Price ActionHow Does It Works?
Price action is a market analysis technique that allows a trader to make subjective decisions based on recent and actual price movements rather than relying solely on indicators that are more oriented to the past.
It is a systematic trading practice that ignores the fundamental analysis and focuses on the study of the recent price movement associated with technical analysis tools.
The study of recent prices translates to a practical search for known candlepatterns that are repeated and are typical of certain market situations. They can be simple or complex and their correct interpretation allows you to understand the behavior of sellers and buyers.
The most popular candle patterns are: Hammer Shooting star, Harami, Doji, Dragonfly, Gravestone, Morning star, Evening star and so on.
The most popular price chart formation/setups are: Flag, Pennant, Triangle, Head and Shoulders, Cup with a handle, and so on.
The study and pattern recognition of candlesticks is associated with other technical analysis tools to improve their performance. The technical analysis tools include:
- Volatility- Supports / Resistances
- Trendline dynamics
- Price bands
- Consolidation levels
- Minimum and maximum oscillation ranges
- Price channels- Etc.
This study that involves different conditions leads the trader to make a very subjective interpretation such that several traders deploying price action can take opposite decisions simultaneously.
Price action techniques are often used by medium/small traders following a medium/short term perspective. They include speculators, and especially scalpers.
The benefits of price action include creating custom strategies that can be used through any trading software, can be back-tested on past data, and create automated trading software.
Price action and candlestick patterns should have clearly defined rules and back-tested for proper evaluation of the signals generated. This will reduce subjectivity to a large extent. This cannot be over emphasized; manually sifting/scrolling through a chart can be deceptive, if the pattern to be validated is not clearly written out as a candle stick price action indicator.