10 Reasons You Should Learn To Read Price Action
As Charles Dow stated, the price is an excellent market data storage. It is the price that contains all the necessary information, and its movements demonstrate the whole market situation.
Price action is the heart of technical analysis. It's a method based on the study of price movements over time. Traders who use price action analysis read the market and make their trading decisions by solely examining the price data illustrated on the chart. Price action trading adherents believe that the asset's price is the most critical element of decision-making. Traders argue that price is a primary source of market information, and by studying only the price action, you increase the chances of success.
This paper sheds light on why every trader should learn to read the price action and demonstrates the uniqueness of this type of trading. We discuss why Forex traders prefer the method and what aspects you should consider while price action trading.
A toolkit of a price action trader
When traders use price action analysis, they examine naked price action charts without additional indicators. To predict future price movements and determine the best entry and exit points, we recommend a trader focus on such aspects as:
- trend lines;
- support and resistance levels;
- price patterns;
- candlestick formations;
- market’s reaction.
This is the basic toolkit of price action traders. However, adherents of this method can vary the combination of things to use in their trading routine. Just keep in mind that a price action trader is a professional chart reader, and these tools only aid him in the decision-making process.
The reasons to use price action analysis
Many professionals, such as Gary Wagner, Nial Fuller, Kim Krompass, Chris Lori, and others, choose to trade exclusively with the price action technique. It’s transparent, informative, comprehensive, and reliable. The price is a reason for all the losses and profits, so building a trading strategy by pure price action analysis seems logical. Now, let’s dive into why you should try this method.
The drastic difference between a pure price action chart and a chart with some technical indicators is undeniable. You can see how clear and easily readable the price action chart without any indicators is. The clean price action chart has no mess with additional data; there are only price bars without any distractions.
Then, take a look at the lower price chart full of indicators. Here, you can see four of the most popular technical indicators: ADX, Bollinger Bands, MACD, and the stochastic oscillator. As you've already noticed, a significant part of this chart is dedicated to the indicators, which reduces the space for the fundamental part – price bars. You don't have to be an analyst to say that the ton of additional information on the chart disrupts traders' concentration on the price action itself.
By comparing these two charts, we can conclude that the bare price action chart is much more transparent and more visible, while the indicators on the "messy" chart shift the trader's focus, creating many variables for him. By doing so, traders want to simplify the price analysis; however, in reality, they don't gain more predictive data from this "messy" chart than from the bare price action chart.
An example of a raw price action chart:
An example of a price action chart with many indicators:
Isolation from news
The doubtless benefit of learning to read price action is its isolation from many trading variables, including news, because price action demonstrates all the factors affecting it.
We all know that news can often be confusing and ambiguous. The information can be contradictive from source to source, so it’s very energy-consuming and exhausting to learn news and analyze how it can affect the market.
The price action method allows you to ignore such distractive activity as reading the news with that shocking content. By using the price action method, traders can avoid information overload and so-called analysis paralysis. Price action includes only three main elements we should take into consideration: trends, charts, and support and resistance levels.
Price action is a human psychology
When we talk about the asset's price action, we immediately think about different chart patterns, indicators, trend lines, horizontal lines of support, and resistance levels; we automatically imagine various events happening in the world about GNP or company reputation. The thing is, price action directly reflects the behavior of people operating on the market. The price action is the pure psychology of traders. That's it!
The formula is simple: when one trader finds a good chance to enter a trade, another – sees a perfect time to leave the market. So, traders decide what it's better to do, leading by their minds and emotions. When many traders consider opening positions as a great decision, the price goes up accordingly, and a bullish trend comes to the market. When more people choose to sell their assets, the price goes down, and a bearish market occurs.
Yes, while the decision-making process, many variables are taken into account. However, the final judgment: to hop into the market or leave is a personal decision made by an individual with his state of mind. These decisions, in turn, make the price move which everyone can watch on charts, and despite different factors affecting the price movement, all the results are reflected via price bars.
So, the price action is everything. First of all, it is the language of traders.
The most relevant market perspective
The key reason to start learning price action trading is its accuracy in determining the most relevant market perspective. Since the price action method is a stable technique of market analysis, it doesn’t require any technical indicators to predict future market changes as it provides everything to make trading decisions without pauses or expectations of what the indicator will show. For instance, many traders get caught up by lagging price indicators, demonstrating already happened price changes. But is it worth waiting for this data from the indicators and wasting your time on it when the pure price action can provide you with the regularly repeating price action setups to analyze what to expect and what the current market situation is?
