Price Action: what is it?
In short, Price Action is the chart pattern analysis of the movement of price. This method of technical analysis is based only on the observation of price chart and not the indicators. It does not mean that indicators cannot be used: they serve as confirmations of Price Action analysis. Proponents of this method claim that since it is the price that reflects everything, it’s also everything that a trader needs. Therefore, Price Action is nothing but examining price movements.
Using Price Action as a form of technical analysis without the indicators is called naked trading. Naked trading implies lack of fundamental analysis, so following the economic calendar is not essential in this strategy. This method is effective and possible to immplement in binary options investments.
Price Action method
The method mostly consists of observing and seeking price formations (formations are the most important part of this strategy) and the lines of support and resistance. When using this technique, transactions are usually placed according to the current trend, so being able to define the line of the trend is crucial.
The candlestick is the core of this technique, as it’s easier to use. The goal is to define the momentum (highs and lows), meaning the points where the price changes, which can be high or low.
Price Action and indicators
As Price Action mostly pays attention to the history of the price, instead of the fundamental factors which influence the market, it is considered a technical method. In fact, it is a pure form of analysis since it is not based on derivative pricing, meaning the mathematical analyses on which the indicators are constructed.
The basic part of every technical indicator (no matter if it’s a moving average or the Stochastic Oscillator or the RSI) is the price, which is why the Price Action proponents claim it’s best to use the price itself as the indicator. Other indicators may just blur our judgment and reasoning.
Knowing the rules of Price Actions is the basic analysis method, so it’s good to get to know it before we use any other form. Indicators won’t teach us the market analysis or how to interpret the price chart. Thanks to Price Action you can understand where the lost positions came from; it improves the strategies and acts as a filter.
If you are into using indicators, make sure you know what they do and how they do it before you start using them. It will not only help you with the choice process, but will assure not doubling the indicators as well, which is how you avoid a mess of having a couple of indicators telling you the same thing.
- Price Action helps you understand the market. The indicator is a derivative of price. Price Action does not tell you what will happen, but what has just happened.
- It’s a universal system that works with every market, every time interval and can be used with many strategies.
- It’s a system that adapts to the market directly.
- It’s simple since there are just easy-to-remember rules. Still, using the system is not that straight-forward as you need to rely on your intuition heavily. You can achieve surprisingly positive results with some training, knowledge and patience.
- It’s comprehensible. All you need is the candlestick chart, so your platform is not overburdened with needless indicators.
- There are no delays, we decide on what we see not on what we think.
Price Action and price formations
Formations are certain repetitve, specific price chart patterns.
In general, there are two types of formations:
- Consolidation and continuing formations.
- Reversal patterns.
Here’s a list of some candlestick patterns:
- Inside bar,
- Outside bar,
- Engulfing pattern,
- 2-bar reversal,
- Fakey pattern.
There are many more, but the ones listed above are the easiest to spot and the most popular with the traders.
Price action and the lines of support, resistance, and trend
Price Action formation analysis may be more effective when combined with the lines of support and resistance. If a given formation is close to the lines of support/resistance, it is more probable that it will work more permanently.
The effectiveness is more likely to be greater when Price Action is used according to the trend, which is why the ability to define the line of the trend is so crucial.
Believe in what you actually see and not in what you want to see in the chart!