A day trading strategy that relies solely on price changes in the immediate and recent past is called a price action strategy. This approach ignores fundamentals that drive commodity futures, stocks, or currencies and relies only on short term technical cues. The point is to read the market, make subjective judgment about where prices are going, ang make short term profits. Various technical analysis tools are useful in pursuing a price action strategy.
Explain Price Action Strategy
Although standard technical day trading and price action trading both make use of technical indicators, a price action strategy only takes into account action that takes place within the trader’s immediate frame of reference and technical cues derived from that frame of reference. Because the information that a price action day trader derives from this approach is, by nature, short lived so should be the trading decisions used. In other words this approach should be tailored to choosing, entering, managing, and exiting short term trades.
Day Trading Price Action Strategies
A common day trading price action strategy is short term trend trading. The trader identifies an emerging trend. Buys or sells into the trend and exits after a short time with a profit. A similar approach is a retracement entry in which the day trader pays attention to lower highs and lower lows or higher high and higher lows as cue to market direction. An approach that can be used when there is a major pivot in the market is to enter and follow an emerging new trend.
Advanced Price Action Strategies
In our opinion, advanced price action strategies are a misnomer. Price action day trading strategies should be short and sweet, aimed at getting in and out quickly and leaving with a profit. That having been said, a head and shoulders pattern or reverse head and shoulders pattern are both slightly more advanced approaches that can be identified and taken advantage of in price action trading. Likewise, simply following highs and lows in order to anticipate the next trend can be profitable.
Algorithmic Trading Using Price Action Strategies
Because price action trading works best when basic approaches are used it can be adapted to an algorithmic approach. In other words, an approach that routinely works when a given price pattern emerges can be programmed into a trading system so that a trader can take advantage of this pattern each and every time it emerges. The only problem is that the predictive power of such a pattern may be substantially less than perfect. As such, traders who use an algorithmic approach need to have programmed in exit strategies for then the prediction of the pattern was misleading.
Easy Price Action Strategy
Traders who use price action strategies should generally keep it simple. The point is to identify cues when they emerge, trade profitably, and get out. Simple trend reversals as commodity futures, stocks, or foreign currencies approach, rebound, or pass key support levels are reliable and easy ways to profit in price action day trading. The point is not to get bored and then try to get fancy when this basic bread and butter approach is routinely generating profitable trades. Maintaining discipline in your trades is important even in this basic approach to day trading.
Best Price Action Scalping Strategy
As with virtually all approaches for day trading the best price action scalping strategy will be the one the routinely works the best for you. Commonly used approaches include a moving average ribbon entry strategy, a relative strength entry or exit strategy, and multiple chart scalping. With so much trading taking place in dark pools in today’s markets gauging market depth can be risky. Keeping your approach as quick and simple as possible is generally the best choice.
Moving Average Ribbon Entry Strategy
The moving average ribbon entry strategy can be an effective way to trade. However, the degree of complication involved in using multiple moving averages with a range of time frames starts to get more complicated than what is intended by a price action strategy. That having been said, this approach helps identify trend strength and spot support and resistance levels as they emerge. This approach requires a bit of practice for those familiar with price action trading because it is a bit more complicated that what one may be accustomed to.
Daily Chart Price Action Strategy
Chart patterns in price action trading include those indicating price reversals and price continuation. Reversal patterns include the head and shoulders pattern, double tops and double bottoms, triple tops and triple bottoms, rounding tops and bottoms, and island reversals. Continuation patterns include rectangles, wedges, triangles, flags, and a cup and handle pattern. When using any of these patterns to trade it is important to exercise discipline in entering, managing, and exiting all trades which is what we routinely teach at DayTradeSafe.