Price action trading is trading from the price chart itself: the swing highs and lows, the shape of each candle and where it closes relative to support and resistance. Indicators play little or no part. The trend gives you a direction, a level gives you a place to act, and a candle gives you the timing.
In short
- Price action traders read swing highs and lows, candles and support and resistance, usually on a chart with no indicators. That is why the style is also called naked trading.
- An uptrend is a series of higher highs and higher lows. By the usual definition it ends when price closes below the last higher low.
- A candle signal such as a pin bar or an engulfing pattern carries more weight at a tested level than in the middle of a move.
- The stop goes beyond the candle or swing that justified the trade, and the position size comes from that stop distance.
- On a $10,000 Classic account, five losses of $99.90 use $499.50 of the $500 daily loss limit.
What is price action trading?
Price action trading means deciding when to buy or sell from the movement of price alone. You mark where price has turned before, judge whether it is trending or ranging, and wait for a candle at one of those levels to show buyers or sellers taking control. The entry, stop and target all come from the same chart.
Price action is part of technical analysis. An indicator such as RSI or a moving average is calculated from past prices, so it reacts after price does; a price action trader reads the prices directly and skips that step. "Naked trading" is the informal name for this way of working, on a chart with nothing but candles and a few drawn levels.
Its weakness is judgement: two traders can mark different swings and levels on the same chart and reach opposite conclusions. Exact definitions, such as the swing rule below, mean you mark the same swings every time and can test what you do.
How do you read swing highs and swing lows?
A swing high is a candle whose high is above the highs of the candles on either side of it; a swing low is the reverse. A common exact rule uses two candles each side: a swing high needs two lower highs before it and two after it. The swing is only confirmed once those two later candles have closed. Swings show the trend, become support and resistance, and tell you where a stop belongs.
Take a 4-hour AUD/USD chart. Price rises from a swing low at 0.6520 to a swing high at 0.6610, pulls back to a swing low at 0.6575, then breaks above 0.6610 and reaches a swing high at 0.6720. The highs go 0.6610 then 0.6720, and the lows go 0.6520 then 0.6575. Both are rising, so the chart is in an uptrend. The uptrend lasts as long as price stays above 0.6575, the last higher low.
How do you tell a trend from a range?
A market is trending when its swings keep stepping in one direction, with higher highs and higher lows or lower highs and lower lows. It is ranging when price turns at roughly the same high and the same low at least twice each. Trends favour buying pullbacks in the trend's direction; ranges favour fading the edges.
| Trend | Range | |
|---|---|---|
| What you see | Higher highs and higher lows (or lower lows and lower highs) | Price turning near the same high and low, at least twice each |
| Where entries go | Pullbacks to support in an uptrend, rallies to resistance in a downtrend | Near the edges: buy near the floor, sell near the ceiling |
| Where the stop goes | Beyond the pullback's low (or high) | Just outside the edge you traded from |
| First target | The last swing high (or low) | The far side of the range |
| What ends it | A close below the last higher low (or above the last lower high) | A close outside the range that holds on a retest |
Most markets move between the two. A trend often pauses in a range, and a range often ends in a breakout that starts a new trend. If you cannot say which one you are looking at, the chart is giving you no direction, and there is no trade.
Which candle patterns matter in price action trading?
The price action patterns used most are the pin bar, the engulfing pattern and the inside bar. Each describes one moment in the fight between buyers and sellers. None means much on its own: a pin bar at a tested support level is a setup, while the same candle in the middle of a move is noise.
| Signal | The rule | Where it means most | Typical stop |
|---|---|---|---|
| Pin bar (hammer or shooting star) | A wick at least twice the body and at least two-thirds of the candle's range | At support in an uptrend, or resistance in a downtrend | Beyond the wick |
| Engulfing | The second candle's body covers the whole of the first candle's body, in the opposite colour | After a pullback into a level | Beyond the low (or high) of the two candles |
| Inside bar | Its high and low both sit inside the previous candle's range | After a strong move, as a pause before continuation | Beyond the inside bar, or beyond the larger candle before it |
Check the measurements before you call a candle a pin bar. One on AUD/USD with a high of 0.6631, a low of 0.6598, an open of 0.6625 and a close of 0.6627 has a 33-pip range, a 2-pip body and a 27-pip lower wick. The wick is 82% of the range, so it passes. The Academy lesson on candlestick patterns explains why the same shape can mean opposite things in different places.
How do you use support and resistance in price action?
Support and resistance tell you where to look for a candle signal. Mark the levels where price has turned at least twice, draw them as zones a few pips deep rather than thin lines, and only act on signals that form inside a zone. A level that has flipped role, from resistance to support, often carries the most weight.
In the AUD/USD chart above, 0.6610 was the high that capped the first rally. Once price broke above it and climbed to 0.6720, many traders would mark 0.6600 to 0.6615 as support. The round number 0.6600 also sits inside the zone.
The next level in your direction is the natural first target, and the far side of the zone you traded from is where the idea is proved wrong, so the stop goes just beyond it. The Academy lesson on support and resistance covers how to draw zones and handle false breaks.
How do you plan entries and stops in a price action trading strategy?
A price action strategy needs three written answers before any trade: which direction the trend allows, which level you are trading from, and which candle triggers the entry. The stop then goes beyond the signal candle or the swing, the target at the next level, and the trade is skipped if the target is too close.
There are three common ways to enter on a signal candle:
- A stop order a pip or two beyond the candle's high (for a buy). It only fills if price follows through, but the entry is the furthest from the stop.
- A market order at the candle's close. This is the simplest, and the stop distance is known at once.
- A limit order at about 50% of the candle's range. It gives a tighter stop, but price often leaves without filling it.
