When it comes to trading strategies, there are several ways that lead to Rome. But price action trading is probably your best starting point on your road to becoming a profitable trader.
In this article I’ll try to explain what price action really is.
What is price action?
Price action literally means the movement of price during a specific period of time.
Price action analysis is therefore the analysis of how price moves. You analyze what price is doing NOW, so that you can predict what the price will do in the FUTURE.
Suppose price stalls at a certain level, it could be that we get a reversal. Which means that price will change direction. Suppose price moves up or down violently, it is quite possible that the price continues to move in that direction.
But without proper analysis this is still all guessing.
The two main things I use for price action analysis are:
What is candlestick reading?
Candlesticks are a detailed representation of price. They show you exactly what price is doing now, so that you can make an educated guess as to what price is going to do in the future.
Candlesticks can take on different patterns and shapes. And it is precisely those forms and patterns that can give us a lot of information.
It is important to know how these candles are born, why they come into existence and how you, as a trader, can get maximum benefit from this. Every candle tells a story and if you can read that story you will become a much better trader.
Candlesticks tell you the following:
- When price stalls and could change direction
- Whether the price could move further in the same direction
- When price action becomes exhausted
- Uncontrolled movements (when you should stay out of the market)
The story of a candlestick
Every candlestick and every series of candlesticks tells a story about who has control over price.
Buyers or sellers?
Buyers are referred to as bulls in the investment world and sellers are called bears.
Candlesticks tell us the story about the constant battle between the bulls and the bears. A large green candle tells us that the bulls have control. A large red candle tells us that the bears are in control.
Who’s in charge of price?
This is THE question that you must always ask yourself. Are the buyers or sellers in charge of price? The answer to this question can be found in the candlesticks and if you combine that analysis with support and resistance, you can make an educated guess about what the price will do.
This will never be a 100% accurate prediction (it doesn’t not exist in trading), but a calculated and well-argued guess. Combine these ingredients with a good risk management and you’re well on your way of becoming a profitable price action trader.
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