The Psychology of Price Action and How to Trade It with High Probability

Jasper Osita - Market Analyst

2025-07-04 09:29:35

Goal of This Lesson

To teach you how to:

Read candlesticks through the lens of psychology
Understand what “priced in” really means
Trade candlestick setups with high probability
Avoid emotional projection
And learn directly from price action legends

What Price Action Really Is

Price action isn’t just candles and patterns.

It’s the language of money, and every candle reflects a human decision: to buy, sell, hesitate, or trap.

Most retail traders ask:

“Is that a bullish pattern?”

Professionals ask:

“Who’s being trapped here—and who’s in control?”

Why Traders Get It Wrong

Most traders project their emotions onto the candle:

See a big bullish candle → “It’s going to the moon!”
See a doji → “I should exit!”
See a bearish engulfing → “Trend reversal confirmed!”

But here’s the truth:

A candle is neutral until placed in the right context.

The market is honest. It shows the footprints of money.

Traders lie to themselves through bias, hope, and fear.

What “Priced In” Actually Means

You’ll often hear traders say:

“The rate hike was already priced in.”
“Even though earnings were great, the stock dropped. That was priced in.”

What It Means:

“Priced in” refers to the market anticipating an outcome and positioning ahead of it.

By the time the event happens:

Price may do nothing if expectations are met
Price may reverse if expectations are disappointed
Price may spike only if the outcome is a shock

This is the key idea behind:

Price leads anticipated fundamentals.

Is it true that “Price leads fundamentals”?

Yes — but it depends and only in context.

Let’s break it down:

Why Price Often Leads Fundamentals

Markets are forward-looking.

Traders and institutions don’t always wait for the news — they anticipate it.

Expectations are built in advance.

Smart money positions itself before data releases, earnings, rate decisions, etc.

Fundamentals don’t instantly move price — positioning does.

If a CPI report is “bad,” but price rallies, it could be that the bad news was already priced in or that expectations were worse.

So: Price often moves ahead of the news because the market is reacting to what it expects, not what just happened.

When Fundamentals Lead Price

Unexpected events: black swans, war, shock inflation, surprise rate hikes
Policy shifts: central banks signaling a pivot or pause (especially when unexpected)
New information: earnings surprises, credit downgrades, economic revisions

In these cases, the fundamentals shock the market → and price reacts.

So What’s the Real Truth?

Price leads anticipated fundamentals.
Fundamentals lead price when the market is caught off guard.

They coexist, but price often reveals sentiment and expectation before the event, and that’s why traders using price action often say:

“The chart knew before the news.”

How to Trade Price Action Candlesticks with High Probability

1. Use Price Action Context First

Never trade a candle in isolation.

Ask:

Are we trending or ranging?
Are we at a key liquidity level (PDH/PDL, EQH/EQL, FVG)?
Are we seeing a sweep, break, or manipulation?

Context = Confirmation.

2. Focus on A Few High-Probability Candle Stick Pattern

Setup Type	Psychology	Entry Tip
Engulfing Candles at FVG or key level (support or resistance)	Bears trapped, bulls reclaim control	Wait for next candle to hold above midpoint
Rejection wick at Equal Highs / Lows	Stop-hunt of breakout traders	Enter on MSS or return to imbalance
Liquidity Sweep + Strong Close (Morning / Evening Star, Pin bars)	Trap, reversal, institutional interest	Confirmation via AMD or MSS

3. Wait for Confirmation — Not Just the Candle

Don’t trade a wick.
Wait for a candle close.
Apply lower timeframe range breakout.

4. Use Time + Price Together

HTF (H1–D1): Trend and bias
M15–M5: Setup and zone
M1 or tick: Confirmation (if needed)

Price action works best when:

HTF context is aligned
Candle patterns form after liquidity events
Entry is confirmed by structure

To learn more about multi-timeframe analysis and trader profiling, read these:

The Power of Multi-Timeframe Analysis in Smart Money Concepts (SMC)

Discovering Your Trader Profile: What Kind of Trader Are You?

Top Mistakes to Avoid

Mistake	Why It Fails
Trading random candles	No context = no edge
Overloading with indicators	Dilutes price clarity
Ignoring structure	Patterns fail without alignment
Reacting emotionally	Candles don’t lie—you do if you chase them

Real-Life Analogy

Candlesticks are like body language in negotiation.

A smile = warmth? Or manipulation?
A handshake = deal? Or trap?

Without the full conversation (context), body language is misread.

Same with candles. Don’t read the face. Read the story.

Action Plan: Trading Candlestick Price Action with Precision

Step	Task
1	Define HTF bias and trend direction
2	Mark liquidity zones (PDH/PDL, FVGs, EQH/EQL)
3	Watch for candle behavior near key zones
4	Wait for confirmation (MSS, structure shift, AMD)
5	Log trade entry/exit and emotional state in journal

Final Thought

“You can’t lie to the market. But the market will show you every lie you believe about yourself.”

Candlesticks are the truth of trader behavior.

Master them—not by memorizing shapes—but by reading their story.

Check Out My Contents:

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This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.

المؤلف

Jasper has been in the markets since 2019 trading currencies, indices and commodities like Gold. His approach in the market is heavily accompanied by technical analysis and of course, supported by fundamentals. He has a background in trading proprietary firms and has been teaching students how to navigate themselves in the markets from basic to advance concepts.

الأسعار إرشادية فقط

The Psychology of Price Action and How to Trade It with High Probability

Goal of This Lesson

What Price Action Really Is

Why Traders Get It Wrong

What “Priced In” Actually Means

What It Means:

Is it true that “Price leads fundamentals”?

Why Price Often Leads Fundamentals

When Fundamentals Lead Price

So What’s the Real Truth?

How to Trade Price Action Candlesticks with High Probability

1. Use Price Action Context First

2. Focus on A Few High-Probability Candle Stick Pattern

3. Wait for Confirmation — Not Just the Candle

4. Use Time + Price Together

Top Mistakes to Avoid

Real-Life Analogy

Action Plan: Trading Candlestick Price Action with Precision

Final Thought

Check Out My Contents:

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