You can learn about price action trading through the use of trend lines and price swings. This trading style focuses on the zig-zag nature of the market and gives you ready tools to analyze the trend. Price action never moves in a straight line but in zig-zag patterns, which highlight market structure and setups. Trend lines are drawn by connecting swing pivots.
Here are some important things to know about trend lines and price swings associated with price action trading:
Price Swings
Swing trading is a technique in which traders look for breakouts from consolidations. Prior uptrends must also be in place before entering a trade. The key statistic to use when swing trading is the Relative Strength Rating (RSI). Another important statistic is the volume, which confirms that institutional investors are building up positions in a particular security. Traders using swing trading strategies tend to trade in a shorter timeframe.
Trend Lines
Price action tends to reverse when a trend line is broken, but when it does, traders usually play against the trend. New traders, enticed by a strong pullback, ignore the previous bars in the hopes of catching the emergence of the next trend and profiting through its entire duration. This is not always the case, though.
Support and Resistance
The EMA line is one of the most important levels in price action trading, providing the most support and resistance. Price tends to be most stable when this line is above and most difficult to penetrate when it is below. As such, it is a great level to enter a new trade at. As a result, the volume on an EMA line increases when the price hits it. This means that the price is more likely to reverse if it approaches this level too quickly.
Candlestick Patterns
When you study the history of a candlestick, you will notice a few key characteristics. Candlestick patterns, especially the Three White Soldiers, have significant short-term predictive value. They are accurate over 75% of the time. Candlesticks are not a template for a market, as many traders believe. They show the dynamics of a market, the behavior of traders, and how buyers and sellers control the price.
Expectancy in Price Action Trading
The importance of expectancy in price action trading should not be overlooked. Expectancy is a simple calculation that highlights multiple ways for you to make money. In other words, you may lose almost every trade but still make a decent income, as long as you are winning more often than you are losing. Basically, expectancy is the average profit that you can expect to make on each trade. But before you apply expectancy to your trading, you must know the exact formula to calculate it.
Tools
Price action traders combine various technical analysis tools in their trading strategy. They use candlestick charts, put/call ratios, and bear/bull ratios, along with volatility, price/volume indices, and support and resistance levels. They also use volatility and technical indicators such as moving averages and parabolic SAR. These tools help traders identify trends and trade efficiently in the market. If you’re interested in developing a strategy based on price action, you’ve come to the right place.
Market Stage
Traders can use price action to identify the market stage to trade successfully. The advancing and descending market stages are the two most common, but each is unique. The advancing and descending stages are the first two. The advancing stage occurs when a price breaks out of the accumulation stage. This means that buyers have succeeded in pushing the price higher while sellers have failed. The advancing and descending market stages are also known as the accumulation and distribution phases.
Profit-Taking Decisions
Unlike traditional trading methods, profit-taking decisions in price action trading depend on the direction and timing of the prices. Traders use support and resistance levels and possible buying and selling pressure zones to determine when to initiate long or short positions. Profit-taking decisions are as important as the placement of stop-losses, so a trader must understand when to take profit. Traders should also know when to sell or hold a stock.