Price Action Trading: The Complete Guide to Reading Raw Charts

Price action trading strips away the noise of indicators to focus on what truly matters: price itself. By learning to read the raw chart, you develop skills that work across all markets and timeframes. This guide will teach you to see the market through the eyes of a price action trader.

What Is Price Action Trading?

Price action trading is a methodology that bases all trading decisions on the movement of price, without relying on lagging indicators. Traders analyze candlestick patterns, chart formations, support and resistance levels, and market structure to make trading decisions.

The Philosophy Behind Price Action

Price encapsulates everything. Every fundamental factor, every trader's emotions, every algorithm's logic—all expressed through price movement. By studying price directly, you're studying the collective behavior of all market participants.

Why Traders Choose Price Action

Advantages:

• Works on any market and timeframe
• No indicator lag—you see what's happening now
• Develops deeper market understanding
• Cleaner charts, clearer thinking
• Applicable across decades (unlike indicator strategies that get arbitraged)

Requirements:

• Screen time to develop pattern recognition
• Patience to wait for quality setups
• Discipline to trade what you see, not what you hope

The Foundation: Candlestick Analysis

Reading Individual Candles

Every candle tells a story of the battle between buyers and sellers during that period:

The Open: Where the period began The Close: Where the period ended The High: Maximum buyer strength The Low: Maximum seller strength The Body: Net result (buyers vs. sellers) The Wicks: Rejection of prices

Key Single Candle Patterns

Pin Bar (Hammer/Shooting Star)

• Long wick showing price rejection
• Small body near one end
• Indicates reversal potential at key levels
• The longer the wick relative to body, the stronger the signal

Engulfing Patterns

• Current candle completely engulfs previous candle's body
• Bullish: Green candle engulfs red
• Bearish: Red candle engulfs green
• Shows strong momentum shift

Doji Patterns

• Open and close nearly equal
• Shows indecision between buyers and sellers
• Often appears at turning points
• More significant at extremes of moves

Marubozu

• Large body with minimal or no wicks
• Shows complete control by one side
• Bullish: Strong buying, minimal selling pressure
• Bearish: Strong selling, minimal buying pressure

Multi-Candle Patterns

Inside Bar

• Current candle's range contained within previous candle
• Represents consolidation/compression
• Often breaks out in the direction of the trend
• Can signal continuation or reversal depending on context

Outside Bar

• Current candle's range exceeds previous candle's high and low
• Shows increased volatility and rejection
• Closes often determine near-term direction

Morning/Evening Star

• Three-candle reversal pattern
• First: Strong candle in trend direction
• Second: Small body (often doji) showing hesitation
• Third: Strong candle in opposite direction
• Very reliable at key levels

Market Structure

Understanding Trends

Markets move in trends, and within trends, they create structure:

Uptrend Structure:

• Higher highs (HH)
• Higher lows (HL)
• Each low stays above the previous low
• Each high breaks the previous high

Downtrend Structure:

• Lower highs (LH)
• Lower lows (LL)
• Each high stays below the previous high
• Each low breaks the previous low

Ranging/Consolidation:

• Equal highs and lows
• Price oscillates between boundaries
• Often precedes breakout moves

Swing Points

Swing points are the turning points in price:

Swing High: A candle with lower highs on both sides Swing Low: A candle with higher lows on both sides

These swings create the market's rhythm and define trend structure.

Break of Structure (BOS)

When price breaks a significant swing point:

In an uptrend: Breaking above a swing high confirms trend continuation In a downtrend: Breaking below a swing low confirms trend continuation

Change of Character (CHoCH)

When price breaks structure in the opposite direction:

In an uptrend: A break below a higher low suggests potential reversal In a downtrend: A break above a lower high suggests potential reversal

This is often the first sign that the trend may be changing.

Support and Resistance

What Creates S/R Levels

Support and resistance form where:

• Previous price rejections occurred
• Significant swing points exist
• Round psychological numbers (1.3000, 1.2500)
• Previous session highs/lows
• Major breakout points

Drawing Quality Levels

Tips for identifying the best levels:

• Look for multiple touches (the more, the stronger)
• Recent levels matter more than old ones
• Focus on levels where price moved significantly after touching
• Use zones rather than exact lines (price rarely respects exact levels)

The Flip Concept

When support breaks, it often becomes resistance (and vice versa). This flip occurs because:

• Trapped traders exit at breakeven when price returns
• New traders enter expecting the level to hold as the opposite type
• Psychology shifts: what was floor becomes ceiling

S/R as Decision Points

Don't expect price to magically bounce at S/R. Instead:

1. Watch price as it approaches the level
2. Look for price action signals at the level
3. The level gives you the "where," price action gives you the "when"

Trading Setups

Setup 1: Pin Bar at S/R

Perhaps the most reliable price action setup:

Requirements:

1. Strong support or resistance level
2. Pin bar with long wick rejecting the level
3. Pin bar body closes away from the level
4. Ideally aligned with overall trend

Entry:

• Conservative: Break of the pin bar body
• Aggressive: Break of the pin bar

Stop Loss:

• Beyond the pin bar wick
• With buffer for noise

Target:

• 2:1 minimum risk-reward
• Next S/R level
• Previous swing point

Setup 2: Engulfing at S/R

Strong momentum shift at key levels:

