Price action strategy describes the characteristics of the price movement of securities. This movement is often analyzed in terms of past price changes. Simply put, price action is a trading technique that allows a trader to read the market and make decisions based on recent and actual price movements, rather than relying solely on technical indicators.
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Since it ignores fundamental analysis factors and focuses more on recent and past price movements, price action strategy is dependent on technical analysis tools.
Many day traders focus on price action strategies to quickly generate profits in the short term. For example, they may look for a simple breakout from a session high, enter a long position, and use sophisticated money management strategies to generate profits. If you are interested in day trading, Mohammad Famurian’s Digital Currency Intelligence course will teach you proven trading strategies, risk management techniques and more in over ten hours of on-demand videos, exercises and interactive content.
Tools used for price action trading
Since price action is related to recent historical data and past price movements, all technical analysis tools such as charts, trend lines, price ranges, swing highs and lows, technical levels (support, resistance and consolidation) etc. The following are considered. It is suitable according to the choice and strategy of the trader.
The tools and patterns observed by the trader can be simple price bars, price ranges, breakouts, trend lines or complex combinations including candlesticks, swings, channels, etc.
Psychological and behavioral interpretations and subsequent actions, which are decided by the trader, also form an important aspect of price action. For example, it doesn’t matter what happens. If a share crosses the psychological level of 600 at 580. The trader may make a further upside move to take a long position. Other traders may take the opposite view – when 600 is hit, they assume that the price has reversed and therefore take a short position.
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The difference between traders
No two traders interpret a particular price action in the same way. Because each of them has a different interpretation, defined rules and behavioral understanding of it. On the other hand, a technical analysis scenario (such as 15 DMA crossing 50 DMA) will result in similar behavior and performance for several traders.
Basically, price action is a systematic trading method. which is done with the help of technical analysis tools and recent price history. Where traders are free to make decisions for trading situations based on their mental, behavioral and psychological state in a given scenario.
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Who uses Price Action?
Because price action is a method of price prediction and speculation. by retail traders, brokers, arbitrageurs and even trading companies that employ traders. is used. It can be used in a wide range of securities including stocks, bonds, forex, commodities, derivatives, etc.
Trading steps with price action strategy
Most experienced traders have several options for spotting trading patterns, entry and exit levels, stop losses, and related observations after making price trades. Having only one strategy in one (or more) stocks may not provide enough trading opportunities. Most scenarios involve a two-step process:
Identify the scenario
Such as the stock price entering the bull/bear phase, channel range, breakout, etc.
In the context of the scenario, identify trading opportunities: whether it may (a) go higher or (b) pull back, as if buying a stock on a bull. This is a completely subjective choice and can vary from one trader to another even given the same scenario.
Here are some examples:
Stocks are hitting record highs for traders. And then it comes down to a small level (scenario fulfilled). The trader can then decide if they think they will make a double top to go higher. Or, after a mean reversion, it falls further.
Based on the assumption of low volatility and no failure, the trader determines the floor and ceiling for a particular stock price. If the stock price falls within this range (the scenario is met). The trader can envision situations where the designated floor/ceiling acts as support/resistance levels, or alternately view the stock breaking in either direction.
The defined failure scenario is met. And then there is the trading opportunity in terms of continuation of the break (going in the same direction) or retracement of the break (returning to the previous level).
As can be seen, practical trading prices are aided by technical analysis tools. But the final trade deal depends on the individual trader and offers flexibility rather than imposing a set of rules that must be followed.
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The popularity of the price action strategy
Price action is more suitable for short and medium term profit trading instead of long term investments.
Most traders believe that the market follows a random pattern and there is no clear systematic way to define a strategy. which is always efficient. By combining technical analysis tools with recent price history to identify trading opportunities based on the trader’s own interpretation, the price action strategy enjoys great support in the trading community.
Advantages include self-defined strategies that offer flexibility to traders, ability to be used across multiple asset classes, ease of use with any trading software, trading apps and portals, and the ability to easily retest any strategy. specified on past data. Above all, traders feel responsible. Because this strategy allows them to decide their own actions instead of blindly following a set of rules.
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The final line
Many theories and strategies are available on price action trading with claims of high success rates. But traders should be aware of survivor bias. Because only success stories make the news. Trading has a good profit potential. It depends on the trader to clearly understand, experiment. Select, decide and act on what suits the best possible profit opportunities.