Price action trading strategies are the most popular of all forms of trading for one reason: because they work.
There is no guesswork involved, and anyone who has taken the time to learn price action can consistently make a profit.
When you start learning about price action, it’s essential to experiment with many different types of trades.
However, you need to find a method that works best for you and your personality type over time.
Method 1: The Inside Bar
The first price action strategy we recommend as profitable and straightforward is trading inside bars.
An inside bar is defined as a candle filling the area between two candles. The next candle opens inside and closes in the same area as the previous candle.
There are three reasons we recommend traders use this strategy:
- The first is that it works surprisingly well, even if you have no idea what you’re doing. If you only take trades that appear easy to predict, there’s a good chance that your account will overgrow and be able to withstand your mistakes.
- The second reason is that it requires little time and effort. If we only check the charts once per day for about five minutes, we can still make consistent profits trading inside bars. It isn’t possible with many other strategies I know of.
- Thirdly, the inside bar is tricky to trade profitably, but it can be highly profitable when you find the right situation.
This trade works well when there is a strong resistance or support level in an uptrend or downtrend, respectively.
A trader should only open long positions (or short positions) after an inside bar has formed at support (or resistance).
Method 2: Fibonacci Retracement
It will likely be one of the most profitable price action strategies; British traders should use. Fibonacci retracement works very simply: you assume that when an asset moves up or down by a certain percentage, it will retrace back to the last price before this movement took place.
For example, let’s assume that the GBP/USD moves up intensely and reaches a high of 1.5500. If there is no pullback or resistance level at this point, one should assume that the asset will continue to move up until it reaches the next Fibonacci level (i.e. 1.5600).
The same logic works for downtrends as well – you would expect an asset to retrace back to the last low before heading lower again (in this case, 1.5350).
The good thing about this strategy is that it only requires two data points – the first high or low reached and the point it retraces to.
If you are lucky, minor Fibonacci retracements can form within or at significant support or resistance levels, making it extremely easy to plan your trade.
The downside of this strategy is that it doesn’t work all the time.
However, when used in conjunction with other strategies we have outlined here – for instance, waiting for an inside bar signal before taking a long/short position – then even using this approach alone will make you win most trades.
Method 3: Price Action Reversal
Price action reversal is simple, effective and requires little time to learn. It works simply by drawing horizontal lines across specific chart points at crucial areas on the chart.
This technique will only work if the price action reverses from these areas or levels, which you can use to take a position.
For example, let’s assume that the GBP/USD has been trading between 1.5500-1.5600 for several weeks.
The trader draws two horizontal lines across the 1.5550 and 1.5600 levels, respectively.
He assumes that he should use any movement above this level for long positions (i.e. buy it). In contrast, they should use any movement below this level for short positions (i.e. sell).
The downside of this approach is that it requires time to learn how to use it appropriately.
It’s not as simple as Fibonacci retracements, in our opinion, as there is a lot of drawing involved, which can be time-consuming.
However, it is one of the best price action strategies British traders should use – it’s straightforward yet effective.
Link to Saxo for more information.