Investing is similar to entering into a relationship with a person for all the reasons that make them unique. Including their personality, upbringing, how closely your ideas fit, and many more. Contrarily, trading is more akin to a blind date. You observe the individual, learn a few fleeting facts about them, and just wing it! Sincerity be damned, the argument over which is superior is really annoying. To each his or her own; after all, it is their money. However, thoughts and guidance on dating are best located in many locations.
Well, most investors live their life under the impression that trading is a risky endeavor that is certain to fail. To further add to their misery, there is a stock market interaction that employs much less data and is even more influenced by a person’s mentality than the information provided. Introducing Price Action Trading!
The features of a security’s price movements are characterized by price action. The movement of prices has been extensively studied in light of current price shifts. Price action trading, which does not heavily rely on technical indicators, allows a trader to read the market and make arbitrary trading decisions. Based on recent and present price moves.
The price action trading strategy relies on technical analysis tools since it overlooks the elements of fundamental research and concentrates more on recent and prior price movements.
What is Price Action?
Price action is a type of trading method in which financial instruments are primarily purchased or sold for a brief period of time based on changes in price. Like other trading strategies, it does not use technical analysis.
Price movement is the pattern or character of how the price of a security or asset behaves, typically in the short run.
It is possible to analyze price behavior when it is visually plotted over time, typically in the form of a line chart or candlestick chart.
Technical analysts look for patterns or indicators that can help predict how an asset will behave in the future. While timing the entry and exit points of trades using price movement on charts. Technical instruments that use price action to forecast the future and give traders information include moving averages and oscillators.
Price Action Tools
Because price action trading is based on recent historical data and prior price movements, all technical analysis tools, such as charts, trend lines, price bands, high and low swings, technical levels (of support, resistance, and consolidation), etc., are taken into consideration depending on the trader’s preference and the strategy’s suitability.
Traders can employ a variety of observation patterns and tools, such as simple price bars, price bands, breakouts, trendlines, or complex combinations like candlesticks, volatility, channels, etc.
Price action deals require understanding psychological and behavioral readings, as well as trader-determined follow-up actions. Assume, for instance, that a stock trades at 880 and above the psychological threshold of 900 for the trader. In that instance, the trader may forecast that the price will keep rising and, regardless of what happens, establish a long position. However, other traders might believe that the price will reverse once it reaches the 900 mark, in which case they will enter a short position.
No two traders will view a given price movement similarly because each trader has their own interpretations, rules, and behavioral knowledge. However, in a technical analysis environment, many traders display the same behavior and activity.
Technical analysis techniques and recent price history form the foundation of price action trading. Within a certain system, traders might select their trading positions based on illogical, irrational-behavioral, and irrational-psychological states.
“Naked price action” or “pure price action” refers to trading with only the prices that are visible to you. It’s similar to using the navigation system while driving. Instead than depending on complicated formulas and time-consuming studies, you place your trades by using your market knowledge.
Price action signals, which are quickly recognizable market patterns that can be used to predict future market behavior, are common. They are sometimes referred to as price action triggers or patterns. Experienced traders occasionally can recognize these signals in a glance by recognizing specific patterns or repeats in prior performance.
Price Action Trading Strategies
For spotting trading patterns, entry and exit opportunities, stop-loss levels, and associated observations, the majority of experienced traders who employ price action trading continue to use a variety of tools. It’s possible that one strategy on one (or more) stocks won’t offer enough trading opportunities. A two-step procedure is typically used:
- Identifying an event, such as the beginning of a bullish or bearish phase, the crossing of a channel range, a breakout, etc. for a stock price.
- Determining whether a stock is likely to (a) overshoot or (b) recede after it commences a bull run can help traders identify opportunities. It is an entirely subjective choice that varies from trader to trader, even in the case of the same event.
Here are a few examples:
- A stock hits its peak before dropping to a somewhat lower level, in the trader’s opinion (scenario met). The trader can then decide whether they think it will form a double top to soar much higher or fall even further following a mean reversion at that point.
- The trader determines a floor and ceiling for the price of a specific stock based on the assumption of low volatility and the lack of breakouts. If the installed base and roof serve as support and resistance levels, the trader may place positions. In contrast, they can adopt the viewpoint that, if the stock price is within this range, the stock will breakout in either direction.
- A trading opportunity in the form of a breakout continuation (moving forward in the same direction) or breakout pullback (returning to the previous level) will materialize upon the fulfillment of a predetermined breakout scenario.
As can be seen, price action trading is not possible without the use of technical analysis tools. The choice to trade or not ultimately rests with the trader. Giving them freedom as opposed to imposing a strict set of rules.
Limitations of Price Action
Price movement is frequently random. Traders may interpret the same chart or price history slightly differently, leading to different results. Pricing history is not necessarily a trustworthy predictor of future outcomes, which is another disadvantage. Therefore, technical traders should make use of a range of tools to confirm indicators and be prepared to immediately close down positions if their predictions are wrong.
Best Books on Price Action Trading
- Price Action Breakdown, By Laurentiu Damir
- In Depth Guide to Price Action Trading, By Laurentiu Damir
- The Ultimate Price Action Trading Guide, By Atanas Matov
- Trading Price Action Trends, By Al Brooks
- Trading Price Action Trading Ranges, By Al Brooks
- Trading Price Action Reversals, By Al Brooks
- Understanding Price Action, By Bob Volman
Many theories and methods of price action trading assert to have high success rates. However, because only successful stories make the news, traders should be wary of survivorship bias. Trading offers the possibility of making money, but it is each trader’s responsibility to fully understand, test, select, and act upon whatever meets the requirements for the greatest likelihood of making money.