Sadly, hundreds of books are out there on trading and most of them not worth the paper they're printed on. Luckily, there are a few price action trading books on the market that are rare gems.
At best, trading books should provide the user with specific trading strategies that are simple to implement. At worst, many are overwhelming, offering too many choices of candlestick patterns, chart patterns and indicators.
Despite providing a buffet of options, they are inadequate for traders who want to focus on trading price action.
In the end, I will suggest a few good books on price action. However, before that, I think it's essential you understand the core basics of price action trading.
What Is Price Action Trading?
- It's a technique in which you base your trading decisions based on the price movements instead of relying solely on technical indicators. In a nutshell, price action is the movement of a stock or other commodities price plotted over time. The end result is a series of formations and trends that traders utilize to make their trading decisions.
Does this sound familiar? Well, it should, as technical analysis is a derivative of price action trading. Like price action, technical analysis relies on past prices to inform trading decisions.
Despite what many "experts" may say, fundamentals--PE ratios, profit projections, and the like--don't directly impact market performance. Instead, what drives performance is traders' reactions to the fundamentals.
In fact, if you take a birds eye view of any market, you'll see that responses are surprisingly consistent from one market to the next. Not only are these reactions consistent, but the patterns of price movement are also equally predictable.
And history has shown that traders who understand this distinction will consistently have the edge over those who do not.
1. What Does Price Action Tell You?
Price action tells us a story. Will a trend reverse? Will a trend breakout? Is the trend bullish or bearish? In conjunction with candlesticks, traders can spot and interpret trends, breakouts and money-making reversals.
You might be wondering why you should use candlesticks to confirm. Candlesticks also tell us a price action story as they display the open, high, low and closing prices.
You can see in the image below, price is ping ponging off the supply and demand zones. Right now, price is stuck in a range but you can still profit in a range.
To trade, you can simply park a limit sell order in the supply zone and short while people take profits. Alternately, you can park a limit buy order in the demand zone and catch the bounce as shorts cover.
How To Master Price Action Trading
- To master this trading style, two things are very crucial:
- Identifying Support & Resistance levels
- Price Acceptance or Rejection at support-resistance levels
1. Identifying Support and Resistance Levels
There are a few different ways to arrive at support and resistance levels but drawing trendlines is the easiest and most straightforward. A trend line is just a straight line drawn on a chart by connecting two or more price peaks.
Below are some useful suggestions on how to draw a trend line:
a. Price Peaks - You should connect a minimum of 2 peaks to consider it as a valid trend line.
b. The Slope of the Trend Line - Ideally, the trend line should have a slope of fewer than 45 degrees as it means it's a healthy trend. More importantly, as the slope of the trend line increases, the support or resistance zones' validity decreases.
c. The price should respect the Trend Line - Whenever you draw a trend line, ensure the price respects the trend line with all its peaks.
2. Price Acceptance or Rejection at Support & Resistance Levels
After knowing the support and resistance levels, it's essential to know whether the price will respect that level or not.
This is important because the more times the price hits the line, the higher probability it will breakthrough.
3. What Are the Candlestick Patterns Telling You?
Some patterns, such as the Harami cross, engulfing pattern and three white soldiers, are examples of visually interpreted price action.
And this is just the tip of the iceberg; many other candlestick formations are generated from price action.
How Price Action Is Used to Calculate Technical Indicators
- Many traders use a technical indicator or two to confirm their price action trading strategy. But did you know that price action data is used when calculating technical indicators? Fundamentally, our goal is to find order in the chaos of price movement. If you know what you look for, even the most seemingly random price movement tells a story.
For example, let's take a look at the ascending triangle pattern. When formed, this money-making pattern has a high potential to break out.
On the chart, the price action shows us the bulls have attempted several times to break out of the channel. Each time the bulls have gained momentum, and this increases the probability of a breakout.
1. How to Use Price Action When Trading
Price action is not a trading indicator like the RSI, MAD or VWAP, but rather the data source in which the tools are built.
For example, many swing traders tend to forgo fundamental analysis in favor of support and resistance levels to predict breakouts and consolidation periods.
2. Limitations of Price Action
Similar to indicators, interpreting price action is very subjective. It's not uncommon for two traders to arrive at very different conclusions when analyzing and interpreting the same price action.
One trader may see a bullish uptrend, and another might think a bearish reversal is imminent. Of course, the time frame you're looking at on your chart also greatly influences what you see.
For example, a stock can have many intraday downtrends while maintaining a month over month uptrend. What is important to take away from all of this is that trading predictions made using price action on any time scale are subjective.
In the end, however, it's best to confirm with other indicators. Therefore, the more tools you can apply to your trading prediction to confirm it, the better.
Price Action Trading Books
- Here are price action trading books but we'll look at 2 favorites in detail below
- Trading Price Action Trends by Al Brooks
- Martin Pring on Price Patterns
- Japanese Candlestick Patterns by Steve Nieson
- Benefits of Using Price Action Within Your Trading Strategy by Vin Castillo
- Forex Price Action Scalping by Bob Volman
1. Favorite Book 1: Trading Price Action Trends
I'm on a simplification journey in all aspects of my life, trading included. Without a doubt, one of the keys to being successful as a trader is to find a system that works, keep it simple and stick to it.
Author Al Brooks has done just that. By simplifying his trading system and trading only 5-minute price charts, he's found a way to secure profits regardless of market direction or economic climate. How great is that!
Brooks' three part book series takes you through his system step by step. His books will allow you to identify the type of trend that's unfolding and how to use techniques that are specific to that type of trend to place the right trades.
Moreover, he also extensively covers the importance of knowing what the institutions, or "big banks" are doing.
This is critical because the key to profits in trading is to piggyback on institutional trades, and you can't do that unless you understand what the charts are telling you about their behavior.
Overall, this series should be on your bookshelf if you're looking for a simple and easy way to make money without having a million indicators on your charts. It is a bit pricey but well worth the investment in your future wealth.
2. Favorite Book 2: Martin Pring on Price Patterns
Pring is another authority in price action trading techniques and technical analysis. Beyond even that, he is one of the industry's most esteemed researchers and practitioners on the skilled use of charts and patterns.
In his book on Price Patterns, he covers all key technical analysis aspects related to price patterns. His choice of topics is fantastic.
From support and resistance, trend lines, volume analysis, breakout analysis, chart patterns to bar patterns, he covers it all.
You'll see Virtually every popular price pattern, from classics such as head-and-shoulders to shorter-term patterns for today's fast-action traders.
Pring then goes on to provide a complete, in-depth examination of today's most widely used price patterns, explaining which work better than others and why.
In the book, he gives examples that are not only clear and convincing but easy to understand. I also love the book because of his tips on placing stops so that they only kick in only when a false breakout occurs.
I think you will find value in this book. However, this book won't cover in detail how to trade the setups nor provide you with a complete trading plan.
It will help you identify the price action patterns so you can then plan your trade accordingly. On a brighter note, Bullish Bears can help you with your trading plan and risk management approach, so I wouldn't worry too much.
I hate to be the bearer of bad news, but you won't be successful trading if you rely solely on technical analysis. Technical analysis does not deal in certainties, only probabilities.
Yet those probabilities improve dramatically when traders understand the psychology of price patterns and how that psychology influences traders' behavior and the movement of prices themselves.
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