If you’re a beginner new to the concept of price action, it’s good to have a clear understanding of what is price action and how to use it. Price action means countless different things, but put it simply, it shows the activity or the ebb and flow of the price itself. As the name suggests, it’s the action of the price.
The price you see on any chart is the price action. Many technicians use price action to determine how the market is moving and Price action trading is the art of making your trading decision based purely on the price.
Price action is a part of technical analysis, completely separate from fundamental analysis which is more focus on macroeconomic issues. Rather than looking at the macroeconomic trends, a price action trader will focus primarily on the current price action and its relation to past price action.
It is important to note that applying any layer over top of the chart, like an indicator or any kind of system, is just using second-hand delayed data, which is another form of technical analysis. Because price action trading does not use these layers of date, some price action practitioners refer to this as naked trading.
With price action, we’re looking at what the market actually generates and gives us first-hand information, as opposed to using technical indicators which is second-hand information.
The two most popular types of bars that plot price action are:
- OHLC bars (Open, High, Low, Close)
Typically we get a bullish bar (bullish candlestick) when the closing price is higher than the opening price. On the flip side, we get a bearish bar (bearish candlestick) when the closing price is lower than the opening price.
Choosing between the two price action charts is a matter of personal preference and trading style.
The Psychology behind Price Action
The driver behind the price is market psychology. Even though there are a lot of fundamental and technical reasons for the price to move, ultimately it’s all about the traders in the market, and their reaction to those developments.
Price action gives an overview of people’s emotions. Fear, greed and all the market expectations are elements that compose the overall sentiment in the market. Same as with human beings, the market is also prone to exhibit different types of behaviors.
The reason why price action trading works is because when we interpret the price chart, we are actually reading market behavior. By studying the price action, we can also have a detailed view of the buying power and the selling power that goes into the markets. Once you’re able to determine these things, you’ll know whether you should be buying or selling.
Who trades with price action?
Since price action is the most accurate representation of the supply and demand (buying and selling power) that goes into the market, it’s used not just by retail traders, but also by institutional traders and multi-billion hedge funds.
Many people consider price action trading as being the Holy Grail of analysis because it can put you in a better position to make more profitable trades. Once you understand price action, you can anticipate what the market will be doing in the future, and you can also capitalize on these price fluctuations by committing some of your money.
However, as with every any new skill, it takes time and experience to master the art of price action trading. Price action is universal as it can tell the same story of if the markets are going up or down – whether it’s stocks, commodities, cryptocurrencies or Forex currency pairs.