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Price Action Trading

Have you noticed that the analysts always have bad news lined up citing the reason for the downward move and have good news lined up citing the reason for the upward move? However, the news is mostly released after the move. How to position yourself to trade before the move happens? By closely following the price action of the equity considered and trade based on the clues provided.


Photo by Anna Nekrashevich from Pexels


So, what is Price Action Trading? Price action trading is a form of technical analysis where traders make decisions solely on the price movements in the market. If you have followed the trading psychology post, we mentioned that a price bar shown on a chart is nothing but a consensus price at a particular period between the bulls ( who create the buying pressure) and bears ( who create the selling pressure). Support and resistances are nothing but the memories of the traders where the prices bounced and retraced. When memories are stronger ( more traders remember), you would see more volume ( more pressure) that may result in a fast move towards the next support/resistance.

Price action traders would mostly look at only the price action coupled with volume to make trade decisions. They understand that most of the indicators available are lagging and use them at most for scanning purposes.

Advantages

  1. Better timing on entries and exits. Why? Most of the indicators available out there are calculated using a formula involving price and they are lagging. Price is price and you can get into a trade and get out of the trade efficiently.

  2. No need to follow the fundamental news as the news is already reflected in the price and what you see is what you get.

  3. Enables you to develop a framework for trading in different market conditions. You can develop a plan for when to buy (around support), when to sell (around resistances) and when to stay away from the markets ( price is vacillating). Most price action traders develop the framework using various patterns either formed by the price action ( candlestick patterns, cup and handle, head and shoulders, etc) or by drawings on the chart ( trend lines and flat lines identifying patterns such as ascending triangle, wedges, descending triangle, etc)

  4. Easy to identify the trends and stay with the trend until it is broken

  5. Predict the future prices fairly accurately using drawings such as Fibonacci, Andrew pitchfork, etc.

Disadvantages

  1. It takes a lot of practice to follow the price action and notice the patterns on the charts.

  2. It takes a lot of data and time to validate the trading strategies based on price action. There may be some scenarios where the trading strategy selected may fail.

  3. Finally but not least, price action trading is subjective. Two traders might have different opinions about the patterns on a chart and may trade in different ways. It is highly recommended to have a framework that indicates when to buy, when to sell and when to stay away. For example, If a trader has determined that he will enter a trade as there is a breakout from support as per his framework patterns, he may also exit the trade if the support is broken.

Summary

Price action trading is based purely on price coupled with volume (indicates the buying pressure or selling pressure). Most price action traders develop their own framework based on the chart patterns and drawings to determine when to buy, when to sell and when to stay away from the markets.

Some content specified here are excerpts from the book PriceActionTradingSecrets by Rayner Teo. He is one of the successful future traders and teaches mostly through youtube and his website.

If you like this post, you might also like Why do most traders fail. Also, did you know that Breakout trading strategy is one strategy that can be used for trading cryptos, stocks, options, and other derivatives and gives you the best risk-reward ratio (RRR) for the trades placed.

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