In this article, Leeloo explores price action trading, its risks, rewards and of course we share some trade secrets, too!
What is price action trading?
What is price action trading you may ask?
Price action trading is a style of trading that is exclusively reliant on price movement and price movement characteristics over time are referred to as 'price action'.
So, in a nutshell, price action trading is essentially what you do when you only base your trading decisions on price movement.
While indicators tend not to be used in price action trading, some traders choose to use one or a few, for example, volume bars.
It's worth noting that this futures trading strategy does call for expertise and is not suitable for all day traders.
What are the benefits of price action trading?
- Price action trading is ideal if you want to respond to the markets more quickly, clearly and effectively.
- In price action trading, you get direct access to the source of market action (the price itself).
- Another benefit of only using price action trading is the clarity and immediacy of the message the trader experiences.
What are the risks of solely using price action trading?
- If you're too fixed on the price, it's easy to miss the bigger picture, whereas you can observe a broader context by using indicators.
- As with a lot of skills, learning the 'art' of price action trading takes time.
- Price action interpretation can be just as arbitrary as price action interpretation using indicators.
Top tips for price action trading
- Look closely: A naked chart contains more information than it would seem at first, so look at a naked chart and try to identify any fresh setups that may have worked.
- Take a look at renowned trader, Joe Ross' 'Law of Charts' method of trend assessment as it doesn't rely on using indicators. Joe Ross also developed another price action technique known as his 'Ross Hook pattern'.
- Familiarize yourself with the following:
- Candlestick pattern interpretation
- Spotting price patterns in the absence of indicators
- Interpreting common chart patterns
- Constructing an approach to market entry and exit based on the previous three
So what's wrong with using indicators?
Indicators are dynamic maps of market activity. Where using technical indicators is helpful for analyzing particular data, some traders find them to be vastly overrated as they aren't intended to provide you with a complete 360-degree perspective and can provide contrasting messages that slow down your decision-making when you're assessing the market for potential trade opportunities.
Some traders also find indicators to be visually confusing.
So in a nutshell, price action is where indicators get their data from and although price action can occasionally be just as ambiguous as indicator data, it keeps you focused on the 'now'.
Conclusion on price action trading
Using price action means you're working directly with the source and by solely using price, you're taking out the indicators that are essentially interpreting the original message.
Therefore, using price action can be an effective overall approach to trading markets using immediate and direct data.
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