Dominated by indicators and algorithms, there is one approach that is far older and much more effective—price action trading. Overly complicated strategy or feel like the market is outsmarting you? Well, you’re probably in the right place. We’re going to uncover the #1 price action trading strategy in this article designed for you to interpret market moves with precision and increase your profitability.
Too many traders cannot recognize market behavior because they are too dependent on lagging indicators and complex systems. They react too late most of the time, which means that opportunities may be missed or losses incur. The biggest problem is that most of the indicators lag behind price and send signals only after the move, sending entry and exit points terrible.
The solution: pure market analysis—the price action. Noise from the indicator is eliminated, and the focus automatically falls on the market. This is therefore a valid method of using going for intraday pattern and trend identification and key levels irrespective of the data lags. We will show you the #1 price action trading strategy that makes it easy for traders to catch swings and trends in markets. It’s a pretty clear entry and exit point system designed purely by price behavior, making it fit for virtually any Forex, stock, or crypto market.
What is Price Action Trading?
Price action trading is one such strategy which interprets the movement of prices over time. Rather than using indicators that place moving averages or oscillators, price action traders use charts to learn the pattern, the level of support or resistance, and trend. The ability is thus to see how prices behave at critical points which often reveal opportunities to enter or exit trades.
The Core Elements of Price Action Trading
To trade price action you need to understand the three core components:
Support and Resistance Levels:
These are important levels where the price normally tends to reverse or even stall. The support is that price level where the asset tends to stop falling and starts to rise, while the resistance is that point where the price tends to stop rising and starts to fall.
Candlestick Patterns:
The candlestick patterns, from pin bars to engulfing patterns and inside bars, are the highest signals in price action trading. They indicate the prevailing sentiment of the market or whether the buyers are in control or sellers are.
Market Structure and Trend:
The structure of the market, which means knowing that at the least in an uptrend there are higher highs and higher lows; in a downtrend, there are lower lows and lower highs, equips the trader with the hint of the current trend and warns of its reversal.
The #1 Price Action Trading Strategy: Rubber Band Trade
The Rubber Band Trade is among the most powerful price action trades. It’s based on the theory of mean reversion, which simply says that prices that have moved too far from a particular trend mean will eventually spring back toward it. Here’s how you implement it:
- Locate the 50-period Simple Moving Average (SMA)
Start by plotting a 50-period SMA on your chart. This will be the base reference point from which to judge if the market is averaging into or out of a position over a cycle of time. The other strategies use either an EMA or forecasted trends, but it’s the use of the 50-period SMA that gauges when a market is overstretched. - Find Overextended Moves
Now that you have applied the 50-period SMA to your chart, look for overextended moves where the price is way above or below the moving average. These are indications that the price is too far from its average and will reverse. The farther away the price moves from the 50 SMA, the better the chance of a reversal. - Entry Trade
Prices that are far above a negatively sloping 50 SMA are indicative of possible short trades. Prices that are far below a positively sloping 50 SMA are indicative of possible long trades. Wait for price action signals such as candlestick patterns to confirm entries.For instance, if the price is above the 50 SMA and there appears a bearish pin bar; then it will present the sellers entry into the market, so you might open a short trade. If the price is below the 50 SMA, then there forms a bullish engulfing pattern, it would be better to open a long trade. - Position Your Stop Loss and Take Profit Points
There is always the need to control risk when entering into any trade. When using the rubber band strategy to enter the trade, you should place the stop loss a little beyond the swing high or low the price made recently. The take profit target should be set at the near 50 SMA where the price has to revert to the mean.
Why This Strategy Works
What makes the rubber band trade elegant is its simplicity and effectiveness. It works for two reasons:
- Reversion to the Mean: Prices always tend to revert back to their mean levels after extreme moves. The price behaves as if there were an invisible gravitational pull by the 50-period SMA.
- High Win Rate: Since you are trading against an overextended market, this strategy often has a higher win rate than trend-following strategies.
- Universal Applicability: Whether it’s on Bitcoin, Forex, or stock trading, this price action strategy is extremely applicable for a vast variety of markets. It’s super versatile and could be used in any time frame—from daily charts to even intraday setups.
Example: Rubber Band Trade on Bitcoin
Let’s take Bitcoin as an example. Recently, Bitcoin made a strongly overextended move above its 50-period SMA on the daily chart. The price moved quite far above the mean, so there was a high-probability short trade. The farther the price moves from the mean, the higher the rubber band effect, pulling the price back toward the 50 SMA.
Traders who enter short based on the rubber band trade can catch a large move because the price will snap back to its average. This is a good example of how one can use the strategy, even in more volatile markets like cryptocurrency.
Conclusion
The rubber band trade is #1 for price action trading strategies. It is actually very easy to deploy but very powerful in terms of profit making in markets. The trade takes the form of extreme prices, and it relies on the guidance of the 50-period SMA to build that high-probability trade. Giving clear-cut entry and exit signals, this strategy is based on the principle of reversion to the mean.
Whether it’s Forex, stocks, or even cryptocurrency trading, price action trade approaches such as the rubber band trade can make a big difference in your profitability. And if you get tired of those lagging indicators, just give this price action trading a try and you should change your results accordingly.
