What Is Price Action Trading?

Nancy B. Alston

The term “price action” has become quite a buzz word in the trading world recently, and at least once a week I am asked exactly what the term does mean. To be quite honest, trading with price action really is all that and even more! After all, how many hedge fund managers or other large traders that manage money do you really think make trading decisions based on MACD, RSI, Stochastic, CCI or any other indicator that is based on nothing more than lagging prices? I can assure you that the answer is closer to zero than it is to one, as most of these market traders are the smartest in the business and they know how to trade price action without a doubt.

In its simplest form, price action trading is nothing more than making trade decisions based on prices alone as they are printed to a chart. It’s often called “trading naked,” because all of the clutter and confusion of adding indicators is no longer necessary and your charts are clean and easy to see. After all most indicators are actually derived from previous or lagging prices, so those indicators are actually giving you data that is based on past or dated prices. Why would anyone think that this was actually a smart way to trade the markets? When you learn to read a chart based on what printed to it alone, then you begin to understand that there are certain rules or properties that prices actually follow. No, they are not written in stone like the laws of physics, but these rules and properties hold true often enough to give you an edge when entering and exiting your trades, and that’s what it takes to make money when trading: An edge!

Trading with price action is not easy, but it’s not that difficult to learn either. It will feel strange at first, particularly if you have spent a lot of time entering trades using indicators. Understand that if you spend the time and actually learn to read a chart, you will have an advantage over 90% of all retail traders, and that will likely place you into the 10% of traders that actually survive and profit as market traders. Understand that price action trading works in any market that can be charted, including stocks, futures, bonds, forex, precious metals, etc. Trading with price action is not something that will work short-term and then slowly lose its effectiveness as the markets evolve. As long as there are markets and charting software, this strategy will give traders a distinct trading advantage.

There is a lot of information out there on many websites that offer a price action strategy, so make sure you find an instructor that teaches pure price action and not some variation that is not a true price action course. Just know and understand that price action trading can and will change your trading for the better!

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