What price action trading is
Every indicator is calculated from price, so a price action trader goes straight to the source. Instead of waiting for a moving average to cross, they ask three questions: which way is the market trending, where are the levels that matter, and what is price doing at those levels right now. A clean chart with a few horizontal lines is the usual setup.
It works on any market that has a chart, and the ideas are the same for EURUSD, gold, Nifty or bitcoin. What changes is the timeframe and how much noise you have to ignore.
Step 1: read the market structure
- Uptrend: higher highs (HH) and higher lows (HL). Each pullback stops above the last one.
- Downtrend: lower highs and lower lows.
- Range: price swings between roughly the same high and low.
When an uptrend's price falls below its last higher low, the structure has broken. Smart money concepts (SMC) traders call a break in the trend's direction a "break of structure" (BOS) and the first break against it a "change of character" (CHoCH). The labels differ, but the idea is the same: the trend lasts until the swings stop lining up.
Step 2: mark the levels that matter
- Swing highs and lows on the daily and 4-hour charts: places where price turned sharply.
- Old support that became resistance, or the other way round. Broken levels are often tested again from the other side.
- The previous day's high and low, and the week's.
- Round numbers such as 1.1700 on EURUSD or 4,300 on gold.
Draw levels as zones a few pips or points wide, not thin lines. Price rarely turns at an exact number. If you want objective levels for the day, pivot points and Fibonacci retracements are both calculated from price. SMC traders mark the same kind of area as an order block or a supply and demand zone: the last candles before a strong move, where they expect orders to be waiting.
Step 3: wait for a signal at the level
Pin bar
A candle with a long wick and a small body at the other end, like a hammer or shooting star. The long wick shows a level being rejected.
Inside bar
A candle whose high and low sit inside the previous candle's range. It marks a pause; traders wait for price to break out of the larger candle.
Engulfing bar
A candle whose body covers the whole body of the one before. At a level, it shows one side taking over.
False break
Price pokes above a clear high, then closes back below it. Traders who bought the breakout are trapped, which often fuels a move the other way.
A signal in the middle of nowhere means little. The same pin bar at a daily level, in the direction of the trend, is the kind of trade price action traders wait for. The candlestick patterns guide has 17 patterns, drawn out.
Step 4: breakouts and retests
When price breaks out of a range or through a key level, there are two ways in. You can trade the breakout candle itself, which catches every move but also every false break. Or you can wait for price to come back to the broken level, hold it, and continue: the retest. A retest gives a better price and a tighter stop, but some of the strongest moves never come back.
Step 5: use more than one timeframe
| Timeframe | What you use it for |
|---|---|
| Daily | The trend and the big levels |
| 4-hour or 1-hour | The swing you're trading and the zone you want to trade from |
| 15-minute or 5-minute | The entry signal and the exact stop |
Taking trades only in the direction of the higher timeframe cuts out many of the setups that fail.
A worked example: gold, with the trend
Gold is making higher highs and higher lows on the daily chart. It breaks above resistance at 4,250, then pulls back to retest it. On the 1-hour chart, at the retest, a bullish engulfing candle forms with its low at 4,242.
- Entry: 4,258.00, just above the engulfing candle.
- Stop: 4,241.00, below the candle's low and the zone. Risk: 17 points, or $1,700 per standard lot of 100 ounces.
- Target: 4,310.00, the last swing high. Reward: 52 points, about 1 : 3.1.
- Size: risking 1% of a $10,000 account is $100, so 100 ÷ (17 × 100) = 0.0588, rounded down to 0.05 lots.
If price falls back through 4,250 and hits the stop at 4,241.00, the retest has failed and you lose 0.05 × 17 × $100 = $85, or 0.85% of the account, a little under the planned 1% because the size was rounded down. The XAUUSD lot size calculator does the sizing sum, and the risk reward calculator shows that at about 1 : 3 you'd need to win only about one trade in four to break even, before costs.
Price action or indicators?
| Price action | Indicators | |
|---|---|---|
| What you watch | Swings, levels and candles | Lines and oscillators calculated from price |
| Speed | Reacts as price moves | Lags, because it's calculated from past bars |
| Strength | Shows exactly where buyers and sellers turned | Objective rules that are easy to backtest |
| Weakness | Takes judgement; two traders can draw different levels | Can give signals far from any level that matters |
One indicator many price action traders keep under the chart is the Traders Dynamic Index, a smoothed RSI with volatility bands.
Mistakes that cost price action traders the most
- Seeing patterns everywhere. On a 1-minute chart there's a pin bar every few minutes. Trade only at levels you marked before the session.
- Moving the stop. A stop belongs where the idea is proven wrong. Moving it further away turns a planned loss into a big one.
- Ignoring the news. A level means little in the minute after a US CPI release. Check forex news today before the session.
- No record. Price action relies on judgement, so you need a trading journal to find out which setups actually work for you.
This is lesson 11 of 20 in the free forex course. Next lesson: Head and shoulders.