Why should you trade based on price action?
This lesson will cover the following
- Main reasons to trade on price action
- Advantages of price action
After we have discussed some general features of price action, the time has come to point out what advantages trading this way really offers.
First of all, price action is about simplicity. In order to make a decision to enter the market, a trader does not need to crowd his/her price chart with tons of technical indicators, such as oscillators, Fibonacci retracements, a number of moving averages, pivot points etc. Such over-analysis does not do you any favor. Using such a complex approach of examining the chart eventually drains your energy, causes stress and opens the door to emotional trading (as we already said in our previous guide, giving in to emotion is the surest way to financial ruin).
In order to secure your trading, do whatever it takes to remove all the factors, which induce stress. So, clear your price chart from all technical indicators. All these indicators usually produce results, which lag behind the actual movement of price itself. Sometimes these indicators signal to go long just as prices are about to retrace to the downside. This could turn out to be a major drawback, especially at times, when the price demonstrates a formidable move (a sudden breakout, for instance). When this occurs, most indicators will usually not respond until a major part or the entire move ends.
Basing your trading decisions on price action, allows you to trade in real time, in consonance with markets movement. When relying on the help of candles (bars) alone, you are able to understand what exactly is happening in the market. Price action leads to clarity, while clarity boosts your confidence when entering into a position.
Second, signals produced by price action are quite easy to detect. In order to understand price action strategies you do not necessarily need to hold a Master degree in Economics or Finance. Access to price action is allowed to anyone willing to devote a certain amount of time studying its basic ideas.
For example, a very popular signal is the so called Pin Bar Reversal. A pin bar stands for a major reversal signal, which allows you to form expectation in which way prices are likely to move next. A pin bar has a long lower or long upper wick (shadow).
In case we spot a pin bar with a long upper shadow, this suggests that prices are not likely to move further to the upside, because of a strong resistance, that has been encountered. A move to the downside is more probable.
In case we spot a pin bar with a long lower shadow, this suggests that prices are not likely to move further to the downside, because of a strong support, that has been present. A move to the upside is more probable. Combining these bullish and bearish price rejections with major resistance and support lines on the price chart gives you a simple trading strategy.
Third, time frames on which you trade are of certain significance. Some price action traders prefer to use daily or weekly time frames, considering them as more reliable. This is so, because one daily bar contains considerably greater amount of data compared to one 5-minute bar. The more data, the more reliable the signals produced by the bar are. These signals have a greater potential to lead to a successful trade.
Using higher time frames in order to trade, provides you with the opportunity to have your time. There is no need to spend hours per day in search of an intraday signal. Trading on a daily price chart allows you to even focus on your full-time job. We can say that price action analysis repays a disciplined trader who does not overtrade.
Fourth, consistent gains in the currency market are obtained through a flexible trading method. Either in a trading range, or in a strong trend, the Forex market is extremely dynamic. In order to take advantage of markets movement, you should rely solely on price action strategies. No lag is present, either there is a candle setup, or there is not.
To sum it up, price action grants you a great opportunity to be emotion-free and flexible in your decisions and, last but not least, to make a living trading the global markets.