Technical Analysis Vs Price Action: Most newcomers think that technical analysis is just adding trading indicators on the chart and trying to predict the market movements based on that.
The technical analysis covers everything from price action trading to trading indicators. The art of reading a chart to plan out your trades is technical analysis and price action is a part of technical analysis.
This article tries to explain Technical Analysis Vs Price Action. Keep reading to find out more.
What Is Price Action Trading?
Price action is a technical analysis strategy that involves the analysis of the price of a particular security. It involves looking at how price has moved over time and looking for patterns that might indicate future price movement.
Price action in most cases is paired with other technical analysis techniques such as volumes and candlestick patterns to generate buy/sell signals.
Price Action Strengths
Price action will give you trade signals at the beginning of a trend which will help you in maintaining a good risk-to-reward ratio and it will help you capture a huge part of a trend.
Price action will make your trading much simpler as you will be reacting to the price movements and formations without looking at any other technical parameters.
Once you have understood price action you will be able to see what is happening in the market clearly and will be able to take positions in the markets using supply and demand zones.
Price Action Weaknesses
A big disadvantage of price action is that each trader may see different outcomes of the same price action.
Another disadvantage is that reading information from price action may be difficult for traders and it needs sufficient knowledge about the patterns and their formations.
You won’t find the exact chart patterns while trading and at times it will be tough for you to identify those patterns resulting in you missing out on trading opportunities.
What Are Trading Indicators?
Trading indicators help to draw out trading opportunities by having a set of mathematical rules to help simplify market movements. These can give a rough estimate of how strong or weak the market sentiment is.
Technical indicators try to calculate the market strength to make reading charts easier.
Technical indicators are focused on historical trading data, such as price, volume, and open interest, rather than the fundamentals of a business, such as earnings, revenue, or profit margins.
Technical indicators are commonly used by active traders since they’re designed to analyze short-term price movements, but long-term investors may also use technical indicators to identify entry and exit points.
Moving averages, relative strength index, Bollinger bands, and pivot points are some of the commonly used technical indicators.
Trading Indicators Strengths
It is easy to automate trading strategies where indicators are used. You just have to wait for a signal whether it is an indicator crossover or price crossing indicator. You don’t have to wait for chart pattern formations before taking a trade.
It gives a key visual representation of potential ideas. You can analyze future trading opportunities with the help of indicators by seeing how the price reacted the last time it crossed the indicator and the kind of movement it gave.
It is much simpler to understand and trade using indicators. Using indicators makes it very easy to identify trading opportunities as you don’t have to wait or look for chart pattern formations.
Trading Indicators Weaknesses
Most indicators are lagging in nature as they calculate their outputs after the candlestick has closed. Most indicators give signals after the price has moved and because of that, you can never get perfect entry signals.
A lot of trading opportunities can be missed if a trader is only using indicators to capture the market movements. No indicator can capture all market movements so you are bound to miss out on a few trades if you are only using indicators to take trades.
At times traders can tend to rely too much on one indicator which can see their trading suffer. No indicator is perfect as all indicators will give you false signals once in a while so it is important to use a mixture of indicators and not solely rely on one indicator.
The Better Bet – Technical Analysis Vs Price Action
It is a matter of choice based on which of the two suits your trading style. Some people can precisely read the markets using price action whereas others are able to book huge profits (capture big moves) using technical indicators.
Usually, the best trading strategies combine both trading indicators as well as price action. The key to being profitable is not to get too dependent on a particular indicator and instead have a couple of confirmations before entering a trade.
On some days price action will show nothing to trade, but indicators may give certain signals and trades can be taken based on that, whereas on another day the indicators may show nothing, but price action may give you a signal and a trade can be taken based on price action.
The key is to find out what works best for you and create a system around your trading style.
Also Read: Does Technical Analysis Work? Everything You Need To Know!
When looking to develop an edge in trading there is no ideal approach. Each approach has its pros and cons. The best way to develop a trading system is to use a combination of price action and technical analysis. That’s all for the article Technical Analysis Vs Price Action – Which One’s The Better Bet? We hope you enjoyed reading it. Happy Investing!
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