Price action is one of the most popular methods of market analysis, allowing traders to make decisions based on price movement alone. In this article, we will look at how price action works, its key principles and why it can be useful for both novice traders and experienced market participants. Understanding this approach will help you better navigate market movements without the need for multiple technical indicators.
↑ Price Action: What is it and why?
Price action is the dynamic that determines price behaviour in the stock market. It allows you to take positions in the markets without the use of technical indicators. With experience, you can work based on the price chart alone, which gives you more flexibility and accuracy in your decision making. When the price breaks the support in a downtrend, makes a pullback to the broken level and returns in the direction of selling - this is the price action. This is where no technical indicator will tell you what to do. Many indicators, such as moving averages, are by definition lagging. Only price action allows you to make real-time decisions.
This pullback on broken support allows a sell without any technical indicators. The pullback confirms the change in status from support to resistance. A novice trader will not immediately start studying price action and that's okay. At first we look for one or a few technical indicators, then there are more and more. Eventually our screen gets oversaturated with indicators and that's okay too.
The more you advance and the more you understand, the more you will remove indicators until you are left with only the one that best suits your trading strategy and style. Of course, you can use different indicators depending on whether you are scalping or day trading. The point is that you control your setups, your probabilities. That is the professional approach
↑ Why do traders move to price action?
When traders work with chart patterns or make trading decisions based on candlestick colour changes, that is price action. For example, if a Heiken Ashi candlestick forms a doji at major support and the next candle is flat (without any wobble), you can consider a buy trade at the close of the next candle.
Heiken Ashi candlesticks make it easier to stay in a move by smoothing out the price. However, they are a bit laggy compared to Japanese candles. Japanese candlesticks, on the other hand, allow for other types of signals, and certain combinations of them are setups in themselves. Each trader chooses the price display that best suits their strategy.
↑ Price Action Principle: A to Z
Working with price action involves several key points:
- Trend analysis: Determining its direction and possible entry points;
- Chart patterns: Continuation and reversal patterns that help predict price movement;
- Candlestick Patterns: Analysis of Japanese candlestick combinations that indicate a possible reversal or continuation;
- Support and Resistance Levels: Important price areas where price often reverses or decelerates.
Wicks are a very good indicator of price fluctuations. If a series of candles with long wicks is formed on the chart, it signals high volatility. The longer the price moves in this state, the more careful you should be when opening trades.
An interesting situation is when the last two red candles are stuck at a support level. If the next green candle has a wick at the top and a small wick at the bottom, this can serve as a preparatory signal. The following green candle with a flat bottom (no bottom wick) says that price is not fluctuating and may be a good time to enter a trade.
↑ Heiken Ashi and Japanese candlesticks: What is the difference?
Some traders start trading with Heiken Ashi candlesticks because their colour scheme makes trend analysis clear. However, over time, many switch to Japanese candlesticks as they provide more information about price movement. Heiken Ashi candlesticks are calculated based on averages, smoothing out the price but with a slight delay. In contrast, Japanese candlesticks provide clearer signals that can be used in analysis. A Heiken Ashi candlestick with a wick or flat base can serve as an important signal. If after a bounce from support, the price starts to climb the ladder (Dow's law), you can wait for this movement to form and enter on a candlestick with a flat bottom.
↑ Conclusion: What is price action?
In hindsight, price action is one of the most effective techniques for analysing the market. Before looking for magic indicators, a trader must learn to clearly identify the trend so that he or she does not make critical mistakes. Price action is one of the best ways to understand market movements, but it takes practice to master. Despite the popular belief that the stock market is an easy way to make money, success in trading requires discipline, analysis and experience.
Price action gives traders the ability to make decisions based on a clean chart, without unnecessary tools that may lag or give conflicting signals. This method allows to better understand the logic of price movement, which is especially important in a highly volatile market. Mastering price action takes time and practice, but in the long run it offers a significant advantage over mechanically following indicators.
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