Many traders tend to overlook the price action strategy. Most of them only focus on the place to place the indicators when they are about to enter a trade.
The price action strategy helps traders to understand the market emotion and direction. Understanding the key price action inside the trading charts help traders to make a more effective analysis.
Price action translates into the study of the price alone, without any use of technical indicators. In other words, price action study lets traders to just analyze the data from the market, without comments from a moving average, trend-following tools, and many more.
Price Memory
On its basic idea, technical analysis is from a belief that the market or the price has a memory. The price will define the market, which makes the market know at what price levels deserve quick reversal. Besides, that makes the market sees directions with the least resistance.
Traders normally look for trades in the path with the least resistance or getting near to the reversal levels. Knowing these levels or trading around them will take extra conviction breaking through these memory zones.
Yet, you always have to remember that analyzing this pure data price or analyzing the price alongside the indicators does not change the uncertain future. But, price action, at the very least, allows traders to know whether key levels are packed with conviction or indecision.
Regardless of the pattern that you trade, price action will always be important for the specific and asymmetrical risk-reward ratios.
Series of Directional Swings
Once you break down the market’s most basic components, you will see the higher lows and the lower highs during the period of your analysis. If you encounter a higher low, then, there is an uptrend or bullish environment.
On the other hand, the lower highs signal the downtrend that supports traders to sell their assets against the swing highs. If a trader has identified those directional bias, he or she can use it to see the probability favored approach.
After you break down the chart into a price alone, you will know the levels of support during an uptrend or level of resistance during a downtrend. That way, you will know, the right time to make a potential entry.
