As a price action trader who believes that trading with price action is the holy grail of trading, I am often asked to explain what price action trading actually entails. While there really is no true definition of price action trading as far as I am aware, I have come up with a nifty way to explain it so that even a non-trader can understand. I will attempt to explain to you exactly why price action trading works, and why it gives the trader a distinct advantage.
When most new traders first get interested in trading, they almost immediately become shell-shocked when they look at a trading chart and see all of the undulating bars that make up a trading chart. These charts make little if any sense, and most new comers simply cannot determine anything about where prices are likely to go based on the price bars in front of them. In fact, these random price bars on the chart in front of them can be so confusing that most traders think that there must be some magical trading indicator that allows any winning trader to make money trading the markets. If new traders don’t feel this way immediately, they inevitably begin to feel this way shortly after they start trading and losing their hard earned money!
Most indicators are derived from the actual price action itself, and this data is old data by the time the indicator tells you anything. So, if you are using an indicator to help you with trade decisions, you are most likely using past data to give you information on your charts. Rather than use an indicator that is simply crunching or smoothing the price data that is already on your charts, why not learn to read the price action and skip the indicators. It’s not as hard as you think, and once you understand it and remove all of the indicators that are hiding the real price action, trading becomes much more simplified and much less complicated. Now I’m not saying that you can learn price action in a few short days or even a few weeks, but once you do learn to read it, you will forever change your trading results for the better. Best of all, you will no longer be trading with confusing and lagging indicators that are so predictable and so often used that many institutional traders actually fade these signals. You heard that correctly! Many large traders actually fade these indicators because so many losing traders use them every day.
Trading price action is very similar to a big game tracker. Big game trackers follow the footprints and the trails left by the game that they are tracking. With time, they begin to learn what the tracks are telling them. The big game may be stopping to feed or forage, or they may be looking for water, or maybe even searching for a mate. Based on how the tracks are made, a good tracker can determine these things, and also determine which way the big game is headed.
Trading price action is very closely related to a big game tracker. As you learn to read the price action, you begin to understand what prices are doing, and why they are doing it. There are price action rules, and these rules generally hold true over 90% of the time, so as you learn the rules, and begin to see them as they unfold one bar at a time on a chart, you begin to understand why as well. Once you understand why prices are doing what they are doing, you then begin to understand where prices are likely to go next as well. As with anything, you will need to put in the time and effort to learn to read price action, but it is a very teachable an attainable skill.
Hopefully you can see the correlation of trading price action to big game tracking. While I realize that they are completely different processes, they really are very closely related and they have helped me to easily explain what price action trading is all about to many inexperienced traders. Once I use the big game comparison, a light goes off in their head and they suddenly understand. If you want to learn how to trade with price action, you can learn more at http://priceactiontradingsystem.com/pats-price-action-trading-manual/.