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Price Action

the best trading strategy?

Price Action in action

Perhaps one of the most infamous trading strategies is Price Action, something the beginners usually try to avoid, whilst the more experienced traders have definitely heard of. What is Price Action in the first place, and more importantly how to use it profitably? The very first question already posses some trouble, as there is no single clear definition of the Price Action, as two traders can have discrepancies in how they understand it and consequently how they use it. Nevertheless, the one thing that most of the Price Action traders would agree on is that in its purest form Price Action suggests using the actual movement of the price i.e. looking at the ‘naked’ graph of an asset to determine the points of entry. Although that might seem quite a trivial task and most of the traders would want the assistance of some computer indicator, the use of Price Action does not suggest simply betting on the future development. Rather, as initially proposed by C.H. Dow that the market considers all past information at all times, Price Action suggests that all is needed to predict the future price is already present on the graph and does not require additional indicators. The adept users of Price Action commonly remind that any technical indicator derives its data from the graph, that is from Price Action.

Therefore, Price Action can be considered as an approach, rather than a detailed ‘to do’ list of rules to obey. Price Action looks at the actual price behavior of an asset, taking into consideration factors like: direction, speed, volume, patterns formed and horizontal levels, amongst the most common ones. Although such use of the graph may seem as actual gambling on what might happen next, it is vital to understand why this approach has such popularity and actually works. It has nothing to do with one’s luck, rather it uses the idea of how other market participants perceive and act on the asset’s price. Therefore, it can be said that the Price Action approach must be the most accurate one, as it takes into consideration the actual market and not some arbitrary numbers and formulas used in indicators. However, as much as it is a better approach, that much worse it is, as it relies on one’s understanding on what other participants see, making it useful and useless at the same time.

Fear not, as one key clarification that we are about to uncover, makes it so much simpler. The use of Price Action merely suggests that the direction, volume and speed factors shall be viewed directly on the graph, yet the exact points of entry are somewhat unclear. That is because, Price Action is best assisted by the use horizontal levels the classic and perhaps the most underestimated tool. Horizontal level, namely resistance and support levels, are the inseparable part of Price Action, as they not only show how the market previously acted upon reaching a certain price level, but most importantly allow us to extrapolate this to understanding of what the participants are likely to do once the price reaches a level again. Although it seems obvious, it is mostly neglected by traders, as many forget that the direction of the market is not determined by some abstract force, but rather a pure collective decision of all market participants. Therefore, it is more important to understand how others would perceive the graph than how we can outthink it directly and cut corners.
The other common approach to be used in conjunction, or sometimes even as an interpretation of the Price Action itself, is the use of candle patterns. The formation of candlestick patterns like hammers, engulfs, morning/evening stars and numerous doji variations, being the most common ones, show exactly what Price Action represents, that is the formation and further development of the price as a direct prediction of the graph.

To sum up, the use of Price Action, or its adjacent interpretations in the form of horizontal levels and candlestick patterns, is rather simple, yet complex. That is perhaps the main reason as to why so many omit the importance of it and tend to heavily rely on some indicators, without realizing that indicators use market data themselves. On the other hand, the use of Price Action allows one to trade without the need of any other analytical tools, however, practice is necessary. Luckily, one is able to perfect the Price Action and other trading skills on a free Demo account before taking it to real funds.

Furthermore, during the series of our tutorials, one is able to learn about the horizontal levels and various candlestick patterns to successfully apply to the Price Action theory and have profitable trades with ease!