Why price action is the best way to learn trading
What Makes the Market to Move?
Trading is one of the toughest ways to make the easiest money. Making money from market depends on how correctly you predict the market movement. Market movement depends on various factors like news, weather, Wars, economic reports etc. So, to predict the market movement, you have to track all these variables, if you rely on news to predict the market.
Disadvantage of News Based Trading
Imagine, You want to be a Trader and you try to follow the news, and based on your perception from the news you take the trade. Think what will happen?….. you have to stick continuously to the television, blog or any news resources to make the trade. That may be a very complicated and time consuming process. It is almost impossible to analyse all information and take trade in a very short span of time. Besides this factor, there is always issue of delay delivery of news and authenticity of it.
However, for long term investors news, economic reports, politics etc. play a very crucial role in investing. Many times as a trader you have noticed that the market has already given movement before you knew the news or it went against the news. With such uncertainty, complexity, and time consuming method it makes trading even more difficult.
What is Price Action Trading?
Then, naturally a question will arise, what is the best alternative to learn trading. Answer is Price Action. Price action method is the way to analyze the recent price data of a particular security index, forex, cryptocurrency or any financial script to predict future price. And making decisions based on the recent price movement. Price movement occurs due to various factors.
We know that the market variables like news, Politics, company performance and economic reports affect the market movement. And this movement is reflected through the price of the script. And this action of price movement is called price action. And this action of price movement is analyzed through the price chart. The most preferred and the favorite price chart for the traders, is the Candlestick charts.
The concept behind price action trading is that. The variable, which decides the market, eventually is going to be reflected through the price chart of the financial scripts. That’s why there is no need to stick to the news throughout the day. To observe and predict the market, there are certain price action based rules, methods and components of price action, by understanding those components rules setups and methods one will be able to understand the nature of the market by analyzing the recent price chart data.
Price action trading is also known as a naked trading. Because, the trading decision is made based on recent price movement on price chart. We do not depend on lagging indicators and news. All indicators are derived from raw data of price action. But it is advisable for new traders to use indicators to identify market trends and dynamic support and resistance.
Example of Price Action Trading Vs News Trading
And here with the example, we are going to discuss how the price action and the news react to the market.
For this, we consider the time period before the US presidential election of November, 2016.
Before the election Nov 8, 2016, most analysts and investors believed that Donald Trump Victory would create significant uncertainty in the market. The primary reason was the trade Wars, tariffs, uncertainty in policies, his unpredictable nature, his proposals regarding tax and other regulations. And due to this many thought market volatility will increase fears and cause a prolonged downturn
Market reaction on election night: As election results started coming Dow Jones Futures fell over 800 points and the global markets declined. The Mexican peso crashed to a record low. Gold prices spiked, as investors moved to the safe haven assets. By anticipating the uncertainty and the market. Till this point, it seems like the anticipation of a market crash is coming true.
Election Result Day: On the 9th November, 2016. It was clear that Donald Trump will be the next president despite that initial panic market reversed sharply just after a few hours. And it not only recovered but surged over 250 points by the end of number 9 and continued in the following weeks and the S & P 500 hit an all time high.
But, we observe from the initial news and analysts and other investors anticipating the market will be in a downturn due to Trump’s Policy and his natures.
But eventually, after the declaration of the election result the market showed overall bullish behavior completely opposite to the news and analyst anticipation(see chart below).
Price Action Analysis: But, if we observe the chart(See chart below) we can simply identify that possible bull market ahead. As on November 7, 2016 candlestick formed on the day chart is super bullish (Marubozu candlestick), Which indicates a high chance of the market going bullish in upcoming days. And the next day we saw another green candle with some volatility.
And on the day of 9th November 2016, we saw that after the initial fall the market reversed and moved to 250 points by the end of the day. We observe that from the 7th, November 2016, candlesticks indicating that the market may be going to be bullish while the news agency and other analysts were anticipating, the market will be bearish.
Here, clearly it has seen the price action won over the news and analyst.
Advantage of Price Action Trading Over the News Based Trading
- Price action trading leverages historical price behavior to predict future moves, providing a more stable approach compared to the uncertainty of news reactions.
- Price action trading is versatile and works across stocks, forex, commodities, and cryptocurrencies without the need for market-specific news expertise.
- Price action strategies are effective in trending, ranging, and volatile markets. News-based trading often thrives only during major events.
- Real-Time Market Insights with simplicity and clarity.
- Avoid information overload and reduce emotional bias.
How to Master Price Action
To master the price action trading, you should have knowledge of technical analysis, risk management, and positive psychology and to implement these must have rigid discipline.
Technical analysis comprises candlestick pattern, chart pattern, market structure, chart reading, support and resistance identification, trendline and channel identification. Risk management is the process of controlling potential losses in trading to ensure long-term survival and profitability. It helps traders protect their capital and avoid emotional decision-making. Trading psychology refers to the emotional and mental state of a trader that affects decision-making. It plays a crucial role in success.
Just knowledge is not enough to be a successful trader. Consistent controlled psychology, discipline, risk management and profitability for a long duration(at least 6 months) is the indication of being a successful trader. It tests your patience, greed, fear, learning, discipline etc. during the learning phase and during learning there is chance of many time you blow up your capital. That is why I started with “Trading is one of the toughest ways to make the easiest money”.
Conclusion
As we know trading is very stressful job. And tracking market variables to make trading decision makes it even more difficult and stressful. So if you want to be a trader, first learn price action component, basic trading strategy, chart reading then start it with small capital and proper risk management, psychology and discipline.
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