How to Use the Price Action Strategy to Identify Trends and Become a Better Trader – Introduction
In 2008, the world saw its first major recession after the 1930s depression. In that year, the S&P and all other global indices had their worst year, falling by more than 30%. In mid-2009, the stocks started to rally. To this date, the rally has never stopped and the stocks have rallied. The same is true with crude oil which started a major decline in 2014, settling at $27 a barrel in 2016. Since then, the price of crude oil has rallied and is today trading at more than $70 a barrel.
Investors who bought stocks in 2009 or crude oil in January 2016 have seen their holdings rise by more than 200%. Those who shorted these assets have seen their losses increase in what is known as a short squeeze.
As a trader, the best thing you can do is to identify when such trends are forming in what is known as price action trading. As a trader however, the price action is usually on a short-term basis. For example, as crude oil rose, short-term traders found some opportunities to short the price. The foundation for this is that even in times of a bull run, securities tend to have some short-term pullbacks.
The challenge however is on how to identify the formation of trends. A good way to do it is to use technical analysis. This method of analysis uses indicators, which give signals on the likely direction of the assets.
There are three types of price actions: upward, downward, and sideways. In an upward trend, your strategy is to buy low and exit the trade when the price rises. In a downward trend, the strategy is to sell when the security’s price is high and exit when it is low. The sideways trend is also known as a consolidation phase. In it, the strategy is to wait until a new trend form. This is because it is almost impossible to make money in a narrow horizontal trend.
A good way for using technical analysis is to use the three common types of indicators. The trend indicators like moving averages, Bollinger Bands, and Parabolic SAR are used to identify a trend. When using Bollinger Bands, when the price of an asset is at the lower band, that is seen as a good entry point for a buy trade. After identifying a trend is forming, you should use the oscillator indicators to confirm this. These types of indicators include the relative strength index, stochastics, and relative vigor index. They show whether an asset is overbought or oversold. For example, when a trend indicator is bullish and it is confirmed by an oscillator, this can be seen as a bullish move. Finally, the volumes indicators are used to show the interest among traders in the security.
To use the technical indicators well, you need to take time to practice. The Ppro8 platform has hundreds of indicators that you can use to learn and practice. A good way if you are a novice trader is to use a demo account that provides real data. Using this platform will help you become a better trader and polish your trading skills.