If you want to make any decent income from the global markets, then price action trading is one of the go-to methods to achieve this.
Simply put, you need to understand price fluctuations thoroughly to be able to identify which assets are likely to appreciate or depreciate, and through the process, generate some decent revenues.
Price action cuts across the trading sphere, whereby it incorporates a host of other trading tools to yield success. Therefore, these instruments are a vital aspect of any price action trading strategy.
So strap in and get ready for an eye-opening lesson into price action trading. This article will consider the basics of exploiting the ever-changing cost of trading instruments. Further on, you should get a definitive answer as to whether price action trading is worth the trouble.
Understanding Price action
Price action, in its primary sense, describes the frequent change in the value of trading assets. This technique tells traders the story behind how prices vary over time in a market.
You need to understand how markets behave for you want to earn something from the market. For instance, significant price drops favor buying simply because everything has become cheaper.
Before engaging in a trade, market players are often involved in a host of various analyses more so concerning price changes in the recent past. These figures give a good indication of where the market is headed.
The price action adds to the information traders already have on the markets may either further their beliefs about a particular trading decision or dismiss them.
Price action is King simply because trading revolves around price changes. Profits are generally realized from the difference in the highest and lowest price hence its significance in any trading endeavor.
One of the simplest ways of analyzing trading charts is by looking at the price curve, or simply, price action. You don’t need any fancy indicators or tools to tell you that a curve is declining. Nevertheless, additional tools like support and resistance, candlesticks, trendlines, and basic patterns, help to magnify the prevailing trend.
Now since price action works across different markets, it can be used in trading securities, bonds, FX, commodities, etc.
Price Action And Trading Charts
Price action is visible on any trading chart. The line that runs across your screen is the price of an asset, and its oscillations stem from its varying market value.
A lot of the charting techniques in use today were developed a long time ago. Traders developed the classical head and shoulders pattern from which you can draw a profit. Furthermore, additional technical analysis trends also took root such as ascending and descending triangles and the rising and falling wedges.
Back then, however, the lack of computers and computer programs forced traders to do all the drawing by hand. It wasn’t easy, and this made trading less appealing to newbies.
Today, a lot has changed, especially in the tech scene. Computers are mainstream tools used in virtually every major global sector. In trading, the use of computers has fundamentally changed how we trade.
The 21st-century trader doesn’t need to worry about doing anything by hand since financial markets today are dominated by Artificial Intelligence. The machines account for nearly half of all market trades and during high volatility sessions, this figure rises to 90%. This should give you a better picture of how much human ingenuity has contributed to global markets.
The result of this evolution is that price action trading is a lot easier today than it was several decades ago. Tiding algorithms are all the rage today, and these critical assets help translate price action into trading signals which you can incorporate in your decision-making process.
The Basics Of Trading Price Action – Technical Analysis
Price action is visible on any trading chart, but you need more than just a pair of eyes to know what the market is undergoing. For starters, technical analysis is a crucial facet of trading on price action. Therefore, the first step to grasping price action trading is understanding technical analysis.
There is no escaping technical analysis and more so if you trade short-term timeframes. On the other hand, fundamental analysis usually involves studying the news releases and is a favorite of traders who are out to make money in long=term timeframes.
A technical analysis revolves around asset prices and price charts. Such a study aims to determine the direction of flow for the price. After doing so, traders should be able to decide their next move.
Technical analysis follows a pair of rules, one of which is the price we are viewing on a chart has already accounted for the fundamental data available. This way, we therefore do not need to consider vital information.
Also, technical analysis maintains that price follows a trend that is driven by momentum. Momentum holds the prevailing trend as it heads in a specific direction until a far greater force emerges from the other end.
Technical Analysis Tools
To succeed in technical analysis, we need to be armed with a set of tools that make it easier to interpret what is on the price chart. Without them, the price lines would simply be so, just lines running across a blank screen.
Trendlines
These are lines drawn on a price chart to connect a series of prices. They are used to indicate a prevailing trend or a range of price movements which a trader can easily pick out as they study the price chart.
Trendlines link the lowest point on a downward moving price to the highest end of the ascending price line. As the cost of an asset trend upwards, the trend line also rises. Drawing trendlines on individual swing highs enables traders to get a better picture of the prevailing market pattern. Such as its angle of ascent. This way, you can decipher critical factors like the strength of the price move and ultimately the trend.
