:max_bytes(150000):strip_icc()/PriceActionTradingStrategies-0d426307fc12487d9e0044c7570bb0d9.jpg "An Introduction to Price Action Trading Strategies")
Price action describes the characteristics of a security’s price movements. This movement is often analyzed in relation to price changes in the recent past. In simple terms, price action trading is a technique that allows a trader to read the market and make subjective trading decisions based on recent and actual price movements, rather than relying solely on technical indicators.
Since it ignores the fundamental analysis factors and focuses more on recent and past price movements, price action trading strategy depends on technical analysis tools.
Key takeaways
Many day traders focus on price action trading strategies to quickly generate a profit over a short period of time. Traders using a price action trading strategy take positions according to their subjective and technical analysis. Various tools and software platforms can be used to trade price action.
Tools used for price action trading
Since price action trading is related to recent historical data and past price movements, all technical indicators, such as charts, trend lines, price bands, swing highs and lows, technical levels (of support, resistance and consolidation), etc. are taken into account. account according to the trader’s choice and strategy.
The tools and patterns observed by the trader can be simple price bars, price bands, breakouts and trend lines, or they can be complex combinations that include candlesticks, volatility and channels.
The price action trader’s psychological and behavioral interpretations, and their subsequent actions, also constitute an important aspect of price action trading.
For example, suppose a trader has personally set a level of 600 for a stock. If a stock that has been hovering near 580 crosses the established level of 600, the trader assumes a further upward move and takes a long position.
Other traders may have an opposite view – once the stock reaches 600, they assume a price reversal and therefore take a short position.
No two traders will interpret a particular price action in the same way. Each trader has their own interpretation, self-defined rules and understanding of behavior. Contrast this with a technical analysis scenario that will produce similar behavior and action from various traders, such as a stock with a 15-day moving average (DMA) crossing over 50 DMA, leading traders to take a long take position.
Essentially, price action trading is a systematic trading strategy, aided by technical analysis tools and recent price history, where traders are free to make their own decisions within a given scenario. Price action traders take trading positions according to their subjective analysis, behavioral assumptions and psychological state.
Who Uses Price Action Trading?
Since price action trading is an approach to price predictions and speculation, it is used by retail traders, speculators, arbitrageurs, and even trading firms that employ traders. Price action trading can be used with a wide range of securities, including stocks, bonds, forex, commodities and derivatives.
Price Action Trading Steps
Most experienced traders who follow price action trading keep several options for recognizing trading patterns, entry and exit levels, stop losses and related observations. Having only one strategy for a stock may not provide sufficient trading opportunities. Most trades involve a two-step process:
Identifying a scenario: Traders identify a scenario, such as a stock price entering a bull phase or a bear phase. Identifying trading opportunities within the scenario: For example, once a stock is in a bull run, it is likely to either overshoot or pull back. Guessing which path the stock price will take is a subjective choice that will vary from one trader to another, even given the same identical scenario.
Here are some examples. Suppose a stock reaches its peak (in the trader’s view) and then pulls back to a slightly lower level. With this scenario met, the trader can then decide if they think the stock will form a double top to go higher, or if it will further decline towards a mean reversion.
The trader sets a floor and ceiling for a specific stock price based on the assumption of low volatility and no breakouts. If the share price lies in this range, a scenario is met. The trader can take positions assuming that the established floor and ceiling will act as support and resistance levels, or they can take an alternative view that the stock will break out in either direction.
When a defined breakout scenario is met, trading opportunity exists in terms of breakout continuation (going further in the same direction) or retracement (returning to the past level).
Price action trading is now assisted by technical analysis tools, but the final trade call is dependent on the individual trader. It offers flexibility instead of enforcing a strict set of rules to be followed.
The popularity of Price Action Trading
Price action trading is better suited for short to medium term trades with limited profit instead of long term investments.
Most traders believe that the market follows a random pattern and that there is no clear, systematic way to define a strategy that will always work. By combining technical analysis tools with recent price history to identify trading opportunities based on the trader’s own interpretation, price action trading has gained much support in the trading community.
Advantages of price action trading include:
Most importantly, the trader feels in control as the strategy allows them to decide on their actions instead of blindly following a set of rules.
What does price action mean?
Price action refers to the pattern or character of how the price of a security behaves, typically in the short term. Price action can be analyzed when plotted graphically over time, often in the form of a line chart or candlestick chart.
What does price action tell you?
Technical analysts look at price action on charts to look for patterns or indicators that can help predict how a security will behave in the future and to time entry and exit points of trades. Technical tools such as moving averages and oscillators are derived from price action and projected into the future to inform traders.
What are some limitations to using price action?
Price action is often subjective, and different traders may interpret the same chart or price history differently, leading to different decisions. Another limitation of price action trading is that past price action is not always a valid predictor of future outcomes. As a result, technical traders must use a range of tools to confirm indicators and be prepared to exit trades quickly if their predictions turn out to be wrong.
The Bottom Line
Many theories and strategies are available on price action trading, many of which claim high success rates. However, traders should be aware of survivorship bias, as only success stories make news. Although price action trading does have the potential to make good profits, it is up to the individual trader to clearly understand, test, choose, decide and act on what meets their requirements for the best possible profit opportunities.
If you’re interested in day trading, Investopedia’s Become a Day Trader Course offers a comprehensive overview of the subject from an experienced Wall Street trader. You’ll learn proven trading strategies, risk management techniques and much more in over five hours of on-demand video, exercises and interactive content.
Disclaimer for Uncirculars, with a Touch of Personality:
While we love diving into the exciting world of crypto here at Uncirculars, remember that this post, and all our content, is purely for your information and exploration. Think of it as your crypto compass, pointing you in the right direction to do your own research and make informed decisions.
No legal, tax, investment, or financial advice should be inferred from these pixels. We’re not fortune tellers or stockbrokers, just passionate crypto enthusiasts sharing our knowledge.
And just like that rollercoaster ride in your favorite DeFi protocol, past performance isn’t a guarantee of future thrills. The value of crypto assets can be as unpredictable as a moon landing, so buckle up and do your due diligence before taking the plunge.
Ultimately, any crypto adventure you embark on is yours alone. We’re just happy to be your crypto companion, cheering you on from the sidelines (and maybe sharing some snacks along the way). So research, explore, and remember, with a little knowledge and a lot of curiosity, you can navigate the crypto cosmos like a pro!
UnCirculars – Cutting through the noise, delivering unbiased crypto news
:max_bytes(150000):strip_icc()/PriceActionTradingStrategies-0d426307fc12487d9e0044c7570bb0d9.jpg&description=An%20Introduction%20to%20Price%20Action%20Trading%20Strategies){kind=link}