Price Action Trading is a form of trading where trading decisions are taken purely on the basis of price or price charts alone. It does not does not give any consideration to Indicators, volume, news, or fundamentals of an instrument that is being traded. In this form of trading Price is considered as Supreme. Price action traders believe that Price reflects the sum total of all beliefs and expectations of all market participants at any given point in time.
If you think of indicators, most of them are nothing but calculations of Price itself in various forms. Let us looks at a few of them.
MACD: The standard MACD calculated by subtracting the 26-period EMA from the 12-period EMA.
Now what is an EMA? Exponential moving average (EMA) is a type of moving average that gives greater weight and significance on the most recent Price points which are typically closing Price of previous time intervals. So essentially MACD is a calculation based on Price. Price is the leader and MACD is the follower. It comes in the category of laggard indicators or momentum indicators that typically generate a Buy or Sell signal after a lot of price move has already happened.
RSI: The relative strength index (RSI) is an oscillator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a traded instrument. If you search for RSI on any good web source you will clearly see that the formula to calculate RSI values are also using Price.
Bollinger Bands: Another indicator that make use of moving averages and standard deviation calculations based of Price values.
The list of such indicators goes on and on and on… Some indicators make use of Volume and some combine Price and Volume. Whatever be the indicator or the signal it generates, ultimately to buy or sell any instrument we need its price. Price is where we buy and Price is where we sell.
In Price Action Trading, trading decisions are taken on the basis of what price is telling. Very often price itself will give a clue of what it intends to do next.
Here is an example of Price Action Trading:
This is a Candle Sticks chart that uses Price alone for its plotting. We will talk about them in detail in upcoming video and articles. For now, just take a look at how price moves and throws clues on its way of what it intends to do next. So here, after a good rally in price, price makes a high at candle at A, price then retraces a little bit and then rallies again to cross the high of candle at A but eventually fails to sustain above A and closes below the high of a forming a candlestick pattern called the Inverted Hammer. When next candle at C breaches the low of candle at B, price gives a hint that it wants to go down further. If a short position was opened when the low of candle B is breached, one would have a nice trade with the fall in price thereafter.
As you can see, no indicators, no news or any kind of fundamental analysis was used to take this trade. Only pure price action. This is just a sample price action trading method that price action traders may use to trade. There are many such methods, some simple and some more sophisticated on the way of price action trading.
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