Core characteristics of price action analysis
Here are the basic things you need to know:
- Price action refers to the up and down movement of an asset/item’s price when it’s plotted over time.
- Often you’ll see charts with averages plotted on, but raw price charts have the ‘candlesticks’.
- Many traders use candlestick charts for trading decisions, since they help better visualise price movements by displaying the open, high, low, and close values in the context of up or down sessions.
- Many short-term traders rely exclusively on price action and the formations and trends learned from it to make trading decisions.
- Technical analysis is all based on price action. This means you’re not looking at the raw data when using technical analysis because it uses past prices to inform trading decisions.
- Price action trading is more of an art than a science: two traders may arrive at different conclusions when analysing the same price action.
One trader may see a downtrend, while another might believe that the price action shows the possibility of a turnaround — purely based on their personal experience reading the charts.
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Price action strategies in practice
For the most part, you use price action analysis for short- or medium-term trades rather than long term. Usually it’s for smaller profit gains too.
You must first take a look at the movement of the price action — identify whether it’s in a bullish or bearish trend — and make a decision on whether you think it’s likely to turn.
The terms bullish and bearish refer to a positive or negative market movement. They are inversions of each other: bullish is an upwards trend and bearish a downwards trend.
Common Bulls and Bears
Below we cover a few common trends to help you analyse the data.
Price action charts can seem complex. If you’re not sure how to read candlestick charts, check out our guide to reading forex charts.