What Is Price Action?
The current price of a market or anything that holds value is based on what others are willing to pay for it right now. Whether it is a car, house, or a market. Price is a pure reflection of what the masses are thinking and agree upon at any given time. This change in value or opinion is what leads to the constant fluctuation of prices.
When looking at a price chart there is a vast amount of information, if you understand what it is communicating. In the market, everything happens for a reason. There is no such thing as "noise." Every bar is important and tells a story. This story is a description of what the institutions are doing and how they are managing trades and positions.
There is no one clear definition of price action. It can be as simple as "Every tick on any given chart, of any given market." However this definition is too broad and does not adequately describe the term. A better definition is "The collective result of buyers and sellers entering the market for any logical reason, which together create reoccurring patterns that can be analyzed and capitalized." (Josh Ridenour)
Price action is based on humans behaving rationally, logically, and similarly in similar situations over time, and is the cumulative effect of institutional trading. It has been, and always will remain fundamentally unchanged. If you compare a chart from 100 years ago (such as the crash of 1929) with one of today with the time scales removed, you will not be able to tell the difference between the two. It does not matter if you compare a yearly, monthly, daily, or even 1 minute chart with any other chart of a different time frame. Price action appears the same and works the same in every market, and on every time frame. The institutions cannot hide what they are doing; price action is their foot print.
Price action can be used to invest long term, or day trade any market. It allows a trader or investor to identify opportunities without the use of any indicators. In fact, all indicators are a derivative of price action in one form or another. Interestingly, the patterns which repeat as well as trend tendencies can be observed on different charts, even outside of markets.
The Advantages of Technical Analysis (Price Action)
Everything you need to know is on the chart in front of you. Completely disregard all news and outside information. The price action of the market is all you need to know. Once you understand how institutions operate, you can follow them.
No indicators. All indicators are a derivative of price. For example a Fibonacci level. Every price on a chart is a Fibonacci level of some other price on the chart. Although they appear to work, these levels do not work because of Fibonacci. But instead due to the traders equation, which is the mathematical formula institutions use to enter and manage trades.
Clearly define support and resistance. You can see on a chart where prices are likely to do something. These are "Key entry points" or "Buy and Sell Zones."
Clearly define risk and edge. With technical trading, you have the ability to define your risk before getting into a trade. If the market does not do what you expected, and instead goes beyond your stop, you exit. Without needing to wonder about why this happened, or constantly observing the news.
Identify the strongest markets without relying on outside information like news, indicators, someone else, or a tip. Become independent and trade for your self.