Price action is a day trading method where traders base their trading decisions on price movements instead of indicators from technical analysis. Making decisions based on an asset’s price movements is the basis of this method. Traders that use it track the movements and base their trading on the actions that they deem most profitable. This trading method has different action strategies to offer, such as breakouts.
Most traders using price action do not use technical indicators. If you are part of the few that do, you shouldn’t give technical indicators much weight in your decision-making process. A price action trader only trusts the price and its movement as a reliable source of information. So if a stock price starts surging, it indicates that investors are buying.
The trader then assesses the price action based on historical charts, real-time information like velocity, magnitude and bids, and buying aggressiveness. While investors are concerned about returns and a corporation losing profitability over a substantial period, price action traders are concerned about prices during real-time trading.
Although favored by many traders, it is not a one-size-fits-all strategy, so you should practice before you start trading with real money.
How to assess price action
Price action trading involves analyzing impulse and corrective waves, commonly called trending waves and pullback waves. A trend progresses when the impulse waves are greater than the pullback waves. Traders observe the “swing lows” and “swing highs” to identify the trend direction. The price has higher swing highs and higher swing lows during an upward trend. The exact opposite characterizes the downward trend.
The trendlines’ peaks and troughs on a price chart flow between resistance and support lines. These price waves can also create patterns like:
- Triangles: price waves that get smaller and smaller.
- Ranges: equal size waves, both up and down.
- Expanding ranges: lower swing lows and higher swing highs.
Patterns and trends make up the price action trading’s fundamental building blocks. Traders also observe patterns on candlestick charts and supply and demand levels.
Pillars of the price action indicator
The following four pillars are critical in the price action trading strategy. By understanding these concepts and how they relate to each other, you will better grasp the price action method.
1. Flat Market
Generally, the market is in a flat trading range most of the time. It is rare for securities to trend in a single direction all day. Once you set your morning range within the first hour of trading, the remaining part of the day is characterized by a series of head fakes. If you can revisualize the charts more abstractly, you can quickly approximate the next move in a security.
Most traders also lose the most money in flat markets because their expectations and what the market can produce are not aligned. Whenever there is a tight range in the market, huge gains are unlikely. The best approach in such instances is to sell high and buy low.
Currently, these are the most popular kind of charting in trading. Line graphs, point and figure charts, and bar graphs had more popularity in the past. Of course, you can choose to use any charting method. There isn’t any hard line.
The main thing to keep in mind about these charts is that each candle relays information, and each cluster of candles is also used to send a message. When using candlesticks, traders have to think of the trading market in terms of layers.
3. Bearish trend
Most traders do not find bearish trends fun, and with good reason. This trend is the opposite of the bullish trend and is characterized by lower lows and lower highs. If you are trading in a bearish market, you might need to learn shorting. It is the selling of stocks that you don’t own. Familiarizing yourself with shorting as a new trader might be helpful in a bearish trend.
4. Bullish trend
A bullish trend is easy to identify on the chart. Most retail traders are familiar with its formation. This trend develops when a group of candlesticks stretches up and to the right. The vital aspect to watch out for is that as the stock upsurges to a new high, the resulting retracement shouldn’t overlap with the previous high. It ensures that the stock continues to trend and move in the right direction, i.e., higher highs and higher lows.
Price action trading techniques
The following are popular price action trading techniques that a trader can utilize:
- An outside bar
- Spring at support
- Long wick candles
- Inside bars following a breakout
The bottom line
Price action trading is powerful when selecting and trading high probability opportunities in the trading market. If you don’t already have one, open a trading demo account and try using some of these techniques today.