Most traders in trading world rely heavily on moving averages, MACD, RSI, and stochastic oscillators, which are lags time indicators. These indicators are based on past price data most times, which causes you to miss some entry signals. This delay in indicators brings poor trade execution with a low success rate. By the lack of price action nuances, the traders might react more than anticipate the price movements and therefore lead to bad results and potentially loss.
The way to avoid this is by focusing on understanding the pricing action concept, which basically relates to the process of analyzing the movement of prices in real time. Trading based on price action requires discretionary decisions according to the moving and emerging price patterns. There will be no reliance on indicators that display historical data. This gives traders more updated and informed choices. Here, we use TradingView as the platform through which such strategies are carried out. TradingView offers sophisticated charting tools with an elegant interface, ideally suited for price action analysis.
This is an extensive guide that covers four essential secrets of price action. It can perform a complete overhaul in your trading strategy and increase the success rate. By understanding and mastering these secrets, you will be able to predict more accurate price movements and determine the best decisions that can be made with respect to trading. Let’s get started and find out more about these strong price action techniques.
Secret 1: Understanding Candlestick Patterns
Price action trading bases its entire principle on a candlestick pattern. Where most people pay all their attention to candlesticks wicks, the body of a candle can often tell far more about what is going on in the market. Here’s what you should know:
- It is the indication of large green candlesticks without wicks. So, it shows hefty buying and that market sentiments are strongly oriented towards the bull’s side. This type of candle tells you that buyers are strong in this market, so the price shall provide support at these levels.
- Support and Resistance Levels: A large green candlestick without wicks. This would probably indicate a possible support or a resistance level. For example, when you see a candle like this, you would set a support level, whereby the price tends to rebound at that level. The attraction of buyers occurs because of the buying at the price level where the candle closed strongly.
Example: If the price continues going sideways and goes back to this level, you will probably observe a bounce because of the reason mentioned above: that buyers still prefer this price. This can be a strong bullish signal and a good trading entry point.
Secret 2: Mean Reversion
Prices tend to revert towards their average over time. Although this is a principle that works well in using moving averages, it’s equally insightful to understand how prices move relative to their historical average as well.
- Price Drops Significantly Below the Moving Average: In such a scenario, when the price drops significantly below the moving average, it tends to invite buying, as the price is supposed to revert towards the mean.
- Price Moves Above the Moving Average: If the price moves far above the moving average, then it is likely to retreat back toward the average.
Example: When the price goes below the 50-day moving average, it presents a potential buying opportunity as the price should repric More on this in later pages, but because of the assumption that the stock price are in a channel, if the price goes above the average, determine whether to sell or wait for the price to pullback to the mean.
Secret 3: Momentum Analysis
Momentum is the rate at which price is moving, and it simply shows if the trend has its strength increased or decreased. This enables an investor to find out whether the market is gaining power or losing momentum.
- Gaining Momentum: Sharp peaks, and upward movements after a series of gradual increases in price indicate rising momentum.
- Decreasing Momentum: The opposite is also true: If the price increases slowly and then spikes, this is a sign that momentum is decreasing, which means that the price could pull back or reverse.
Example: Look at a chart where the price moves up slowly and then jumps significantly upward. This is a sign of strong momentum. If you can enter a trade at a time when the price is developing increasing momentum, you will maximize your potential profit.
Secret 4: Measuring Pullbacks with Fibonacci Retracement
A pullback is a natural correction in a trending market. Knowing whether it’s strong or weak is crucial for making the right trading decision. The best tool to determine a pullback is the Fibonacci retracement.
- Fibonacci Retracement Levels: Draw Fibonacci retracement levels from the lowest low to the highest high. Major levels that you want to look at are 0.382, 0.5, and 0.618.
- Weak Pullbacks: The price only retraced up to the 0.382 level or higher. That is a weak pullback, and indicates continuation in the trend.
- Strong Pullbacks: It retraced below the 0.382 level. This is a strong pullback and may result in a trend reversal or consolidation.
When the price retrace up to the 0.618 level and then goes back up, it will signify a weak pullback that might be a good opportunity to buy. When the price falls below the 0.382 level, then this could reveal a strong pullback and may possibly even indicate that it is reversing the trend.
Conclusion
Mastering these four secrets of price action such as candle pattern understanding, mean reversion, momentum analysis, and pullback evaluation using Fibonacci retracement would be a tremendous step for your improvement in trading. These strategies would help you in deciding or trading at the right time and with no errors that further ensure an improvement in trading performance.
Remember, while each of these secrets is powerful in its own right, the combination of them with each other or with indicators may bring even more insight and amplify the chance of success. Of course, to make your understanding deeper and to see these strategies put into action, you are highly encouraged to check out a bit more resources and training materials. If you have gained anything from this guide, do not forget to give it a thumbs up, like this article, and keep tuned for further interesting articles and strategies on trading. Happy trading!