You might have already heard about the “Price Action” strategy or method, but do not clearly understand or identify what it is about, what it is based on, and if it is for you. This article will describe what price action is, what it is based on, what are the advantages, disadvantages and who this type of strategy or trading pattern is for in the prediction market.
What is Price Action?
Price Action is a method used by an analytical trader who does not want to entrust his trading decisions to technical indicators or automated systems but prefers to make buy and sell decisions based on the situation of the price here and now.
Why Price Action?
- It is the fundamental language of every financial market.
Before technical indicators there is price. Price is a reflection of supply and demand. Supply and demand are what govern every market in the world and mass psychology is immersed in it.
When you trade based on price action you are trading the constituent of the market, the really important thing, which goes deeper than analyzing candles or figures independently
The price action trader understands that their buy and sell decisions are based on the 5 elements of price action, not simply the formation of candlestick patterns or isolated chart patterns on the chart.
What is the Price Action approach based on?
This approach is based on 3 main characteristics:
– Flexible, unsystematic approach
Flexible trading is based on decision-making (the trader decides which operations to carry out based on current market conditions). The opposite of flexible trading is systematic trading that is based on rules (the system decides which trades to take, regardless of current conditions).
Both flexible trading and systematic trading have the potential to be equally profitable, so the decision should be made based on the personality of the trader.
– Principle of Supply and Demand
Demand refers to the quantity of a product or service that buyers want. Taking this to the crypto market, the quantity demanded is the number of coins that people are willing to buy at a given price. The offer (sellers) represents how much the market can offer. Price, therefore, is a reflection of supply and demand. Within these two concepts is enclosed the term “balance and imbalance”.
– Balance and imbalance between supply and demand
When supply and demand are equal, buyers and sellers are said to be in equilibrium. At this point, the quantity of shares supplied is exactly the same as the number of shares demanded. Therefore, everyone is satisfied with the current market condition. At the given price, the bidders are selling all the shares they have and the buyers are receiving these shares they are demanding.
On the other hand, imbalance occurs when supply exceeds demand or demand exceeds supply. If the price is too high, it will create an oversupply and it will fall. On the other hand, excess demand is created when the price “is cheap.” Because the price is so low, market participants want the good (stocks).
Let’s take a look at what balance and unbalance look like in the market in the images below.
Buyers vs Sellers in the market!
The main elements of Price Action
A trader who trades Price Action looks at 5 main elements:
In what condition is the price at the moment? Trend or range? What relevant supports and resistances are important on the chart? The market structure basically answers the question: What has the price done in the last minutes, days, weeks, or years? (Depending on the type of trader you are).
Forceful price movement
Which side has the power? In which direction does the price move more easily or in which direction is it difficult for it to move?
Price reversal signals
What signs am I seeing that indicate that there will possibly be a turn in price and a change in market structure? If the trend is bearish, what is the chart/candles telling me that indicates a possible reversal?
Volume is NOT an indicator; it is simply data. A very useful piece of information is reflected in bars in the histogram. The price action trader looks at the volume to identify strengths and weaknesses on the part of buyers and sellers and uses it as a confirmation after they have collected the information in points 1, 2, and 3.
What candles serve as confirmation to enter in favor of purchases or sales? This element is also used as a confirmation after collecting the information from points 1, 2, and 3.
Once these elements are identified and confirmed, the flexible trader enters the market defining in advance a stop and awaits the appearance of elements to close his trade. It does not automatically close at a certain price level; it waits patiently for the price action to decide that it is time to close.
Pros and Cons of Trading with the Price Action Strategy
Adapts to current market conditions
You may have a great trading system, but if you know that it tends to malfunction when certain market conditions exist, you can avoid taking those trades or bets. Or if you find that your strategy has a tendency to perform very well in other conditions, you can increase your position size slightly during those times to maximize profit. Trading price action also allows you to read what is happening here and now in the market and take advantage of the signals to trade, while an automated or strict rules-based system can inhibit you from taking advantage of these types of opportunities.
It is susceptible to the psychology and emotions of the trader
The downside to a discretionary system is that many traders are prone to doubting themselves. “Could this be the right time to enter?” If they have already had losses, they often doubt their ability to read the price and its context. A high level of concentration and self-control is required to apply this method as it requires the trader to be immersed in reading and interpreting the charts without the interference of emotions.
Price Action Summary:
- The Price Action method is based on the basic principles of supply and demand and considers only the context and price movement.
- This method is NOT for all types of traders. It is for the analytical trader who does not want to trade using indicators, but to have a clean chart to be able to interpret the information that the price leaves and how to take advantage of the opportunities.
- This method does not contemplate automatic exits to take profits (the exit by stop loss must be automatic to guarantee good risk management), but the price context itself will indicate to the discretionary trader that it is time to close his trade and exit with your profit.
- If you decide to trade with this approach, you need a lot of practice to be able to identify the ideal scenarios based on the 5 elements of price action.
- This method requires self-control and a lot of discipline on the part of the trader, as it can be susceptible to their psychology and emotions.