What is price action trading?

Let us learn all about price action trading and whether it can be applied on the Nifty.

Apr 06, 2019 12:04 IST India Infoline News Service

One of the most successful practitioners of price action trading was Jesse Livermore, the greatest trader ever. He would use price action to determine the direction of the trade and purely trade on signals given by the ticker. This was long before the era of online technical charts and tickers were the only way to trade short term. But what exactly is price action trading and can it be applied on the Nifty?

Chart Source: Investing.com
 
What price action trading is all about?
When you base your trading decisions on the price movement of a stock or an index it is popularly referred to as price action trading. A price action trader does not give too much credence to indicators, charts and other signals and will not try to extrapolate the past charts into the futures. Instead, the price action trader is more focused on giving the maximum weightage to how the actual price tick flows are behaving. What started off as an intuitive approach to trading has, over the years, been fine tuned into a full-fledged technique based on price tick flows alone. The focus is entirely on price as an indicator and volumes for ratification; both of which are less vulnerable to opinion.
 
A price action trader believes that the only true source of information comes from the price itself. The price of a stock or an index encompasses all that is to be known and hence sufficient for identifying trading opportunities. For example, if a stock goes up, it tells the price action trader that people are buying. The trader then assesses the conviction in the buying, before taking a trade. Price action traders focus on “What” is happening in the market, rather than “Why” it is happening.
 
How to practically apply price action strategies on Nifty
  • Many price action strategies exist but the underlying principle remains the same. All price action strategies react to price movements. In the process they look for set patterns in the price movements and watch for triggers to act. Here are some commonly used price action strategies.
  • Break-out is one of the most common price action strategies that most traders use to trade the index or the specific stock. The concept of a breakout is quite simple. When the index has been moving with a certain tendency and after a period of time it breaks that tendency, it is a breakout and alerts traders to a new trading opportunity. If the Nifty was in the range of 10,800 to 11,000 for over a month and if it breaks above 11,000 with volumes and positive fund flows, it can be interpreted as a positive breakout.
  • Price breakouts could be genuine breakouts or false breakouts. A false breakout presents a trading opportunity in the opposite direction of the breakout. Breakouts can be small or large. Typically, the longer the Nifty stays in a range prior to a breakout, the bigger the likely breakout.
  • Price action strategies can also be related to typical chart patterns. For example, some specific price action strategies look at how price bars form on a particular type of chart. For example, when using candlestick charts, traders use the engulfing candle trend strategy to take smart trading positions.
  • Finally, a popular method of price action trading is through the use of price supports and resistance zones. These often provide good trading opportunities. Support and resistance areas are cluster levels and good indications for a bounce or reversal trade.
Price action trading is not perfect, but it is useful!
One of the big advantages of price action trading is that it is simple and intuitive. Hence, it is fairly easy to apply in practice. You just focus on the reality called price rather than worry about lead and lag indicators. However, price action trading is still too manual and interpretative and cannot be automated beyond a point. That limits the scale of its application. But price action trading is a good starting point to understand stock price movements.

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