Price Action, an Introduction

Technical Analysis is the process of using the price chart itself to assist in trading decisions. While this may
sound initially confusing, please let me explain.
The price chart, reflecting all changes that have happened to price within a specified period, can be looked at
another way; the price chart can also be considered a gauge of traders sentiment during that same specified
period.
As news came out that was bullish for the asset, the market prices that news accordingly to reflect a higher
price. If news came out that was bearish, the exact opposite can be true, the chart will reflect losses to
account for the incorporation of this new information.
Future events, which have not yet taken place, are unknown and as such, are not yet currently reflected in
price.
The Technical Analyst operates under the presumption that the chart, at any point in time, reflects the
sentiment of all known information in regards to that asset at that specific moment in time.
If the trader tries to read the price chart directly, it can often prove confusing. Price movements can, often-
times, appear erratic and chaotic with little rhyme or reason. Below is a weekly chart of the EUR/USD
currency pair. This chart, which contains an uptrend, a downtrend as well as an element of congestion,
could prove difficult for a trader to analyze.

This is where indicators can help.

Indicators, based on past price information, can be added in an effort to assist the trader in making heads or
tails of what is actually going on. The list of possible indicators to be used can go on for quite awhile, and
there are a lot of different mannerisms in which indicators can come into play. But there is one universal
concept that many Technical Analysts try to keep in mind:
No indicators or Trading Systems works 100% of the time.
Once again, we have to remember that price action, like any other future event, is unpredictable especially
when were using past price information to make those decisions.
This is where price action can help.
Price action is the process of using the price chart itself, without any indicators, to assist in trading decisions.
To get started, lets first look at one of the more pertinent areas of analysis: Trend identification.
Many traders, with the idea that future prices are unpredictable, simply try to use Technical Analysis to try
to get the odds on their side.
Traders can attempt to identify their trend under the presumption that price, of recent, had shown a bias in
one direction and that bias may, perhaps, continue. If price is in a down-trend, then traders can look to
initiate short positions in an attempt to be on the correct side of this bias in price. If price is showing an up-
trend, the exact opposite can be true; where traders are looking to Buy into long positions so that this bias
may work for them to push their trades higher.
Below is the same chart we had looked at previously, a weekly EUR/USD chart, but this time we have 2
sections identified.

No indicators were needed to identify these trends; this was done entirely from the chart itself.
Notice that during the down-trend, price did not make a linear movement down in a straight line. Most of the
movement can be explained by big moves down, followed by congested price action, followed by further
moves down.
Below is the same chart, but this time weve went down to a Daily time-frame.
Each dark box identifies the periods of congestion, during the downtrend.
As the trend began above 1.50, notice the quick movements made as the currency pair trends down. Shortly
after piercing 1.45, a run of ~500 pips, the currency pair begins to display congestion; exhibiting price
movements that disagree with the direction of the trend.
But these counter-trend, price movements dont last for long, as the currency pair, eventually, strives to
even lower levels.
During these periods of congestion, or counter-trend, price movements, the trader can notice the rice
swings displayed on the price chart. Below is our EUR/USD chart with swing-highs circled in red.
Did you notice something that was consistent amongst each of these swings?
Each swing-high is at a lower price than the previous swing.
Lower-lows and lower-highs are being exhibited on the chart. And with this, I can then grade this as a
down-trend.
The Forex Traders Guide to Price Action
Over the past few months, weve published multiple articles on the topic of Price Action, which is the study
of one of the most pure indicators available to traders: Price.
With knowledge of price action, traders can perform a wide range of technical analysis functions without the
necessity of any indicators. Perhaps more importantly, price action can assist traders with the management
of risk; whether that management is setting up good risk-reward ratios on potential setups, or effectively
managing positions after the trade is opened.
This article is a capstone of all of price action studies that weve published thus far; teaching traders to
analyze and grade trends, enter trades in 6 different ways with various setups, and manage risk while
looking at support and/or resistance.
Before we get into the individual elements of price action, there are a few important points to establish.
Trend Analysis
The first area of analysis that traders will often want to focus on is diagnosing the trend (or lack thereof), to
see where any perceivable biases may exist or how sentiment is playing out at the time.
In Price Action Introduction we looked at how traders can notice higher-highs and higher-lows in currency
pairs to denote up-trends; or lower-lows, and lower-highs to qualify down-trends. The chart below will
illustrate in more detail:
Entering Trades
After the trend has been analyzed, and the Price Action trader has an idea for sentiment on the chart, and
trend in the currency pair its time to look for trades.
There are quite a few different ways of doing so, and weve published quite a few resources on the topic.
In Price Action Pin Bars, we examined one of the more popular candlestick setups available, which traders
will commonly call a Pin Bar. The Pin Bar is highlighted by the elongated wick that sticks out from price
action. The picture below will show a pin bar in greater detail:

