Price action trading is a day trading method in which traders make trading decisions based on price movements rather than indicators derived from technical analysis. So what exactly is price action trading and how accurate is price action trading. Let’s find out by reading the article below.
What is price action in trading?
Some traders base their decisions on an asset's price movement. This is the premise of price action trading - following price movements and taking trades based on what they believe to be the most profitable action.
Most price action traders don't use technical indicators such as moving averages or Bollinger Bands, but if you do, you should rarely consider them in your trading decision-making process. Price action traders believe that the only trustworthy source of information comes from the price itself and its movements.
If the stock starts to climb, it's a sign that investors are buying. They then evaluate price action based on buying aggressiveness; historical charts; and real-time price information such as bids, offers, volume, velocity, and magnitude.
Price Action Trading System
Price action trading is simple, and most systems typically have a two-step process to identify and take advantage of trading opportunities in the market. Proceed as follows:
Determine prevailing market conditions
As mentioned above, markets can be in an uptrend, downtrend, or move sideways. By looking at the price of an asset, a trader should be able to quickly determine what stage of the price movement the market is at at that time.
Identify trading opportunities
After identifying the current market conditions, the trader then proceeds to determine whether an actionable trading opportunity exists. For example, in an uptrend, the price action should tell the trader whether the price will continue higher or if a retracement is expected. An example of a price action trade is when the price of gold has been trending higher and approaching $2,000. If it manages to break above this level, $2,000 will now act as a new support area. Long positions will now be initiated after a pullback failed to break below $2,000. If the earlier support level was $1,980, price action traders would place stops below that price, which is where the uptrend would be considered invalid. Trade exits can be triggered when traders meet their risk/reward ratio, or when the market fails to make higher highs and higher lows.
How accurate is price action trading?
Price action trading is not perfect. No trading system or strategy is 100% correct. However, price action strategies have proven to be quite accurate, with many setups used by price action traders showing success rates of 75% or higher. The most accurate trading pattern used by price action traders is the head and shoulders (or inverted head and shoulders) setup. When properly identified and traded, this setup was more than 83% accurate in reaching the intended target. Other accurate setups include bullish and bearish rectangles (with close to 80% accuracy), and triple tops or triple bottoms (also with close to 80% accuracy).
I hope this article will help you to learn what exactly is price action trading and how accurate is price action trading. All new traders can benefit from learning price action trading. Learning to read and interpret price chart movements is a trading system in itself. It helps if you decide to implement other analysis tools such as statistics, metrics or seasonality.
