Your guide to a crucial aspect of technical analysis

Fact checked by Suzanne Kvilhaug
Reviewed by Erika Rasure

In investing, many traders rely on a deceptively simple approach: watching how prices move. This method, called price action trading, strips away complex mathematical formulas and indicators named with several nouns in a row to focus on what matters most—the actual movement of stock prices over time on price charts.

Interpreting price action on technical charts is like reading footprints in the sand—each mark tells a story about who’s been there and where they might be heading.

Instead of using complicated technical tools, traders who follow this approach study price patterns, support and resistance levels (price points where stocks tend to stop falling or rising), and the psychology driving market participants’ decisions.

While many trading strategies layer on several indicators like moving averages or momentum oscillators, price action trading cuts through the noise by concentrating on the market’s most fundamental element: price.

This highly visual approach helps traders spot trends across all kinds of markets—stocks, currencies, commodities, cryptocurrencies, etc.—by identifying repeatable patterns. Below, we take you through the principles of this trading method.

Key Takeaways

• Price action involves analyzing price movements over time to make decisions without relying heavily on indicators.
• Price strategies can be divided into reversal patterns, which signal changes in the direction of a trend, and continuation patterns, which indicate movements that resume after a pause.
• Candlestick patterns are critical for identifying shifts in sentiment and potential entries or exits, providing key insights into market psychology.
• Traders use price action to recognize patterns like flags, triangles, and head and shoulders for both trend continuation and reversal setups.
• Price action strategies are versatile and can be applied across all markets, making them highly adaptable for both novice and experienced traders looking to understand genuine market behavior.

How Price Action Fits Into Technical Analysis

Before turning to price action, it’s best to first review the field of technical analysis as a whole. Technical analysts investigate market moves by studying charts rather than company fundamentals. That is, instead of analyzing earnings reports or economic data, technical analysts focus on patterns in price and volume data to predict where markets might head next.

The field rests on three key principles:

1. Market action discounts everything. That is, all known information is reflected in the price of assets.
2. Prices tend to move in trends
3. History tends to rhyme, but doesn’t necessarily repeat

For example, let’s say Apple Inc.’s (AAPL) stock drops 20%. Technical analysts would focus far more on the price decline itself than the supposed reasons behind it (e.g., a bad earnings report). They believe the market’s collective wisdom, revealed through the movement of prices, provides more actionable knowledge than by looking under the hood at a company’s fundamentals.

Important

Technical analysts say their tools for examining market shifts help them time their entries and exits far more precisely than fundamental analysis alone.

Technical analysts use these tools, among others:

• Price charts (line, bar, candlestick)
• Volume indicators
• Moving averages
• Momentum indicators
• Pattern recognition
• Support and resistance levels

While critics argue that technical analysis is like reading tea leaves, proponents point to large financial institutions that put their money on the line using these methods.

What Is Price Action?

Trading with price action is a technique that involves analyzing a security’s historical price movements to make trading decisions without relying on lagging indicators or complex models.

For example, say Apple Inc. (AAPL) repeatedly stops falling at $215. This price becomes a support level, showing where buyers consistently step in. When enough buyers act at this level, it creates a pattern that price action traders can spot and potentially profit from. Similarly, if Apple struggles to rise above $225 multiple times, this resistance level signals where sellers become active.

Price action traders pay attention to several key elements:

• Support and resistance levels where prices tend to reverse
• Candlestick patterns that reveal buying and selling pressure
• Trend lines and channels that highlight price direction
• Chart patterns that suggest where prices might head next
• Volume that confirms price moves

One way this might work is if traders see that Apple’s price has bounced strongly off $215 support with heavy trading volume, they might buy shares, expecting other buyers to do the same. They could then set a protective stop-loss order just below $215 in case the pattern fails, while targeting the previous resistance at $225 for potential profits.

Important

For price action enthusiasts, this approach strips away unnecessary complexity to focus on what the market is actually telling us through its movements.

What Tools Does a Trader Need to Analyze Price Action?

