What is it and How to Trade the Price Action Method ?

One of the trading strategies used in forex is the price action method. What is it and why is the price action method worth studying and implementing so you can make quick profits. In language, trading means buying and selling activities. In terms, trading is the activity of buying and selling financial assets, such as stocks, forex and cryptocurrencies on the market to get short-term profits. The market or market is a meeting place for sellers and buyers. In the context of trading, the market is a meeting place for traders to trade the above financial assets. 

The market price is the price that is the meeting point between the price set by the seller and the buyer. One of the advantages of the financial asset market above is that the movement of market prices is well recorded, so that it can be used as material for analysis by the trader concerned using the price action method. 

Definition of Price Action Price action is a trading method that uses market price movement patterns as the main ingredient. In other words, this strategy only uses trend lines, support and resistance lines, and candlestick patterns as the main ingredients. This analysis method does not use various statistical indicators, such as Bollinger Bands, RSI or MACD and others as analysis material. Therefore, do not be surprised if another name for this method is naked chart trading. 

The reason why this method is used is because in financial markets, the track record of market prices is well visible in chart form. That is, if the market price goes up, the image on the chart will also go up, and vice versa. Especially if you use a candlestick. Candlesticks or candle charts not only record today's and yesterday's market price movements, but also record market prices this morning and afternoon and indirectly show the trading volume that occurred at that time. How to Use the Price Action Trading Method 

1. Understand the concept of trend, support and resistance 

For many reasons, market prices in the world of trading often change. Not only in hours or days, price changes in this market also often occur in minutes or seconds. The trader's task is to estimate how these changes will occur, so that they can benefit. One way is to make trend lines, support and resistance. The trend line is a line that connects the highest, lowest, or midpoint of the market price from several different times. If point AB>C thus indicates the potential for a strong price decline. Apart from the two patterns above, there are many more candlestick patterns that you should learn.

2. Understand candlestick patterns 

Apart from understanding the line pattern above, you can also understand candlestick patterns to learn this price action method. As previously written, candlesticks indirectly describe price movements and their volume. As a result, the appearance of this candlestick chart can be used to predict whether the price will move up or down. Take the example of the three white soldiers and three black crows candlestick patterns. As the name implies, three white soldiers is a candlestick pattern consisting of 3 white or green candles named A, B, and C. In this pattern, AB>C thus indicates the potential for a strong price decline. Apart from the two patterns above, there are many more candlestick patterns that you should learn.

3. Understanding breakouts 

Breakout is a combination of the two concepts above (lines and candlesticks). Breakout is a condition where the body or tail of the candlestick breaks the support or resistance line. There are two types of breakouts, namely true breakouts and false breakouts. A true breakout is a condition where what penetrates the support and resistance lines is the body of the candlestick, while a false breakout is a condition where what penetrates support and resistance is only the tail of the candle. Generally, a true breakout indicates a potential strong price reversal, whether it's a price change up or down (depending on what line is broken). However, there are certain conditions where the candle after a true breakout actually indicates a trend continuation (continuation), so you need to be careful in making decisions. 

4. Using a long time frame

In the financial market, price movements of financial assets tend to be unstable in the short term, and will be more stable in the long term. As a result, traders are asked to analyze charts in the long term to ensure that the prevailing trend is strong and not a false signal or noise. What is meant by a long-term time frame is a time frame within 4 to 5 days (1 week). However, it is not uncommon for traders to use multiple time frames for analysis purposes so that they can find out the full picture of what is really happening in the market. This is considering that many trading applications currently provide this feature. However, usually traders who use it are experienced traders, because novice traders can get confused when faced with several time frames at once. 

5. Don't just rely on price action 

One way to be careful in analyzing breakouts is to use various available statistical technical indicators, such as Bollinger bands, moving averages, stochastic oscillators, and so on. These technical indicators are created by processing asset price data using certain statistical formulas, so that they can produce comprehensive analysis results. Relax, you don't need to process statistical data yourself. Currently, many applications and trading platforms are equipped with automated technical analysis, so you only need to know how to interpret it and how to make trading decisions based on the analysis results. Why do you need the results of this statistical technical analysis? This is because price action indicators do not always produce accurate data. For example, a spinning top candlestick which can be in the middle or at the end of a trend, so it can indicate a reversal and continuation at the same time or a hammer candlestick and a hanging man which have similar characteristics but opposite meanings. 

In addition to the 5 ways to trade using the price action method above, you can also learn the early theories of trading in the capital market, such as Dow Theory, Wyckoff Theory and Elliott Wave Theory. This is because these capital market theories generally analyze the capital market based on price patterns, it's understandable that when the theory was published, there were still many statistical formulas that had not even been developed. These theories are useful for increasing understanding of how and what causes the movement of financial asset markets as a whole. Conclusion Price action is a trading method that uses market price movement patterns as the main ingredient without using other technical indicators. This method can be done by understanding trend lines, support and resistance, understanding candlesticks and breakouts. In order to make the results of the analysis more comprehensive, traders are advised to use this method to analyze price patterns over a long period of time accompanied by various other technical indicators.

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