The stop goes beyond the far end of the signal candle, or beyond the swing low or high, with a few pips added for the spread. Measure the distance to the first target and divide by the stop distance. Many traders skip anything under 1.5 or 2 to 1, which the risk-reward ratio guide explains with examples. Size the position from the stop, never the other way round.
What does a price action trade look like with real numbers?
This example is a pin bar at support on a 4-hour AUD/USD chart, for a $10,000 Classic account risking 1% ($100) per trade. A pip is 0.0001, and one standard lot of AUD/USD moves $10 per pip. Prices are for illustration.
- The trend is up: highs at 0.6610 and 0.6720, lows at 0.6520 and 0.6575.
- Price pulls back into the 0.6600 to 0.6615 support zone, the old resistance.
- A 4-hour pin bar forms: open 0.6625, high 0.6631, low 0.6598, close 0.6627. The wick dips below the zone and closes back above it.
- You place a buy stop at 0.6632, 1 pip above the pin bar's high, and a stop loss at 0.6595, 3 pips below its low. The stop distance is 37 pips.
- Size: $100 ÷ (37 × $10) = 0.27 lots after rounding down, or $2.70 per pip. The risk is 37 × $2.70 = $99.90.
- The target is 0.6706, just under the 0.6720 swing high. That is 74 pips, worth 74 × $2.70 = $199.80, twice the risk.
If the next candle trades up to 0.6632, the order fills, and if price reaches 0.6706, the trade makes $199.80 before costs. If it fills and price then falls back through the zone to 0.6595, the stop is hit for a loss of $99.90. If price instead falls through the pin bar's low without ever reaching 0.6632, the buy stop never fills and you cancel it at no cost.
A close below 0.6575 after that would break the last higher low and end the uptrend, so you would stop looking for buys until a new trend forms.
A 4-hour trade often stays open overnight. Simulated trades carry trading costs, as they would on a live account: a commission when a trade opens and when it closes, a price markup on some symbols, and holding costs on positions kept overnight.
How price action trading works on CMC Funded Classic and Direct accounts
On CMC Funded, the daily loss limit sets how many failed price action trades you can absorb in a day. It is a share of your equity at the start of each day, measured on equity, so a trade still open and 20 pips against you already counts as $54 at $2.70 a pip. Reaching the limit ends the account, with no warning stage.
With the $99.90 risk from the example:
- On a $10,000 Classic account the daily limit is $500. Five full stops cost $499.50, which leaves 50 cents.
- On a $10,000 Direct account the daily limit is $400. Four full stops cost $399.60, which leaves 40 cents.
- Two attempts at the same support zone cost $199.80, about 40% of the Classic limit and just under half of the Direct one. A two-attempt cap per level keeps one bad zone from taking the day.
The maximum loss is fixed. On the Classic account the floor is $9,000, so ten full stops ($999) leave $1 of room. On the Direct account the floor is $9,400, and six full stops ($599.40) leave 60 cents.
For scale, the Classic Phase 1 profit target is 8%, or $800. Four winners of $199.80 make $799.20, 80 cents short. The Direct target is 10%, or $1,000, and five winners make $999. There is no time limit, so you can wait for 4-hour setups that meet every rule, but you need at least 3 trading days. Holding overnight and over the weekend is allowed, with holding costs.
The leverage you choose at purchase, from 1:10 to 1:500, changes the margin and leaves the risk the same. The 0.27-lot position is 27,000 Australian dollars, about $17,906 at 0.6632. At 1:100 that ties up about $179 of margin; at 1:10, about $1,791. The position moves $2.70 a pip either way. Higher leverage magnifies both gains and losses.
Common mistakes
- Trading every pin bar you see. Take signals only inside a marked zone and in the direction the swings allow.
- Calling a level from one touch. Wait for two clear turns at the same area, or a broken level that has been retested.
- Moving the stop to just under the candle body to trade a bigger size. The wick is the part that shows rejection, so the stop goes beyond it.
- Buying a pullback after the last higher low has already broken. The uptrend is over by your own definition.
- Taking a third and fourth attempt at a zone, often to win back the first loss. After two failures, treat the zone as broken and wait for a new one.
- Judging a 4-hour candle before it closes. A wick that looks long at 3 hours can be gone by the close.
Questions traders ask
Is price action a good trading strategy?
Price action is a method of reading charts, and its results depend on the rules you build from it. Its strengths are that signals have no indicator lag and the stop has a logical place. Its weakness is judgement, so write the rules down and test them on 30 to 50 past trades before relying on them.
Which is better, SMC or price action?
Neither is better across the board, because smart money concepts is a branch of price action with its own vocabulary and an explanation about large institutions. A liquidity sweep is close to a failed breakout, and an order block is close to a demand or supply zone. Which suits you depends on which one you can define precisely and test. See our smart money concepts guide.
Can you use indicators with price action?
Yes. Many price action traders keep one tool, such as a 20 or 50-period moving average to judge the trend at a glance, or volume to judge a breakout. Use it for context, and let the level and the candle decide the entry. Once the indicator decides, you are running an indicator strategy, which needs its own testing.
Which timeframe suits price action trading?
Price action works on any timeframe, but the 4-hour and daily charts give fewer, cleaner signals and leave room for spreads and costs. The 5-minute and 15-minute charts give many more signals, where the spread is a bigger share of each stop. Many traders read the trend on one timeframe and time entries on a lower one.
Next steps
The Academy lesson on trends and trendlines practises labelling swings on real charts, the first step in every setup here. Turn every stop distance into a lot size with the position size calculator, and check the daily loss limit for your account on the rules page.
You can compare the Classic and Direct routes on the challenges page.