What is Price Action Trading & It's Strategy?
Price action means the characteristics of the price movements of a security. The price movement of a security is often analysed over a shorter period of time. In simple meaning, price action trading is a technique in which traders make decisions on the basis of the movements of the price rather than simply depending upon the technical indicators.
In price action trading, there are multiple strategies that traders can use. This article will outline the price action indicators and price action trading strategies that traders can use while trading in the stock markets.
What is Price Action Trading?
Some traders use the movements of the price of an asset to make their decisions. This is the meaning of price action trading - studying the movements of the price of an asset and taking trading decisions based on the price actions that they think will be profitable for them.
Most traders who use the price action trading technique do not make use of technical indicators such as Bollinger bands or moving averages. But, even if they do, these indicators only have a minute effect on their trading decisions. This is because price action traders have a belief that the sole trustworthy way of information is through price and its movements.
If the price of a stock rises, this means that investors are purchasing that stock. The price action is assessed as per the aggressiveness of purchasing. It is also based on historical charts and some real-time information such as offers, volume, bids, magnitude, and velocity.
Price Action Trading Indicators
Most traders prefer tools like candlesticks, trends, and breakouts for price action trading. Support and resistance are also one of the methods that traders use. Traders make use of these price action indicators to develop some strategies that will work with their preferences.
These are graphical representations that appear on a chart that showcase trends, open, high, close, and low prices of a security. Traders make use of candlesticks to develop different kinds of strategies. For example, while using candlestick charts, some traders tend to use the strategy of engulfing candle trends.
- Trend Indicator
The trading of security can happen all through the day, with the prices of the security falling or rising. When the prices of a security rise, traders refer to it as a bullish trend, whereas when the price of a security fall, they refer to it as a bearish trend.
When the movement of the price of an asset showcases a specific tendency, the traders are alerted of the possibility of a new trade once it tends to break the specific tendency. For example, if a stock is trading at a price of ₹150 to ₹160 for the last 15 days, then it shows a movement above ₹160. This transformation in the tendency of the price indicates to the traders that the sideways movement of the price might have ended, and the price will not go to ₹160 or maybe higher than that.
Breakouts take place in various patterns, which include flag patterns, head & shoulders, triangles, and ranges. However, breakouts do not mean that the movement of the price will continue to be in the direction anticipated by the trader, and this often doesn’t happen. In this case, it is called a false breakout, and traders get an opportunity to trade in the direction that is opposite to the breakout.
- Support and resistance
Traders make use of price resistance and price support to recognise a great trading opportunity. Resistance and support areas tend to take place if the price has shown a reversal tendency in the past. Therefore, these levels may again become relevant in the coming time.
Price Action Trading Strategies
These are multiple price action trading strategies to pick from, and you can choose the ones that you think are profitable for you. Some of these are:
- The Hammer
The hammer refers to a candlestick that is shaped like a hammer. This shape is formed because the open, high, and close are quite close to one another while the low is quite long, which makes it shaped like the handle of a hammer. Most traders look at the hammer as a trend reversal.
- Inside Bars after a Breakout
This strategy refers to a bar seen in a candlestick pattern. This bar is in between the previous bar’s range, post the occurrence of a breakout.
- The Harami
The harami can be viewed as a downward or upward trend that corresponds with a rise and fall in the closing and opening prices. You will see that there is a smaller candle on the side next to it, with a movement in the price that is opposite to the direction of the trend and a smaller gap between the closing and opening prices. Haramis mostly signify changes in the trend.
- Spring at Support
This refers to the sudden increase in the price of an asset after it hits or comes close to the support price or the lowest price that the market will support for the asset.
If you are a new trader, you will benefit from learning about price action trading and price action trading strategies. Knowing how to interpret and comprehend price movement charts becomes a trading system of its own. While you use price action trading strategies, it is essential to understand everything about these so that you can maximise your gains.
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Frequently Asked Questions
Price action trading is a method of price speculation and prediction, and it is widely used by traders, arbitrageurs, speculators, and even trading companies that employ traders. You can use these strategies on a range of securities like commodities, shares, equities, derivatives, etc.
Traders use price action trading strategies to spot indicators or patterns that can help them in predicting the way in which the security will behave in the future and decide their entry as well as exit points.
Price action is very subjective. This means that different traders can interpret it differently, leading to different decisions and outcomes. Also, the price action of the past might not be the right indicator of the future. So, as a trader, you must make use of multiple tools and exit a trade swiftly if it is not going as per the prediction.