Price Action AnalysisReading Time: 5 Min Experience Level:Beginner
What is price action analysis?
Price action is simply the change of an asset’s price, whereas price action analysis is studying, reading, and interpreting the current price of the said asset compared to its previous prices of recent times. Price action analysis aims to use the natural price movements to represent patterns and hopefully make a profit trading on them. It is also the base for all technical analysis, referring to past prices to perform calculations that help traders make informed decisions.
But what distinguishes price action analysis from the rest of technical analysis is that the price action analysis focuses solely on the movement of the price itself, while ignoring everything else. The wider technical analysis practice makes decisions using many tools and methods other than price action analysis, although most of them are derived from the price itself. Technical analysis mainly includes the use of technical indicators, such as moving averages (MAs) and Relative Strength Index (RSI).
How to use price action analysis?
All you have to do is simply follow the price. Whether you are using a bar chart, a candlestick pattern, or support and resistance lines, just try to focus on the price.
This includes observing peak and trough sequences, drawing lines (trendlines, channels, support, and resistance), and identifying patterns, be it bars, candlestick patterns, or price formations like double tops and triangles.
In price action analysis, keeping it simple is key, as people tend to overcomplicate the process by obscuring their charts with too many technical indicators thus over-analyzing markets.
The downside of price action analysis
The eternal enemy of price action analysis is its subjectivity, similar to all technical analysis tools. It is not unusual to see two analysts studying the same chart reach two different conclusions. Still, this disadvantage allows individual skills to shine, for the field of technical analysis is not only a field of knowledge but also a field of skill and art.
Many researchers have accused price action analysis of “poor placement of stops,” suggesting that it does not perform well in this arena. Yet, the complete disregard of technical indicators could result in placing a stop in an area where the stock is already oversold, and from which recovery is highly anticipated. But the price action itself does not indicate so, and the absence of related technical indicators makes it impossible for the trader to identify that the stock is indeed oversold.