Price action is a method of analyzing the market that separates it from conventional techniques. Price action traders focus on price and volume for decision-making instead of the interpretation of traditional indicators.
Price action trading is an effective way to trade because it helps you identify market trends, time your trades correctly, manage risk effectively and make quick decisions.
To find out how price action trading works, let’s bust ten common myths about this technique:
The best time to enter into a trade using price action is when the market gaps up or down, opening at 6 am EST.
Fact: If at 6 am EST the majority of stocks are gapping down, this could indicate negative news that has occurred overnight in Asia or Europe. Meanwhile, stocks gapping up at 6 am EST could tell positive news overnight. Because you cannot gauge the market sentiment until after the opening bell rings, it is best to avoid trading during this period even if the price action seems promising.
You must use real-time data feeds to trade using price action effectively.
Fact: While many sophisticated trading platforms are available that offer real-time quotes, not all traders have access to them. Many forex brokers will only give 1 hour of delayed data, so you need to consider your broker’s data feed restrictions before committing to a specific strategy or platform. If you do not have access to real-time information, look for charts with candlesticks that have a long enough history of being effective.
You must use technical indicators to identify market trends when trading with price action.
Fact: While many price action traders use indicators, it is not necessary to trade effectively. Price action can be used to identify trend reversals, pullbacks and breakouts without the need for any additional indicators. However, experienced traders may find that using arrows can help them fine-tune their entries and exits.
Only day traders can use price action trading successfully.
Fact: Price action trading can be used by short-term or long-term traders. The key is to find profitable trades and enter them at the right time. Day traders may find that price action is a more effective way to trade than using indicators, while long-term traders may find that indicators are more suited to their trading style.
You must have a large account size to trade with price action.
Fact: Many successful traders trade with small account sizes. While it is true that you can make more money if you have a more extensive account size, it is not necessary to have one to be successful. Starting with a small account can help you learn to trade without risking too much money.
Price action trading is only for experienced traders.
Fact: Price action trading can be learned by anyone willing to put in the time and effort to learn the basics. The best way to get started is by using a charting platform and practising looking for different patterns and price levels before trading with real money.
Price action traders use indicators to make trading decisions.
Fact: A price action trader never uses indicators because it gets in the way of their decision-making process. If you are a technical analyst, price action can be an effective tool when used correctly. While learning how to read candlesticks and chart patterns is essential, not all indicators work well with price action trading strategies.
You must predict where the market will go next to trade using price actions effectively.
Fact: The best price action traders often look for opportunities in both directions, whether they expect a pullback or break out. This means that you could find yourself making profitable trades without predicting what direction prices will move in next. However, experienced traders can use volume to identify likely breakouts, especially when combined with other factors such as chart patterns.