Price Action : Enhancing Technical Trading

Explanation

The movement or fluctuation of a stock’s price. The price action over a period of time may form patterns or technical signals that  can forecast the future direction of a stock’s price. Price action or daily movement is analyzed through mathematical formulas or more commonly with stock charts and  technical analysis.

Related Topics

Stock Volume

Support and Resistance

Chart Patterns

Moving Average

Why Price Action so Important

From a technical perspective, you can analyzing historical price action  to determine areas in which a profitable trade may be found. According to technical analysis, prior to a stock moving, the price action will give you an idea of the direction the market is likely to go.

Price Action is The Truth: The truth in the actual quoted price of a stock lies in the millions of investors who trade the stock. A “vote” by the millions, so to speak, decides what a company is worth. It’s nothing new, wall street financial records can sometimes be unreliable. With the demands of investors, companies are forced to perform as expected. Often times executives feel pressured to “report good earnings”. This will often lead to bad investments for the personal investor. So to find the truth, we look only at price.

Price action reveals crowd psychology: Stock trading is a mind game. If you don’t understand how the crowds think, you are just a part of the herd waiting to get slaughtered. By observing the price action of a stock after news breaks can give you an idea how the crowd perceives future value. You must step away from the herd and analyze objectively understanding what the price action is telling you.

More than anything price action is interpreted through some form of technical indicator like support and resistance lines, stock trading volume, moving averages, candlestick charts etc. There are thousands of technical indicators that will interpret price action. The secret to stock trading is formulating a combination of these indicators to signal the proper time to buy and sell.

Observing price action is somewhat of an art form.It’s important to understand that these indicators have an predictive quality about them, the signals can be delayed. This is due to data changing in the period being analyzed. For instance, a moving average indicator set to 200 has more of a delay than a 10 day moving average. The increase of period analysis increases the delay of the indication.
It is important to note that price action can be analyzed in it’s purest for by simply looking at the chart pricing. Look at the highs and lows of the past week, month, year, and 5 years.  Using technical analysis tools like a trend line or support and resistance lines, are not delayed because of an algorithm that makes up other indicators.

The foundation of all indicators are price and volume. These two things are what makes up all of the other indicators. Volume spikes can point to important turning points in the trend of a stock. Price has a tendency to repeat at specific numbers, like $50 and $100. You can also notice important price levels to trade. Often times a stock may gap around critical price levels.

 

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