So, what is price action exactly? Well, in the world of day trading, price action is king. This is because price action trading allows you to make subjective trading decisions based on what you see on your charts, rather than relying solely on technical indicators.
Technical indicators are great, but they can often lead to false signals.
On the other hand, price action is a technique that focuses exclusively on a security’s recent and actual price movements. By ignoring fundamental analysis factors and focusing more on price movement, we can trade with a higher degree of accuracy. In this article, we will discuss what price action is and why it should be used in your day trading strategy!
What Is Price Action?
Price action is defined as the movement of prices over time. In other words, it is simply a way to track and analyze the most recent price changes. When we say “most recent,” we refer to the last few bars on our chart. By examining price action, we can make informed decisions about where the market is headed and what our next move should be.
Price Action Trading Strategies
Support and Resistance
There are a few different ways to trade price action, but the most common is through support and resistance levels. Support and resistance levels are horizontal lines that indicate where buyers and sellers have been buying or selling in the past. By using these levels, we can predict where the market is likely to move in the future. See example of a resistance level below.
When trading support and resistance levels, we also look for the price to return to the level and move to the next level of support or resistance. However, we allow the price to signify what it will do next.
Candlestick Patterns and Analysis
Another common price action trading technique is called candlestick analysis. Candlestick analysis involves looking at the shape of the candlesticks on your chart and using that information to make trading decisions.
Candlesticks can give you a lot of valuable information, such as whether the market is in a bullish or bearish mood, the current level of support or resistance, and whether there is any momentum behind the current price movement.
Check out these additional articles below on many candlestick patterns that can be used when trading price action trading.
- Breakout Day Trade: 7 Tips to Guarantee Success
- Double Top and Double Bottom: Simple Patterns
- Pennant Candlestick Pattern: Bullish or Bearish?
- Three White Soldiers Candlestick Pattern: Bullish Reversal
- 5 Quick Steps: Find the Three Line Strike Pattern
Supply & Demand
Another price action technique is the concept of supply and demand. Supply represents the areas on a technical chart where the sellers are selling. Demand represents the area where buyers buy back in. See the example below of supply and demand zones.
Similar to support and resistance, price action traders look for the price to return to a zone and go to the next level of supply or demand. This is the exact methodology that we primarily use within our overall trading strategy.
Price action trading is a great way to trade the markets without relying too heavily on technical indicators. We can make informed decisions about where the market is headed by using support and resistance levels and candlestick analysis.
If you are new to trading, price action can seem complicated. However, it is pretty simple once you get the hang of it. And once you start using price action in your trading, you will quickly see why it is such a popular technique!
Reasons to Trade With Price Action
#1 – Offers Simple Techniques for Trading
As you can see, the price action examples discussed earlier (like support and resistance and candlestick patterns) offer a simple style of trading the stock market compared to other overcomplicated strategies. Trading using price action will allow you to develop a simple, repeatable process that you can add to your trading arsenal without overcomplicating your trading technique. You will likely feel less stress since your technical charts will not look overloaded with multiple indicators that may conflict with one another.
#2 – Avoid Lagging Indicators
With price action trading, you have the opportunity to analyze what the market is doing now and not rely on past information (like lagging indicators). Technical analysis indicators rely on past price action and not what may be happening at the moment. Usually, the market likes to return to prior past movements, which is why technical indicators are very popular. However, this is not always the case.
One of the most popular lagging indicators is the moving average. Moving averages smooth out price action and can help us identify trends, which is why they are commonly used in the trading world. There are many moving averages, but the most common are simple moving averages (SMAs) and exponential moving averages (EMAs).
Another popular lagging indicator you may have heard of is the Relative Strength Index (RSI). The RSI is a momentum indicator that measures how fast the market moves. It can be used to identify overbought and oversold conditions and confirm price action signals.
Lagging indicators can benefit your trading, but we must remember that they are lagging. This means that they will not always give us an accurate signal and may not take into account current price movement. In some cases, lagging indicators can give false signals. If you decide to go with lagging indicators, then ensure that you use them in conjunction with other techniques. Such as price action. We can get a more accurate picture of where the market is headed using multiple approaches. For example, if we see a candlestick pattern that suggests the market is about to turn around, we can look at lagging indicators to see if they are also starting to turn.
#3 – Better Understand Market Sentiment
While technical analysis can be very helpful, it is essential to remember that it is only one tool in our toolbox. We also need to use other techniques, such as market sentiment, to get a complete picture and make more informed decisions about where the market is headed.
Market emotions are a key driver of price action in the stock market. By studying price action, we can better understand market sentiment and make more informed decisions about where the market is headed to get the most accurate signals possible.
#4 – Provide Higher Probability Trading Setups
Price action is another high-probability trading setup. High probability trading setups offer better risk to reward. The better the risk to reward, the more profitable we can be as traders.
Summary: What Is Price Action
This article defines price action and offers tools and strategies on how to trade with it. Many benefits can be gained from adding a price action strategy in your trading plan. Learning to trade it can be the one thing that helps you to become a successful trader.
Our trading program is based upon price action using supply and demand techniques.
To Learn More
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
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