Price Action Trading

Price action trading is a method that garners a great deal of respect in the trading community. There may be thousands of types of trading techniques. However it’s quite common for most veteran traders to give a tip of the hat towards a fellow price action trader. That being said, we can break down traders into one of three categories: Price action traders, indicator traders, and those who use both. If you’re just starting out then price action trading is one of the simplest forms of trading to learn. I encourage you to stick around to see how it can help you.

Typically, most traders and investors rely heavily on technical analysis or fundamental analysis to determine their entry and exit points. Price action trading simplifies this by making real-time trading decisions based on a stocks price movement on a chart.

What Does Price Action Mean in Trading?!

  • The concept of price action trading is relatively simple.
  • If the price action is bullish, you look to place a long trade at a key level.
  • Likewise, if the price action is bearish you look to place a short trade at a key point. 
  • Armed with this information, you can decide if it’s time to go long vs short
  • Ultimately, your goal is to pick the right entry point so you can maximize your profits when buying and selling. 

Price Action Trading vs Technical Analysis

Stocks vs Options

You’re probably wondering, “how is price action trading is different from technical analysis trading? Well, they are sort of the same but different.

Price action trading focuses on price, whereas technical analysis considers several things – price included. With technical analysis, you rely on a specific set of rules to make your trading decision. We refer to this set of rules as your system or trading plan. 

With a system, you know exactly your entry and exit points. Which means you have a trigger into and out of trades instead of just trading the setup.

In other words, you don’t just enter a breakout pattern; the pattern must match your criteria. For starters, some day traders will only enter if the 9 EMA is above VWAP, volume above 300,000 and a float less than 20 million. Technical traders will only enter when their specific criteria is met. 

On the flip side, price action traders zero on price, but they’re not strictly rule-bound. As opposed to relying solely on technical indicators, price action trading enables a trader to read the market based on the recent and actual price movements.

Like no two people are alike, no two price action traders interpret price action in the same way. Which means, they have different rules based on their own interpretation.

On the other hand, a technical analysis trader with strict rules (like 15 DMA crossing over 50 DMA) will yield similar behavior and actions (i.e. buy trigger) from other technical traders. 

Tools Used for Price Action Trading

Price action traders use all the technical analysis tools – charts, trend lines, support/resistance levels, along with recent historical data and past price movements.

Furthermore, simple price bars, price bands, breakouts, trend-lines, or complex combinations involving candlesticks, volatility, channels, etc. can also be utilized.

If you want a watch list to try price action trading with than check out our list of penny stocks.

Price Action Trading TSLA
A simple heikin ashi chart of $TSLA using a 5 minute time frame shows a perfect short entry on a trend line breakdown. Sometimes simple is better.

What Is a Price Action Trading Strategy?

  • One of the most common price action trading strategies is to trade a breakout.
  • A stock that’s been moving one way for a while, eventually will break the trend and reverse or pick up speed. Typically this is some type of pattern, like an ascending triangle.
  • It is at this reversal where we make money. 
  • For example, assume stock ABC is trading between $10–$11 for the last 20 days. and suddenly it moves above $11.
  • This sudden change is a signal to traders that the sideways movement might be ending.
  • And that a possible move to $12 (or higher) has begun.

Having said that, breakouts occur from many different types of patterns, not just one. We see breakouts of ranges, patterns – head and shoulders, flags, the list goes on. 

Breakouts can provide you with an excellent opportunity to make some profit if you catch them on time. 

Psychological Support and Resistance Levels

Another subtle feature that distinguishes price action traders is their use of psychology and human behavior. They might set specific buy or sell rules when a stock hits a whole number.

Naturally, humans are attracted to whole numbers, which translates to psychological support and resistance lines. Also, we tend to gravitate to round numbers that end in 0 and for lower-priced stocks, those with 25 or 50 cent increments.

To put this in perspective, think back to when you were young. You probably won’t remember, but we were exposed to whole numbers and those that end in 5 in every aspect of our life.

For example, payphone calls were 25 cents and items for sale ended in $0.99, so it felt like a bargain. I hate to tell you this, but the market is no different.

People see a whole number like $150 and think, “I got to get out now!”. It’s a blatant psychological price point.

Coincidence? I think not. I believe these price action traders are on to something. We talk both price action trading and support and resistance in our trading room.

A Work of Warning About False Breakouts

I do want to warn you about one thing: A breakout doesn’t mean the price will continue in the direction you think it will.

Sometimes, you could be seeing a false breakout. That is why it’s essential to use your indicators for additional verification. Be aware of major supply and demand zones and never be caught off guard.

One in particular indicator I use is very simple, and used by new and experienced traders alike. Volume. Traders use volume to confirm uptrends such as breakouts, downtrends and overall chart patterns (i.e. head and shoulders, flags, etc.).

So if you want to trade breakouts, a volume surge is mandatory to confirm that it’s, in fact, a breakout. Generally, any price movement (up or down) with relatively high volume is a stronger, more relevant move than one with weak volume.

At Bullish Bears we love to trade breakouts. If you want to learn how to spot a breakout and trade it profitably, sign up with our stock trading service today. 

Nasdaq Penny Stocks List
Check out $SRNE – fantastic move with 5 minute candles moving above the 9EMA on the daily time period. (a function that only trendspider does well) Note the increase in volume to confirm the trade.

Closing Thoughts

To conclude, price action trading uses simple technical analysis along with recent price action history. Price action traders rely heavily on the movement of price and utilize psychological tactics to turn a profit with their trade. It’s a no nonsense way of trading stocks, options or futures. Finding patterns like the bullish homing pigeon along with general price action is a fantastic way to trade stocks or forex. 

Are you curious to learn more and figure out how to spot a breakout? You’re in luck as we’ve got a plethora of courses and materials to get you started. Checkout our free online trading courses and get started. 

2 comments on “Price Action Trading

  1. Troy Wilkinson on

    One of the most complete explanations of the difference between Price Action traders and technical traders. Thank you.

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