Updated: May 26
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Did you know that most of the technical indicators are derived from the price? Besides, price action trading plays a crucial role in all types of trading? Be it scalping, intraday trading, breakout trading, or positional trading.
This article will cover all the aspects of price action trading, starting from the basic definition to the application part, which is beneficial to forex, commodity, equity, and derivatives traders.
What is Price Action?
'Price Action' means price fluctuations of a script in the given market.
On any trading day, from open to close, the price keeps on changing. This variation is nothing but price action (market action).
What is Price Action Trading?
'Price Action Trading' is a trading technique in which a trader reads the market, and makes subjective trading decisions based on the price movements, rather than relying on technical indicators or any other factors.
In simple words, traders use only 'Price' and 'Volume' to make any trading decisions.
The famous trader John Murphy has mentioned in his book "Technical Analysis of the Financial Markets", that technical analysis is the study of market action using charts, aiming to forecast future price movements.
He also suggests the best way to learn stock market is using only two components - 1) Price and 2) Volume.
What Does Price Action Mean in Trading?
Removed all of the Moving Average (MA), Bollinger Band (BB), PSAR indicators?
Removed all the underlying indicators like RSI, Stochastics, MACD, ADX?
Do you think you would be able to trade? some traders may ask how to trade in stock market then?
It might look impossible, but don’t forget most of the indicators derive their existence from one thing – ‘PRICE.’
A fluctuation in the price will also bring variations in those indicators. Isn’t it?
Then which is better to study? The PRICE, or Indicators? one can think for some time.
The three essential components in share market trading are (in the same order):
Price—it advertises all the opportunities.
Time—it regulates all the opportunities.
Volume—it measures the success or failure of all the advertised opportunities.
Volume is essential as 80% of the trading volume is given by 20% of the big players.