Successful price action trading doesn’t require expensive software, but it does demand specific tools to analyze markets effectively. Here are the charting tools you’ll need:

• A quality charting platform (like TradingView, which offers a free basic version)
• Candlestick charts to show price opens, highs, lows, and closes
• Drawing tools for trend lines and support/resistance levels
• Volume indicators to confirm price moves
• The ability to view multiple time frames

While premium platforms like Bloomberg terminals cost thousands monthly, most retail traders can effectively trade price action using free or low-cost platforms. In addition, many brokers offer built-in charting software at no added cost.

But because technical indicators and price moves can only tell you the past, and the future isn’t determined, you’ll need to manage your risks. Here are some tools to do so:

• Position size calculator to determine appropriate trade amounts
• The ability to put in stop-loss orders through your broker
• Profit target setting tools
• Trade journal software (this can be as simple as a spreadsheet)

Note

An upshot of price action charts is that by gaining experience with pricing patterns, you can start to recognize institutional money flows without relying on lagging indicators.

How to Read Supply and Demand on Price Charts

As you gain experience with price charts, you’ll learn how to best interpret shifts in these aspects of them:

Support and Resistance Levels

These are fundamental markers of supply and demand, where price often halts or reverses because of strong buying or selling pressure. Support levels show where buying demand typically emerges. For example, if the value of bitcoin repeatedly bounces off $80,000, this price represents significant demand—buyers consistently step in here, creating a floor for the price.

Resistance levels indicate where the selling supply increases. If Apple stock struggles to break above $230 several times, this suggests there are many sellers willing to part with their shares at this price.

Consolidation Zones

These occur where supply and demand are balanced, while breakouts from these areas signal one side gaining control. Supply and demand zones are broader areas of interest, often marked by rectangles, indicating significant buying or selling interest during previous price movements, and tend to attract market activity during future pullbacks.

Order flow, price gaps, candlestick patterns, and retests of key levels all provide insight into the battle between buyers and sellers.

Important

Volume is crucial for price action traders. A high volume at support or resistance suggests stronger interest and a greater likelihood of the price reacting meaningfully.

Volume

Just as you might not believe a salesperson’s claims about a product without proof, a price move without strong volume backing it up might be misleading you.

Here’s what volume tells traders:

• High volume on a price rise demonstrates that demand for an asset is real.
• Low volume means the move is not likely to last.
• Heavy volume during a drop often means panic selling—as with fire in a crowded theater, there’s typically not much order when crowds rush for the exits.
• Light volume during a drop could mean most investors are staying put.

Note

Major volume spikes often mark important turning points in price action.

Example

Suppose Apple’s stock jumps from $215 to $225. You would look at volume to discern the following:

• If it jumps on high volume (millions of shares), the rise is probably real.
• If it heads upward on not much volume, the rise might be a blip.

Candlestick Patterns

Candlestick charts, first developed by Japanese rice traders in the 1700s, tell the story of the market psychology for an asset in single bars. Each candlestick represents a specific period— a minute, hour, day, week, and so on—and shows four crucial pieces of information: the opening price, closing price, highest price (high), and lowest price (low) reached during that period.

The opening and closing prices form the “body” of the candle, typically colored green (or white) when the price closes higher than it opened (bullish) or red (or black) when the price closes lower than it opened (bearish).

The thin lines extending above and below the body, called “wicks” or “shadows,” show the highest and lowest prices reached during the fight. A long upper wick suggests sellers stepped in at higher prices, while a long lower wick means buyers emerged to support the price.

Common candlestick patterns signal potential reversals or continuations. For example, a “hammer” pattern—which looks like a hammer with a small body at the top and long lower wick—appearing after a downtrend suggests buyers are starting to overcome sellers.

Meanwhile, a “shooting star,” which looks like an upside-down hammer, appearing after an uptrend warns you that sellers might be taking control (i.e., that prices will drop).

Price Gaps

When a stock opens for trading much higher or lower than its previous closing price, it creates a gap in the chart—a space where no trading happens. For example, if Apple closes at $220 but opens the next day at $230 because of great earnings, that $10 space is a gap.

Gaps often show a powerful sentiment at work in the market—excitement over good news or panic selling.

Note

Many traders watch for price gaps because prices often try to “fill” them later—price charts, like nature, abhor a vacuum.

