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What is Price Action
If you come across a group of traders or investors it is not very unusual to hear the word “Price Action”. Slowly it is gaining popularity due to its simplicity and usefulness. Price action trading is a method of trading that uses technical analysis to predict price movement.
The goal of this article is to give you an overview of what price action trading is and how it works. We’ll also cover some essential concepts that every trader should know before embarking on this exciting new area of investing!
What is Price Action Trading?
Price Action Trading is a form of technical analysis that focuses on price behavior, rather than on the fundamental reasons behind price movements. It’s considered to be one of the most powerful tools in technical analysis and can help you make money by identifying patterns that occur over time and then acting upon them.
Origin of Price Action Trading
Price action trading is based on price movements. The word “action” refers to a type of movement in the market. For example, if you see a stock rising from Rs. 100 to Rs. 120 and then falling back down again, that would be an example of price action.
Markets for Price Action Trading
Price action methods can be used in any market where liquidity is not an issue. It can be stocks, derivatives, commodities, Forex, Crypto, etc.
Essential Trading Concepts
The term ‘price action’ refers to the movement of a security’s price over a period of time. In other words, it’s simply the study of price movement in the market.
There are lots of technical analysis tools available. We know them as indicators on a chart.
What do those indicators do?
They derive their values from the price.
So, the question is, why not study the price itself?
That is what price action traders do. They anticipate the next movement of the market analyzing the current price behavior.
Price action traders believe the price is supreme. They consider only two important elements. Price and Time on a clean chart. It is also called a naked chart because there are no indicators to cloud the mind of a trader.
If prices are moving up, it means buyers control the market; whereas falling prices indicate sellers are pulling the strings.
Price Action Trading is simple. It involved just a two-step process. First, identify the current market condition by observing the price of the security. Then, find trading opportunities.
As discussed earlier, price action trading is based on a naked price chart without indicators like MACD, RSI, etc.
A price action trader only looks for past and current price data which includes open, High, Low and Close prices. Therefore, they primarily use candlestick charts.
Here are two charts. One is naked and the other is loaded with indicators.
Comment below which chart you like.
I’m sure you like the first one. Because it is clean and easy to the eyes while the second one is confusing and messy.
Price Action trading doesn’t count on fundamental factors. It looks at the historical prices.
What differentiates price action from other forms of technical analysis?
The answer is, it focuses on the relationship of a market’s current price to its past or recent prices rather than values derived by a mathematical formula.
Since, price action trading is a pure form of technical analysis, it does not include indicators. Traders are only concerned with the price data that the market generates.
Price action uses charts to identify support and resistance levels. It’s an essential component of any trader’s arsenal, and it can be used to make better decisions than traditional technical indicators.
Price action works by identifying periods when prices have held steady or declined, then analyzing those moments later in the same direction as they moved up or down. If you’re looking for a trade, this gives you an idea of where the market might go next—and if it turns out right (i.e., if your prediction was correct), then you’ve made money!
Beyond the lines
Price Action Trading is a long-term trading strategy. It is sufficient without technical indicators. But you can use any technical indicator along with price action that suits your trading style.