To really understand price action means you need to study what happened in the past. Then observe what is happening in the present and then predict where the market will go next.
When traders make trading decisions based on repeated price patterns that once formed, they indicate to the trader what direction the market is most likely to move.
Price action trading uses tools like charts patterns, candlestick patterns, trendlines, price bands, market swing structure like upswings and downswings, support and resistance levels, consolidations, Fibonacci retracement levels, pivots etc.
Generally, price action traders tend to ignore the fundamental analysis-the underlying factor that moves the markets. Why? Because they believe everything is already discounted for in the market price.
Price action trading uses a clean chart without indicators. Take a look and compare the two charts below.
It’s worth pointing out how in the indicator-laden chart you actually have to give up some room on the chart to have the indicators at the bottom, this forces you to make the P.A. part of the chart smaller, and it also draws your attention away from the natural P.A. and onto the indicators. So, not only do you have less screen area to view the P.A., but your focus is not totally on the price action of the market like it should be.
If you really look at both of those charts and think about which one is easier to analyze and trade from, the answer should be pretty clear. All of the indicators on the chart below, and indeed almost all indicators, are derived from the underlying P.A.. In other words, all traders do when they add indicators to their charts is produce more variables for themselves; they aren’t gaining any insight or predictive clues that aren’t already provided by the market’s raw price action.
Before you get started, these are some words that you may encounter:
Bullish=if the market is going up, it is said to be bullish (uptrend).
Bearish=if the market going is down, it’s said to be bearish.
Bearish Candlestick=a candlestick that has opened higher and closed lower is said to be bearish.
Bullish Candlestick=a candlestick that has opened lower and closed higher is said to be a bullish candlestick.
Risk : Reward Ratio=if you risk $50 in a trade to make $150 then your risk: reward is 1:3 which simply means you made 3 times more than you risked. This is an example of risk: reward ratio.
Now, the next chapter of the price action trading course, you are going to learn what price action is and lots more.