Definition of Price Action Trading

Price action trading is the process of observing market price move-
ment to anticipate future price movement. The purpose is to trans-
act in the market to make a profit.
As it uses past and current price action to predict market movement,
it is a branch of technical analysis. Traditional technical analysis fo-
cuses on chart patterns like double top/bottom, head and shoulders,
and flags.
However, price action trading is increasingly used as an umbrella
term that includes analyzing chart patterns, bar patterns, and
candlestick patterns. Look at how search volume in price action
trading has increased steadily while searches of chart patterns has
fallen.

Support & Resistance

Price action traders also project support and resistance levels using
swing pivot points.
Support areas are likely to reject price upwards, and resistance areas
tend to prevent the market from rising above it.
Support and resistance are core price action trading concepts.
The key to successful price action trading lies in finding effective
support and resistance areas.

rules for support and resistance

Once broken, swing points act as containment (support or resistance) in the direction of the trend. That means basically
that where there was old supply, there will be new demand, and where there was old demand, there will be new supply.
This is an ever-changing trait of markets, and basically drives all trends.
Static support and resistance on longer term price horizon is more relevant to trade from. So when doing study, look at
time frames above 240 minute chart for intraday traders, with daily and weekly being ideal for end of day traders)

Support and Resistance rotate over and over, meaning, old support becomes new resistance, and old resistance
becomes new support. The smaller the time frame the less accurate and more often it changes.

We don’t always trade from support and resistance, we may use the level to place a stop loss. E.g., if we enter a trend
trade to the long side (bought) at a moving average, we might place our stop under support. (the opposite is also true).
Support and resistance work best in trending markets and can be seen working on both short and long term time
horizon..
There are often ‘false breaks’ of Support and resistance, which we can use to trade.
Price action usually gets us into most trades , so don’t be too concerned about becoming an expert at identifying swing
points and support and resistance. You just need to be aware of the levels and patterns that form near them.
Learn to plot them on the chart, always.
It is not hard to realize by simply glancing at a chart, that horizontal levels in the market guide everything.

ADVANTAGES OF CANDLE VS. BAR CHARTS

There are three major advantages of candlestick charts
compared to bar charts.

Candlestick charts are much more "visually immediate" than
bar charts. Once you get used to the candle chart, it is much
easier to see what has happened for a specific period be it a
day, a week an hour or one minute.
With a bar chart you need to mentally fill in the price action.
You need to say to yourself, "The left tick says that's where it
opened, the right tick where it closed. Now I see. It was an
up day." With a candlestick chart it is done for you. You can
spend your energy on analysis, not figuring out what happened
with the price

With candles you can spot trends more quickly by looking for
whether the candles are clear or colored. Within a period of
trend, you can easily tell what a stock did in a specific period.
The candle makes it easier to spot "large range" days. A large
candlestick suggests something "dramatic" happened on that
trading day. A small range day suggests there may be relative
consensus on the share price. When I spot a large range day,
I check the volume for that day as well. Was volume unusual?
Was it say 50% higher than normal? If so, it is very likely that
the large range day may set the tone for many days afterward.

Most important, candles are vital for spotting reversals. These
reversals are usually short term --precisely the kind the trader
is looking for.
When traditional technical analysis talks about reversals,
usually it is referring to formations that occur over long periods
of time. Typical reversal patterns are the double top and head
and shoulders. By definition, these involve smart money
distributing their shares to naive traders and normally occur
over weeks or even months.
Candlesticks, however, are able to accurately pick up on the
changes in trend which occur at the end of each short term. swing in the market. If you pay meticulous attention to them,
they often warn you of impending changes.

Why do Candlesticks Work?

Price action traders rely on candlesticks because they convey a great deal of information about each trading
period in a visual format that is easy to interpret, allowing traders to compare the behavior of price in
different time periods with a quick glance at a price action chart. Each candlestick can be “read” as a
meaningful part of the developing narrative of price. They communicate the “market sentiment”: whether
(and to what extent) bears or bulls were in control, and how far traders managed to push price in both
directions. For example, a long candle’s body with no wicks indicates a definitive shift in this struggle for
power, whereas a candle with a long upper wick beyond its body indicates a more contentious period with
an effort by bulls to push price higher that was pushed back by pressure from bears before the close of the
candle. Certain re-occurring candlestick patterns have become popular among traders as reliable signals of
future market behavior. This guide is intended as an introduction to some of these patterns, which help
traders make sense of market conditions and recognize advantageous times to enter trades.
The ability to read candlesticks allows the price action trader to become a meta-strategist, taking into
account the behaviors of other traders and large-scale market-movers. In other words,
candlestick patterns help traders

6 PROFITABLE CANDLESTICK PATTERNS

EVERY TRADER NEEDS TO KNOW

Dojis

The doji candlesticks are single (individual) candlestick patterns. There are 4 types of
doji candlesticks as shown below:

1. The doji cross can be both considered a bullish or bearish signal depending on where it
forms.

2. The gravestone doji is considered a bearish reversal candlestick when formed in an
uptrend or in a resistance level.

3. The dragonfly doji is considered a bullish candlestick pattern when formed in a
downtrend or in a support level.

4. The long-legged doji shows a period of indecision by bulls and bears and depending on
where it forms (uptrend/resistance level=bearish signal, downtrend/support level=bullish
signal) it can be considered a bearish or bullish signal.

Evening Star

The “evening star” is the small-bodied middle candle of a 3-bar pattern that can
provide an early indication of a reversal from a bullish to a bearish trend, typically
with an opening price at or a gap above the close of the previous candle
(a gap indicates space between the body of the previous candle and the open
of the consequent candle). The pattern represents a potential top, and therefore
a potential signal to sell. These are the characteristics of the three candles:

A long bullish candle
A small-bodied bullish or bearish candle or a doji that opens at or above
the close of the previous candle.
A black candle that opens at or below the low point of the previous candle’s
body and closes at or below the center of the first candle.
A long bearish candle
A small-bodied bullish or bearish candle or a doji that opens at or below
the close of the previous candle
A white bullish candle that opens at or above the high point of the previous
candle and closes at or above the center of the first candle.

Morning Star

The “morning star” is the inverse of the evening star, a 3-bar pattern in which
the “star” is a small-bodied candle, typically opening at the close of the previous
candle or opening a gap below it, indicating that a trend is transitioning from
bearish to bullish. The morning star constitutes a potential bottom to the
preceding bearish leg, and functions therefore as a buy signal.
The three candles are as follows:
While an evening star pattern after an uptrend signals a reversal, the opposite
a morning star pattern in a downtrend can also signal reversal, and a change in
the balance of power between bears and bulls.
In order for the pattern to be valid, the sequence of candles must be as described above.
Moreover, the pattern should appear in the context of an uptrend in order to signal a reversal and
the start of a downtrend.

HAMMER

This hammer marks a reversal off a bottom or off an important
support level. On the day of the hammer, prices decline. They
hit bottom and then rebound sharply making up all the ground
– and sometimes more – compared to where the sell-off
started. The candle shows that the buyers have seized control.
A bullish candlestick on the following day confirms this
analysis.

The harami is a 2 candlestick pattern and can be bullish or bearish.

1. Bullish Harami-this is a 2 candlestick pattern. The first candlestick is a very bearish
  candlestick followed by a bullish candle, which is quite short and is completely covered
  by the shadow of first candle. When you see this in a downtrend or in an area of support,
  this will be your bullish(buy) signal.
1. Bearish Harami is the exact opposite of bullish harami. When you see this pattern form
  in a resistance level or in an uptrend, this is a bearish reversal signal and may indicate
  that the uptrend is ending and you should go short (sell).