Price Action Trading (PAT) is quite popular in the trading community as it gives utmost importance to price graphs irrespective of news fundamentals. It does not make use of indicators and other things that make the chart dirty and rather uses the information on the charts efficiently. This is more applicable for retail and institutional traders chiefly because of its uncomplicated nature and technology.
This article will highlight the core principles of the price movements-based trading system, the ways it functions, the most prevalent patterns, and the advantages and downsides of this method of trading.
What is Price Action Training?
Price Action Trading is the practice of trading based on price movements only. In which volume data might be plotted on the price chart in some cases, but in general, other forms of technical analysis or tools are not used. This trading style is most commonly associated with the so-called ‘naked traders’ who make use of raw price movements visible. Usually, through candlestick charts, without any other graphical indicators.
They analyze trends, price envelopes, and landmarks supporting or opposing trends and forecast movement in price out of those. This principle holds that since all the notable things concerning the market are incorporated within the price. Looking at the price only is enough to determine when and how to execute the trades.
How Does Price Action Trading Work?
Among price action traders, it is believed that prices are conveyed in trends or patterns that develop within a specific period in the market. Such patterns are all a reflection of human psychology in the market. Which is based on fear and greed, uncertainty and tendency. At the moment price development is recognized, the trader employs his or her strategies to maximize trade entrances and exits.
Price action trading is more directional, going long or short depending on the trend, which can take any time frame, intra-day daily or weekly charts. The objective is to read the price action of candlesticks, charts, or trend lines and come up with a plan.
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Key Principles of Price Action Trading:
Support and Resistance Levels: The foremost action in captivating traders into coming up with an ideal price is resistance and support levels. Where the price goes up a certain point then fails to exceed resistance or dips down to a certain level then fails to break below support. These are also known as key reversal levels.
Trend Identification: In terms of price movement, price action traders distinguish between bullish, bearish, and sideways price movement. So it will be to go with the trend.
Price Patterns: Certain entitled price action patterns such as double top, head and shoulders, and flag patterns are used by the traders to show the possible reversal or continuance of price movement.
Key Price Action Trading Patterns
Price action trading is very much based on the usage of diagrams. Chart patterns are very common in analytic price action trading. Moreover, these patterns may also signify the completion of some trend or possible continuations. Here are some of the most important patterns:
Candlestick Patterns
These are images formed over given time frames of the price movement. They are beneficial to the traders since the traders can find and fathom the market’s feelings and future price movement.
Doji Candlestick: Occurrence of the Doji is when both the opening and closing rates are at almost the same level. Which implies that the market is under uncertainty. When it is at some level of a trend, it can support self-completeness.
Engulfing Pattern: In a bullish engulfing pattern, two candles of opposite colors appear one after another. With the second covering the body of the first with more volatility; a smaller bearish candle is then seen with a bigger bullish candle coming covering the first candle. This pattern shows a change from a downtrend to an uptrend.
Pin Bar: This is a one-candlestick pattern that comprises a long wick on one end with a little body showing rejection of a price level. It points towards an opposite move further away from the wick.
Chart Patterns
Further to that short-term points that can be drawn from candlestick patterns chart patterns show price action direction and duration to the traders.
Head and shoulders: This is a reversal pattern that implies a change from an upward to a downward trend. It is a set comprised of three crests out of which the middle one is the highest (the head) while the two shoulders are of lower and almost equal height.
Double Top/Bottom: A double top pattern is formed when the price hits the resistance level twice and fails to break past the level. Thus indicating a bearish reversal. A double bottom is a situation where the price touches a support level that is failed for the second time and suggests a bullish reversal.
Flags and Pennants: These continuation patterns signify that the market is going through a brief period of consolidation before continuing along the current trend.
Advantages of Price Action Trading
Price action trading is a flexible form of trading that can be practiced by traders in all logo markets such as forex, commodities, and cryptocurrencies.
Simplicity
One of the main advantages of price action trading is its simplicity. The traders can get rid of the many lagging indicators by using only the price charts via a straightforward approach. Such a simple approach allows traders to start with a solid basis and apply a price action technique whenever applicable, realizing a trend.
Flexibility Across Markets and Timeframes
Price action techniques can be used in any market. Whether it be stocks, forex, commodities, or cryptocurrencies, and on any time frame, whether it be intraday or long-term. The traders can modify their methods according to the conditions.
Decision-Making in Real Time
In sharp contrast with many technical indicators that are lagging, price action trading enables quick responses to on-the-go market conditions. By emphasizing live price movements, traders are capable of making the right decisions. Whenever most necessary rather than making a decision long after when it is already too late
Negatives Of Price Action Trading
There are several advantages to price action trading, however, it can not be said that price action trading does not have its weaknesses. Such limitations should not be ignored by the trader while applying this strategy.
Subjectivity
The most important downside of price action trading, which is almost universally acknowledged, is subjectivity. Many traders might have a completely different action plan concerning the same price chart for instance. Because of such ill-defined rules for beginner traders, it may make it even more difficult to find the right pattern.
Requires Experience and Discipline
In this type of trading, one has to be deeply aware of the market psychology and be very strict on the trading methods used. This kind of trading is also real-time and thus requires lots of self-control. Since strategies have to be stuck to no matter how aggressive the trading scenario is.
No Predictive Power
Price action trading is mostly done within a reactive framework. It supplies presentations of price action to a trader and offers an insight into how the price may react in the future. This is why price action trading should be combined with proper risk management approaches.
Conclusion
Price Action Trading is a simple yet effective technique that remains in use even to this day. It allows traders to evaluate the market and make decisions based on the movement of price alone. Instead of using schwierig indicators. Nevertheless, as is the case for every trading strategy, to achieve effective results. Adequate knowledge, discipline, experience as well as sound money management should be practiced. Price action trading is one of the strategies that all traders, whether beginner or long-term do not leave out. It reduces the number of decisions to be made erratically by the traders and focuses on the most important thing—price.