Requirements:

1. Identified S/R level
2. Engulfing pattern at the level
3. Engulfing candle closes beyond engulfed candle

Entry:

• On close of engulfing candle
• Or on break of engulfing candle high/low

Stop Loss:

• Beyond the S/R level
• Or beyond the engulfed candle

Setup 3: Break and Retest

Classic price action pattern for catching trends:

The Pattern:

1. Price breaks through S/R level
2. Price returns to test the level
3. Level holds (previous support becomes resistance or vice versa)
4. Price continues in breakout direction

Entry:

• On rejection candle at retested level
• Wait for confirmation, don't anticipate

Stop Loss:

• Beyond the retested level

Target:

• Measured move from pattern
• Next significant S/R level

Setup 4: Inside Bar Breakout

Volatility compression leading to expansion:

The Pattern:

1. Inside bar forms (preferably at key level or after strong move)
2. Breakout occurs from inside bar range
3. Enter in direction of breakout

Entry:

• Buy stop above inside bar high
• Sell stop below inside bar low
• Or wait for close beyond the range

Stop Loss:

• Opposite side of inside bar
• Keep the risk defined

Setup 5: Trend Continuation Pullback

Trading with the trend using pullbacks:

Requirements:

1. Clear trending market (HH/HL or LH/LL)
2. Price pulls back against trend
3. Pullback shows signs of exhaustion
4. Entry in trend direction

Entry Triggers:

• Pin bar at pullback extreme
• Engulfing in trend direction
• Break of minor structure
• False break of previous swing

Advanced Price Action Concepts

Liquidity

Smart money traders understand that liquidity pools exist:

Above swing highs: Buy stop orders from sellers' stops Below swing lows: Sell stop orders from buyers' stops

Markets often move to grab this liquidity before reversing. Be aware of this dynamic when placing stops.

Order Blocks

Areas where institutional orders were placed:

Bullish Order Block:

• The last bearish candle before an impulsive move up
• Represents where big buyers stepped in

Bearish Order Block:

• The last bullish candle before an impulsive move down
• Represents where big sellers stepped in

Price often returns to these zones and continues in the original direction.

Imbalances (Fair Value Gaps)

When price moves rapidly, gaps are left in the price action:

Identifying Imbalances:

• Three-candle pattern
• Middle candle's body has no overlap with the wicks of surrounding candles
• This gap represents unfilled orders

Price often returns to fill these gaps before continuing the trend.

Context Is Everything

The same pattern can mean different things depending on:

• Where it appears (key level vs. random area)
• What preceded it (trend or consolidation)
• The size relative to recent candles
• The timeframe

Always analyze patterns in context, not isolation.

Multi-Timeframe Price Action

The Top-Down Approach

1. Higher timeframe (Weekly/Daily): Identify trend direction and major levels
2. Middle timeframe (H4): Look for trading opportunities aligned with higher timeframe
3. Lower timeframe (H1/M15): Fine-tune entries

Alignment Increases Odds

The best setups occur when:

• Daily shows clear trend
• H4 shows pullback to key level
• H1 shows entry trigger (pin bar, engulfing, etc.)

This multi-timeframe confluence dramatically improves success rates.

Building Your Price Action System

Step 1: Choose Your Timeframe

Match your timeframe to your lifestyle:

• Swing traders: Daily charts with H4 entries
• Day traders: H4 context with M15/M5 entries
• Position traders: Weekly context with Daily entries

Step 2: Define Your Setups

Pick 2-3 setups and master them:

• Write specific rules for each
• Know exactly what qualifies as valid
• No ambiguity—if it doesn't meet all criteria, it's not a trade

Step 3: Create Entry Checklists

Example checklist:

• Clear S/R level?
• Price action signal at the level?
• Aligned with higher timeframe trend?
• Risk-reward at least 2:1?
• No major news within 2 hours?

Step 4: Test and Refine

• Backtest on historical charts
• Forward test on demo
• Track detailed statistics
• Refine based on results

Common Price Action Mistakes

Mistake 1: Seeing Patterns Everywhere

Every candle isn't a pin bar. Every two-candle combination isn't an engulfing pattern. Quality over quantity.

Solution: Be strict about pattern criteria. If in doubt, it's not a pattern.

Mistake 2: Ignoring Context

A pin bar in the middle of nowhere is meaningless. Patterns matter at levels.

Solution: Only trade patterns at pre-identified significant levels.

Mistake 3: Fighting the Trend

Counter-trend setups have lower probability. Trend-aligned setups are forgiving.

Solution: Primarily trade in the direction of the higher timeframe trend.

Mistake 4: Overcomplicating

Adding too many concepts creates paralysis and confusion.

Solution: Keep it simple. One or two patterns at key levels with the trend = enough.

Conclusion

Price action trading offers a pure, unfiltered view of market dynamics. By learning to read raw price movement, you develop skills that will serve you regardless of what market you trade or what era you trade in.

The path to price action mastery requires:

1. Screen time: Study charts daily
2. Pattern recognition: Learn to see setups instinctively
3. Context analysis: Understand what makes a setup high-probability
4. Discipline: Trade only the best setups
5. Patience: Wait for price to come to you

Start simple. One timeframe, one pattern, at key levels, with the trend. Master this before adding complexity.

The charts are speaking. Learn their language.