What Is Price Action?

The crypto market is notorious for its high volatility and is ruled by uncertainties. Positive news leads to a price rise and negative development in the space leads to a crash.

However, the price of an asset speaks of its market value, which in turn tells us how the market will react in terms of buying or selling. This is why price action is important to study. Read on to learn what price action is all about.

What Is Price Action?

Price action refers to the way prices move, and change over a period of time. Understanding the way price has moved in the past and how it is currently moving could help you make good trading decisions like when to enter and when to exit a position.

This is why being fluent in price movement is a fundamental skill every crypto trader must have. In fact, without it, you can’t even do simple technical analysis since all technical analysis has its roots in price data. After all, technical analysis is simply about understanding past prices to predict price movement in the future.

When you take a look at a chart and you see all the green lines and red lines, price action might look abstract. However, something to keep in mind is that every line you see on the chart tells a story of some trader somewhere and their possible reason for buying or selling an asset.

Understanding the technicalities involved in price action will bring you closer to making highly profitable trades almost every time.

What Is Price Action Trading?

The next concept to understand is price action trading. So, what is it?

Price action traders believe that a good old price chart tells you everything you need to know about the market concerning making good trades. So they hardly, if ever, consider technical indicators or even fundamental factors.

In many ways, these guys make an excellent point. At any point in time, the price of an asset as found on a price chart sums up the collective knowledge, beliefs, and actions of all market participants.

For instance, if prices are going up then you know that buyers are in charge. If prices are on a decline, however, then it’s obvious that the sellers are calling the shots. When there’s a sideways market, it’s a 50-50 draw, which means that the market is indecisive. So, as you can see, you can tell a lot about a market just from price charts alone.

Nevertheless, some criticize the use of price charts alone to gauge market behavior. This school of thought believes that a better way to measure market behavior is to combine price action analysis with technical analysis. In their opinion, this combination will yield trading signals that are more reliable than if you only use price action.

However, it is generally accepted in the world of crypto that price action is a powerful market analyzer used by all kinds of traders. Even retail investors and institutions use it as well.

How Do Price Action Traders Use Price Charts?

The good thing about price action trading is that it is very simple. So, most times, even a beginner can get the hang of it quite quickly. You just need to be able to do two things: figure out the market and figure out the opportunity.

Figure Out the Market

Markets are always in one trend or another. It could be an uptrend, a downtrend, or the market could be moving sideways. Monitoring the prices of assets should be able to tell you the prevailing market trend.

Figure Out the Opportunity

When you have successfully understood the market, the next thing you need to do is decide on what your trading move would be.

So, say the market is in an uptrend. In such a case, there are two ways things could go. The price could either continue to rise or a retracement might be around the corner. Let’s see how that might play out in a market scenario using bitcoin.

Let’s imagine the price of bitcoin begins to rally toward $20,000. Now, if bitcoin successfully breaks the $20,000 level, $20,000 will form a new support level for bitcoin. Of course, after such rallies, you can expect some price correction. But if that pullback does not go below $20,000, then you should know that it is time to go long because very likely, prices will still go higher.

But that is not all because you still need to set your stop loss. Again, you turn to the price action to find out where the last support level was. Let’s say it was $19800. The price action trader would consider this and then set their stop loss somewhere below $19800.

And there you have a simple example of how a price action trader might use a price chart to execute trades.

Three Popular Price Action Charts

For a price action trader, two crucial elements must always be kept in view: price and time variables. Usually, these variables are displayed on what is called a clean or naked chart.

They are referred to as clean or naked charts because there are no other indicators on the chart which could muddle up the charts for the price action trader who only cares about price movement.

Now, there are different kinds of price charts. However, for the sake of this article, we’re only going to zero in on three of the most popular ones.

• The Candlestick Chart
• The Bar Chart
• The Line Chart

The Candlestick Chart

You may wonder why they are called candlestick charts. Well, that’s because the shapes on this kind of chart actually look like candles.

Now, these candles could look random to you if you don’t know what to look for. But many price action traders find them highly resourceful in supplying all the data they need to know about prevailing market conditions.

Essentially, candlesticks tell you how the market opened, how it closed, and what the high and low price marks were for a particular trading session. How do you interpret that? Thankfully, it is mostly simple.

Usually, you will find candlesticks in one of two colors: green or red. If a candle is green and pointing upward, it tells you that the price of an asset closed higher than it opened with. On the other hand, if the color of the candle is red and pointing downward, it tells you that the price of the asset closed lower than it opened with.

By the way, depending on the platform you are using, green candles can also be blank or white, while red candlesticks can also be black.

Now, that is colors. Let’s talk about the body and wick of the candle.

