Traders can choose multiple trading styles based on their skills, experience, goals, and other personal preferences. Some trading styles are more popular than others.
Price action trading is also a top contender in terms of popularity, and it’s one of the best trading styles for both beginners and experienced players.
Don’t know what action price trading means? You must be new to trading! Don’t worry; we have got you covered.
In this article, we will discuss what price action trading is, and we will also talk about its advantages and disadvantages. We will also mention the best strategies for price action trading. Moreover, we will discuss the important things you should learn as a trader.
Stay tuned until the end to find out if this trading style is the right fit for you.
What Is Price Action Trading?
As the name suggests, price action trading involves analyzing the basic price movements to identify trade entry and exit signals. Price action traders don’t rely only on technical indicators but make trading decisions based on recent and actual price movements.
It’s a suitable trading style for short to medium-term traders. It can be your primary trading style, and you should aim to make medium to small profits per trade.
Now, let’s discuss the best strategies you can follow.
Best Action Price Trading Strategies
Trend Trading
Many traders make trading decisions based on market trends (trends in price movements), and it’s also an excellent strategy for beginners, as it’s easy to execute. You can use various tools and techniques to identify and follow market trends.
Based on your analysis, if you have predicted an uptrend, you can open a ‘buy’ position, and if you have predicted a downtrend, you can open a ‘sell’ position.
Spring at Support
Spring at support can be a profitable strategy if executed correctly. Generally, there is a sudden rise in an asset’s price when it hits or reaches close to the support level.
Traders following this strategy look for entry points near the support. To execute it correctly, you must be good at identifying support and resistance levels.
Inside Bar
The inside bar pattern consists of two bars: the mother bar and the inside bar. In this pattern, the mother bar is bigger, and the inner bar lies between the low and high range of the outer bar.
Generally, inside bars show a period of market consolidation, but they can also indicate a turning point. Traders identify such trends and make their trading decisions accordingly.
The Hammer
As the name suggests, the hammer is a candlestick on the price chart that looks like a hammer. It’s generally found at the bottom of a downtrend, and most traders view it as a reversal signal. This strategy can be highly profitable but involves high risk, as not all traders identify signals correctly.
Well, these are the best strategies for action price traders. They all can be equally profitable depending upon the market conditions.
You can also choose other popular options, such as the trend after breakout entry, the harami, head and shoulders reversal, and the pin bar. You should choose an option depending on your personal preferences, skills, market conditions, and other important factors.
Why should you choose price action trading as a trading style? Do you have such questions in mind? Well, it has several advantages, which we will discuss in the following section.
Advantages of Price Action Trading
Easy to get started
This trading style is suitable for both beginners and experienced traders. You won’t have to undergo professional trading to start price action trading.
Based on your interpretations, you will have clear entry and exit points, and if your predictions are correct, you can make a significant profit in the long run.
Also, once you gain experience in this area, you will find several other trading styles/strategies easy to follow.
Time-tested trading style
Price action trading is a time-tested option, and traders have been using it for a long time. Support, resistance, trends, and other main principles of price action trading aren’t new to traders.
No need to worry about long-term price movements
Price action traders don’t have to worry about the long-term performance of stocks. They are more concerned about short-to-medium-term price movements, which means they can also find opportunities in bad market conditions.
It also means a company’s fundamentals aren’t its major concern. Such flexibility helps them stay active throughout the economic cycle.
Money doesn’t get stuck in one asset
Having funds in the trading account is very important for traders, as they open several new positions every day or week, depending upon their trading style.
Since price action traders usually try to capitalize on medium or short-term trends/patterns, their money doesn’t get stuck in one asset for extended periods.
You can make profits fast
You aren’t guaranteed to make a profit, but price action trading can help you make profits quickly. Unlike long-term investors, they don’t set big price targets, and they try to make a small-to-medium profit per trade.
With consistent effort, these small profits can add up and turn into a significant amount. It’s important to set realistic goals depending on the market conditions.
Self-development
No book or video can teach you the things you can learn as a trader. The experience you gain now will help you throughout your trading journey, and price action trading can teach you a lot. You can learn how the market (stock prices) reacts to news and other factors. You can also learn how to read charts and identify trends correctly.
It can be challenging to understand the market conditions at the beginning, and you may also fail many times. However, if you are an active learner, action price trading can help you greatly in self-development.
So, these are the advantages of price action trading. It’s one of the best trading styles; however, it has a few disadvantages, just like other trading styles.
Let’s have a look at them.
Disadvantages of Price Action Trading
Time-consuming
You will have to study charts and identify patterns to find the right entry and exit points. The process isn’t too difficult, but it can take a considerable amount of time. You should choose this trading style only if you are willing to put in the effort and time it demands. You should also be able to handle stress.
It can be challenging to combine price action trading with a 9-to-5 job. You can combine it with other trading styles, but they should complement each other.
