Day Trading Price Action Strategy — Overview and Backtest

Day trading is becoming popular among retail traders in many markets. Many new retail traders want to try out a day trading price action trading strategy. What is it, and how can you be successful?

A day trading price action strategy refers to the pattern of price movement of an asset. Thus, a day trading price action trading strategy is using patterns of price movements to determine when to enter and exit a trade.

The strategy can be used in different trading styles, including day trading, where the trader looks for such patterns on the intraday price charts.

In this post, we take a look at price action and we give some advice on backtesting price action trading strategies.

What is price action?

In technical analysis, price action literarily means the action of price. It refers to the patterns created by price movements. The analysis of the basic movements of the price, to use the patterns to generate signals of entry and exit in trades, is known as price action trading.

Price action analysis is a form of technical analysis since it looks primarily at the history of an asset’s price movement and ignores the fundamental factors of the asset. A day trading price action strategy can be based on both discretionary and quantitative/data-driven strategies (we’ll return to that later in the article).

What differentiates price action from other forms of technical analysis (with indicators) is that it focuses on price movements alone, with little or no input from indicators. It studies price swing highs and swing lows, as well as the characteristics of the individual price bars, trying to use it to explain the market sentiment and behaviors of market participants. That is, it incorporates the behavioral analysis of market participants as a crowd from evidence displayed in price movements.

At the macro level, price action traders observe the broad price structure — whether it is trending or range-bound — using trend lines, moving averages, and support and resistance levels. They look for chart patterns that may reveal how the price might move next. They may further look at the individual price bars, observing their size, shape, and development during the price sessions they represent.

List of Day Trading Price Action Strategies

On this page, we have compiled all the trading strategies (investment strategies) we have published since our start in 2012 (plus relevant trading strategy articles). The page contains 200+ free trading strategies plus articles about indicators and trading strategy-specific articles. We are confident you find a viable investment strategies among all these articles.

Patterns traders look out for in price action trading

In price action analysis, traders look out for two kinds of patterns:

  • Chart patterns
  • Candlestick patterns

Chart patterns

These are recognizable structures on the price chart formed by a series of price swing highs and lows. Chart patterns often have the shape of physical objects, and they are named after whatever object they resemble. These patterns can be classified into the following:

Reversal chart patterns

These are chart patterns that form after a prolonged price movement in one direction. They can be seen in an uptrend or a downtrend and indicate a potential reversal of the existing trend. An example of a reversal pattern is the head and shoulders pattern that forms at the end of an uptrend, indicating a potential reversal to a downtrend. The inverse head and shoulders pattern forms at the end of a downtrend and indicates a potential reversal to an uptrend. Other examples include: