What is Price Action?
Price action shows the activity, or the ebb and flow, of the price active itself – the action of the price. The price on any chart is the price action. Traders use price action to predict how the market is expected to move, and price action trading is the art of making a trading decision based only on the behaviour of the price.
Price action is a part of technical analysis where rather than looking at the fundamental macroeconomic trends, a price action trader will focus primarily on the current price action and its relation to past price action.
Applying any layer on top of chart data, like an indicator or any system, is just using second-hand delayed data. As price action trading does not use additional layers of data to suggest trading strategies, some price action practitioners refer to this as naked trading. In doing this, traders are looking at what the market is doing and gives traders first-hand information.
Plotting Price On Charts
There are two types of bars that plot price action. Choosing between the two price action charts is a matter of personal preference and trading style. They are:
- OHLC bars (Open, High, Low, Close)
Typically a bullish bar (bullish candlestick) is created when the closing price is higher than the opening price, and a bearish bar (bearish candlestick) is created when the closing price is lower than the opening price.
The Psychology Behind Price Action
Market psychology is what drives price. 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 developments.
Price action gives an overview of people’s emotions. Fear, greed and all market expectations are elements that compose the overall sentiment of the market. And the market is also prone to exhibit different types of behaviours.
Price action trading works because a price chart shows market behaviour. By studying the price action, we get a detailed view of the buying and selling power that goes into the markets. With a detailed view of the market, a trader can then decide whether to be buying or selling.
Who trades with price action?
Since price action is the most accurate representation of supply and demand on the market, it’s used by retail traders, institutional traders, banks, and multi-billion dollar hedge funds.
More technical traders consider price action trading as the Holy Grail of analysis, as they believe that it puts them in the best position to make more profitable trades. With price action analysis, traders can anticipate market movements and trade the price fluctuations.
It takes time and experience to master price action trading. Price action is universal as it works regardless of if the market is going up or down, and regardless of if the market is equities, commodities, cryptocurrencies or FX pairs.