“All economic data and world news that causes price movement within a market is ultimately reflected via price action on a market’s price chart.” – Nial Fuller
Intraday traders rely on technical analysis to make long or short bets on securities. Price action forms the basis of all technical analysis. Price action trading consists of analysing the history of a security’s price to make predictions on future movements. Technical analysis tools such as moving averages and advanced charting are derived from price action.
Here’s part 1 of our series on Price Action Trading.
1. What is Price Action Trading?
Traders use price action as a way to make sense of seemingly random price movements of securities. Price action uses charts to plot the price movement of a security over time, which helps traders detect patterns.
For example, a common pattern “breakout with a build-up” allows traders to take advantage of short stop-loss orders above a resistance level. If the price of a security breaks above the resistance level, there is a good chance that the security will experience sustained bullishness, and a trader may enter a buy order just above the resistance level.
There are many such patterns in price action trading. Essentially, the job of a price action trader is to identify these patterns and make their bets accordingly.
2. What are the Advantages of Following Price Action?
Price action is not just a technical tool. It is the idea behind all technical tools and indicators. Price action traders use this idea to make increasingly sophisticated tools to better predict the markets.
Most intraday traders almost exclusively use price action theory to chart resistance and support levels of securities. This allows them to predict when breakouts or consolidations might occur.
The beauty of price action trading is that fundamental news and events form a part of the history of the price of a security. Hence, price action covers almost every factor that decides the future price of a security.
3. What are the Shortcomings of Price Action?
While price action is the dominant idea behind which all technical analysis is based, it also has its limitations. This is because interpretations from price action data can be highly subjective. The same price chart can cause a price action trader to go long on a security, while another price action trader would go short.
Hence, traders should remember that there is no guaranteed way to predict the markets as they are inherently unpredictable. All you can do is use your best judgment and make informed decisions while trading.
The best way to think of price action trading is in terms of probability. You have a higher probability of making the right trades if you rely on price action rather than without
Price action trading has been around for a long time and modern intraday traders still rely on past prices to predict future prices. There are certain authoritative books written by highly experienced traders which can help you go further in your trading journey.
- Martin Pring on Price Patterns – Martin Pring
- Make Money with Price Action Trading – Sunil Gurjar
- The Ultimate Trading Guide – John Hill, George Pruitt, and Lundy Hill
- The Art and Science of Technical Analysis – Adam Grimes
- Price Action Trading Secrets – Rayner Tao
And if you’re one of those traders who relies on price action to place trades, you may want to explore PHI 1 for easy tracking of prices and chart patterns with 120+ technical indicators at your perusal.