The Ultimate Guide to Price Action Trading

price action

Reading price action is the art and science of trading by understanding the interaction of buyers and sellers as measured by price action on a chart. Many pure price action traders remove all technical indicators from their charts and only trade according to price behavior. Some people consider price action trading the purest form of technical trading, and technical indicators are just price derivatives. Many traders prefer to use price action alone for their trading decisions.

The most important factor in reading price action is probably key support and resistance levels.

sale zone buy zone

The price forms progressively higher highs/lows confirming the uptrend.

The price forms progressively higher highs/lows confirming the uptrend.

And vice versa in a downtrend

downtrendTrend lines are used to identify vertical and horizontal support and resistance areas for price action on a chart. Many chart patterns are built by looking at price action and identifying breakouts from these trendlines.

chart template

Chart patterns can signal breakouts, reversals, and continuity by reading price action support and resistance zones. Price action can be read on charts from all timeframes from minute charts for day trading to monthly charts for long position traders.

Many trend traders create reactive trading systems out of price action alone. An example might be buying a new 20-day high and selling it when the price makes a new 10-day low for a big win and a small loss.

Legendary trader Nicolas Darvas was one of the first to use reading price action to make millions from trading uptrends. Darvas’ system will look for stocks that are making new all-time highs thanks to increasing volume. He quantifies the trading range of price support and resistance highs to draw a box around. A break above the high will signal him a new buy entry point and a break below the low in the Darvas box price will trigger a stop loss and signal you to exit the trade. The Darvas Box Strategy allows him to hold his positions as long as the price does not fall and stays within the box of the previous price range. A breakout in price will signal a possible new support level, you should watch for the next box if the price ladder turns up. Nicolas Darvas was one of the world’s first famous pure price action traders, and you can see a description of how he trades in the image below.

Nicolas Darvas

Many legendary traders who have used pure price action trading systems sometimes simply follow the path of least resistance between buyers and sellers.

Happy trading!

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