Price Action Trading Strategies: Breakouts, Reversals & Scalping
What Is Price Action Trading?
Price action trading is one of the most important basics of day trading that a trader needs to understand to be able to read market movements without the use of technical trading indicators. By watching the recent price action of the candlesticks, a trader can determine the overall market trend by watching for prices to make higher highs, higher lows, lower highs and lower lows.
When the market is making higher highs and higher lows, the market is bullish, meaning that it is moving in an upward trend. When the market is making lower highs and lower lows, the market is bearish, meaning that it is moving in a downward trend. You need to learn to spot these movements so you know if the market wants to continue its current trend or not and make trading decisions based on that information.
How Do I Read Price Action Correctly?
The key to reading price action correctly is looking for higher highs and higher lows when the market is bullish and looking for lower highs and lower lows when the market is bearish. Price will form a pivot when it reaches its short term top or bottom and that maximum or minimum price point of the pivot is the level you are looking for.
Once it forms a pivot high, it will then form a pivot low. If that pivot high is higher than the previous pivot high and the pivot low is higher than the previous pivot low, then you can expect the market to continue higher from there. If the pivot high is lower than the previous pivot high and the pivot low is lower than the previous pivot low, then you can expect the market to continue lower.
You also need to be aware of short term, mid term and long term pivots. The short term and sometimes mid term pivots will likely get taken out before a big move starts, but the long term pivots should hold which is an indication that price will continue the longer term trend if that long term pivot holds. Always pay attention to the long term pivot points when trading as that will show you the overall trend for the day/week/month, but the short term pivots will show you the trend for the next few hours or so. The short term pivots are valid price action patterns for quick day trades and getting in and out of the market quickly, but if you are looking for larger price movements, you need to look for pivots near the long term pivot points that hold, showing you that the overall trend is ready to continue it’s direction.
Effective Price Action Trading Strategies
Trading purely price action is a great way to keep your charts clean and avoid the use of relying on technical indicators for your every move. But you need to learn how to read price action properly like we talked about in the section above so that you can navigate the markets effectively and know when it’s safe to enter and exit your trades. So let’s look at some effective day trading strategies that are based on price action that you can use in your technical analysis.
Price Action Breakout Strategy
Breakouts are a great way to catch markets that are ready to make a decently large move, but spotting them is hard to do sometimes. The first aspect of this type of breakout strategy is looking for price to clear the most recent higher time frame candle levels. If price has cleared the highs of the most recent one hour, four hour, daily and weekly candles, look for price to go past those levels and then retest the high of whatever higher time frame candle is the highest(use our Supply and Demand trading indicator to make this process easier on you). Price should come back and get supportive at that level, with a higher high and a higher low near that level.
Look for that pivot at the highest level that is also making a higher high and higher low and then take your entry, with a stop loss just below the higher low pivot that it just made. If price is really primed to make a breakout, then that higher low pivot point should hold and will be a safe place to put your stop loss without much risk. Then look for it to continue upwards and continue to make higher swing highs and higher swing lows. Once it makes a short term lower low, look to get out of the trade and lock in your profits.
You can follow the same strategy, just in reverse when looking for breakouts to the downside. Wait for price to get below the hourly, four hour, daily and weekly lows and then retest the lowest low from those candles and take your entry after it forms a pivot on the retest. Place your stop loss just above the lower high that it made on the retest and hold the trade until price makes a short term higher low and then get out.
Once you study this strategy and get used to it, it can be a very solid strategy, but you need patience to wait for price to actually break out past the recent higher timeframe candles first, otherwise you will get caught up in choppy price action that isn’t an actual breakout.
Price Action Reversal Strategy
When trading price action reversals, it can be tricky, but if you take the time to study the charts for these setups, you will train your eye to detect them easier so you can recognize them when they appear. The thing to look for when identifying a reversal using price action, is a higher high followed by a higher low after a downtrend or a lower high followed by a lower low after an uptrend. This higher high after a downtrend will need to surpass a mid term lower high for it to be valid and then make a higher low than its most recent bottom pivot. Only once both of those are made does it become a valid reversal that you should enter on.