Price bands
Price bands are, in a general sense, the boundaries that surround any market. Trading usually doesn’t happen outside these borders and with good reason. A seller will typically indicate the upper and lower cost. In between, buyers can place their orders through the price range.
The upper and lower limits guide buyers when buying an asset. The use of price bands is quite widespread in IPOs as a company decides to issue its shares to the public.
Price bands act as controls to trading whereby, the ability to trade is restricted while outside the price bands. They are set to control buying and selling of shares and other assets en masse.
Support and resistance
Support and resistance are, without a doubt, key to the success of technical analysis. They are levels on a chart where the price rarely crosses. These levels often tend to act as barriers to the movement of price.
At the support level, the prevailing downtrend slows down and eventually grinds to a halt. Usually, a drop in the price of an asset drives up demand for the same. This demand creates a level of support.
On the other hand, resistance forms on the rally following a surge in demand and ultimately the price of the asset. Support stems from an increase in the demand from buyers, whereas resistance occurs as sellers offload their assets.
Steps To Trading Using Price Action
Usually, the first step to price action trading involves identifying a trend. Traders rely on trends to make money. This pattern reveals where the price is headed and as such, traders can get a head start to be able to cash in later on.
When trading, the gurus often utilize several tools to recognize the prevailing market trend, find out the best entry and exit points, stop-loss placement etc. relying on a single strategy while trading is often counterproductive. Most times, the success rates lie on the lower spectrum.
1. Identify The Current Market Situation
Simply watch the overall market environment for bearish or bullish leanings. Keep in mind the general trend as well. Identifying a pattern is a critical skill all traders possess as they can understand the market better without having to look at the figures.
2. Identify Trading Opportunities Within The Situation
Once you have the scenario set, you can now begin your search for trading opportunities. The selection process is not uniform across the trading world. Various traders have varying opinions on the markets and this is a subjective decision despite having the same prerequisites hence the significance of trading experience in the field.
For example, a slightly receding asset price could point to a pair of scenarios. In the first, a further drop could occur following a mean reversion, or the price will move up and form a double top. Even with identical information, the final trading decision is made by the trader.
What Makes Price Action Unique?
For starters, price action focuses solely on the prevailing price of an asset. A lot of traders regularly check on the cost of an asset to determine whether to enter or exit a trade.
Price action traders, on the other hand, solely rely on the price to guide their trading. These guys are particularly interested in what’s happening on the right side of the chart; this is where the most recent data appears.
Price action trading is all about living in the present. The further you move from your analysis, the less responsive your price levels will be. The newest data is by far the most reliable, and the market responds best to it. Therefore, many traders dismiss older levels and work to construct new ones.
Shortcomings
Price action trading is sometimes a waiting game. For starters, traders need the price of an asset to manifest for them to draw any conclusion from the trade. On the other hand, if you rely on fundamental information to trade, you don’t have to wait for the market to be opened.
World events cause significant shifts in the value of stocks, currencies, commodities, amongst other traded items. Traders utilizing fundamental data need not wait for the market to open to decide on which trade to follow.
Moreover, once the price gets going, you still need to confirm the trend. Patience is a virtue, but in trading shorter timeframes, it may cause you to lose out on several trades as you wait for the perfect move.
Support and resistance levels assist when it comes to trend confirmation owing to the behavior of the price in these regions. Usually, prices fluctuate with respect to these areas. Support comes about as the value of an asset goes down while the increasing cost of purchase necessitates resistance.
However, a trending market doesn’t follow these ‘rules.’ The strong momentum drives the price way beyond the support and resistance levels. Prices rarely return to previous regions of support and resistance.
The role of market psychology in Price Action trading
Market psychology plays a crucial role in Price Action trading, as the behavior of market participants can have a significant impact on market price movements. The Price Action Indicator provides traders with a visual representation of market price movements and can help traders understand the underlying emotions and behaviors that drive market trends.
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Fear and greed: Fear and greed are two of the most powerful emotions that drive market price movements. When market participants are driven by fear, they may sell assets, leading to a downward trend in market prices. On the other hand, when market participants are driven by greed, they may buy assets, leading to an upward trend in market prices. By understanding the role of fear and greed in market psychology, traders can make informed trading decisions.