Order Flow

Order flow is like watching a crowded shopping mall during a sale—you can see where people are lining up to buy and where they’re walking away. In trading, order flow shows the real-time battle between buyers and sellers by revealing where large orders are placed.

For instance, if there are many large buy orders sitting at $50 for a stock, that level might act as strong support. Professional traders watch order flow through special tools that show these orders, giving them insight into where major players like banks and hedge funds might be planning to buy or sell.

Retests

A retest is like double-checking to ensure you shut off the stove; the market returns to an important price level to see if it still holds. Say a stock breaks above a resistance level at $75, where it had struggled for months. If it later falls back to $75, that’s called a retest.

Traders watch these retests carefully because they often tell an important story: If the old resistance at $75 now acts as a support (meaning the stock bounces up from there), it’s a bullish sign. But if the price crashes back through $75, it might mean the original breakout was false.

Note

A successful retest is like getting a second opinion—it confirms the original diagnosis.

Pattern Recognition Tools

Advances in chart pattern recognition have made price action trading far easier for those who have access to them. These are programs that automatically scan charts to identify common trading patterns. They act as your high-tech assistant, constantly monitoring thousands of stocks to spot potentially profitable setups that you might otherwise miss.

Here are some common types of pattern recognition tools:

• Scanner software: Programs that screen stocks for specific patterns
• Automated charting tools: Features within platforms like TradingView that highlight potential patterns as they form
• AI-based recognition: Systems that learn to identify patterns using machine learning
• Alert systems: Tools that notify traders when patterns appear in their watchlist

Note

Even with the newest tech, price action trading is far from simple. Maintaining strict discipline in risk management is as critical as ever, especially given how effortless trade execution has become.

Price Action Trading Patterns

We’re now ready to look at the two major types of patterns in price action: reversal and continuation patterns. Reversal patterns help traders spot potential turning points where the prevailing trend may be ending, while continuation patterns identify consolidations before a trend resumes.

Reversal Patterns

Reversal patterns allow traders to find turning points in the market, providing traders an avenue to expect that an overarching trend is coming to an end and a new one is about to begin. These patterns include head and shoulders, double tops and bottoms, engulfing patterns, morning/evening stars, and wedges.

Price action traders use these patterns to determine shifts in market sentiment since they show when supply and demand are shifting. Experienced traders wait for confirmation signals like breaks in trend lines and neck lines or increased volume.

In addition, stop-loss orders are used to manage risk since not every pattern will play out as expected.

Note

False signals are a major risk in price action trading. That’s why traders typically use more than one tool so they can confirm the rationale behind their trades.

Continuation Patterns

The other type of price action pattern is the continuation pattern. These are characterized by consolidations within the prevailing trend. Traders who see this pattern will buy or sell based on the view that the price will move in the trend’s original direction.

Patterns like flags, pennants, and triangles serve as temporary pauses, allowing traders to position themselves to take advantage when the trend resumes.

Note

The best setups for trades often have several technical indicators aligning at once.

Like reversal patterns, traders wait for confirmation of breakouts, ideally supported by increasing volume, since this shows how strong the move is. Stop losses are in order when trading with these patterns as well.

Examples of Price Action Trading Strategies

Reversal Pattern Example

The first example is a chart of the Global X Robotics & Artificial Intelligence ETF (BOTZ) with a rising wedge pattern.

When the setup was made, a bearish engulfing chart pattern confirmed the bearish sentiment, followed by a breakout below the lower wedge trend line. This was also accompanied by an increase in price, signaling that selling was strong. A stop-loss order was placed at $32.76, and a target of $31.80 was identified based on the rising wedge.

There was further confirmation on the trade when a double-top pattern appeared. The volume spike during the breakdown gave the trader additional confidence, reflecting market participation and confirming again the breakout’s strength. The trade was eventually a successful one as the price hit the target.

Continuation Pattern Example

In this example, a bearish continuation pennant appeared on the price chart for the Vanguard Total International Bond ETF (BNDX). After an initially sharp decline, the price action formed a pennant, which is marked by converging trend lines, indicating a pause before the trend resumed downward.

There was a breakout below support which initiated the trade. A subsequent bearish engulfing pattern appeared after the breakout, further validating the continuation. Ultimately, the price reached the target for the pennant.

How Do I Identify Support and Resistance Levels in Price Action Trading?

Support and resistance levels are like invisible floors and ceilings for stock prices. Traders find these levels by looking for prices where a stock repeatedly stops falling (support) or struggles to rise above (resistance). For example, if Apple stock bounces up from $210 three different times, that $210 level is likely a strong support level.

Here are some common ways to spot these levels:

• Looking for round numbers ($50, $100, etc.)
• Finding previous major highs and lows
• Identifying areas where a price bounces several times
• Looking out for where heavy trading volume occurs

Remember: These levels aren’t exact prices but more like zones where buyers or sellers tend to become active.

How Important Is Volume Analysis in Price Action Trading?

It’s quite important. Analyzing volume lets you know about the underlying strength or weakness of price movements. Thus, it enables you to confirm trends, validate breakouts, and identify potential reversals.

For example, a stock breaking above $100 with millions of shares traded is more meaningful than the same move with few shares changing hands.

Which Time Frames Are Best for Price Action Trading?

The time frame depends on your trading strategy. Here’s a simple breakdown:

• Scalpers typically work with one- to 15-minute charts to capture small price movements.
• Day traders look at five-minute to one-hour charts to focus on intraday trends and avoid overnight risk.
• Swing traders use one-hour, four-hour, and daily charts to capture price swings over days or weeks.
• Position traders rely on daily, weekly, and monthly charts for long-term trends.

The Bottom Line

Price action trading is based on analyzing the raw movement of price over time without relying heavily on indicators. It involves picking out key levels, reviewing candlestick patterns, and recognizing reversal and continuation setups to capitalize on market opportunities.

The key is learning to spot a few basic things: where prices tend to stop falling (support), where they have trouble rising higher (resistance), and common patterns that show up on charts. While it takes practice to spot these patterns, anyone can learn the basics. The best part is that you can use these skills to trade any market, whether it’s stocks, currencies, or cryptocurrency.

Reviewed by Doretha Clemon
Fact checked by Suzanne Kvilhaug

The U.S. Federal Reserve’s mandate was shaped in the 1970s, when the country suffered from high inflation and unemployment. The Federal Reserve Act of 1977 modified the original act that established the Federal Reserve in 1913 and clarified the roles of the Board of Governors and the Federal Open Market Committee (FOMC).

Congress explicitly stated the Fed’s goals should be “maximum employment, stable prices, and moderate long-term interest rates.” These goals, which remain today, came to be known as the Fed’s “dual mandate.” In this article, we explore all three facets of the central bank’s mandate by first looking at maximum employment before turning to the other two goals, which can effectively be treated as a single mandate.

Key Takeaways

• The Federal Reserve’s two mandates were shaped in the 1970s.
• The first is to maintain maximum employment and the second is the keep prices stable while and long-term interest rates at moderate levels.
• Rather than trying to reach 100% employment, maximum employment means keeping it at levels that are seen in normal economic conditions when there is neither a boom nor a recession.
• Stable prices and moderate long-term interest rates are deemed one mandate.
• Long-term interest rates are set with an eye to managing pricing pressure and inflation.

Maximum Employment

Maximum (or full) employment is the total measure of employment that the economy can experience without any overt inflationary pressures. Almost everyone who wants a job can secure one during maximum employment. The goal, though, isn’t to reach 100% employment and completely eradicate unemployment.

Economists know there will always be some level of unemployment. People will always quit and start new jobs, businesses will fail and new ones will be set up, and specific sectors will contract and expand. Because it takes time to find a new job, there will always be a certain level of unemployment. As such, the Fed is not tasked with achieving 0% unemployment.

The desired unemployment level prevails in normal economic conditions or the absence of a boom or recession. This is referred to as the noncyclical rate of unemployment (previously known as the natural rate of unemployment). It is determined by structural factors that affect the flexibility or mobility of the labor market. For example, regulations that restrict labor mobility tend to raise the natural rate. However, allowing job-seekers to work in other regions can effectively reduce the natural rate of unemployment.