After an uptrend, there needs to be a lower low that surpasses a mid term higher low and then when it bounces back up, that pivot that it forms needs to be below the most recent high pivot. Make sure you wait for both the higher high and higher low after a downtrend and a lower low and lower high after an uptrend to validate the reversal before entering your trade. From there, you can place your stop loss just beyond the highest high or lowest low as that level should hold if the reversal is valid.
To add some confluence to this, you will usually see a volume spike at the reversal pivot or the few candles just before that pivot but that won’t always happen, so make sure you wait for validation of the reversal before entering the trade. Study this on your charts across various different markets and you will start to recognize these patterns. You can also use our 1 Minute Scalping Indicator or our Buy Sell Indicator to help you find reversals, as both of those Tradingview indicators are based on price action.
Price Action Scalping Strategy
Scalping using only price action is one of my favorite ways to trade. You don’t need big wins to steadily increase your portfolio and price action scalping is one of the most efficient ways to do that, as long as you keep your stop loss tight, trade with the trend and take your profits when they are there.
The first step to this is determining whether the market is ranging sideways or if it is trending. If it is moving sideways, then you need to wait for a higher low or lower high at the top or bottom of the trading range and trade in the direction of the other side of the range with the expectation that you may need to get out of the trade quickly because ranging markets like to chop around. When trading the ranging markets, always get out of the trade at the first sign of possible reversal as they can turn around at any time, so taking profits early is always the best move there.
When the market is trending, you can look to hold positions longer than you would in a ranging market, but you still should try to keep yourself from getting greedy and trail your stop loss closely with the price action to ensure you lock in profits along the way. Once you identify a strong trend, look for higher highs and higher lows in an uptrend and take your entry just after it makes a higher low that is near the previous higher low. This gives you an optimal entry and you can place your stop loss just below the most recent higher low as it should hold as long as the trend wants to continue.
For down trending markets, look for lower highs and lower lows. Then once you see a lower high that is near the previous lower high, take your entry and place your stop loss just above the most recent lower high.
If the market is breaking out, you can look to hold positions longer and move your stop loss just past the most recent higher low in an uptrend or lower high in a down trend. Wait for those pivots to form and move away from the pivot and then put your stop loss just past that pivot. This allows you to maximize your gains from the position when the market is trending strongly.
If the market is not trending strongly, then just stick to taking profits when the market starts to show signs of possible reversal and trail your stop loss tightly as price moves in favor of the trade. When the trend is not strong, you will do much better scalping one short move at a time and doing this over and over again until the price action doesn’t look appealing any more. Remember, when the markets are choppy, just stay out. Preserving your capital is just as important as making profits if you want to keep growing your portfolio on a consistent basis.
Watch Out For Liquidity Grabs
When trading price action, you will notice that sometimes price will retrace beyond the short term pivots and sometimes the mid term pivots before continuing the trend. This is what is called a liquidity grab. The market makers push price past the short term pivots to scoop up the retail traders liquidity because they know our stop loss orders are set just beyond the short term pivot points. So they stop all of us out along the way, which helps drive prices further down for them and then they buy just above the long term pivots to keep the trend going.
This is one of the hardest parts to navigate when trading price action, so make sure you spend plenty of time studying this so it does not catch you off guard. Sometimes these liquidity grabs will also be at the very tops or bottoms where they will sharply push price beyond the most extreme pivot point and then price will slam back down. This is a false breakout and is meant to trap retail traders so that we sell our positions back into the market maker’s orders, they fill their pockets and then the trend continues their direction. Keep an eye out for this and always be aware of what pivots are the short term, mid term and long term pivots so that you don’t get caught up in a liquidity grab.
Is Price Action Good for Swing Trading?
Price action is a very viable strategy for swing trading as well as scalping. The principles remain the same as what we have spoken about in this article, you will just need to look at higher time frame charts than you would if you were scalping. For swing trading, try using the 15 minute or above charts and look for the higher highs and higher lows to trade long positions and then look for lower highs and lower lows to trade short positions.