We took this a step further in How to Trade Fake Pin Bars, as we looked at how traders can trade candles
that show long wicks that dont quite stick out from price action. This is where trend analysis can greatly
assist in the setting of initial risk (stops and limits). The following picture will show how a trader might want
to play a Fake Pin Bar.

Periods of congestion or consolidation can also be used by traders utilizing price action. In Trading Double-
Spikes, we looked at the double bottom or double top formation that is popular across markets. We
looked at two different ways of playing Double-Spikes, both of which weve outlined in the following 2
charts.
We looked at the Double-Spike breakout for instances in which traders are anticipating that the support (or
resistance) that has twice rebuked price may get broken with strength. The Double-Spike breakout is plotted
below:

Created by J. Stanley
And for situations in which traders are anticipating support or resistance continuing to be respected,
the Double-Spike Fade may be more accommodating:

On the topic of congestion, another very popular setup that we discussed was Trading Price Action
Triangles.
While there are different types of triangles, most traders look to trade these periods by anticipating a
breakout. Below is the Descending Triangle, in which price has respected a horizontal support level while
offering a down-ward sloping trend-line. Related is the ascending triangle that is highlighted with an upward
sloping trend-line. In both instances, traders are often looking to play breakouts of the horizontal support or
resistance level (this horizontal line is support for descending triangles, and resistance for ascending
triangles).

If no horizontal support or resistance exists, traders may be looking at a symmetrical triangle, which adds
an element of complication since there are no horizontal levels with which to look to play breakouts. The
following illustration shows a symmetrical triangle setup, along with how a trader may look to trade it:

And for periods in which the market is ranging the article How to Analyze and Trade Ranges with Price
Action went over the topic in detail.
Risk Management
In Price Action Swings we identified swing-highs and swing-lows with which traders could use to
identify comfortable areas of setting stops or limits.

And of course, in an up-trend:

We took this a step further in the article How to Identify Positive Risk-Reward Ratios with Price Action, so
that traders can analyze the relevant swings to decide whether or not the potential trade (given its
management parameters) would be warranted.
And of course, once we are in the trade, managing profits is a topic of key consideration. We looked at
exactly that in Trading Trends by Trailing Stops with Price Swings. The following picture will illustrate this
concept further:
Four Simple Ways to Become a Better Price
Action Trader
One of my favorite phrases to use in webinars is as follows:
Price Action is my favorite indicator, because its the only one that will never tell me a lie.
And this is true; albeit maybe a little opaque for new traders, or even experienced traders that havent yet
found the study of price action. The study of price action entails reading past prices, to build an approach or
plan for the future.
Surely, most traders that end up making it as a trader will find this specific study of technical analysis
eventually; but its usually only after multiple disappointments and failed attempts at building indicator-
based strategies that zig when the market actually zags. So, please allow me to elaborate on my earlier
statement.
Price action will never lie to us, as traders, because it never purports to tell us what WILL happen; but rather
it only tells us what HAS happened.
There is a chasm of disconnect between these two premises.
As a trader, you will NEVER truly know what will happen in the future. Any indicator or indication of what
MAY happen in the future is just a possibility. And even then, it could be a remote possibility at best
because that indicator youre using - well, its really just a fancy way of looking at previous price action.
So, regardless of the strategy - those same boring concepts of risk, trade, and money management are of the
upmost importance to the trader.
But after that - traders can focus on getting the probabilities on their side as much as possible through
analysis, and this is where price action can really shine.
Because, once again - this is a clean way of looking at past prices, without the obfuscation of a
mathematical formula that may be obscuring whats happened in the recent past.
Below are four simple ways that traders can become better at reading, reacting, and analyzing price action.
Method 1 - The Price Action Primer
If youve been to DailyFX over the past couple of years, you may have encountered a previous article
on price action. We talk about this A LOT because of all the aforementioned reasons, and quite simply - it
works. Not that it works in telling us the future, but it works in allowing us to see the past as efficiently and
honestly as possible.
Method 2: Grade Trends by Focusing on Swings
One of the first pillars of technical analysis centers on that age-old saying of the trend is your friend.
And the reason for this goes right back to one of those very first things we touched on at the beginning of
this article: The future really is unpredictable.
But trends take place for reasons, right? Maybe it was a QE announcement, or a Debt Crisis - whatever the
reason, trends exist much like the tide of the ocean exists.
And just like swimmers in the ocean, traders are often best served by going with the flow.
Because, if we look at trading as pessimistically as we can, and we assume that any individual trade is akin
to flipping a coin, then we have a 50/50 chance of price moving up or down, right?
Well, if that bias continues, and further - if we are trading in the direction of that bias, it stands to reason that
we can begin moving our chances or probabilities of success slightly better than a 50/50 split.
Perhaps its small, perhaps as small as 51/49 in our favor, or 52/48 - but the logic is the same.
If what has happened continues happening, I may stand a better-than-fair chance at success.
If we add in strong money management, well - now we have an entire strategy!
Traders can read and gauge trends using solely price action. We expand on this topic in our Introduction to
Price Action; but we can simply look to the chart to point out the trend.
Up-trends will often be highlighted with higher-highs, and lower-lows

Meanwhile, down-trends will see lower-lows, and lower-highs

And this, in-and-of-itself, is very powerful... but the big question you need to ask yourself is whether it is
enough to just simply buy when prices have been moving higher, or to sell when prices have been
moving lower?
The answer is a definitive no. And the reason is because, once again, we want to try to get the best possible
chances of success in the market given the information available to us, and for that we can move on to the
next method.
Method 3: Use Price Action to Highlight Valuable Support and Resistance
The second primary aspect of technical analysis is Support and Resistance, and this is another message that
the study of prices can bring to us.
Price Swings can identify support and resistance in the market

Reading swings in the market is an easy way to begin doing this. A swing can, quite simply, be classified
as an inflection point in the market. We discussed this topic in the article Price Action Swings, and have
added an illustration below to highlight this point.
The swing in the market is the point at which demand outstripped supply (in the case of a swing low setting
support), or supply ran over demand (creating a swing high of resistance before prices moved lower).
Traders can use these progressively higher swing-highs, and higher swing-lows to define an up-trend. Each
of these swing-highs offering a point of support with which traders may be able to look to buy into the up-
trend cheaply.
Higher swing-lows define support in an up-trend

They can also use progressively lower-lows, and lower-highs to denominate a down-trend. And, of course,
each of these lower swing-highs become levels of resistance that traders can use.
Lower swing-highs define resistance in a down-trend

We can even rope in some additional Support and Resistance studies in an attempt to find really important
levels. Psychological levels, for instance, can be a great way of pointing out swings that might have a little
more importance in the market place. Fibonacci can be another fantastic addition to Price Action to point out
levels that other traders may be watching for.
After traders can identify swings with support and resistance inflections, traders can then begin looking to
buy up-trends cheaply, at or near support; while traders can look to sell expensively when prices are at or
near resistance. Which brings us to the exact entry of the trade
Method 4: Use Price Action Formations to Trigger into Positions
After the trend has been identified, and after traders have found support and resistance via swings displayed
in the marketplace, traders can begin looking for formations to decide when, and how to enter into positions.
There are quite a few of these out there, and weve talked about numerous such formations over the past few
years. Most recently, we highlighted five of the most common bearish reversal patterns in the
article, Trading Bearish Reversals.
A Bearish Engulfing Pattern before a massive move lower

