If you follow our teachings or have read many of our free articles on price action here on our website, then you already know that we believe that price action is the most important tool available to a day trader. If you aren’t a regular here, then let me explain why our price action trading fundamentals are important to those that are interested in becoming a profitable trader. I am a staunch believer that anyone that is making money on a consistent and long term basis, as a day trader, is actually a price action trader, even if they don’t realize it. I correlate the understanding of price action to the ability to read a price chart, so price action trading to us is merely the same as the ability to look at a price chart and determine what is going on with prices as they print to that chart. Our belief is that any trader that is actually profitable on a long term basis, even if they don’t realize it, has become proficient at reading a price chart, so they are in essence price action traders without even realizing it in many cases.
This understanding of prices allows you to determine, with a very high rate of probability, what prices are going to do in the near term, so if you can actually understand price action and read a price chart accurately, then you have a distinct advantage in trading. That advantage gives you an edge and the ability to enter trades with the odds on your side. Many people that don’t understand this will say that traders are gamblers, and many traders are indeed just that; gamblers! We do not want to gamble, but instead we want to trade only when the odds are in our favor. This does not mean that we will not have losing trades, as those are inevitable and they come with the business. What it actually means is that we will have many more winning trades than losing trades. Once you become an advanced price action trader, those odds will be very strongly in your favor. So strongly that many people will not believe you when you tell them your real winning percentages. They will insist that your winning claims are not possible.
I came across a recent article at www.nobrainertrades.com. This article was based on fourteen rules of price action trading, and the article starts out by saying that price action is the most important tool in any traders tool kit, so that obviously caught my eye and I took the time to read the entire article. It was a very good article, so I thought I would share a few of their rules of survival which I really liked. You can find these below.
– Know your price patterns, and know them all. All it takes is a couple weeks of regular study to familiarize yourself with every single one of them.
Price structure is extremely helpful in identifying new opportunities. The more opportunities you have, the better able you are to hone in on what simply works best for you over the long haul. Getting married to one or two strategies that produce mediocre or poor results can leave you in limbo for a very long time. By dissecting price into various workable structures, you can wean your way forward by having more than enough options to chew at.
– Be curious. Whenever something happens that you don’t understand, find a way to “figure it out” to take advantage the next time it happens.
Nothing is more powerful or useful to your understanding of the way price “works” than that of raw observation, and your ability to find a way to recognize behaviors on a reoccurring basis. “Screen time” is only valuable if you are diligently finding ways to better grasp the way price moves during various circumstances.
– Trade the professional move, not the “scaredy cat” one. When price leaps out of an obvious range, go with the flow. As the trend gets larger, so does your risk of it fading.
There is an old saying that there are really two types of movements in this or any other market: the “professional” move, where price just keeps leaping higher or lower, and the “amateur” one, where the major move is done, but amateurs start to get on board just as price gets consolidated again. Drawing blocks around price ranges is an excellent way to tell you when a “professional” move is on, and it’s time to take out your trend following techniques.
– If you don’t understand it, don’t trade it.
You’re better off going to a casino. You probably won’t lose as much money because none of it is “digitized”. Back off until certainty presents itself. If your certainty comes around once every other day, then so be it until you master techniques that present more opportunity. You can read the rest of the original article here.
I usually don’t agree 100% with most other traders, and this one is no different, although I can’t argue with most anything he has stated in his rules of survival. Learning to spot the patterns we teach is not that difficult, although gaining the mental edge needed to trade them properly is very difficult, and it’s usually the real hurdle to becoming profitable. The trading rules listed here are not really price action rules in as much as we teach price action, but they are what I would describe as trading fundamentals that all traders must understand and abide by when trading for profits. If your trading for the thrills, then throw all of this out and just point and shoot. You won’t make much money that way, but you will have a few highs, along with a lot of lows in your trading, although it will probably be very exciting.
The most important thing discussed in this article in my opinion is the very last rule which says the following: “If you don’t understand it, don’t trade it.” I say this often in my own wording, as I tell traders that you should not be looking for a trade entry at every swing and turn. What you must do instead is learn to read the chart, and by doing so, you will learn to spot what I call “key entry points.” These key entry points are where the best trades will set up in almost every case. You can normally identify these locations long in advance and then your job is to wait patiently for prices to reach that point. Once prices reach the key entry points, you then wait on the right set up or entry pattern to form. If that happens, then you enter the trade, but if it doesn’t, you wait some more. This ability to wait patiently is difficult for most, but it’s what you must do to trade profitably in my humble opinion. If you can’t identify what’s going on and the price action seems confusing, which I hear new traders tell me often, then there is no reason to trade. If you aren’t sure what’s going on, and you enter a trade anyway, then you are simply taking a chance and gambling, which is not what we want to do if we are in this to make money. Learn to be patient and wait on the key entry points and the proper entry set ups and you will improve your trading almost immediately.
It is my hope that this article has given you some wisdom and understanding of why price action trading fundamentals are important to a trader that wants to become profitable. If you would like to learn more about price action trading, then we can help you. You can find more details on our price action strategies by visiting http://priceactiontradingsystem.com/pats-price-action-trading-manual.