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What is Price Action ?
When we talk about the term 'Price Action', we mean about price movement of a security, stock, commodity or any other asset that occurs in a given period of time.
Price Action Trading is to show the discipline in making all trading decisions from a stripped down or nacked price chart. Price action trading is the act of studying, reading and interpreting the price movement of any financial asset over time, which involves the use of raw price charts to trade with no indicators.
In price action methodology it is believed that price never tells a lie. In fact, price action methodology is the main base with the help of which technical analysis can be conducted easily. All technical analysis tools like chart patterns, moving averages are derived and calculated from price action methodology. In price action methodology, only past and current price movement is given importance to predict the future price movement.
Price is determined by supply and demand factors. There are so many factors affecting supply and demand. It is very difficult to analyze all these factors affecting supply and demand at a given point of time and take trading decision. All financial markets generate data about the price movements in a market over various period of time, and this data is displayed on price charts. Price reflects all these factors in one way or the other. Price charts reflect the beliefs and actions of all participants trading in market during a specified period of time and these beliefs are portrayed on price charts in the form of "Price Action". Hence it is easy to study only price behavior and generate entry and exit signals for trade.
There is a famous saying in Gujarati in relation to price action, "Bhav Bhagavan Chhe" which means "Price is God". And this price makes the Market Supreme.
Price action trader gives much weightage to "what has happened" and "what is happening" in the market rather than thinking about "why it is happening?" He is concerned only with past and current price data (like Open, High, Low, Close) and uses Bar charts or candlestick charts.
As said earlier, price action trading is purely based on the concept of demand and supply. Thus price action trading ignores the fundamental analysis of a security.
If the price of any security or asset goes up, it simply indicates that there are more buyers and less sellers, and buyers are ready to pay high price to acquire that security or asset and thereby push the price higher and higher. In other words, if price goes up, demand is higher than supply.
Similarly if the price of any security or asset goes down, it simply indicates that there are more sellers and less buyers, and sellers are ready to get even low price to part with that security or asset and thereby push the price lower and lower. In other words, if price goes down, supply is higher than demand.
Chart -1
Chart -2
In price action trading, a trader is looking and reading only raw price movements and its become easy for him to analyze and candlestick chart patterns. Those who are beginner and trying to learn technical analysis should start learning price action first.
If you really look at both these charts and think which one is easier to analyze and trade from, the answer should be pretty clear. In other words, when a trader adds indicators to his chart just to produce more variables for him, he is not gaining any insight or predictive clues and even if he can, those clues more or less create psychological confusion in taking trading decisions.
This doesn't mean that a trader should not use technical indicators. He should use some of indicators along with price action data which will give him additional confirmation to his analysis. All the indicators in Chart - 2 are derived from the underlying price action.
Price action trading is based on :
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Support and Resistance
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PatternsCandlesticks and Chart
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Trends
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Market Reaction i.e. Price Acceptance & Price Rejection
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Structure of Market
Advantages of Price Action Trading
Easy to understand: It is easy to watch only price data on the charts and hence become easy to identify signals for trading.
Helps to trade in real time: Price action gives the edge in real time frame because it does not include technical indicators which are lagging in nature because they are derived using past price data.
Simple to trade: Plotting of support and resistance becomes easy and simple in price action trading. Using a bunch of indicators in trading creates confusion so also makes the trader indecisive.
Back test: In case of price action, there is study of past price movement and hence is always supported by back testing. This also help in creating confidence in trader for his trade.
Identify entry & exit levels: In price action trading, its become easier to watch demand and supply zones with the help of support and resistance concepts. This helps trader in identifying entry and exit levels for his trades.
Disadvantages of Price Action Trading
Contradictory signals: Price action often gives contradictory signals in different time frames, and this may create confusion in decision making.
False signals : Price action does not give correct signals for ever. In fact, no setup or no strategy gives correct signals all the time. Hence one has be ready to face and learn to stay with false signals.
Few opportunities : Price action trading is a waiting game and requires patience. In price action trading, a trader gets less number of opportunities of trading as compared to trading based on indicators.
So long as trading in stock market or any other financial market is concerned, one has to remember -
"There is no magic formula for being on top".
With back testing and leaning, a trader should find out which system and style is the best and comfortable for him for trading purpose. He should not think to become a billionaire overnight.
Price is God
Market is Supreme
Accept Martket As It Is
Everything that affects a market and makes it move, from news, to economic reports, to big players like hedge funds and banks, is reflected via the raw price action on a price chart. Thus, when you try analyzing all variables external to the price action of a market, you are doing something that is unnecessary, a waste of time and that makes the entire trading process far more complicated than it needs to be.
The age old debate of Fundamental vs. Technical analysis is one.... that will probably never end. Fundamental traders trade solely depending on news and economic data, or “fundamentals”, because they believe that this information helps to make the best trading decisions. Whereas, technical analysis traders make their trading decisions on the basis price charts. Price action traders use only past and current price data for trading purposes.