We also published this piece specifically on the hammer and inverted hammer formations.
And, a favorite of price action traders, the pin bar can offer some excellent entry opportunities.
To learn more:
I know that when I was learning price action, much of it, at least initially, felt very esoteric. So, in our
constant effort to provide the best possible education for our traders, we offer numerous price-action based
webinars every single week.
I do a webinar on DailyFX each week. During this webinar, Ill look at various markets to show how traders
can integrate this type of knowledge in a dynamic environment, and further - how to strategize with and
around it.

-Price Action can help traders find technical reversal setups.

-We go over the five most common bearish reversal patterns in the forex market.
-Traders can look to these setups to institute strong risk-reward plays.
One of the more exciting technical setups in the Forex market has to be the reversal. After all, as human
beings - were wired to look for these setups. As evidence, simply look at the efficacy of The Speculative
Sentiment Index during really long trends.
Like when AUD/USD moved over 1000 pips in a few months earlier in 2013, and retail traders continued to
stay long looking for prices to move back to the previously-defined range on the Aussie.

Created with Marketscope/Trading Station II

This is just one example, but this happens all the time. Thats why SSI is such a fantastic contrarian
indicator.
But nonetheless, there are better way to look for reversals in markets that to simply fade a strong trend and
hope that it reverses. This is where price action can come in. Reversals are, by nature, counter-trend trades;
because after all, were looking for price to reverse from its recent trajectory.
To look at it purely as a counter-trend position, however, could be doing a great deal of disservice to the
strategy.
Looking at Reversals in a Different Light
A reversal may seem daunting when considering that were looking for the entire tide of the market to
completely reverse course; but what if we look at timing from a different scope?
Multiple Time Frame Analysis can help us get a different vantage point on the market.. We can use longer
time frames to define the general trend; and a shorter time frame to get more precise and look for sub-trends
and retracements.
So, for example, lets say that there has been an uptrend in a currency pair, such as the recent move
in GBPUSD.
After the uptrend sets in, price continues that familiar price action gyration of making higher-highs, and
higher-lows. Its when price is in the process of making new higher-lows that things start getting
interesting. Because its in that range of time that traders can start looking for reversals of the short-term
trend, for a return of the long-term trend.
How to Trigger Entries
Much like we looked at in the article, Using Price Action to Catch Swings in The Forex Market, traders can
utilize a 4 step process to institute this strategy. Also as we explained, indecision (congestion, consolidation,
etc) in the market often see multiple indecisive candlesticks form before prices begin making significant
movements.
Reversals can be similar. We may see multiple reversal formations or patterns form before the actual
reversal takes place. Meaning, these entry triggers are like many other indicators available to the trader; they
are simply indications and need to be accompanied by strong risk, trade, and money management.
Below, well focus on Bearish Reversal patterns, and were going to show the five most common in the
Forex market. Well also explain how each pattern can be approached, and what traders may want to look
for when triggering the trade. In our next article, well tackle bullish reversal formations.
Bearish Engulfing Patterns
The Bearish Engulfing Pattern says quite a bit about price movements during that candles period. This is a
single-bar candlestick that has a higher-high, and a lower-low than the previous bar. This pattern is also
called an Outside Vertical Bar.
A Bearish Engulfing Pattern before a Massive Reversal

This candlestick can be traded by looking for momentum to continue in the direction that the candle has
printed. In this case, were looking for Bearish Reversals, so the trader can look to go short after this candle
prints, with a stop above the high, and a minimum risk-reward ratio of 1-to-1.
Traders can also utilize a break-even stop, so that if the reversal doesnt end up panning out, the trader can
see the position closed before a loss is incurred.
The Shooting Star
The Shooting Star formation is another candlestick that says quite a bit about the technical environment.
A shooting star is a candlestick with a long wick on the top of the candle, and a full, bearish body at the
bottom of the candle. The picture below will illustrate further.
The Shooting Star in front of a strong bearish reversal

