What is price action trading and why it does make you a better trader
Price action trading is a type of trading that allows traders to observe and study the current market. This, in turn, allows you to anticipate the market trend and make certain assumptions/decisions based on the current (and actual) price movements.
Price action trading is the purest type of trading that eliminates all noise.
It does not anticipate, it reads the market.
Price action is great!
Is price action trading better than other types of trading?
Hard to say.
It is really difficult to say if one type of trading is better than another. What matters is which type of trading fits your personality.
Another important element of trading is money management. What matters is even not that much the trading system, but the way you use it.
Profitable traders will agree with me.
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If you are confused about how to trade / invest when you have an opinion or follow one then you do need to get yourself a lesson in trend following. Elliott Wave analysis is meant for market forecasting but actual trades have to be taken based on classic technical tools that give you levels to manage a trade. It is my belief in this process that I do not give calls or tips. I do the difficult part of taking a view and take the flak for it when wrong.
However to successfully make money you will need to add Position sizing to either your investment decisions or trading decisions so that you can minimise losses and maximise gains. So I would expect you to learn some of that. In today’s note, I will give you a head start on this.
If you do not know how to trade at all then you first need a lesson in trend trading however if you want to know which trend to trade you have come to the right place. Learning to trade involves knowing.
1. How to buy/Sell
2. Time to monitor trades, to get out of losing trades
3. Understand support resistance
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Quantified trading signals can be based on different types of strategies. Some buy high in the hopes of selling higher, while others try to create a great risk/reward ratio by buying low hoping to sell on rebounds or reversals in price action. Here are four different types of trading signals.
- Momentum signals are based on buying strength. Momentum traders wait for a strong move in a stock and then buy and get on-board for a short amount of time. Momentum traders usually trade short time frames of days. These work primarily in bull markets.
- Breakout signals are based on buying all-time highs or 52 week highs, trying to buy high and sell higher. Breakouts are bought trying to catch a parabolic move where a stock could double or even triple over weeks and months. These work primarily in strong bull markets when indexes break to all-time highs.
- Buying oversold dips are based on buying a long term price support level or an oversold oscillator like the 30 RSI, a price extension far from the 10 day EMA, or a -80 to -100 $NYMO. This signal tries to create a great risk/reward ratio based on buying a deep dip of a historical price range. These work best in range-bound markets.
- Trend following signals try to go in the direction of the long term trend by using long term moving averages like the 200 day SMA breaks as buy or sell signals, or all-time highs or lows to enter longs or shorts. These work in trends with higher highs or lower lows.
The original article is authored by Steve and appears on New Trader U. It is available here.
The original article is written by Steve of Trading Method, Trading Plan and can be found here.
Most new traders think their win rate is the most important math in their trading. It is not, your risk / reward ratio will determine your profitability more than a win rate.
Chart Courtesy of Tradeciety.com
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