Price action trading tracks the movements in security prices in the short run, usually with regards to price fluctuations in recent times. This is a viable trading technique because it lets traders understand the market and make trading decisions based on past and recent price movements.
It takes away the common errors associated with using only the technical indicators. If you are into meta trading and want to have some idea about the kind of strategies used in price action trading, then read on.
Top three strategies used by price action traders
Price action traders use a number of strategies on various instruments, including the exchange traded funds, and the following three stand out the most:
Pin bar strategy
The pin bar strategy is commonly known as the candlestick strategy due to its distinctive shape. It almost looks like a candle that has a long wick over it. This stands for a sharp reversal of a specific price. The tail that looks like a wick stands for the rejected price range.
In this scenario, traders assume that the price is going to shift in the direction opposite to the wick. It is up to them to decide if they want to take longer or shorter market positions after that. For instance, a long low tail of the pin bar shows a trend of lower price rejection. Thus, the traders wait for the prices to rise.
Head and shoulder reversal
Like the pin bar strategy, the head and shoulder strategy also derives its name from the way it looks – like a silhouette of the head and shoulders. This shows a trend of price fluctuations where the prices keep rising and falling until the rise has a lower peak and the drop stops being too sharp. Traders find this suitable because they can make the most of a temporary rise in prices.
Trading in price action trends
Price action trend refers to the in-depth study of trends on trading platforms. A trader can use several trading techniques to note and follow the price action trends. This is a good strategy for the new traders because it lets them learn and imbibe knowledge from experienced traders. They chase the price action trends when they are visible.
Are there any limitations to relying on price action?
As any financial consultancy will tell you, the main issue with price action is the flaws in interpretation. Two traders can interpret the same graph and price history differently.
Also, price changes in the recent past do not always serve as the correct indication of the future. Thus, traders consider price action trends in combination with technical tools to get a more accurate picture.
Wrapping Up
There is no denying that price action trading can yield good profits. However, the risk of losses cannot be undermined at the same time. Thus, if you are a new trader, try to better understand the market and the available technical tools before heading straight to price action trading.
