Have you ever wondered why you could rarely jump in at the very beginning of a huge movement in the market and reap huge profits? Do your stop losses get hit regularly, before a bull run in the market, despite you being long (buy)? Continue reading if you wish to tackle the aforementioned problems.
What you see in the charts is the cumulative efforts and emotions of various participants in the market. They include huge sharks like the financial institutions, investment banks, companies and retail traders like you. A typical retail trader relies on indicators to judge the market and make his / her decision. Unfortunately indicators have a huge lag. An indicator rarely tells you about the traps set (for example stop loss hunting) by the huge players in the market.
Consider determining the trend in a market using a moving average indicator. A moving average indicator system tells you that the market has reversed after say a few days whereas price action will tell you the same in a matter of hours. How is this possible? This article takes you through the whats and whys of the most promising trading strategy – Price Action Trading. But before we move onto that, let us compare average traders and smart traders.
Average Trader vs Smart Trader
An average trader always thinks about which indicator to use, which TV channel to watch, which data to be considered, which news to be followed, etc. Thus he has a lot of things to consider before making a trading decision.
However, the ugly truth is that all this is unnecessary. Moreover it is a total waste of time! All these indicators and channel tips are based on the movement of price. It is the price that moves first. Indicators merely follow them. Hence, they are all lagging significantly. You should have already experienced that by the time you execute a trade based on indicators, the price would have moved much further, and you almost always end up in a loss!
So, what makes a trader smart?
Well, a smart trader thinks how to outsmart all indicators – he learns that ONE THING that provides cues to indicators and thus outperforms them. So, even before the indicators reflect the market movements, the smart trader knows what is going to happen in the market. Remember,
“The first man gets the oyster; the second man gets the shell!”
The smart trader, therefore, focuses only on one thing and has more clarity in his mind. In short, he is cool!
Now pause and think for a moment: whose footsteps do you want to follow – the average traders’ or the smart traders’ ? If your answer is the latter, read on:
What is price action trading in simple terms?
Simply put, price action trading is trading in stock or forex market based on clean price charts.
Now that brings us to the question – what is a price chart? Financial markets around the world create data regarding the upward and downward movement of prices of stocks, currencies, etc. These movements could be the result of government policies, psychology of market players, etc. Therefore, we can say that this financial data is the sum total of all factors influencing the market prices. These data are represented in the form of charts, called price charts. Analyzing and interpreting these price charts and taking a trading decision on the analysis is called price action trading.
Following is an example of a price chart. The data is shown using candle sticks.
Why should one learn to trade based on price action?
Forex/stock trading is all about making anticipations. You anticipate what is going to happen in the very next moment/day/month/year(s) and execute your trade accordingly. This anticipation becomes easier when there is a pattern involved. And the good thing is that, human behavior vis-à-vis financial market also follows a pattern and these patterns can be identified from the price action charts!
So if you can identify a pattern, then you definitely can anticipate what is about to come. You can foresee if the price of a particular stock or currency is going to move up or down. This makes interpretation of price action chart all the more important.
Now let us understand a bit more about price action charts.
Which type of price chart should you use?
Basically, there are two types of price charts – the ‘clean’ one and the ‘messy’ one.
A ‘clean’ price action chart shows only the price movement and nothing else. Look at the GBPNZD chart below; it is a clean chart and hence easy to interpret.
On the other hand, a ‘messy’ price action chart is one that shows price movement along with many other indicators. The presence of too many indicators and too much information makes it very difficult and confusing for a trader to interpret it.
Look at the same GBPNZD chart with indicators like Bollinger, Fractals, MACD and RSI.
The average trader spends considerable time hopping from one indicator to the other, to find out the holy grail. But as the chart is cluttered with indicators, they seldom get enough to focus to make their analysis and interpretations properly. For example, one indicator would indicate buy while another one would predict sell, resulting in total confusion. More importantly, this gruesome process takes away all the fun in trading and makes it very stressful.
In short, price action trading involves…..
- Clean charts only
- No indicators
- No news feeds
Now that we know which chart should be used for best results, let’s turn our attention to the million dollar question.
How to interpret price action charts?
There are several methods of drawing conclusions from a clean price action chart. These are called price action strategies. For example, take a look at the image below. You can see high points and low points.
By analyzing the behavior and pattern of these ‘swings,’ we can anticipate what is going to happen next. We can estimated with good accuracy,
- The range of next price movement
- Support and resistances
All these strategies can be learned and mastered in a step-by-step manner. They can then be integrated into your trading techniques, to take the right trading decisions and make handsome earnings.
Interested to learn price action trading?
Do you want to be an excellent trader and price action strategist? Do you want to be a forensic expert in market movements?
Top quality trading needs quality training as well. Trading, like any other skill needs thorough on hand experience with a solid theoretical background, to yield great results.
Header image credits Business photo created by freepik – www.freepik.com