Price action trading is one of the most popular and straightforward methods active traders use. It benefits from a high degree of transparency, appealing to professional traders and retail investors.
The approach also helps traders to minimise losses during periods of choppy or sideways market conditions while allowing them to profit when prices trend in their favour.
Since demand drives the price movement towards equilibrium, studying how supply and demand affect market direction can be extremely useful for anticipating trends. This trading strategy does not rely on complicated charting techniques or algorithms but considers essential elements easy to follow.
KeyPoints
Price action trading is a strategy that focuses on the price movement of security rather than indicators or economic news releases.
The goal is to read and interpret the price movements to make informed trading decisions.
This type of trading is often used by traders who want to keep things simple and effective in sideways or choppy markets.
Price action traders use candlestick charts and patterns to identify potential trade setups.
There are no guarantees when trading, and price action traders can still lose money even if they have a good understanding of how the market works.
There are many different price action trading strategies, but all share some common elements.
Price action traders typically use candlesticks to spot areas of support and resistance, as well as chart patterns that give a potential buy or sell signal when they form.
This type of trading requires the trader to understand how price moves effectively.
Strengths
Simplicity
There are no indicators in this kind of strategy, ensuring that a trader can focus on one less thing.
Transparency
Since all information is drawn from the price movement itself, traders can easily see what has worked in the past and build upon it.
Low Barrier to Entry
As long as you have a clear chart with candlesticks and some basic knowledge about supply and demand, you can start trading using a price action strategy.
Timely Entries and Exits
Price action traders quickly enter and exit trades, often taking advantage of small price movements.
Weaknesses
Slower Response in Choppy Markets
Because this type of trading is based purely on price movement, it can not be easy to trade when the market is choppy or moving sideways.
No Indicators
As mentioned earlier, indicators are not used in this strategy, leading to missed opportunities or incorrect trade signals.
Subjective Interpretation
The interpretation of price movement can be a personal exercise, and two traders may see things quite differently.
The Basics
While there is no guarantee of success, those who can master the basics have the potential to become very successful traders.
Low Capital Requirement
A significant advantage of price action trading is that it requires very little capital to begin trading – next to nothing for some techniques.
One can even trade with a virtual account until they feel ready to risk their own money and still use and understand the same techniques as those traders who do have large amounts of money available.
Flexibility
Price action trading involves fewer hard-and-fast rules than many other forms of technical analysis, so it allows one’s intuition and judgement more room for expression than, say, Fibonacci trading or Elliott Wave analysis.
No Outside Opinion Necessary
Since price action trading is based on the actual price movement and not on any indicators, there is no need to rely on anyone else’s opinion to make a trade decision – including so-called experts.
Increased Consistency
One of the benefits of price action trading is that it relies purely on candlestick formations and chart patterns. It is more consistent than other forms of technical analysis, which use indicators that can give false signals.
Easier To Understand
As mentioned before, price action trading does not involve any complicated calculations or indicators, making it far easier to learn and understand than most other forms of technical analysis.
Can Be Applied To Other Areas Of Trading
Because price action trading is based on the actual price movement, it can easily be applied to stocks, commodities, Forex, etc., unlike some other forms of technical analysis, which are more specifically limited to one market only.
High Probability Trade Entry
Price action allows traders to enter into trades with very high probabilities of winning. It filters out all the false signals indicators when they move in the wrong directions or through wrong patterns.
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Jason is the Marketing Manager at a local advertising company in Australia. He moved to Australia 10 years back for his passion for advertising. Jason recently joined BFA as a volunteer writer and contributes by sharing his valuable experience and knowledge.
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