What is Price Action? | Definition and Example

Price action is the movement in the prices of financial assets such as stocks or commodities, as shown in charts over time.

When the market moves or changes with different trends and the key support or resistance level, price action is observed. It is the base of all the technical analyses of a commodity, stock, or another asset in charts in a short-term period. Therefore, most short-term investors are inclined to follow the price action. Formation and trend extrapolation from price action can detect the trading decisions.

Price Action in a nutshell

  • Price development is the price movement of financial assets over time.
  • Technical analysis relies on price action to make trading decisions, focusing on patterns and trends.
  • Price action analysis considers factors like support/resistance levels and trading volume for accurate predictions.

Understanding Price Action

All technical assessments of stock, commodity, or other asset charts are based on price activity. Trading choices are based only on the price movements, patterns, and trends of different short-term traders. Technical analysis can be considered as the subset of price action. Therefore, it detects different prices in calculations that may be used to change trading decisions.

By using charts and graphs, one can understand the trends of different stocks, shares, and commodities. Traders follow candlesticks charts until they visualize different price movements with displayed values (open, low, high, and closed) in both the contexts of up and down sessions. The traders use different chart compositions to improve their abilities to detect and interpret sensations, reversals, and breakouts. 

Candlestick patterns like three white soldiers, harami cross, and engulfing patterns help you visually interpret the price action trend. The goal of the candlestick’s interpretation or price action interpretation will predict the price breakouts. The price action is not used as a tool or indicator, but as the data source that helps build the tools. 

Price Action Analysis

In the cases of swing and trend traders, analysis and prediction of different breakouts and consolidations would solely focus on the favor of support and resistance level. Even traders should pay attention to the additional factors beyond the current price of the stocks, as the trading volume and periods establish the levels of accurate interpretations. 

Moreover, price actions analyze the trends and characteristics of prices and the security of assets. Technical analysts observe price action to get patterns and indicators, which will help you predict how the security will behave at the entry and exit of trade points. They derive technical tools like moving averages and oscillators from the price actions. The trading indicators are eventually projected to inform the traders. 

Price Action Patterns

To find out the most appropriate patterns and behaviors of trading movements, most experienced traders study price action charts. But certain steps are included in the price action trading, such as identifying the scenario and finding the opportunities. You must understand whether the stock price is getting into a bull or bear phase, breakouts, and channel range.   

Analysis in Bull Runs

When a stock is in a bull run, it would have two types: overshooting and retreat. As stock behavior choices are subjective, they can vary irrespective of any trader. Behaviors might be affected by different factors, even if in identical scenarios. 

For instance, when a stock reaches a higher position per the trader’s view and then slows down at a lower level, the trader will decide whether the stock will be profitable. The trader can refer to the price action charts and decide that the stock will double top and go higher. On the other hand, the trader can also understand if it will show a mean reversion.   

In a nutshell, plenty of theories and strategies can be applied to claim a higher success rate. However, they can easily refer to the price action charts by avoiding survivorship bias. 

How to use Price Action for Binary Options?

Binary options trading is about predicting market trends by analyzing the price movements of financial assets. Price action strategies focus on the interpretation of price movement patterns. Traders can make accurate predictions of future trends, by understanding past and present price movements.

Here are seven top price action strategies for binary trading:

  1. Pin bar: Candlestick patterns are used in this strategy to analyze whether the market is rejecting certain price levels, which could indicate a possible reversal of the price movement.
  2. Price action trend: Understanding the direction in which the market is moving is key. Keep an eye on price trends, you can decide whether it is a good time to buy or sell assets.
  3. Inside bar: Spotting smaller bars within the highs and lows of the previous bars. This indicates either a consolidation phase or that a new trend could soon begin.
  4. Trend following breakout entry: Pay attention to support and resistance levels. If the price breaks out beyond these levels, it could mean a trading opportunity. Then decide whether to buy or sell assets based on this movement.
  5. Head and shoulders reversal trade: This method watches for a specific pattern where prices first rise, then fall, then rise again before falling once more.
  6. Trend following retracement entry: When prices are consistently making higher highs and higher lows (or lower highs and lower lows), you can enter positions accordingly, selling in a downtrend and buying in an uptrend.
  7. Sequences of high and low: By looking at the pattern of highs and lows, you can determine whether the market is in an uptrend or downtrend. Then make your trading decisions based on this trend, buying during uptrends and selling during downtrends.

About the author

Percival Knight
Percival Knight is an experienced Binary Options trader for more than ten years. Mainly, he trades 60-second trades at a very high hit rate. My favorite strategies is by using candlesticks and fake-breakouts

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