A shooting star is not to be confused with an inverted hammer. An inverted hammer is a bullish candle, and
a bullish candlestick pattern (one that will be looked at further in our next article.
The Hanging Man
This is another reversal pattern that will often show up around the top a trend. The Hanging Man is noted by
its bearish candle body, with long wick to the downside of the candle.
During this candles formation, price was offered lower only to see buyers come in to support. If the
momentum that initially triggered the bearishness that sparked this candle can come back, the reversal will
set and the trader can begin riding the new trend at a very early stage.
A Hanging Man Formation in front of a Bearish Reversal

Evening Star
The Evening Star formation is a three-candle pattern that will also often show up at the top of a trend.
As a matter of fact, the first candle in the evening star formation is a large bullish candle. The second candle
is where things begin to get interesting, as this should be an indecisive candlestick. And that could be an
inside bar, a spinning top, or any variation of the many dojis that exist.
Whether its a long-legged doji or a traditional doji that would make the evening star formation more precise
with the title of the Evening doji Star.
The Evening Doji Star Formation

The Bearish Pin Bar

The Pin Bar is, without a doubt, one of the more widely followed price action formations within various
price action communities on the internet. The Pin Bar is named as such after the character Pinocchio.
This formation highlights long wicks that stick out from recent price action, much like Pinocchios nose. It
also serves in telling the trader when the market was lying; or more precisely, when market prices were so
far off from where they should have been, that the initiation of a reversal took place.
Its attraction is logical... The Bearish Pin Bar has a wick that is at least the size of the candle body sticking
out of the top side of the candle; and that wick should stick out from previous resistance.
A Bearish Pin Bar Reversal Pattern

During the candle formation, price ran very high on a relative basis, only to see sellers come in with a brutal
correction that more than traversed the open of the candle.
If a long wick is sitting atop a candle body less than half the size of the wick, but yet the candle does not
stick out from price action, then its not a true pin bar. Thats known as a fake pin bar.
The Pin Bar is traded in much the same way as the shooting star formation. Traders can look to place their
stop above the eye of the pin (shown below), and then can look for profits at least the size of their initial
stop.
But rather than just show some candlestick setups, were going to try to take this a step further, as we have
with all of our Price Action articles, in explaining the rationale for why these setups are important for
traders to recognize.
If you would like a guide for how reversals should be treated, please dont hesitate to check out any of our
previously published resources on the topic. Trading Bearish Reversals supplies a model that traders can
utilize in reverse to trade in bullish scenarios; and the article Trading Reversals will provide a much more
high-level view on the topic of reversals in general.
The Hammer
The Hammer formation is probably one of the more telling bullish reversal formations that traders can find
in markets, and its also one of the formations that will most stand out to traders.
The Hammer has a long wick on the bottom of a Bullish candlestick

The hammer formation tells the trader quite a bit. During this candles formation, prices ran down quickly,
only to reverse. And not only did prices reverse, but they reversed beyond their initial opening price, thereby
creating a bullish candle.
This setup can be especially attractive if the long wick on the bottom of the candle is sitting outside of
previous price action. In the picture below, we look at the same hammer formation that we looked at in the
above graphic; but this time were going to look at the formation with some context:
A Bullish Hammer to trigger in direction of previously established trend

Notice in the above picture on the British Pound against the US Dollar, a nice and strong up-trend had
formed before running into a retracement (in red).
During the retracement, a hammer formation forms (the same candle we looked at in each of the previous
two illustrations).
Traders can look at this an entry opportunity, looking for the previously established trend to continue in that
direction.
Traders can look to enter once the hammer formation has completed (the candle has closed), with a stop just
below the low of the hammers wick.
If the previously established trend comes back, the trader can look for 2, 3 or even 4 times the amount they
are risking at the outset of the trade.
Inverted Hammer
The inverted hammer is another bullish candlestick formation that will often be found at or near the bottom
of a retracement in an up-trend.
The inverted hammer is opposite of the hammer formation, in the fact that the bullish body of the inverted
hammer is at the bottom of the formation, with a long wick sitting atop the body. The picture below will
illustrate further:
The Hammer formation shortly before an up-trend sets in the market

