Thoughts on Price Action Systems

As I have mentioned earlier, I have only studied and traded around price action.  What is price action?  Well, I guess the definition can be vague and I’ve seen many traders give their own opinions on what it is trading price action.  Some say it’s the idea of trading without any indicators, others say it’s the way of trading what prices have done in anticipation of the future…. some say it’s trading patterns on the charts.  I don’t think there is a textbook answer but I’ll give some thoughts on my experiences with it.

In my opinion, price action is the art of trading based on what prices have shown tendencies to do in the past and what prices are doing NOW and using that to enter a trade with a higher probability outcome than pure randomness.  For example, I have a chart in front of me.  What does the chart show?  The chart gives a visual representation of buyers and sellers agreeing upon a price and the transactions that have occurred are now shown in the form of bars or candlesticks on a price/time (or tick, volume).  I will read off a series of prices to you now.  Consider what are your thoughts as these prices occur:

12.20, 12.21, 12.22, 12.23, 12.24, 12.23, 12.23, 12.23, 12.23,  12.22, 12.22. 12.23, 12.24……

This is just a very small sample set of prices.  What can you infer from these prices?  Well for me, I can infer there is some upside momentum.  The price from 12.20 up to 12.24 showed a quick rise and it showed some resistance at 12.24 then tapered off at a little at 12.23, with a slower, less sharp drop to 12.22 and then starts moving back up.  If you were to take a trade right now, is going long or short more likely to occur?  The answer should be, well I’d like some more information, haha.

Now, we don’t know what happened before these prices.  Perhaps this is just a pullback in a downtrend.  Perhaps it’s the next leg up in the uptrend.  Maybe we are running into resistance in a range.  This where previous price action on the charts gives us context.  We can look back and see what prices have done and where we are now.

So, I see that we are in an uptrend with higher highs and higher lows.  Taking this into consideration, we now look at what prices are doing now.  We are seeing some upside momentum taking place.  Do the chances of taking a short here favor us?  If yes, where is a good entry point where the upside momentum may subside allowing us some movement in our favor?  If no, where is a good long trade to enter where downside momentum has stalled and chances are that continuation of prices is more likely?  These are all pieces of information (and what I call price action) we need to consider before taking a trade.

Of course, there is a lot more to this than what I just presented.  So that’s why I would like to take the opportunity to look back and give some perspective on some of the different price action systems out there.  And I’ve gone through a LOT.

But in my opinion, in some form or another, all of these show ways to trade around price action.  Some use basic indicators, some use tick charts, some have different time frames, but I would say what all of these have in common is the use of previous prices (depicted on a chart) as an indicator of past buying and selling sentiment and using the current ebb and flow of prices to find areas of interest where we have a better chance of grabbing some profit than randomly entering and hoping for something.

Here is the list of price action systems or traders that I hope to get into one by one in the near future (not too detailed, but a general overview):

Al Brooks

MACK’s price action trading system

Vince Virgil Slow Hand Method

Lance Beggs YTC price action system

 

 

 

 

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