What Is Price Action?

 What is price action?

Price action is the combined characteristics that are illustrated by price movements in a specific security. Price action is typically evaluated in terms of price differences (or changes) that have occurred in the past. Price Action is best described as a technique used to observe and study the current market. It gives traders the ability to anticipate the trend and make assumptions and decisions based on current/actual price movement. Traders who use this method should keep in mind that it relies solely on technical analysis. Price action strategies ignore many fundamentals when it comes to financial markets, instead relying more on past and present price movements.

Who can benefit from price action?

Speculators, arbitrageurs, prop trading firms and retail traders are the most common users of this trading approach, because it relies on price action signals and constantly changing market environments. Price action trading can be used in different securities. Forex Commodities Bonds Derivatives Stocks

Price action trading 

 1

The trader identifies the trend, whether it is bullish (rising) or bearish (falling). Then the trader identifies where the major support and resistance levels

Word of Caution: This step is challenging, and a trader can become confused during this process unless they are following strict, prewritten trading rules.

 2 Once the trader has completed step one, they can evaluate their opportunities. For instance, what are the chances of the security (stock or a currency pair) breaking through the support/resistance levels or reversing back? This step can be subjective, because while price action is supposedly an objective approach, two traders might interpret the results very differently. Therein lies the difficult and interesting nature of price action trading.

What tools can be used with price action?

There are many technical indicators available when using a price action strategy. These include trend lines, charts/graphs, price bands, low and high swings in price, support, resistance and consolidation levels, breakouts, channels, and volatility, just to name a few. While the trader may use any or all of these, their usage should be based on individual style. A significant part of price action strategy is the trader’s use of psychological and behavioral patterns to go with the flow of market actions.

Support

Support is the level at which demand is strong enough to keep price from going lower. The logic behind this is that as the price goes lower, it becomes cheaper and more alluring for market participants to buy. By the time that price is at the support level, demand will overcome supply and the price will bounce up and go higher.

There are times when the price doesn’t hold and it fails. This is an indication that the previous levels were not strong enough to prevent falling prices. As more sellers emerge and outnumber buyers, price continues to decline. After support levels break, they can become the new future resistance as a rally back to the old price support level gives traders a second chance to exit at the price level they were interested in previously.

Resistance

Resistance is the opposite of support. It’s the level at which sellers are hesitant to continue buying because it’s already too expensive. As buyers become more hesitant, sellers come into play and push the price lower.

However, resistance doesn’t always hold. Market participants may be willing to pay even more, pushing price higher until a new equilibrium is found. Once the resistance is broken, another resistance level is formed and new sellers are established. An example from the daily EURUSD illustrates this point.

Support and resistance zones

Technical analysis is not an exact science, and this becomes clear when examining support and resistance zones. Zones are like support/resistance lines, but they encompass a larger area on the chart.

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