- What is price action and what principles is it based on?
- What are the main patterns in price action?
- What are the advantages and disadvantages of price action?
What is price action?
We already said in the article “Dow theory in technical analysis” that this theory is based on several principles. One of the most important of these principles is that all fundamental factors show themselves in the price chart. This is the basic principle of the method of analysis known as Price Action.
With this explanation, we understand that price action is a completely technical method that takes help from the price chart and its history. It is known that in price action the main question of the analyst is not what is happening. Rather, he asks himself why this is happening?
There are no tools and indicators in the price action method. A price action analyst tries to analyze the behavior of traders and consequently price behavior away from subjective biases and make decisions based on it. To learn the basics of price action, we suggest you participate in the price action course of Rahvard Academy.
Price action traders usually focus on the chart of the last 3-6 months and have a basic motto: “Keep your chart simple!”.
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They believe that the use of many tools not only does not help the trader, but often confuses him and prevents him from making the right decisions. This goes so far that the charts used by these traders are called bare charts or clean trading charts. As mentioned, there are no indicators or other tools in these charts.
History of price action
“Richard Wyckoff” was the first person to propose the price action method. He based this theory on the principles of economics and social sciences. Wyckoff’s theory was not only technically correct, it was also based on the behavior of traders. That is why it was welcomed.
Basic principles of price action
A price action trader should know the basics of using charts. Principles such as support, resistance and trend lines.
Support and resistance levels
Resistance and support levels are the ranges that the price reacts to. These levels can transform into each other after they break.
Suppose we expect that the price will not exceed the range of one thousand tomans. Our reason is that every time the price has reached this level in the past, it has not grown more and has gone down. So the range of 1000 Tomans is a resistance range for this share.
Now, if the price breaks this range and grows more than it, this same range will become a support range from which we expect the price will not decrease. Of course, support and resistance are not permanent. Rather, they should be examined in a specific time frame.
trend lines
There is an English proverb that says “Don’t catch a falling knife!”. Traders use this proverb to show how important it is for a trader to identify and befriend the price trend. One of the principles that every trader should learn is not to try to fight the market trend. Rather, he must give it his body.
Trend lines are made by connecting price floors and ceilings. In this way, they determine the possible reversal points of the trend. This issue is important because the trader can decide to buy or sell immediately after detecting the breaking of the trend.
Advantages of price action
Price Action is free and does not require any additional tools.
It is used in every market and situation and is not specific to a specific market. Therefore, stock traders of digital currencies or even forex and commodities can use it.
It is faster than any other method. In this method, you do not need past information and there is no news of price delay.
If we accept that according to Dow’s theory, everything shows itself in the price, we can consider price action as a comprehensive method that includes the principles of technical analysis, fundamental analysis and market psychology.
Disadvantages of price action
The time frame that the trader chooses greatly affects his detection. Therefore, it often happens that two traders get completely opposite results from looking at the same chart. In such a situation, one of them will definitely fail in his deal. Suppose a stock or digital currency is down for several consecutive days, but the same currency has been up for several months. Imagine, in this case, if we consider the time period of a week or a month, how much it can affect the results!
Another disadvantage of price action is that patterns do not always come out right away. Most of the time, it is necessary for the analyst to give enough time to get confirmation from the pattern. Of course, don’t forget that in no way can you be 100% sure of the results of the analysis.
Price action patterns
Price action is based on simplifying price charts and trends. Instead of using thousands of tools and indicators, price action traders use price fluctuations, chart patterns, trading volume, and other market information. Perhaps the main advantage of price action can be seen in two issues: firstly, its simplicity and secondly, it can be used in almost any market.
Price is the main basis of price action data. Japanese candlesticks are one of the formats that are more popular than any other method in price charts. In this way, patterns can be used in candles to make it easier to identify trends.
Rahvard collection has made it possible for users to gain sufficient knowledge in this field by participating in the price action training course.
Conclusion
Price action is one of the most popular trading methods in all financial markets. This method is based on the principles of economics and behavior of traders, and it does not use indicators and different analysis tools in its analysis. In fact, in price action, the emphasis is on simplifying the charts and making decisions.
Although Price Action has many advantages such as being fast and free, its disadvantages cannot be ignored. Disadvantages that mostly go back to the choice of timeframes and can change the analysis to a great extent.
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