Price action VS Indicators Signals
The use of a price action strategy is ideal for those beginner traders (but not only them) who want to operate on the market without the need for structured analysis based on oscillators or moving averages that can often confuse their ideas or make the trading choices particularly difficult.
The price action instead allows the trader to focus on the price and its behaviour. The movement, the extension, the colour of the candle, the thickness of the body of the candle, are just some of the features that can express much more than what 10 oscillators may together represent on a single chart.
Several oscillators and indicators have the characteristic to be lagging, or to indicate with a more or less consistent delay the trend of the market (see MACD, RSI, and others) if they are used in a medium long period of analysis. Instead, if the period is shortened, the oscillator becomes more sensitive, providing different false signals that, in addition to being expensive, can also cause degradation in the trader for the repeated stop and go.
By focusing only on price, the trader can understand in real time the message conveyed by the market and act accordingly in case he notices the development of particularly significant price actions.
We can prove this concept with an example by watching the temporal distance between a signal generated by a typical price action with respect to the signals generated by commonly used indicators such as MACD and Stochastic.
As we see from the circle, the bearish pin bar that the market had reported could be exploited thanks to the technique of price action on the very next day with a short entry below the low of the pin bar. The Stochastic signal sent it only three sessions after the pin bar while the MACD indicator even after six sessions.
A cornerstone of the strategy based on the price action is always to work in trend, i.e. open long or short positions but always in the main direction that the market has chosen as primary. The next graph is inserted in a bullish channel with several lows and tops that are developed when a clear directionality is created.
This allows us to set clear and defined benchmarks on the basis of which we can fix the stop loss or the take profit. On the other hand, we have a potentially large number of signals with a high chance of success in case a price action is shaped.
Operating in the trend direction obviously does not exclude the possibility of developing trades even in lateral phases of the market; the important thing is avoid going against the trend.
As we can see from the next chart, we can get indications based on signals generated by the price action also in very lateral phases.
At the base of the strategies of price action, we can always find the evaluation of how the market behaves, which tends to have repetitive movements. This characteristic of repeatability ensures a high probability of success in trading operations if certain graphics rules are followed and supported by a proper money management.
Operating in trend, but mainly focusing on certain very important price areas as supports and resistances, will allow us to build effective and efficient trading strategies.
For this reason a beginner trader will have to try to locate on the chart the most significant price action. The understanding of technical levels of support and resistance on which the market will tend to react more significantly will surely increase his success.
The graph below is a perfect example of how the technique of price action is well suited to trades that are following the main trend.
GbpUsd is inserted within a sequence of rising tops and lows. These are joined by a trend line that is drawn after the first correction of the beginning of August. This downward ends with an outside bar, or a long bullish candle that integrates the previous bearish candle. A clear bullish price action signal that in fact results in subsequent sessions. A few sessions after, a new fix and a new outside bar offer a new bullish window. After a few days, a new correction at the end of August. This should be taken as a textbook example of the price action. The fall stops exactly on two key supports. The static one linked to the low of the previous correction and the dynamic one, linked to the trend line. The pin bar that is formed is a signal not to be missed and in fact the result does not disappoint the trader. Even during the subsequent tops, the resistance generated by a previous pin bar is a great short entry point at the occurrence of a new bearish price action.
Some techniques such as those related to Fibonacci retracements can be very useful in this case.
Here we can see a couple of examples where price action and analysis of support and resistance have provided an exceptional trading signal.
The UsdCad chart shows how powerful a pin bar exactly formalized close to a previous primary top was. In that case we could not know if we were facing a potential double top, but the element of certainty was represented by the good risk / reward that we were facing. A short entry at that point would have been smart from a technical point of view, always setting a stop loss near the top of the previous month. The clearly bearish next trend explains much of the power of this price action as a trading tool.
Let’s now observe a second case of price action that takes place on a significant support this time. In this case we are talking about GbpAud and the outside bar is made exactly close to the 61.8% of retracement of the entire bullish trend. Traders usually identify this threshold in a significant point of support (maybe the last one) before a definitive trend reversal. It’s clear that a powerful price action figure such as an outside pin bar has a very powerful meaning in this situation. Going long with a stop loss below the low of the pin bar proved in that case to be an excellent trade considering the following days.
Those discussed above are just a few examples that try to explain how the technique of trading based on the price action can also be used by beginner traders provided they comply immediately with the basic principles that we have begun to illustrate in this section.