If you’re a day trader, you probably know that price action strategies can allow you to turn a profit quickly over a short period of time. If you’re just getting into day trading, you might still be wondering how to make price action trading work for you. When it comes to this trading technique that allows a trader to read the market and make subjective trading decisions based on the recent and actual price movements, there’s no such thing as too much information.
The Tools Of The Trade
Price action trading ignores the fundamental analysis factors and puts more focus on recent and past price movement, making it a strategy that’s dependent on technical analysis tools. Since it relates to recent history and past price movements, some of the best tools include:
- Trend Lines
- Price Bands
- High and Low Swings
- Technical Levels (support, resistance, and consolidation)
Other tools and patterns that are observed by the trader can be as simple as:
- Price Bars
- Complex Combinations
The trader can also use personal psychological and behavioral interpretations and actions as tools in price action trades. While a technical analysis scenario (like 15 DMA crossing over 50 DMA), can spark a similar response and behavior in multiple traders, it is unlikely that two traders will ever interpret a certain price action trade in the same way. Each will have their own set of interpretations, rules, and behaviors of understanding.
Taking Steps To Price Action Trading
Any trader can use price action trading tools and techniques. It’s an approach that uses predictions and speculation, making it useful to retail traders, speculators, arbitrageurs, and trading firms. It can be used on a wide range of securities such as equities, bonds, forex, commodities, and more.
Most traders follow a two-step process to find patterns and opportunities. First they identify a scenario, then they identify the opportunities within the scenario. For example, if a stock is getting into a bull phase, it’s likely to either overshoot or retreat, giving the trader a subjective choice that can vary from one trader to the next. Price action trading can rely greatly on technical analysis tools, but the individual trader makes the final call, which allows for flexibility instead of a strict set of rules that must be followed.
Why Is Price Action Trading So Popular?
Price action trading is discouraged for long-term investments, but works better for short-to-medium term profit trades that are limited. Many traders view the market as following a random pattern, giving them no opportunities to define a strategy that will work in every scenario, every single time. But combining the technical analysis tools with recent price history to identify trade opportunities based on personal interpretation makes price action trading a popular way to come close. Though trading can provide a good opportunity for a profitable outcome, it’s the trader’s responsibility to understand, select, and decide upon what actions will meet the requirements to do so.
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Your broker may have a contractual agreement not to seek redress for slippage, it’s obligation to execute stop loss orders at the stop loss price or better, will not apply to limit and stop loss orders during hours when it is closed. This also does not include bad price spikes. Bad price spikes are removed from the price charts quickly to alleviate confusion.