You can’t automate your trades
It can be difficult to automate price action trading strategies, and traders have to do things manually. They have to control their emotions and can’t let personal bias come into play to be profitable in the long run.
Market noise
Unless you prefer noise trading, market noise will be one of your biggest enemies as a trader. Rumors, bad news, and several events can lead to a short-term decrease in a stock’s price. Traders who have open positions in such situations can suffer.
However, such downtrends are often temporary, and the market starts moving in the right direction soon after things get settled down. Moreover, traders who stay active can find new entry points when stock prices fall temporarily.
Every trader reads signs differently
Every trader is different and reads signs differently. You will read signs based on your skills and knowledge; some other traders will read them based on their experience. It means chances of making an error are there, and if it happens, an asset’s price may not move in the direction you predicted.
So, to minimize the risk, you will have to check every little detail carefully before making a decision.
Sometimes signals can be hard to predict
In certain situations, signals can be hard to predict, especially for beginners. Many traders find indicator-based trading easier than price action trading. If you can’t predict the price movement correctly, the risk will increase. You can’t avoid false signals, and you will likely make mistakes, but no trading style is 100% risk-free.
So, these are the disadvantages of action price trading. If the advantages of a trading style outweigh its disadvantages for you as a trader, you can try it.
On the other hand, if the disadvantages concern you, it would be better to choose some other option as your primary trading style.
Starting your journey as a price action trader is easy. However, there are some important things you should learn before trading stocks.
Things Price Action Traders Should Learn
Different types of charts
As an active trader, you will need to read charts regularly, and you should be good at it. Line charts, candlestick charts, bar charts, and point and figure charts are the most preferred options; however, many other charts are also used for technical analysis.
Many traders prefer candlestick charts/bar charts over line charts. However, each chart type has its importance, advantages, and drawbacks, so you should pick an option based on your preferences and requirements. The best option is to learn how to read all of them.
Types of market trends
A trader must be good at identifying market trends and patterns to make the right moves. It’s even more important for short-term traders. Mainly there are three types of trends.
Downtrend
As the name suggests, stock prices decrease in a downtrend. If a series of lower highs and lower lows is observed on the price chart, we can say the stock is in a downtrend or bearish trend.
Uptrend
Stock prices rise in an uptrend. When a series of higher highs and higher lows is formed on the price chart, an uptrend or bullish trend is observed. Traders try to open a position at the beginning of an uptrend.
Sideways trend
A sideways trend is observed when the swing highs and swing lows move within a horizontal range for a period. Sideway trends are often observed during a consolidation period.
Usually, a continuation of the existing trend or reversals is observed at the end of a sideways trend. You can find many entry points during this phase, and short-term forms of trading can be very profitable.
Support and resistance
Support and resistance are two important levels for traders, and you should be clear about these terms. You should also learn how to identify these levels.
Support is a price level on the chart where the buying interest exceeds the selling pressure, or the demand tends to exceed the available supply. The high buying interest/demand stops the stock price from dropping any further, and a rise in the price is usually observed. Most traders find an entry point near the support.
Resistance is also a price level on the chart, but the selling pressure exceeds the buying interest, or the available supply tends to exceed the demand at this level.
The high selling pressure stops the price from rising any further, and the stock price usually decreases. If the stock price breaches the resistance level, a breakout could occur.
Importance of liquidity, volume, and volatility
When you buy a stock, liquidity, volume, and volatility should be your top priorities. You should understand the importance of these factors.
Importance of risk management
Risk management is an important part of trading, and price action traders should also do it the right way. Without proper risk management, there will be no limit to your risk, and you can lose a significant amount of money.
Stop-loss is a helpful tool for traders, and you should use it whenever you open a position. It will limit your loss, and you can set it based on your risk tolerance.
You should also diversify your portfolio as a trader and start trading smaller positions during your learning phase.
Is Price Action Trading Profitable?
Yes, price action trading can be very profitable, and there is a reason why many traders choose it over other options. If you are good at reading charts and identifying trends, it can be one of your best trading styles. However, like other trading styles, action price training doesn’t guarantee profits.
You can lose a significant amount if you fail to read the signs correctly and don’t do proper risk management. So, you should invest the effort and time it requires and follow a good strategy to minimize the risk. If you take care of every little detail and do the execution part correctly, you will likely be successful in the long run.
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Conclusion
We hope you have found this article helpful and cleared all your doubts about action price trading. It, without a doubt, is a good trading style. If you follow and execute a good strategy effectively, you will likely make a profit. But before starting your trading journey, you should familiarize yourself with the terms mentioned in this article.
If you are new to trading, you should choose one trading style and get good at it before learning more. If you have read this article carefully, you will know if price action trading is a suitable option for you or not. It can help you a lot in the long run, as you will get good at reading charts and predicting price movements.