Price action is sometimes overlooked by new traders, since it is less well known as a trading method than fundamental and technical analysis. Price action doesn’t involve plotting technical indicators on your chart unless you want to. Some traders use them as guides to help them to see the context of events. Others incorporate them into their trading systems in a more direct way. But the main feature of a price-action methodology is that it involves letting price tell you what to do.
Traders who like price action usually appreciate its simplicity. It’s a less cluttered method for trading, and it’s likely to provide fewer or no mixed signals, especially if you keep the charts relatively empty of indicators. Another reason that traders like price action is that it is more direct in some ways than other forms of analysis. Indicators react to price; price is price.
When you use price action to make trading decisions, you search for patterns in the bars which tell you that price is likely doing a certain thing. These patterns aren’t 100% reliable; like anything else, they are fallible. How helpful they are depends largely on the context. In a choppy market, they’re likely to provide you with fakeouts. In calmer seas, they can be extremely reliable. The placement of a pattern is also important. A buy signal right up against strong resistance isn’t as reliable as a buy signal which is bouncing off of strong resistance. Let’s talk about a few different price action patterns you can look for.
Price Action Patterns
- Inside bars – An inside bar is any bar which has its open and close contained within the open and close of the previous bar. The more of these you can find in a row, the better. A popular formation to look for is the “inside 4 bar,” which is the fourth bar that occurs in this manner. What does this show us? Consolidating price, heading for a breakout. Since it’s hard to know which way price will break out, you typically will want to be prepared to buy or sell. Some brokers allow you this flexibility, while others don’t.
- Triangular consolidation – This is similar to the formation above, but is characterized by a compressing triangle formation. It may take place over more bars and it may not be an “even” triangle or a perfect one, but it’s usually a good sign of a forthcoming breakout. Once again, it’s tough to guess the direction.
- Outside bars – There are two types of outside bars to look for—bullish and bearish. A bullish outside bar has an open and close which eclipse the open and close of the previous bar. Its close is bullish, and it signals a call/buy. The opposite is a bearish outside bar with a bearish close. It signals you to sell/put.
- Pin bars – Picture three bars in a row. Now picture that the middle bar extends either significantly above or below the two on either side of it. This is a pin bar formation. If the bar that is sticking out is pointing up, this is a sell signal. If the bar that is sticking out is pointing down, this is a buy signal. What it means is that price has “tested” the one direction and rejected it, and is now likely heading in the other direction. The bar sticking out represents that test, which is why the signal indicates price is headed the other direction.
In binary options trading, you’ll probably have an easier time dealing with formations that tell you a direction, and not just inform you that a breakout is coming. Check the features offered by the website you trade on though. Some sites allow you to place a trade where you’ll profit if price touches either of two different trigger points. Those can be placed on opposite sides of price, so that you profit if price breaks out, regardless of whether it goes up or down (you’ll lose the trade if price doesn’t break out by the end of the expiry period).
As you learn about price action, you’ll also probably learn to recognize markets which are ranging and which aren’t likely to go anywhere anytime soon. You can profit during these quiet periods by placing boundary trades where you wager that price will stay inside a certain range. If price spikes outside of that range or starts trending, you’ll lose, but if price continues to trade in that range, you’ll win, even though price went nowhere. That’s not something you can do with most traditional forms of trading, so that’s a very cool feature of trading binary options.