What is Price Action Trading?

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Price action trading is a technique where traders read the price movements and take positions based on current and actual price movements over time. They do not rely solely on technical indicators, like moving averages, oscillators, or pivots, derived from technical analysis.

If price action traders use technical indicators, they give them very little weightage when making trading decisions. They believe that the price and its movements can be the only trustworthy source of information. For example, if a rising stock price shows that investors are buying, the price action will be assessed based on the buying aggressiveness, velocity, historical, and real-time price bids and offers.

What is price action in the stock market?

Price action is the price movement of a financial asset over time and is a vital component in the analysis. If price action analysis indicates that the asset price is about to increase, traders might want to go long, and they might want to go short if the price declines.

After elaborating on ‘what is price action’, let us differentiate it from technical indicators.

What is the difference between Price Action, Technical Analysis & Indicators?

Technical analysis and indicators involve using numerous calculations to predict asset price movements. In contrast, price action uses only the asset price movements. Price action indicators trace trading activity on the chart. Seasoned traders can spot these indicators easily.

Best Price Action Trading Strategies

Price action traders can follow several strategies. A few of these are mentioned here:

  • Pin Bar

    Pin Bar is also known as the candlestick strategy. It denotes a sharp reversal and rejection of a certain price. This price action strategy is based on an assumption that the price movement will be in the opposite direction continually.

  • Inside Bar

    It is a two-bar strategy - inside and outside bars. The inside bar is smaller than the outer one (mother bar). Based on the size and position of the inside bar, traders determine if the price will increase or decrease.

  • Trend following breakout entry

    It involves tracking a major movement in the market with the assumption that a retracement will follow post a price spike. A market movement outside a defined support or resistance level is called a breakout. Traders take a long position if the stock price crosses the highest resistance level or a short position if the stock price moves below the support line.

  • Head and shoulders reversal trade

    It’s one of the most popular price action trading strategies. It helps traders choose an entry point, generally after the first shoulder (fall), and to set a stop loss generally after the second shoulder.

Benefits of Price Action in Trading

First, price action is about simplicity. Traders need not crowd the price chart with many technical indicators, like moving averages, pivot points, etc. A complex approach might cause stress.

Second, trading decisions based on price action allow traders to trade in real-time, following market movements. It leads to clarity that helps understand what exactly is happening in the market. You can take a position with confidence.

Third, time frames are significant in price action trading. Most traders prefer daily and weekly time frames depending on their preference.

Fourth, signals created by price action are easy to catch. You need not be a master in the field to understand price action.

Conclusion

Price action is a simple trading strategy that helps traders to predict market movements using identified patterns in the stock price movements. Retail traders, speculators, and arbitrageurs can follow this approach for price predictions and speculation for a wide range of financial assets.

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