What is a Price Action Indicator?

We now know that price action is the study of the actions of all the buyers and sellers actively involved in a given market. The most commonly used price action indicator is a candlestick, as it gives the trader useful information such as the opening and closing price of a market and the high and low price levels in a user-defined time period. Let's look at an example:

If you were to view a daily chart of a security, the above candles would represent a full day's worth of trading. Both candles give useful information to a trader:

• The high and low price levels tell us the highest price and lowest price made in the trading day.
• The seller candle, shown by a black, or sometimes red, body tells us that sellers won the battle of the trading day. This is because the closing price level is lower than the opening price level.
• The buyer candle, shown by a white, or sometimes green, body tells us that buyers won the battle of the trading. This is because the closing price level is higher than the opening price level.

Using this simple candle setup is one of the first steps towards creating a price action strategy. For example:

1. If after the seller candle, the next candle goes on to make a new low then it is a sign that sellers are willing to keep on selling the market. This weakness will cause some traders to initiate short positions or hold on to the short positions they already have.
   
2. If after the buyer candle, the next candle goes on to make a new high then it is a sign that buyers are willing to keep on buying the market. This strength will cause some traders to initiate long (buy) positions, or hold on to the long positions they already have.

This type of price action analysis is just one way to use candlesticks as a price action indicator. However, the candles themselves often form patterns that can be used to form a price action strategy. Before we look at these patterns, let's first look at where they work best.