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Market sentiment: Market sentiment refers to the overall mood or attitude of market participants. Market sentiment can be positive or negative, and it can be influenced by a variety of factors, including economic data, political events, and public opinion. By using the Price Action Indicator to understand market sentiment, traders can make informed trading decisions based on the overall mood of the market.
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Mass psychology: Mass psychology refers to the behavior of a large group of market participants. This can include retail traders, institutional investors, and other market participants. By using the Price Action Indicator to understand mass psychology, traders can make informed trading decisions based on the behavior of the larger market.
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Trend followers: Trend followers are traders who follow market trends and enter trades based on the direction of the trend. By using the Price Action Indicator to identify market trends, traders can follow market trends and make informed trading decisions.
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Contrarian traders: Contrarian traders are traders who go against the trend and enter trades in the opposite direction of the trend. By using the Price Action Indicator to identify market trends, traders can make informed decisions about when to enter trades as a contrarian trader.
Market psychology plays a crucial role in Price Action trading, as the behavior of market participants can have a significant impact on market price movements. By using the Price Action Indicator to understand market psychology, traders can make informed trading decisions based on the underlying emotions and behaviors that drive market trends. This knowledge can help traders improve their trading results and increase their chances of success.
The importance of risk management in Price Action trading
Risk management is a critical component of successful trading, and it is especially important in Price Action trading. The Price Action Indicator provides traders with a visual representation of market price movements and can help traders identify market trends and price patterns. However, it is important to manage risk effectively to ensure long-term success in trading.
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Setting stop-losses: One of the most effective ways to manage risk in Price Action trading is to set stop-losses. Stop-losses are predetermined levels at which traders will close their trades if the market moves against them. By setting stop-losses, traders can limit their potential losses and manage risk effectively.
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Position sizing: Position sizing is the process of determining the size of a trade based on the amount of capital a trader is willing to risk. By using proper position sizing, traders can manage risk effectively and ensure that they do not expose themselves to excessive risk.
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Diversification: Diversification is the process of spreading investment capital across multiple assets to reduce risk. By diversifying their investment portfolio, traders can reduce their exposure to any one particular asset and manage risk effectively.
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Proper trade selection: Proper trade selection is also important in managing risk in Price Action trading. Traders should only enter trades that have a high probability of success and should avoid entering trades that have a high degree of risk. By making informed trade decisions, traders can manage risk effectively and increase their chances of success.
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Emotional control: Emotional control is also important in managing risk in Price Action trading. Traders should avoid making impulsive decisions based on emotions and should instead make informed decisions based on market trends and price patterns. By maintaining emotional control, traders can manage risk effectively and increase their chances of success.
In conclusion, risk management is a critical component of successful Price Action trading. By setting stop-losses, using proper position sizing, diversifying their investment portfolio, making informed trade decisions, and maintaining emotional control, traders can manage risk effectively and increase their chances of success in trading. By taking the time to implement a comprehensive risk management strategy, traders can ensure long-term success in Price Action trading.
The Bottom-Line: Does It Work?
Let’s start by saying that all trading strategies rarely work 100%. Following the price action of an asset can guarantee successful trades. However, it is mostly suited to short-term investments.
Traders often argue that the market doesn’t follow a pre-determined pattern along its course. Its randomized nature makes prediction difficult – but not impossible.
Traders use an asset’s recent price history to pick out possible trading opportunities. Additionally, coupled with a raft of technical trading tools and their interpretation of all this information, traders are then able to arrive at their preferred trading decision.
Price action trading enjoys great popularity in the trading scene because it cuts across different markets. Everything subject to trading always has a price attached to it. How the items’ price action performs will then determine whether a trader will realize a profit or loss from the venture.
Additionally, price action trading is popular among beginners because it provides the perfect platform to learn the ins-and-outs of trading. Trading is hardly easy, and most newbie participants struggle to get a grasp of all the data involved.
Unlike large financial institutions who have teams of analysts working to decipher fundamental and technical data, standalone actors rely wholly on their capabilities. Herein is where technical analysis works in our favor.
Firms with significant trading positions are sometimes unable to hold them as individual participants. Technical analysis drawn from price action helps us to identify entry points into the market that were entirely missed by those relying on fundamental data.
Moreover, trading requires us to maximize our advantage to gain a better position in the market. Failure to do so will inevitably lead to lossmaking and is generally a waste of time.
While price action trading can guarantee a degree of success, you still need to combine the method with a host of technical indicators. They will add on to your conviction in the trading decision you fall upon.