As traders, we owe it to ourselves to continuously explore different concepts and trading strategies. Staying profitable over time means constantly tweaking our trading game plans and regularly seeking out new knowledge. Most new traders struggle with figuring out the best place to start due to the sheer amount of information out there. Learning about price action is a great concept that new traders can build upon over time. It should be considered essential learning for anyone looking to understand how prices fluctuate in the market.
What is Price Action Trading?
Price action trading is a trading method that involves looking at historical prices of an asset in order to make better trading decisions. Instead of flooding your screen with more complex tools like lagging indicators and algorithms, price action trading focuses on keeping things relatively simple. The idea behind price action trading is that by analyzing the historical data and price movements of a stock or security, you are able to make more educated trading decisions.
It is a strategy that normally only relies on basic indicators like moving averages to find support and resistance areas on a short term chart. Sure, price action trading is not perfect, but it should be considered essential learning for every trader looking to improve their skill set. You can use price action trading for swing trades, day trades, and other short term trades in the equities, FX, and commodities markets.
Tip # 1 - Understand Support and Resistance
One of the best tips for learning price action trading is to spend the necessary time learning and fully comprehending the concepts of support and resistance. Support and resistance are good for indicating crucial price levels in the security you are trading. Support is the level at which demand for the asset is so strong that the market will not allow the price will not go any lower. Resistance is essentially the opposite, as it’s the price level at which buyers aren’t confident in buying. Learning how to map out support and resistance channels is a trading skill that can take you a long way towards becoming profitable.
Tip # 2 – Timeframes Are Key
One of the big things that new traders overlook whenever they are trying to interpret a chart of a security are timeframes. The timeframe you choose to view a security can be the difference between big gains or huge losses. If you want to understand price action trading, you need to understand the importance of looking at multiple timeframes to confirm a trade setup. Price action traders focus on anything from the daily chart to the monthly chart. The daily chart can be valuable for identifying trade setups and new lows and highs, but you should also check out a longer timeframe for a broader picture of the trend.
Tip # 3 – Candlesticks Are Your Friend
If you are interested in learning price action trading and understanding technical analysis, you will need to study candlesticks. Candlesticks are a type of price chart that shows us the high, low, open, and closing prices of a security for a specific period. You can learn a lot of information just by looking at a single candlestick. Combining candlestick charts with different timeframes is one of the main techniques of price action trading. The vast majority of traders use candlesticks to identify patterns and trends on charts.
Tip # 4 – Don’t Expect Price Action Trading to be Perfect
One of the biggest mistakes new traders make is thinking that just because they understand a certain trading strategy or system, it will work every single time. Trading is a game of risk by nature. Understanding price action is a great way to begin a trading career, but you need to accept the fact that there is no such thing as the perfect trading system. Even though price action allows us to view the market with minimal noise, it can still lead us to losing trades. Managing your expectations and learning how to sit on the sidelines patiently awaiting a trade setup is just as important as understanding trading concepts.
Price action trading is a very important tool for any trader to add to their skillset. These tips can help amateur traders improve the quality of their trading and understand how to pinpoint entries & exits with more accuracy. Spending the time to research and learn the basics of price action trading will help you out on your trading journey for many years to come.