The body of each candle represents the gap between the opening and closing price of an asset. The bigger the body, the wider the gap. The wick, on the other hand, tells you the extremes the price achieved, both high and low.

If you want to go into price action trading, then you must always keep an eye out for long wicks. Here’s why.

Let’s imagine that a candle has a long upper wick. From that, you can deduce that buyers tried to push the price of the asset in question as high as they could. However, sellers later stepped in, causing the price of the said asset to fall again.

Now that you have this information, what do you do? Well, you have two moves. On one hand, you could back the sellers in the next trading session. On the other hand, you could wait for a confirmation before you make your move. Whatever the case, it is up to you.

Further, understanding a candlestick chart makes it a lot easier to interpret the two price charts — the bar chart and the line chart.

The Bar Chart

Like candlestick charts reflect candles, bar charts display price action using bars. Every bar you see on a bar chart shows you all the activities and movements around the price of an asset within a given period.

Just like candles, bars also show you the extremes of price movements. That is the highest and lowest levels of the price achieved, along with the opening and closing prices for a specific period.

Like candlesticks, bar charts are very easy to interpret. To the left of the bar, you will see a horizontal foot. This indicates the opening price. Conversely, a horizontal foot on the right hand of the bar indicates the closing price.

Also, the top of a vertical bar is where you find the highest price point while the bottom of the bar tells you the lowest price point for that trading session.

The Line Chart

The Line chart is another helpful tool for monitoring price action, although it is not quite as exhaustive as the other two we have talked about.

For the line chart, closing prices are connected to one another using lines which helps the trader to visualize market changes. The good thing about line charts is that they eliminate all the noise in the market. This way, traders can spot key areas of support and resistance without breaking a sweat. Still, they do not give a lot of information that could be particularly helpful for day-to-day traders.

Should You Use Price Action for Your Trading Decisions?

As much as many people swear by price action either coupled with technical analysis or on its own, it’s always important to not trade exclusively using either or both of them. Especially as a beginner who’s just getting into the market, it’s very important to understand fundamental analysis as well. That is, to find out about the assets themselves and what value they have intrinsically.

Price action and technical analysis are great. But don’t forget, they rely on historical data, not future events. Plus, they don’t necessarily tell you why the market is leaning this way or that. If you’re not careful, you could be unpleasantly surprised by an unforeseen event that leaves you in regret.

Therefore, as a rule of thumb, some experts recommend that you create your trading ideas based on fundamental analysis. Then you can use price action and/or technical analysis to determine your entry and exit points.

Price Action Trading Strategies

Now that you know why it is important to do fundamental analysis in addition to price action and technical analysis, it’s time to learn some patterns. Understanding chart patterns can help you come up with trading strategies that work best for the market.

The Hammer

When you see the hammer on your candlestick chart, it’s good news. It means that the buyers are in charge, pushing prices from below the bar to the top of the candle. In such a case, your best move would be to enter above the high of the candle and then set your stop loss order at the candle’s bottom.

The Shooting Star

The shooting star is not a great sign because it indicates that the market is weak and the sellers are in charge, dragging prices from the top of the bar to the bottom. Ideal entry would be below the low of the candle and then you can set your stop-loss order at the top.

The Inside Bar

An inside bar is formed by two candles on the chart, one of which is called the mother candle. In an inside bar pattern, you’ll find that one candle’s price range, from low to high, is swallowed up by the bigger mother candle.

Typically, inside bars usually signal a state of equilibrium in the market. And you want to interpret them in the direction of the general market trend to increase your chances of success.

The Outside Bar

This is somewhat like the reverse of the inside bar. Instead of the inside bar being contained in the mother candle, the outside bar falls outside the previous candle. In other words, the current candle’s high and low prices are higher than those of the previous candle.

Outside bars signal trade reversals and show a shift in the momentum of the market. And there are many scenarios in which an outside bar can be helpful.

Support and resistance in Flat Markets

A horizontal wedge between support and resistance defines a flat market. To know your entry point, you’d have to pay attention to the exhaustion signals around each of the key areas of support and resistance. This is where all the patterns we discussed previously come to play: the hammer, the shooting star, the inside bar, and the outside bar. Look out for one of these signals around the key areas to determine your entry point.

Conclusion

Price action and technical analysis are great. But do not forget, they rely on historical data, not future events. Plus, they do not necessarily tell you why the market is leaning this way or that. If you are not careful, you could be unpleasantly surprised by an unforeseen event that leaves you in regret.

Therefore, as a rule of thumb, some experts recommend that you create your trading ideas based on fundamental analysis. Then you can use price action and/or technical analysis to determine your entry and exit points.