What Is Price Action Trading?
Price action is one of the simplest forms of trading to learn, and one of the most effective. If you’re just starting out in trading, learning price action is a great launching point for your trading career.
Price Action Trading
Price action trading means basing your trading decisions on the raw price movement itself. You won’t use indicators or other analysis methods, or you’ll give them very little weight in your trading decisions.
A price action trader believes the only real source of information is the price itself. If a stock rises, that tells the price action trader that people are buying, and the trader then judges — based on the strength of that buying — whether the move is likely to continue. Price action traders generally aren’t concerned with asking why something is happening.
Using historical charts and real-time price information such as quotes, bids, volume, and speed, the price action trader looks for a favorable entry point for their trade. A favorable entry point is one that allows for controlled risk while still offering potential profit.
Types of Price Action Strategies
There are many price action strategies. One very common one is the breakout strategy: when an asset’s price is moving along a certain trend and then breaks out of it, that alerts traders to a new possible trading opportunity.
For example, suppose a stock traded between $10 and $11 over the past 20 days. When the price moves above $11, that change signals to traders that the sideways move may be over and that the price could rise to $12 (or higher).
Breakouts occur across many different pattern types, including ranges, triangles, head and shoulders, and flag patterns.
A breakout doesn’t mean the price will keep moving in the expected direction — and often it doesn’t. This is called a false breakout, and it can also present a trading opportunity in the opposite direction of the breakout.
Breakouts can be small or large. When watching small consolidations or short periods where price moves sideways, a break through the trend can offer a strong profit opportunity.
Other price action strategies study how price bars form on a specific type of chart. For example, when using candlestick charts, traders use candlestick strategies such as candle-trend strategies.
Building on all of this, traders use price support and resistance zones, which can offer good trading opportunities. Support and resistance zones occur where price has tended to reverse in the past, and these levels may become relevant again in the future.
Advantages and Disadvantages of Price Action Strategy
Once you know a price action strategy, it won’t take much research time — look for an asset with the specific price conditions you need, or wait for those conditions to develop. Another advantage is that you often get more favorable entry and exit points compared to many indicator-based methods.
Although indicators use price as their basis, they often lag behind it. By focusing simply on price, you get information in real time instead of waiting for a lagging indicator to give you that information.
One drawback is that price action strategies are difficult to automate. This means you’ll need to watch for patterns to develop and trade them manually yourself. This isn’t a problem for most people, but if you’re hoping to build a trading robot that can trade on your behalf, many price action strategies don’t fit that process.
Price action isn’t perfect either — you’ll still have losing trades, just as with other trading strategies. Although price action looks great in theory, you can only know what the price will actually do once you’re already in the trade.
If the price is moving up and you buy, the price might start falling shortly after. You can never avoid situations like this — the only thing that matters is that you profit more than you lose. Learning to do that takes time and practice.
Final Word on Price Action
Every new trader can benefit from learning to trade price action. Learning to read and interpret price chart movements becomes a trading system in its own right, or it can help if you decide to add other analysis tools such as statistics or indicators.
There are many price action strategies, but you only need to learn one to get started. Have a profit-minded approach before trying to learn more strategies. Price action trading doesn’t guarantee profits — it makes for a great trading style, but it takes time and practice to learn.
Price action is simply the movement of a security’s price on a chart over time, and it forms the basis for all technical analysis of stock, commodity, or other asset charts. Many short-term traders rely exclusively on price action and the patterns and trends derived from it to make trading decisions. Here are the key points about price action:
- Price action generally refers to the upward and downward movement of a security’s price when it is plotted over time.
- Different chart forms can be applied to make price action trends clearer for traders.
- Technical analysis formations and chart patterns are derived from price action, and technical analysis tools such as moving averages are calculated from price action and projected into the future to inform trades.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. Price action trading, like any trading strategy, carries risk, and past chart behavior does not guarantee future results. CFDs and leveraged trading products carry a high risk of losing money rapidly due to leverage; most retail investor accounts lose money when trading these products. Some links on this page may be affiliate links, meaning EasyTradeWeb may earn a commission if you open an account through them, at no extra cost to you.
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