using the Fibonacci tool. The A, B, C, D formation looks like a zigzag.
To draw this formation, place the Fibonacci so that 0% falls at point A and B at 100%. Ensure that point C is more than 50% from A to B. mark point C at 0% and point D at 100% on your Fibonacci tool.
If this formation occurs in an uptrend, then enter a buy position at point D, while in a downtrend, open a sell position at point D.
Strategy 4: Session open
It is important to know when your market opens. There are three sessions; Asian, European, and the US Open. The point where the session opens marks a support/resistance level. If the trading session begins with a downtrend, then it becomes a resistance zone. If the market opens with an up-trend, then the place it opened becomes support.
If a resistance zone is formed in a downtrend, wait for the price to hit this zone again and open a short position.
Combine this strategy with others; however, it is a good stand-alone strategy too.
Strategy 5: Daily open
Another point that marks strong support/resistance zones is the daily open when a day closes and a new one begins.
Wait for the daily open, and watch the direction of the market. You need a few candles to confirm the trend. If there is an uptrend during the daily open, then that point is the support and vice versa. Wait for the prices to come back to the support to open a long position. Like synthetic indices GMT 01:00 is ideal for mapping your scalping levels for the day.
Strategy 6: Daily/ weekly high and low
The weekly and daily highs and lows are very crucial in trading, and they show where the prices failed to go up or low. A high shows the zone where sellers took over the market with large trading volumes and defeated the buyers.
These highs and lows work as strong support/resistance zones. People are therefore watching these zones to see whether the price will break out or not. Support/resistance zones are strong areas that need a lot of volumes to breakthrough.
Here, I usually go long from the previous day’s low and go short from the previous day’s high. This is not a stand-alone strategy, and you need more input to tell whether these are legit breakouts.
For a long trade scenario, wait for the previous day high, which is the resistance point to get breached. Wait for more candles to form to confirm the breakout. After the breakout, the resistance point becomes the new support. When prices return to this level, I enter a long position.