Introduction to price action trading strategies

Price movements describe the characteristics of changes in securities prices. Such changes are often analyzed based on recent price changes. Simply put, price action is a trading technique that allows traders to read the market and make subjective trading decisions based on recent and actual price changes, rather than just relying on technical indicators.

Because it ignores fundamental analysis factors and pays more attention to recent and past price trends, price action trading strategies rely on technical analysis tools.

Many day traders focus on price action trading strategies to quickly generate profits in a short period of time. For example, they may look for simple breaks from intraday highs, establish long positions, and use strict money management strategies to generate profits. If you are interested in day trading, InvestingClue’s Becoming a Day Trader course provides an experienced Wall Street trader with a comprehensive review of the subject. In more than five hours of on-demand videos, exercises and interactive content, you will learn proven trading strategies, risk management techniques and more.

Tools for price action trading

Since price action trading is related to recent historical data and past price movements, all technical analysis tools, such as charts, trend lines, price bands, high and low fluctuations, technical levels (support, resistance, and integration), etc. are considered based on the trader The choice and strategic fit.

The tools and patterns observed by traders can be simple price bars, price bands, breakouts, trend lines, or complex combinations involving candlesticks, volatility, channels, etc.

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The psychological and behavioral interpretation determined by the trader and the subsequent actions also constitute an important aspect of price action trading. For example, no matter what happens, if the stock price hovers at 580 points above the personally set psychological level of 600, then the trader may move further upwards to hold a long position. Other traders may have the opposite view-once it reaches 600, they assume that the price reverses and therefore hold a short position.

No two traders will explain a certain price behavior in the same way, because everyone has their own interpretation, defined rules and different behavioral understandings. On the other hand, technical analysis scenarios (such as 15 DMA crossing 50 DMA) will generate similar behaviors and actions (long positions) from multiple traders.

In essence, price action trading is a systematic trading practice. With the help of technical analysis tools and recent price history, traders can freely do in a given scenario according to their subjective, behavioral and psychological state. Make your own decision to establish a trading position.

Who uses price action trading?

Because price action trading is a method of price prediction and speculation, it is used by retail traders, speculators, arbitrageurs and even trading companies that employ traders. It can be used for a wide range of securities, including stocks, bonds, foreign exchange, commodities, derivatives, etc.

Price action trading steps

Most experienced traders who follow price action trading will retain multiple options to identify trading patterns, entry and exit levels, stop losses, and related observations. Adopting only one strategy for one (or more) stocks may not provide sufficient trading opportunities. Most scenarios involve a two-step process:

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  1. Identify scenarios: For example, the stock price enters a bull market/bear market phase, channel range, breakthrough, etc.
  2. In this case, identify trading opportunities: like once a stock is in a bull market, is it likely to (a) overshoot or (b) fall back. This is a completely subjective choice, and even under the same circumstances, it may vary from trader to trader.

Here are some examples:

  • According to traders, the stock reaches its peak and then falls back to a slightly lower level (satisfying the scenario). Traders can then decide whether they think it will form a double top to move higher, or if it will fall further after the mean returns.
  • Traders set lower and upper limits for specific stock prices based on the assumption of low volatility and no breakthrough. If the stock price is within this range (satisfying the scenario), traders can assume that the set lower limit/upper limit is used as a support/resistance level to open a position, or another view that the stock will break in either direction.
  • Encounter a defined breakout scenario, and then there are trading opportunities in terms of breakout continuation (further development in the same direction) or breakout callback (back to past levels)

It can be seen that price action trading is closely assisted by technical analysis tools, but the final trading decision depends on the individual trader, providing flexibility rather than enforcing a strict set of rules.

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The popularity of price action trading

Price action trading is more suitable for short-term and medium-term profit trading, rather than long-term investment.

Most traders believe that the market follows a random pattern and there is no clear systematic method to define a strategy that is always effective. By combining technical analysis tools with recent price history and identifying trading opportunities based on the trader’s own interpretation, price action trading has received a lot of support in the trading world.

Advantages include custom strategies that provide traders with flexibility, are suitable for multiple asset classes, are easy to use with any trading software, applications, and trading portals, and can easily backtest any identified strategy based on past data. Most importantly, traders feel responsible, because the strategy allows them to decide their behavior instead of blindly following a set of rules.

Bottom line

There are many theories and strategies about price action trading that claim to have a high success rate, but traders should be aware of survivor bias, because only success stories can become news. It is indeed possible to obtain substantial profits from trading. Individual traders have the responsibility to clearly understand, test, select, decide and take actions to meet the requirements of the best profit opportunities.

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