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TME 022: Price Action Trading

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Price Action Trading

What is price? When I was young I came to my granddad and I said look at this baseball card it’s worth $5. He said it is only worth what someone is willing to pay for it. The price of something is what someone is willing to pay for it. When you look at a stock quote you see a bid price and an ask price. The bid is what someone will pay. The ask price is what someone will sell it for. The difference is the price.

What is price action trading?

Price action trading is a trading technique that allows a trader to make trading decisions strictly based on price changes. Price action trading relies strictly on price and ignores fundamental analysis. Price Action Trading focuses on recent and past price movements.

Price Action Trading Simplifies Trading

Trading is sometimes more complicated than it need to be. You get your young child a brand new toy for Christmas. I’m talking about the one where you have to put together 100 pieces and it takes until 1:00 in the morning. The child wakes up on Christmas morning and plays with the toy for about 5 minutes then sees the box that the toy was in and plays with it for hours. You have a nice $500 dollar toy and he plays with the box.

It would have been much simpler to just drive to the neighbor’s house and take their boxes from off the street.

Obviously we would never do that but we can make our trading simpler by cutting out the noise. We can simplify our trading if we look at one metric and that is price.

 

Price Action Trading System

A price action trading system is one that uses price to determine what, when, and how to trade a market or stock. A good price action trading system will calculate based on price the following:

What price should I get in at?

How much should I buy?

How much volatility is in the market?

A price action trading system captures all of this just by looking at price. Price will tell you when the market is going down. Look at the oil prices it did not lose 50% of its value overnight. The fall in crude oil happened over months. A price action system system would have captured much of the loss by shorting.

 

How do we use a price action trading system?

All of our trading is based on a mathematical formula. Every formula in our system uses price to make its calculations. Now we want to be clear price only tells us what has happened. There is no system that will tell you what will happen in the future. No system will ever tell you the future. What price can show you is a trend. When you see a trend then its time to follow that trend.

We do not expect a gain on every trade. In fact many trades will be a small loss. Sometimes a trader might get discouraged when trying to follow a price trend because of the whipsaw. When a large trend (like the recent oil drop) comes you will see that the trend truly is your friend.

Charts

Some people use charts to analyze price action. They see a trend in the chart and then move into a position. They may have a watch list of 10 to 20 stocks or markets. When a chart shows a trend then they move into the market with their  money management tool in place.

Money management is the most important thing in your trading system. Without it you will fail.

 

Conclusion

Price Action Trading is a great way to study and trade the market. It takes the market and its mass of information and simplifies it. When risk parameters are set then emotion is taken out of the equation. Many people fail because of emotional trading. A price action trading system takes the emotion out of trading.

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