There are many potential trading strategies that traders can adopt depending on the market they operate in. Most of these strategies are useful for trading stocks and shares or for trading currencies. There aren’t many strategies that apply to both, but price action trading is one of them.
What is Price Action?
Price action refers to how the price of a tradable instrument will react according to the levels of resistance or support experiences on the market. Price action trading relies on a technical analysis approach whereby traders used the value of an instrument according to its price history.
Price action trading is found on both the Forex market and in share trading. Traders who are using price action trading don’t have to worry about moving averages or lagging indicators, both of which frequently distract from the most important variable – the price. Because price action trading charts are free of this extraneous data, they are much simpler and easier to read. Stock price action is usually displayed in the form of a candle chart.
Below are some of the common indicators that price action traders use to determine the relative value of two assets.
Moving Average Indicators
Moving average indicators enable traders to quickly identify the average price of an asset over a specific time period. In the simplest form, moving averages are solely concerned with the mean price during a specific period. However, exponential and weighted moving averages are also adjusted to take into account more recent information.
Moving Average Convergence Divergence
The moving average convergence divergence indicator is a momentum indicator and compares moving averages against a buy line. Once a moving average has moved above this line, traders will look for a new position.
The stochastic oscillator is another momentum indicator and allows traders to see whether the current price trends are deviating from the norm and how much they are deviating by.
Relative Strength Index
The relative strength index is a way for traders to tell whether an asset is being oversold or overbought. The relative strength index uses a scale from 1 to 100 to indicate the relative strength of an asset. As this number approaches either end of the scale, the risk of trading falls off.
The Benefits of Price Action Trading Strategies
There are a number of reasons that price action trading is ideal, especially for day traders. First and foremost, price action trading strategies are relatively simple and non-technical. This makes it easier to pick up for new traders by minimizing the number of indicators that a trader needs to consider when deciding on a trade. Price action trading reduces the amount of noise that the trader has to deal with and enables them to focus on making quicker and more informed decisions.
Price action trading strategies can be used by traders operating in any market. Whether you are trading stocks and shares or foreign currency, price action trading is a reliable approach to trading based on the price history of an asset. Because there is so much less data for traders to consider, they are able to make smarter decisions more quickly.