The primary reason for recommendation of price action trading is simply because all the fundamental variables that affect a market, from any news event (war, weather, politics, management etc.) to economic reports, are all ultimately reflected by price movement (price action) on a raw / ‘naked’ price chart. Thus, in my opinion, and in the opinion of many other successful traders, analyzing fundamental data is simply a distraction and a waste of time. It’s a waste of time because you can get all the information you need about a market simply by analyzing its price action, as the price action reflects all this fundamental data in one way or the other.
As a trader, we are simply trying to take advantage of price movements in the market, so it only makes sense to analyze the actual price action, rather than trying to analyze variables that will eventually lead to price action.
Price action filters all market data and provides a clear picture of what is happening in a market. If you try analyzing all the fundamental variables that can influence a market each day, you will drive yourself crazy. It really comes down to noise versus clarity. There’s a lot of ‘noise’ in the financial media about what a market ‘might’ do next if X,Y or Z happens, it all sounds very professional coming from the talking heads on T.V. and the internet, but at the end of the day, nothing they say really matters. This is because, all that really matters is what the charts show us via the price action.
Price Action - Keep it Simple
Trading is something many people over complicate by clouding their charts with numerous technical patterns and indicators and generally over analyzing a market. But price action traders uss the phrase "Keep It Simple Stupid".
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Price action trading is sometimes referred to as 'clean chart trading', or 'nacked trading' or 'raw trading' using only past and current price movements.
The simple stripped-down approach in price trading means there are no indicators on price charts and no economic events or news is used to take trading decisions. Price action traders believe that the price action reflects all the variables (news, events, economic data etc.) that influence the market and cause the price to move. The sole focus is on a market's price action. In this sense, price action trading is simpler to just analyze the market and trade, rather than trying to decipher and sort the many different variables affecting the market each day.
While studying price action trading on price charts, it is necessary to know certain terminology. To know more about such terminology, checkout Technical Analysis, Chart Patterns.
Please note that in studying price action the term 'candle' describes trading with candlestick charts, and in general the terms 'candle' and 'bar' are used often interchangeably.
Up Bar : An 'up bar' or 'bullish bar' is a bar with a higher high and higher low than the previous bar. Generally, the close is higher than then open in an up bar, but sometimes close may be lower than the open and still it can be termed as an up bar as shown by black bar in the chart. This can happen in aggressive trends where the high and low of the black bar are still above the high and low of the previous bar. Up bars indicate that buyers or bulls are in control of the market.
Down Bar : A 'down bar' or 'bearish bar' is a bar with a lower high and lower low than the previous bar. Generally the close is lower that the open in an down bar. Down bars indicate that sellers or bears are in control of the market.
Inside Bar : An 'inside bar' is also sometimes called a 'narrow range bar'. An inside bar is a bar with high that is lower than then previous bar's high and with a low that is higher than the previous bar's low. The previous bar is also referred to as the 'mother bar'. Thus inside bar is contained completely within the high and low range of the mother bar. Inside bars usually represent indecisive market situation where neither the buyers nor sellers are in control of the market.
Pin Bar : A 'pin bar' is a bar with a long upper or lower 'tail' or 'shadow' and a much smaller 'body' or 'real body' which exists nearer to one end of the bar. Long upper or lower tail and small real body show the rejection of the price and reversal in the market. A general thumb rule for pin bar is that its tail (either upper or lower) should be 2/3rd or more of the total bar. The end point opposite the tail is referred to as the 'nose'.
Conclusion
Experienced traders will likely understand better what I am talking about when I say that “all market variables are filtered through and reflected on a naked price chart”, but as a beginner it can be a hard pill to swallow at first. However, based on my experiences in the market, I am 100% confidence that following news and other fundamental data will eventually lead you to blow out your trading account. My experiences have shown me that a trader should strive to analyze and trade from a limited amount of data and use that data (price action) to make their trading decisions. If you let everything and anything influence your trading decisions, you will just be a gambler with no real strategy or trade edge.
I cannot guarantee that you will make money in the market by trading price action, but I can guarantee that doing so will give you the best possible chance, if you trade with discipline and patience. Trading with price action will remove a lot of the mental confusion from your trading and will give you clarity as to what your trading method is and what the market *might* do next.
Price Action Trading Strategies
In price action trading, traders use raw price data to analyze and anticipate fure price movement of financial markets. Price action trading strategy is based on logic and simplicity, removing all external noise including news, economics and fundamental data.
The concept of 'support & resistance' is the foundation in technical analysis of any financial asset. Many technical techniques......
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An 'inside bar' pattern is a two-bar pattern in which inside bar is smaller and within the high low range of the previous bar.......
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A pin bar pattern consists of one price bar, typically a candlestick bar, which represents a sharp reversal and rejection of price......
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Pin bar is a price action strategy showing rejecion of price and indicating a potential reversal. An inside bar shows consolidation and.....
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As the name suggests, it has a false breakout from an inside bar pattern. It is also known as 'fakey pattern......
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