The ability to make a profit by increasing the time frames and saving time
Another decent benefit of price action trading is that it becomes more effective as the higher time frames you choose for trading, allowing you to trade less frequently but accurately. The price action method helps you analyze charts much faster. Traders experience firsthand what trading means with an hours-long preliminary examination of charts and how exhausting it is. However, many traders suppose it’s more profitable to trade frequently and on lower time frames, not realizing its destructiveness and losses, not just money but time.
When you know how to use the price action trading method, you can significantly save time and trade with a concise chart analysis that doesn’t require much effort. No secret that having a well-developed trading plan based on pure price action excludes work on small time frames or lengthy chart examination because price action trading is about time and effort economy. This method is about concentration and transparency.
Price action is a great option to learn all the necessary information from the price itself without going into details of a deep full-fledged market analysis. It’s just enough to learn the foundation and let it play out with a profit.
Time to develop a trading discipline
Trading discipline is a vital aspect that helps traders survive in the unpredictable market and grow as professionals. When you trade with a straightforward and reliable price action method, it is easier to focus on the psychological side.
Often, traders become addicted to setting their trading method and strategy, so they forget their goals and what really matters in trading. However, it is much more essential to improve your self-control and self-management from day to day in order to attain high achievements. Your reactions to ups and downs, day planning, and emotional stability are much more important than exhausting analysis and constantly developing your trading method.
The best thing about price action trading is the ability to concentrate on yourself. You don’t have to overthink about the efficiency of the chosen trading method. It’s a time-tested way of market analysis used by traders for decades. It’s comprehensive and complete.
Identification of the best entry and exit points
Price action trading allows its adherents to enhance the ability to determine the best time to enter or exit the market. This type of analysis implies the study of trends, support and resistance levels, and the formation of candlesticks which, in turn, provide traders with all the necessary data to determine the most appropriate timing for opening or closing positions. By using the price action method, you can easily detect the key market movements where you can make a profitable trade. Price action trading teaches you to see the market clearly. At the same time, many other methods often have so-called “grey areas” and prevent traders from deciding when they should enter or exit the market in a timely manner.
Effective risk management
Risk management in trading is a plan that helps a trader to control his losses and keep a sound risk-reward ratio. Every professional knows that an effective risk management plan is a keystone to success, and it is the price action analysis that allows one to build a reliable plan. The pure price action enables traders to learn price patterns and candlesticks’ formations which, in turn, ensures an excellent opportunity to assess the risk-reward ratio of future trades precisely. With the help of the price action method, you can determine support and resistance levels to place stop-loss orders and manage the risks. The market analysis through the price action makes your trading strategy stable and effective, mitigating risks and increasing long-term profitability.
The price action approach is undeniably minimalistic and corresponds to the lifestyles of many people. The approach aims to minimize distracting factors and mitigate your anxiety. There are fewer things to think about and worry about.
The price action analysis proves a well-known idiom, “the less you know, the better,” the main idea of price action trading is that the less you interact with the market, the higher the probability of your success. However, it doesn’t mean you should sit back. Your purpose is to perfect a craft of concise price action trading through hard work and study.
Why do Forex traders use price action?
Price action trading is popular among Forex traders. Here are some points proving this fact:
- The Forex market is highly liquid, and price action trading allows traders to open and close positions easier and promptly.
- The Forex market is open around the clock and constantly changes. It's the largest market in the world. That's why many speculators try to persuade other traders to buy additional Forex indicators and robots, stating that it helps raise the probability of success. However, the reality proves that examining the price movements is primary, and analyzing anything other than price doesn't make sense. So, the fundamental thing to do in Forex is to know how to read a naked price action.
- On the Forex market, the price tends to move according to a particular trend line. Trends, in turn, include a series of higher highs or lower lows with pullbacks and reversals that overall create sharp waves. The first step in riding these waves is learning to read the price action with its extremes of peaks and troughs.
Well, price action trading is a winning choice natural for professionals. The price action technique allows traders to maintain objective thinking while trading. When you focus on the fundamental element – price, you can stay cold-headed and not waste your attention on anything else. Price action is about transparency and clarity. It provides traders with the most accurate data to determine the best time to hop on or off the market.
A price action analysis is the holy grail of your trading career. We highly recommend you learn how to read the price action and what tools to use while price action trading. Our guides and recommendations will help you to learn the skill. Join us and create your trading path with FBS.