Price action is a term for how the price of a product moves and what it means. This change is often looked at in light of how prices have changed in the recent past. In simple terms, price action is a trading method that lets a trader read the market and make subjective trading choices based on recent and real price moves, rather than counting solely on technical signs.
The price action trading strategy relies on technical analysis tools because it doesn’t look at basic analysis factors and instead looks at how prices have moved recently and in the past.
KEY TAKEAWAYS
- Many day traders focus on trading methods based on price movement so they can make money quickly in a short amount of time.
- For example, they might look for a simple exit from the session’s high, start a long trade, and use strict money management tactics to make a profit.
- Price action trading can be done with a number of tools and software systems.
Since price action trading is based on recent historical data and past price movements, all technical analysis tools like charts, trend lines, price bands, high and low swings, technical levels (of support, resistance, and consolidation), etc. are taken into account based on the trader’s choice and strategy.
The tools and patterns that a trader looks for can be as easy as price bars, price bands, break-outs, and trend lines, or as complicated as candlesticks, volatility, channels, etc.
An important part of price action trades is how the seller interprets and acts on psychological and behavioral information.
No two traders will look at the same price movement in the same way. Each trader will have their own way of looking at it, their own set of rules, and a different way of acting when they look at it. On the other hand, when traders look at a fundamental analysis situation, like 15 DMA moving over 50 DMA, they will all act the same way (take a long position).
Price action trading is a structured way to trade that uses basic analysis tools and recent price history. Traders are free to make their own choices within a given scenario to take trading positions based on how they feel, how they act, and how they think.
Who trades based on price action?
Price action trading is used by individual traders, investors, arbitrageurs, and even trading firms that hire traders because it is a way to guess prices and make bets. It can be used on many different types of products, such as stocks, bonds, foreign exchange, commodities, swaps, etc.
How to Trade Based on Price Action
Most expert traders who use price action trading have more than one way to spot trading trends, entry and exit points, stop-loss levels, and other notes. If you only have one plan for one or more stocks, you might not have enough buying chances. Most situations happen in two steps:
Identifying a situation, such as a stock price going through a bull/bear phase, channel range, breakout, etc.
Identifying trading chances in the scenario: Like, once a stock is on a bull run, does it tend to (a) go too high or (b) go down? This is a completely personal choice that can be different from one seller to the next, even if they are all in the same situation.
Here are just a few:
From the trader’s point of view, a stock hits its high and then falls to a slightly lower level. The dealer can then decide if he or she thinks it will make a double top and go up, or if it will drop more after reverting to the mean.
The investor sets a floor and a cap for a stock price based on the idea that it won’t change much and won’t break out of its range. If the stock price stays in this range (the scenario is met), the investor can take positions based on the set floor and ceiling working as support and resistance levels, or they can take the opposite view that the stock will break out in either way.
When a specific breakout scenario is met, there is a chance to trade based on whether the breakout continues in the same way or pulls back (goes back to the previous level).
As you can see, technical analysis tools help price action trading a lot, but the final trading decision is up to the trader. This gives traders freedom instead of making them follow a strict set of rules.
Why trading based on price action is so popular
Price action trading works best for short- to medium-term trades with limited profits, not for long-term investing. Most traders think that the market moves in a random way and that there is no way to make a plan that will always work. Price action trading has a lot of support in the trading community because it lets traders use basic analysis tools and recent price history to find trade chances based on how they see the market.
Self-defined strategies give traders more freedom, they can be used with multiple asset classes, they are easy to use with any trading software, tools, or trading platforms, and any strategy can be easily tested on historical data. Most importantly, the buyers feel like they are in charge because the strategy lets them decide what to do instead of just simply following rules.
What does it mean when prices move?
Price movement is the way the price of a property or object moves or changes, usually in the short term. When price activity is drawn visually over time, like on a line chart or a candlestick chart, it can be studied.
What can you tell from the way prices move?
Technical analysts look at charts of price movement to find patterns or signs that can help them predict how an investment will act in the future and figure out when to buy and sell. Technical tools like moving averages and oscillators are based on the way prices move and try to predict what will happen next.
What are some things that Price Action can’t do?
Price movement is often a matter of opinion, and different traders can make different choices based on the same picture or price history. Another problem is that the way prices moved in the past is not always a good indicator of what will happen in the future. So, technical traders should use a variety of tools to check their indicators and be ready to quickly get out of deals if their plans turn out to be wrong.
In conclusion
Price action trading has a lot of theories and methods that claim to have high success rates. Traders should be aware of survivorship bias, which is the fact that only success stories make the news. There is a chance of getting a lot of money through trading. It is up to each investor to clearly understand, test, choose, decide, and act on what meets the standards for the best possible earning possibilities.
