When we talk about the technical analysis of stocks, webs of indicators come into our mind. A section of retail investors believes that without applying technical indicators, an accurate analyzation of a stock cannot happen. They are wrong to some extent. There is a quite popular way by which one can analyze stocks without applying any study. It terms as Price Action. PA strategy works solely without applying studies. This article will provide you with guidance regarding the PA strategy and the steps to identify it.
Firstly, let’s have a quick look at the definition of Price Action, then we will go for features, example, and strategies of this specific tool.
Definition of Price Action
In simple terms, Price Action strategy is based on the actual price movement rather than relying solely on indicators. The price movement analysis depends on the recent past and current price changes. This particular technical tool helps traders to identify market trend and sentiments. One of the main reasons for applying the PA is it is less time-consuming and a quickly generate profit-maximization tool.
Generally, in PA, a candlestick chart works as a base, candle’s type, size, OHLC bar are the significant factors here. Over the years many analysts who write about PA, categorize the strategies and observations in a proper way.
Features of Price Action Strategy
- Market price chart reflects price movements which are caused by economic variables. Therefore, instead of analyzing economic variables, we can simply apply the PA analysis method. This will help to identify the price action, created by the market variables.
- PA analysists search for a favorable entry and exit point by using charts along with real-time price data like bids, offers, volume, velocity, and magnitude.
- It not only identifies the extry-exit point but also provide valid guidance regarding support and resistance level. In order to execute a trade, you need to search for support and resistance level first to find out the intrinsic value of it.
- It’s a less complex analytical platform in technical analysis. Besides this, as it is free from indicators complexity, consume less time than other technical tools.
- By applying this, the bearish and bullish trend can easily be identified.
- The tool is widely used in equity, commodity, forex, etc.
PA Every Trader Should Know About
- Breakout Strategy: Among various price action strategies, it carries a significant role. If a price move is in a certain direction and suddenly a breakout happens, at that point, traders become alert about the upcoming trend or future direction of the price action. In order to make your eyes comfortable with the breakout strategies of PA, you need to understand certain chart pattern very thoroughly. These patterns include Triangle, Head and shoulder and Flag Patterns.
- False Breakout Strategy: The strategy is exactly the same as it sounds like. A breakout that failed to continue the certain pattern. It can be considered as a ‘deception’ by the market. It looks exactly like the price will break out the previous pattern but then after a short time, quickly it reverses. Therefore, it is advisable to take advantage of the false breakout strategy rather than falling victim to them. Pin bar pattern or a fakey pattern are some of the common false breakout appearance signals.
- High-Low Strategy: This strategy is one of the most vital trading strategies in the PA. Today we will cover this strategy with examples but before that let’s have a quick look at the brief description regarding this. The strategy covers high low price action with a certain pattern. We will get back to you with this particular strategy in details later.
- Support and Resistance Zone: This is the most tricky zone in charts. Some traders just use single lines to trade in support and resistance level but ultimately these lines are of no use. Hence, instead of drawing single lines, specific zones should be created. By creating specific zones on the support-resistance level, traders will not miss the trading opportunities.
- Price Level Strategy: Based on the previous price level, creating a new support-resistance level plays a vital role in trading. You need to find out the proper location on a chart and from this search for the current entry-exit signal. In order to avoid loss in trading, finding a good location along with mature signal is very much necessary.
- Candlestick Pattern: By following different candlestick patterns traders can work in PA. In candlestick pattern, the length of tails, bullish-bearish candles, the position of the body, the position of candles can guide traders to identify high trading opportunities.
High-Low OR Trend Identifying Strategy
As I have stated above that we will cover the High-Low strategy of PA in details with an example. Here, we come with an example of Nifty50 where we will show you how this strategy works. In order to clarify the subject, we attach images below:
The above attachments are the 1day and 15 min charts of Nifty50. As you can see in both the charts, the first half is composed of lower low while the 2nd half is composed of the higher high pattern. Lower low consists of Lower high and lower low and Higher-high consists of Higher high and higher low. Here in this example, during the continuation of the lower low, a higher high comes suddenly. As a result, the market reverses and moves towards a bullish trend with a higher-high pattern. Therefore, lower-low represents bearish movements while higher high helps to identify a bullish trend.
Besides this, if you want more information regarding this, you can get our FREE guidebook. We provide a link below:
Indrajit is a professional blogger and trading system developer. Amibroker expert, WordPress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.