It is not always obvious whether the economy is in normal economic times or even where the noncyclical rate of unemployment falls. Thus, the Fed must rely on assessments from its members despite the uncertainty, and these are always subject to revision. The longer-term natural or normal rate of unemployment is estimated to hover around 4.3% during 2025. That estimate is expected to drop to 4.2% as the economy heads into 2030.

Note

The U.S. Federal Reserve made revisions to its inflation target in 2020 to an average, meaning that it will allow inflation to rise somewhat above its 2% target to make up for periods when it was below 2%.

Price Stability

People and businesses need to be reasonably confident that prices will remain relatively constant over time so they can plan for the future. As a result, unstable prices (through either deflation or rapid inflation) can have drastic consequences on economic stability.

As noted above, ensuring stable prices and moderate long-term interest rates could effectively be interpreted as a single mandate. That’s because long-term nominal interest rates are set with inflation expectations in mind. For any given nominal interest rate, rapidly rising prices diminish the real interest rate that lenders receive and debtors must pay. Thus, in an unstable monetary environment with rapidly rising prices, lenders will want to charge much higher interest rates to mitigate the inflation rate risk.

Important

The FOMC announced it was going to lower the target range for the federal funds rate by 25 basis points during its Dec. 2024 meeting. Rates effectively dropped from a level of 4.5%-4.75% to 4.25%-4.5%. After that, the Federal Reserve kept rates steady for several months, as of April 2025.

The FOMC began targeting inflation at 2% in January 2012 to achieve its dual mandate. This was just after combining the goals of stable prices and moderate long-term interest rates into a single one. As such, many see this as the Fed’s attempt to be consistent with the single mandate of price stability sought by the European Central Bank (ECB).

By ensuring price stability, the Fed reasons that this inflationary target creates a stable economic environment that can foster the goal of maximum employment. When prices are stable, people and businesses can make longer-term economic decisions necessary for stable economic growth. This leads to improved employment opportunities.

Explain Like I’m Five

The Federal Reserve is the central bank of the United States. It has two important duties, assigned by Congress: maintaining high employment and keeping prices stable. It fulfills those tasks by controlling the flow of money through the economy.

But it’s impossible to achieve both goals at once, since low unemployment leads to high prices, and vice versa. Instead, the Fed is continually adjusting interest rates to balance the two priorities. It aims to keep unemployment low, but not zero. It also aims to limit price growth at about 2% per year.

Can the Fed’s Dual Mandate Work?

The Federal Reserve’s dual mandate is to achieve maximum employment and keep prices stable. It does this by controlling the money supply, and raising or lowering interest rates when the economy is slowing down or growing too fast.

Maintaining the dual mandate is possible, in theory. But some critics suggest the two ideas clash, saying that maintaining maximum or full employment may be difficult while keeping prices low. Some experts also want the Fed to focus on just one mandate—notably, keeping prices in check.

What Is Monetary Policy?

The term monetary policy refers to tools used by a central bank to control the country’s money supply and boost economic activity. In the United States, the Federal Reserve is responsible for implementing and maintaining the country’s monetary policy. It entails controlling how much money is available in the economy.

Monetary policy can be contractionary or expansionary. When the Fed contracts its monetary policy, interest rates increase and the money supply is cut back. This is done to curb inflation. Expansionary monetary policy occurs when interest rates are lowered and the money supply opens up. When the Fed takes these steps, it’s meant to boost growth when the economy slows down or during a recession.

What Are the Key Responsibilities of the Federal Reserve?

The Federal Reserve is tasked with several main goals. These include setting interest rates, managing the country’s money supply, and overseeing the nation’s financial markets. The Fed is also responsible for acting as a financial services provider for various entities, including the federal government, banks, and financial institutions outside the U.S. It also manages payment systems in the United States.

The Bottom Line

Whether it is a triple, dual or single mandate, the primary aim of the Federal Reserve is to create a stable monetary environment. To achieve this, the Fed has deemed that targeting inflation (by keeping it at a low and stable rate of near 2%) is the best way to achieve such stability.