Why Price Action Trading

Most people that are interested in learning to day trade have now likely heard or read about price action trading.  However, many still ask me the question:  Why Price Action Trading?  There are actually many variables as to why we prefer price action trading, but the number one reason is because we believe that it is the only sure method of learning to day trade profitably on a consistent daily basis.  We also believe that price action trading is nothing more than the ability to read a price chart and understand what is going on with that chart.  In other words, price action trading is the ability to know and understand what prices are actually doing as they print in real time to a chart and where they are likely headed next.

Price Action Trading Tools

Price Action Trading Tools

Without the ability to read a price chart, prices will simply appear to be randomly printing to your chart, and you will have no real understanding of what is happening as they do so.  The ability to read a price chart will allow you to understand what is happening as prices print to the chart, and that will allow you to also have a better understanding of where prices are going next.  Even if they don’t realize it, anyone that is consistently profitable as a trader most likely understands how to read a price chart!  They many not call it price action trading, but I can assure you it is some variable of the ability to read a price chart.

There are other reasons why we prefer price action trading as well, and it is for reasons such as fewer failed trades, which translates to more winning trades and a higher winning percentage.  Obviously if you can understand why prices are doing what they are doing and you also have a higher predictability of where prices are going next, then you have an advantage over other traders.  Since more than 80% of traders don’t have the ability to understand and read prices, if you can learn the skill, you are going to out trade that 80% and you are going to join the small percentage of traders that actually make money trading.  Sounds simple, and it is really not that difficult, but it takes a great deal of study and experience, and that often does take more time than most are willing to give to reach any level of success in the day trading business.  If you are like most traders, you will be eager to jump in to live trading with real money long before you are ready, and you will simply go broke in a short amount of time.  Rather than make this mistake, you should get on a simulator and get the training and experience you need and prove that you can make money there before ever risking any of your real cash.  If you can’t make money on a simulator, you certainly won’t make money trading live, so make sure you understand that fact.

Below is a small excerpt from another price action website called www.daytradetowin.com.  We included this information because we like their reasons for learning and using price action trading as well.  Here is what they had to say.

When implemented correctly, price action trading may exceed the success rates of indicator based trading. Black box indicator systems are often hard coded to perform a specific strategy and therefore require additional optimization. Even if the indicator is ultimately correct in advising a long or short trade, the signal may arrive too late to actually use. Additionally, the indicator may not advise profit targets or stop losses, thus disregarding fundamental safety nets that serve to minimize risk. Keep in mind, this is a best case scenario. Price action techniques taught by John Paul of Day Trade to Win are mostly cross compatible with the E-mini and other markets like the Euro (6E) and Crude Oil (CL). Indicators are usually designed with one market in mind, and in some cases, can only be traded upon during specific hours or other conditions. Finally, indicators can be costly. To provide the same level of compatibility across multiple markets, additional indicator purchases may be required. Price action is relatively universal, although some day trading programs at DTTW focus on the E-mini exclusively.

As mentioned earlier, a key concept in successful price action trading is adaptability. Markets go through periods of stagnation where nothing really happens. Contrarily, there are times when markets are too volatile to trade; for example, after a major news event or a rare market glitch. John Paul’s day trading courses at DTTW take into account what the market can produce at any given time. For example, the Atlas Line® software is best accompanied by the ATR (average true range) which indicates how much the market can substantiate point-wise. If the Atlas Line says to go Short during a highly volatile period, the ATR may dictate a tighter exit strategy to avoid large potential loss. Furthermore, the angle of the plotted Atlas Line® can be used to take trades: short trades if price is below the line and long trades if price lands above. A second point for adaptability is time of day. Day trading courses like the ATO (At the Open) center around price conditions at market open. Price trades differently during the morning open outcry session than it does midday, in the afternoon near market close and then changes again after hours. Since price action is geared around understanding real-time data, traders can engage the markets at any time of day with certainty.  You can read the rest of the original article here.

While we are not endorsing their products or teachings, since we know nothing about them, we do believe that they have a solid understanding of the importance of price action trading and why it is the only way someone can consistently make money at day trading.  Not only do price action trading techniques give you the ability to understand and read prices as they print, they also give you the ability to evaluate a trade without having to take them all blindly.  As an example of what I’m trying to help you understand, assume that a particular pattern will make a lot of money.  If you use a black box technique or if you even create a trading program to look for this pattern, you will have to take it every time it appears, when there are times it will actually fail, but if you can read the price chart and you can understand that the pattern is appearing in the wrong location or at the wrong time, then it has less value and should be weeded out.  Only human eyes have that ability, as you can not program that properly.  That’s also why I don’t believe in back testing either, because the back test will be flawed or tainted since it can’t eliminate patterns or evaluate the surrounding prices of the pattern, which is a key element to profits.

Hopefully this addressed your question as to why price action trading is our method of choice.  There is simply no substitute for understanding the rules of price action and learning how to read a price chart in real time.  Anything else leaves you guessing and that is gambling and as price action traders, our goal is to make money, not gamble.  If you would like to learn how to read a price chart and make money day trading, then you have come to the right place.  You can find additional information on learning how to use price action trading to improve your trading results at http://priceactiontradingsystem.com/pats-price-action-trading-manual.