What is a Price Action Trading Strategy? Complete Guide For Traders
Financial matters may seem complex but these are also the most important skills for any investor. If you are new to trading you have heard about different trading strategies including price action trading strategy. The price action trading strategy is one of the most popular and most effective trading strategies in options trading such as binary options. According to a recent report in Feb 2023, the daily volume record by reaching 68+ million contracts changed hands.

So, if you are willing to invest in options trading and looking for proven strategies to back up your trade, you can include a price action strategy in trading. It can also be a great option to upscale your trading skills. You can even incorporate a price action strategy in your algo trading app to benefit from this trading strategy.

However, first, you need to understand what is a price action strategy and how you can incorporate/use this strategy in your options trading. In this blog post, we will share a complete guide to price action strategy for traders. Here, we will discuss the definition of price action strategy, how to use it, its advantages, and more.

What Is Price Action?

Before you learn about how to use price action trading strategy or its benefits, you must begin with the basics. We will begin by discussing the definition of price action to help you understand better. Price action is primarily a trading technique where price movements of an asset are plotted within a designed timeframe (where the stock price can either increase or decrease).

A price action can simply be understood as the movement of price that various types of trading charts depict. Also, you can identify price action in your algo trading software on the page where you view the trading charts. Some of the examples of bearish candlestick patterns here are Evening star, Shooting star, and Hanging man and bullish candlestick patterns are Piercing Line, Hammer, and Inverse Hammer. 

What Is Price Action Trading?: An Overview 

Price action and price action trading are two close concepts but they are not the same. However, if you are new to options trading you may feel confused or overwhelmed. To help understand better, we will also share a brief description of price action trading. So, what price action trading actually is.

Well, it is very simple when the price action technique is used for any kind of trading like bonds, securities or stocks, commodities, exchange, etc., is called price action trading. It is basically a trading approach that can be used to predict price, speculate trade, and identify the best entry and exit points for the trade.

Due to the price derived from the price chart, the price action trading technique is also known by names like raw trading, natural trading, naked trading, etc. Price action trading uses the past performance of the security or asset to make or suggest trading decisions. However, it does not rely on recent economic news or other factors that may influence the price of the security of or asset.

Price Action Vs. Technical Analysis Vs. Indicators

Price action indicators and technical analysis are not similar things. Here, we will discuss the differences between price action indicators and technical analysis.Price action indicators involve a chart that illustrates trading movements. It helps traders to identify an emerging trend in the current market. Price action indicators can also be easily analyzed by even beginner traders for investment decisions.

Technical analysis can predict future price movements by using different indicators while price action only uses price movements of an asset to predict future trends. Technical analysis allows traders to use a number of indicators and calculations to predict asset price movements. On the other hand, the price action indicator is more simplistic and focuses on only one aspect; the price of an asset within a trading timeframe.

Finally, price action helps traders take the intuitive trading approach that involves analyzing price action indicators and trading according to them. However technical analysis is a broader approach that uses multiple calculations to find order in the seemingly chaotic trading world. An algo trading platform can help you understand where to use technical analysis and where to use price action indicators for best results. 

Best Strategies For Price Action Trading 

Price action trading strategy is a common and effective trading strategy. Most experienced traders recommend this strategy to make trading decisions, especially for short-term investments. Here are some best and proven price action trading strategies that you can try for your options trading- 

  • Trend Trading

As the name suggests the Price action trend trading strategy analyzes price trends to make trading decisions. Although, price action trading strategy studies the price movements to make trading decisions, price action trend trading studies trends to suggest trade moves. Traders can use several other strategies along with the trend trading strategy to make trading decisions. For instance, traders can use a head and shoulder reversal strategy with the trend trading for their options trading.

  • Pin Bar

Another beneficial price action trading strategy traders can use for their options trading is the pin bar strategy. The pin bar strategy or pin bar price action trading strategy is sometimes also called the candlestick pattern strategy. It is because of the similar shape of candle and pin, especially candles with a long wick on them. It usually represents the sharp rejection or reversal of a certain price and the wick or tail represents the price that was rejected or reversed in the trade.  

  • Inside Bar

Inside bar is also a popular price action trading strategy that you can use in your options strategy builder app. The inside bar strategy has two bars – an insider bar and an outsider bar. The inside bar will always be smaller or shorter than the outside bar. Also, it will fall under the high and low range of the mother bar or outer bar. In most cases the inside bar appears as a consolidation of the market. However, it can act as a red signal that indicates a turning point in the market. 

  • Head And Shoulder Reversal Trade

Head and shoulder is also a major price action strategy that you can use in your options trading app. The head and shoulder strategy in the options trading price chart actually looks like a silhouette of a human head and shoulder. It actually forms from the price rise, fall, further rise, again falling, and then again rising to above the lower barrier. The head and shoulder reverse is one of the most popular price action trading strategies for proven success. Also, the Success rate of the head and shoulder reversal strategy is 83.04% which is quite impressive. 

  • The Sequence Of Highs And Lows

The sequence of highs and lows is also one of the popular price action trading strategies most experienced traders recommend. It is the core of options trading and can be utilized for all types and segments of options trading. Traders or options traders can use the sequence of highs and lows strategy to identify the new emerging trends in the options trading market. 

  • Trend Following Retracement Entry

This is a simple price action trading strategy. Traders usually observe current trends to make investment decisions. If the price of an asset is continually rising with higher highs and lows, a trader can opt for a long position. Conversely, if there is a continuous downturn in the price of an asset, a trader might choose a short position. An options strategy builder can help you identify the best strategy for price action trading.

  • Trend Following Breakout Entry

This trend assumes that a retracement usually follows a price spike. And based on this assumption, this trend tries to track any major movement in the market. A breakout occurs when a market moves outside a predetermined resistance or support. Traders use breakouts as signals for trading. Traders take a long position when there is an uptrend or the trend breaks above the resistance line. Opt for a short position when there is a downtrend or trend moves below the support line.

  • Three Candle Reversal Pattern

The three-candle reverse pattern is a less known but helpful price action trading strategy. This pattern consists of three candlesticks in a specific order as follows: a bearish red candle, a candle indicating a lower high and a higher low, and a bullish green candle. This pattern indicates a reversal. The third candle in this pattern must have a higher low. It should also close above the high of the second candlestick in the pattern.

Advantages Of Price Action In Trading

Many traders find price action trading beneficial. Here are some of the benefits of price action trading:

  • Helpful in short-term investment- Traders use various strategies for different trades. Price action trading may not be ideal for long-term investments. However, the trading strategies can offer considerable profit when used in medium or short-term investments. 
  • Helpful in decision making- Price action trading strategy allows traders to use past prices (high, low, open, and close) to predict future price movements of an asset. Traders can easily make decisions using past prices of an asset.

Conclusion

Price action trading uses the price action technique in options trading to make trading decisions. The price action technique can be further described as the movement of the price of any asset, security, or bond in a trade price chart. It is one of the proven options trading strategies that can help traders hedge significant profit from short-term investments and quickly reach their investment goals.

There are several strategies in price action trading that traders can incorporate in their algo trading app. Above, we have discussed a comprehensive guide to price action trading strategy and the advantages you can get when you employ it in your options trading.

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Prachi 17 April, 2025
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