Price action refers to the price movements of an asset over time plotted on a chart. Price action is the basis of all technical analysis, regardless of whether we’re talking about commodities, stocks, bonds, forex, or cryptocurrency.
Traders will use price action and chart analysis to look for formations, trends, and patterns in market structure, from which they can create trade ideas. In fact, the core of technical analysis is price action itself, since it uses past prices to try and project future price movements.
Price action traders rely heavily on analyzing the price action of a financial instrument to create trade ideas. In fact, many short-term price action traders will exclusively use price action to identify trade setups. At the same time, many traders may use a combination of technical indicators to support their price action analysis. The idea behind this is that the combination of price action analysis and technical indicators may provide more reliable trading signals.
Price action can be analyzed using various charting tools and chart settings. The most common ones are the Japanese candlestick chart, the line chart, and the bar chart. All of these illustrate price action in different ways, and traders use them to better identify and interpret market trends. It’s worth noting that each of these chart settings can have their unique advantages, and choosing which one to use for price action analysis is up to personal preference.
Candlestick patterns are an important part of price action trading. These chart patterns are essentially reoccurring formations in price action that traders can identify and use to create actionable trade ideas. The idea behind this trading strategy is that these patterns tend to play out in similar ways, so the trade ideas created based on them may have a high probability of success.
If you’d like to read more about candlestick chart patterns, check out A Beginner’s Guide to Classical Chart Patterns, and 12 Popular Candlestick Patterns in Technical Analysis.