At its core, price action trading is a form of technical analysis that uses market data (like price and volume) to predict future market movements. Technical analysis is often contrasted with fundamental analysis which uses non-market information, like the projected cash flows of a company to forecast its “fair value”.
Generally, technical analysis is more prominent in short-term trading including day trading and swing trading. On the other hand, most traders agree that fundamentals do not matter in intraday trading. Launching a new killer product might start a bull trend in a company’s stock that lasts for months, However, it has minimal impact on the price movement of a single trading session. An exception is sudden and breaking news.
Price action is a simple approach to trading. It does not rely heavily on indicators. It focuses on the most important variable: price. The simplicity it offers in an industry where the next magical indicator is always emerging is appealing to many traders. Earn more with less (indicators) is a tempting proposition.
However, price action is just one of the many trading approaches. It is a tool, and tools are only as good as the person who wields it.
To many traders, price action is the elusive Holy Grail. Yet, it is neither elusive nor the Holy Grail.
Price action is not elusive. One can acquire it easily, but not always use it profitably. You must accept that trading with price action is discretionary. It is not mechanical. There is no magic formula, but there are tendencies and nuances.
It is akin to the writing of narratives. In school, teachers tell us that a good narrative piece must be creative. You must show and not tell. Capture the reader’s imagination. Evoke emotions. Then, the teachers would show us examples of good narratives.
Yet, ultimately, there is no magical step-by-step guide that every student can employ to write a good narrative every time. Naturally, it comes easier to some students and harder for others. Admittedly, with hard work and practice, most students will be churning out reasonably decent narratives. However, only a very small percentage of these students (if any) will be able to write narratives for a living.
The same goes for trading. I can teach you how to analyse the market with price action. You can practise and eventually learn how to analyse the market with price action. But it does not even scratch the surface of what is required to trade for a living.
Price action is not the Holy Grail for all traders, but it does illuminate the market for some traders. In most aspects, price action trading is not superior to other trading methods.
However, it is clearly a method suited for the minimalist trader.
I am neither a price action purist nor an indicator-crazy trader. Instead, I advocate an open approach that reviews each trading method based on its merits.
However, it is impossible to make ten thousand trading methods work concurrently. So, to trade effectively, I must focus on a core trading approach that makes sense to me. And my choice is price action.
Price is the single most important variable in the market. Volume and time are useful variables too, but nothing is as important as price. The price you buy at and the price you sell at determine your profit. And profit is what we are after. It makes sense to me that we focus on what is important.
Volume is a common complement to price action trading. It is useful and often serves to clarify price action. However, the focus of this series is price action trading. Trading with volume deserves an entire tome and is beyond the scope of this series. Volume analysis is an additional tool. If you do not know how to use it, you are better off without it. For those who are interested in volume analysis, after you have mastered price action analysis, add a volume overlay to your charts and observe if volume patterns add value for you.
The same goes for trading indicators like the moving average and the Stochastic Oscillator. Even if you feel that they might add value to your trading, learn to read price action before you place them on your charts.
Ultimately, our topic is on analysing the market with price action. However, I need to clarify that I use indicators for:
- Determining the time frame to trade
- Marking out price patterns
- Assessing if a trading setup offers positive expectancy
I use them to help me trade more conveniently. They are not essential to the trading approach in this series. You can definitely employ the methods without these indicators. They just make it easier, especially when you are just starting out.
I assure you that these indicators are not black-box systems. The exact logic of each indicator is laid bare. In addition, they are relatively simple and anyone with moderate programming skills can replicate them.
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