Price action is the raw movement of a security’s price plotted over time, which traders analyze to make buy and sell decisions.
Understanding price action
For Elephants looking to analyze markets, price action forms the foundation of technical analysis. It involves studying historical prices on a chart to identify patterns and trends. Traders observe the open, high, low, and close prices over specific intervals, such as daily or hourly charts. By focusing on these data points, market participants attempt to understand the behavior of buyers and sellers.
Many trading strategies rely on mathematical indicators like moving averages or oscillators. Price action traders choose to remove these overlays from their screens. They operate under the premise that the current price reflects all available market information. These traders look for specific market structures, including support levels, resistance levels, trend channels, and candlestick formations.
This analytical approach is applied across international markets. It is used in global equities, foreign exchange markets, cryptocurrency exchanges, and bond markets. A trader in London might use price action to trade the British pound against the Japanese yen, while an investor in Tokyo might use the exact same principles to evaluate agricultural commodities. The method scales across timeframes, making it applicable to short-term day trading and long-term portfolio management.
Example
Suppose an Elephant trader is analyzing the stock of a fictional agricultural firm called Pachyderm Peanut Distributors PLC on the London Stock Exchange. Over the previous eight months, the stock price reached 120 pence on four separate occasions. Each time the price hit 120 pence, heavy selling volume entered the market, and the price immediately dropped back down to 95 pence.
The trader notes this resistance level at 120 pence using pure price action. When the stock approaches 120 pence for the fifth time, the trader watches the candlestick charts closely. The price stalls at 119 pence and begins to drop. Recognizing this historical price action pattern, the trader decides to sell their shares at 118 pence before the anticipated decline occurs, without waiting for a lagging technical indicator to confirm the trend reversal.