Three Key Price Action Elements
The following three key price action elements are very important to price action traders. They are (1) Market structure (2) Support and Resistance and (3) Candlestick patterns.
However, other factors can be put into consideration when applying price action elements into your trading style.
Basically, factors such as (a) the right time frame, (b) price velocity with some other factors are very important when analyzing price on the trading chart with price actions strategy.
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The very first key element to price action trading is the study of the market structure (trend). Understanding the current market structure is very important if you want to succeed in your trading career.
Market structure or trend formation occur in three different views. They are (1) Bullish market structure (2) Bearish market structure and (3) Ranging market structure.
Bullish market structure
In a Bullish market structure, you will see price forming Higher Highs, and Higher Lows. The price directional pattern on your chart will look like that of a rising (ascending) staircase.
Bearish market structure
For a Bearish market structure, you will see price forming Lower Highs, and Lower Lows. The price directional pattern on your chart will look like that of a falling (descending) staircase.
Ranging market structure
In a Ranging market structure, you will see price forming Highs and Lows in a horizontal direction. The price directional pattern on your chart will look like that of a flat zig-zag price movement.
Price will always form one of the above categories of market structures at any given time.
It is best to first identify the type of structure that is formed on higher time frames (4 hour time frame and above).
Support and Resistance:
Technically, Support is the floor level at which price bounces and forms a Swing Low. Resistance level on the other hand, is the ceiling level where price touches and drops o form swing high.
Once the market structure is identified, it is best to locate the next support or resistance level on the chart.
Bollinger Bands indicator is one of the indicators that may be used to identify support and resistance levels on the chart.
The third element of Price Action strategy is the candlestick pattern that is formed at Support or Resistance levels.
Formation of reversal candlestick patterns such as Engulfing bars, hammer, shooting star or pin bars at the end f a trend do give price action traders price reversal alert.
The formation of continuation candlestick patterns such as Rising Three Methods, Three White Soldiers and Three black crows also give price action traders price continuation alert.
Waiting for confirmation candle formation is also key to successful trading of reversal or continuation candlestick patterns.
The combination of the above three elements will definitely give you an edge when trading with price action strategy.
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