Price action is one of the trading strategies that has become very popular among traders. In this article, we will show you 6 important exercises to learn price action strategy so that you can learn and start trading this profitable trading method as soon as possible.
Remember that trading in the stock markets and digital currency markets can be very risky and without proper training and knowledge, you are risking your capital. So make sure to take a few minutes to read this useful article.
Learn the concept of price action
“Price action” is a type of trading without the use of indicators or other tools. With this method, your price chart is private and we only focus on price levels and major supports and resistances.
In simple terms, price action is a trading technique that helps the trader to understand the market better. In addition, using a price action strategy allows you to make correct decisions based on price changes and market sentiments instead of using technical analysis.
To read the rest of the article and understand it better, it is not a bad idea to read the article “What is price action” and clearly know its meaning so that the terms in this article do not confuse you.
1. Know the current market structure.
First of all, you need to have a good understanding of the current market conditions. This means that you need to know whether the market conditions are bullish, bearish (neutral) or bearish at the time of your trade:
- When the market is bullish, you need to look for the right buying opportunity.
- When the market is falling, you need to look for a good selling opportunity.
- If the market is suffering or neutral, try to buy near the lows of the support zone or sell near the highs of the resistance zone.
A ranging or neutral market is a market in which the price constantly fluctuates between a certain upper limit and another upper limit.
For example, if the price of the digital currency Bitcoin fluctuates between $17,000 and $17,500, this means that the market is in a neutral state. In this situation, the price ceiling acts as a resistance level that the value of the security cannot overcome.
Therefore, we come to the conclusion that most of the uncertainties will be clear to you if you understand the current market structure well.
2. Find the price zone
When it comes to buying stocks, we recommend: Just because the market is rising does not mean you should buy quickly and without thinking.
A strong market trend can cause stocks to be overbought, leading to a sharp decline and reversal. If you just buy without thinking in such conditions, the market will decline and there will be a chance to lose.
In such a situation, you need to identify important areas of your chart. When the market is in an uptrend, the price area can:
- A support area
- A turning point
- A valid moving average, such as a 50-day moving average.
- or a valid trendline from which the market has bounced several times.
These examples are valuable areas to identify in your chart.
3. Set Your Trade Ahead of Time
To better understand this, let’s look at an example. Let’s say the market is in an uptrend. There are a few different ways to trade this trend.
You can look for a trade at a high point or even trade a retest of resistance that has turned into support.
As you can see, there are a few different ways to trade an uptrend. As a trader, you need to set your trades ahead of time for sensitive market conditions so that you don’t lose control of the market during these times.
4. Avoid trading in a zone where no one is trading
Imagine that the market is in a neutral state that includes the maximum and minimum prices, but the value of the stock you are looking at is exactly in the middle of these two prices.
Let's take an example. Let's say the upper limit is $500 and the lower limit is $100. Their median price is $300.
If you trade in such a zone, the outcome of the trade will probably be unfavorable, because if you want to set an appropriate stop loss, it must be lower than the minimum price in the affected zone. (less than $100 in the example above) This situation increases your risk.
Most swing traders set their target slightly below the maximum price in the affected zone. This means that if you trade near the average price of this market, your stop loss will be below the minimum price (equivalent to $100), while your target will be in front of the resistance zone.
In the trade example above, you would likely risk $1 of your assets to gain 60 cents or even less. For this reason, we strongly recommend that you avoid trading in an area where no one is buying.
5. Know the behavior of the markets you are trading in
Different markets behave differently. For example, the stock market has been in a long-term upward trend, according to statistics and based on scientific research.
Of course, it is natural that there will be setbacks along the way, but in most cases, this market will not fall or experience long-term stagnation. Stock market declines usually end, and then the price trend begins.
If you are a stock trader, the times when the market is falling or correcting are the best buying opportunities, because there is a 50% chance that the price trend will return to the upside.
Therefore, we come to the conclusion that if you are using a price action strategy in your trading, you must have a deep understanding of the behavior of the stock market and other markets in order to take advantage of the excellent opportunities in your favor.
The following example concerns the currency pairs “Pound/Dollar” (GBP/USD) and “Pound/Yen” (GBP/JPY) in the “Forex” market. These currency pairs are very popular in the foreign exchange market and tend to have momentum.
- Momentum: This is a quantity that describes the force needed to stop something.
As long as these currency pairs exceed the previous day’s high, their upward trend is likely to continue. On the contrary, if these two currency pairs exceed the previous day’s lows, it is possible that they will continue their downward trend.
6. When in Doubt, Don’t Trade
Finally, the last exercise that you need to know when using the price action strategy is that if you have doubts about your trading, it is best not to start trading at all.
Internal feelings and emotions as well as caution are two fundamental elements that have a direct impact on price action trading. Sometimes the market structure can change in a way that you are not familiar with.
In such conditions, you should not enter the market at all. No one has pointed a gun at you that you should never trade, no matter what the circumstances. Sometimes you have to sit in a corner and be a spectator so as not to increase the risk of loss.
final word
In this article, we try to explain 6 important exercises to learn a price action strategy that will help you reduce your risks and losses.
Trading markets always involve risks and losses are an inseparable part of these markets, but with proper research and practice, you can keep your losses as low as possible and even make a good profit. Our wish at Hosseini Finance is your success and profitability.
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