Traders are one of the most dynamic people you would ever find on earth. They are agile, receptive, and disciplined. They don’t mind if something goes wrong; successful traders quickly accept their mistakes and rectify it.
Since ages, traders have been trying hard to outshine others. They are constantly devising strategies, performing complex calculations, reading books, watching trading videos, and using indicators.
Almost all strategies in the trading universe can be categorized into two divisions – indicator-based strategies and price action strategies.
While indicator-based strategies often fall short of expectations, price action strategies, when implemented properly, can generate consistent returns.
Read on to know the best five reasons why expert traders prefer price action more than any other strategy.
What is Price Action?
Price action is an age-old trading strategy that aims to find a pattern in stocks’ random price movements.
Unlike traders who rely on indicators, pure price action traders never look at anything beyond a naked chart.
Their power of observation and analysis is often so sharp that they can accurately predict a stock’s price movement by looking at the chart.
What are the Elements of Price Action?
To accurately predict the direction of a stock, price action traders generally uses the following tools:
a. Charts – Price action traders mostly use candlestick charts; although finding Heiken Ashi, Renko, or Line charts, are not uncommon.
b. Trend Lines – Price action chartists use trend lines to find out the possible direction of the stock price.
c. Horizontal Lines – Horizontal lines help in drawing support and resistance. Price action traders generally enter a stock when there is a breakout bar above the resistance line with high volume. They exit when there is a breakout bar below the support line.
While charts, trend lines, and horizontal lines are the tools nearly every price action trader requires, they also consider things like chart patterns, price band, swing high, swing low, pivot points, supply, and demand, among other things.
The Top-5 Reasons Why Knowing Price Action Can Make You an Expert Trader
Most, if not all, traders start their journey in the stock markets with technical indicators. Sooner than later, they realize that without understanding price action, no amount of technical indicators can help them to be a trading expert. The following are the advantages of using price action for making trading decisions.
1. Trading Becomes Faster, Simpler, and More Precise
In trading, time plays the biggest role. As most of the famous technical indicators, like MACD, RSI, and the likes, are lagging indicators, they often generate signals after the price has moved substantially. Hence, by relying solely on technical indicators, you can often skip the right moment of entry and exit.
As price action mostly works on a no-indicator chart, you can filter out noise from the chart, which can make trading faster, easier, and precise.
But, to be an expert in price action trading, you have to be accurate in understanding the concepts of chart patterns, support, resistance, and pivot points.
Although stocks move randomly, they move in waves. Price action traders anticipate when a wave will begin and where it will recede, and place bets accordingly, thereby minimizing risks and increasing the probability of success.
2. Signals are Easier to Spot
To understand any technical indicator, you have to be an expert in it.
Taking trades simply because RSI has crossed the 80-mark can spell doom. Moreover, technical indicators vary greatly depending on the time frame. So, the MACD parameters for a 1-hour time frame might not be very effective for a 1-minute time frame.
Price action signals are much easier to spot. Brush up your knowledge about candlestick chart patterns, and you will get ready to take the majority of trades in either direction.
For example, a pin bar candlestick formation is one of the most favorite chart patterns for people following the pattern day trader rule.
A pin bar is when the upper or lower wick of a candle is longer than the body of the candle. If the wick is on the upper side, traders go short, and if the wick is on the lower side, traders go long.
3. Accurate Entry and Exit Points
No other technique is as effective as price action while determining accurate entry and exit points.
Generally, when the price reaches a point where buyers feel skeptical, the sell the stock, and the stock price comes down. When this phenomenon happens repeatedly, it creates a resistance level.
Similarly, support gets created when a stock price is unable to penetrate a level on the lower side.
As a price action trader, you can short when the price reaches the resistance and buy when the price reaches the support. Although easy, sometimes, if there is a breakout above the resistance or support line, you should close the position for once.
4. Works The Best For Amateur Traders
Traders who are employed and cannot work as a full-time trader can benefit from price action strategies. As price action strategies work more effectively on daily and monthly charts, you can look at a larger time frame to take long-term trading decisions.
Although price action techniques work equally on smaller time-frames, try to avoid the signals if you are a part-time trader.
Longer time frame charts have much less noise than smaller time frame charts. Hence, an amateur trader can look at a day’s action and combine it with a week’s or a month’s action to predict the future course of the stock.
5. Price Action Works in All Market Conditions
Stocks move in three directions – upward, downward, and sideways.
During its upward journey, rarely does a stock move up continuously. It moves up a little, tests the resistance, retraces, and restarts its upward journey. Price action signals can tell you how far the stock may go and when it may retrace, thus enabling you to place your trades at appropriate points.
Similarly, when a price is on its course to the bottom, you may use the several swing highs and lows to place your trades.
One of the most tricky moments that perplex even the most experienced traders is when the market moves sideways, or there is no clear trend. However, a non-trending price is the best price you can get before it resumes its upward or downward journey. By employing advanced price action strategies, expert traders make the most out of non-trending stocks.
Price action works best when you employ the strategies on a real-time chart. Industry leaders prefer a stock broker who gives access to Trading View charts. Whatever your charting platform, price action strategies can be the best way of making money in the stock markets.