The inverted hammer is often found at the bottom of a move, and will indicate a potential reversal in the
near-term trend. The logic of this candle is similar to the logic of the hammer. During this candles
formation, prices ran high, but sellers came in to bring prices lower before the candle completed.
Inverted Hammers v/s Shooting Stars
Many traders will often confuse the inverted hammer formation with the shooting star formation that we
looked at in our last article, Trading Bearish Reversals.
The Shooting Star formation as shown in Trading Bearish Reversals
There are some key differences to note between these two formations. Firstly, the shooting star is bearish,
while the inverted hammer is bullish; and as such, the shooting star candlestick should be bearish, and the
inverted hammer should be bullish.
But perhaps more importantly is the context of the market at the time of formation.
Shooting stars take place at the top of a move. And just like we looked at in Trading Bearish Reversals,
trading shooting star formations is optimal in longer-term down-trends, with a near-term retracement (up-
trend). This way the trader can look to the shooting star formation to initiate a short position for a reversal in
the near-term up-trend, and a continuation in the longer-term down-trend.
The inverted hammer works similarly.
As a reversal formation, the inverted hammer should be found at the bottom of a move. But, once again, this
can be a near-term down-trend or retracement, found within the longer-term up-trend. The trader can use the
inverted hammer to trigger into the position, looking for the longer-term trend to continue, while playing the
reversal of the near-term retracement.
If you would like more information on this style of trading, our article covering multiple time frame
analysis can assist in helping traders separate longer-term trends, from near-term movements.
Price Action: Pin Bars
As we discussed in our last article in regards to price action, traders can potentially use the price chart itself,
devoid of any indicators to make trading decisions.
There are numerous price action mechanisms that traders use in attempt to get the odds on their side as well
as possible.
One of the more desired conditions that traders can look for are short-term reversals in price. Candlesticks
themselves can help us see some of these potential reversals, with the Pin Bar.
Pin bars, which are short for Pinocchio, bars, attempt to find candle wicks that stick out, from price
action in an effort to capitalize on particularly volatile market conditions.
To get deeper in a pin bar, lets first examine candles and candle wicks in closer detail with the picture
below.

In the candle displayed above, drawn inside the rectangle, notice that this would be a decline in price as the
currency pair closed at a lower value than it had opened. The difference between the open and close is often
referred to as the candle body. The skinny area above and below the candle body are commonly referred to
as wicks.
Also notice that price actually proved quite volatile during this period, and this can be seen from the wicks,
of the candles. Although this candle shows price moving lower from the open to the close, the wicks can
show the astute trader that price had actually climbed at one point! This can be seen from the wick atop the
candle.
As price was moving higher than the candle open at the time, this would have appeared as a bullish,
candle. But that was a temporary movement as negative momentum came back in the pair only to push price
lower; much lower in fact. So low that price actually began increasing, exhibiting that the pair may have
been oversold.
When the candle completes, we have a long wick that sticks out, from price action. This is the pin bar:

When the trader notices the pin bar, they can imagine the price action that had driven price higher may
potentially continue into the next candle.
Traders can potentially look to go long in the above setup, looking to play on the strength that had driven
price off the low values in the pin bar.
Now, it is important to keep in mind that not all Pin Bars can be identified as tradeable, opportunities. By
nature, trading on pin bars are counter, to current price action exhibited.
In the below setup, please take a look at what is happening leading up to the pin bar that forms:

Before the pin bar forms, price has made a fast move to the downside, which some traders may construe as a
downtrend. Opening a long position would be going in exactly the opposite direction, which could
potentially prove costly.
With Pin Bars, its important to add other areas of price action or technical analysis to further confirm the
entry into the trade. This is where trading in the direction of the trend, or trading with Support and
Resistance can come in handy. Luckily for the price action trader, much of this can be identified directly off
the chart without the need of any additional indicators or strategies!