Price Action Analysis
Reading Time: 5 Min
Experience Level:Beginner

What is price action analysis?


Price action is simply the change of an asset’s price, whereas price action analysis is studying, reading, and interpreting the current price of the said asset compared to its previous prices of recent times. Price action analysis aims to use the natural price movements to represent patterns and hopefully make a profit trading on them. It is also the base for all technical analysis, referring to past prices to perform calculations that help traders make informed decisions. 


But what distinguishes price action analysis from the rest of technical analysis is that the price action analysis focuses solely on the movement of the price itself, while ignoring everything else. The wider technical analysis practice makes decisions using many tools and methods other than price action analysis, although most of them are derived from the price itself. Technical analysis mainly includes the use of technical indicators, such as moving averages (MAs) and Relative Strength Index (RSI).


How to use price action analysis?


All you have to do is simply follow the price. Whether you are using a bar chart, a candlestick pattern, or support and resistance lines, just try to focus on the price. 


This includes observing peak and trough sequences, drawing lines (trendlines, channels, support, and resistance), and identifying patterns, be it bars, candlestick patterns, or price formations like double tops and triangles.


In price action analysis, keeping it simple is key, as people tend to overcomplicate the process by obscuring their charts with too many technical indicators thus over-analyzing markets.


The downside of price action analysis


The eternal enemy of price action analysis is its subjectivity, similar to all technical analysis tools. It is not unusual to see two analysts studying the same chart reach two different conclusions. Still, this disadvantage allows individual skills to shine, for the field of technical analysis is not only a field of knowledge but also a field of skill and art.


Many researchers have accused price action analysis of “poor placement of stops,” suggesting that it does not perform well in this arena. Yet, the complete disregard of technical indicators could result in placing a stop in an area where the stock is already oversold, and from which recovery is highly anticipated. But the price action itself does not indicate so, and the absence of related technical indicators makes it impossible for the trader to identify that the stock is indeed oversold.


Suggested Articles

Essential Forex Terms
A part of the essential knowledge you must acquire before you start trading Forex is the terminology. In this article, we will be explaining some basic Forex terms that you will be hearing frequently throughout your trading journey.
Introduction to Commodities
One of the essential steps everyone must take before they partake in any investment is to know what assets they will be working on. This will serve as a basic introduction to commodities and the commodities markets.
The Psychology of Trading
The usually overlooked factor relating to trading psychology is as essential in accumulating success in trading as learning fundamental and technical analyses for developing a holistic trading strategy. In this article, we will get to know how traders can and should intelligently handle the unpleasant emotions that often accompany trading.
Hedging 101
Naturally, investors are keen on protecting their finances from incurring massive losses by crafting robust trading strategies and risk management tools. In this article, we will highlight one of the most widely used risk management techniques, hedging.
Becoming a Full-time Forex Trader
You might have been in the Forex trading industry for a while now, and you feel like you have reached the place where you are confident in your Forex skills to trade in it full-time. Such a step would be considered a bold yet plausible move. First, you have to think it through before committing to the world of Forex trading.
Common Trading Mistakes and Challenges
In this educational article, we will be addressing the common mistakes and challenges that traders tend to fall into and encounter, while presenting helpful ways to overcome them.