Sunday, December 8th, 2013 by Michael Freeman
Introduction to Price Action Trading
Price Action Trading, also referred to as PAT, is a method used by many traders to predict the price movement of a financial asset, by analyzing the price history of either a Company, Commodity, Future, Index or a Currency Pair; in reference to Binary Options.
Price Action ONLY takes into account information that is derived from the ‘price’ movements, therefore all that is required in order to trade using Price Action, is a charting solution and technical analysis indicators. Although there is no way predict with 100% accuracy, many analysts believe that price action trading is the easiest and best way to successfully day trade. The ‘Theory of Price Action’ discredits the use of fundamental research. It’s important to note that many day traders prefer a hybrid solution that incorporates both technical and fundamental study. The concept of Price Action is often seen as elusive in a sense that every trader analyses price trends differently, in any case when done properly, price action trading techniques can increase the ‘In The Money’ success rate.
The price chart shows the asset’s price changes for a specific time period and we can set the chart anywhere between 60 seconds and 1 year. The ability to set the chart on multiple time periods can provide us with a better idea or a broader picture of where the trend is ‘going’, as we can easily shift between different time periods. It’s not the case with our binary options trading platforms charts only displaying the asset’s price movements for the last couple of hours and the previous day’s closing price.
The broker’s charts are very limited and should only be used to execute trades! On the broker’s charts you will NEVER find Candlesticks Charts view, Indicators or a Full-Screen view. It’s very important to use free or paid live charts instead of relying on your broker’s charts.
Price Action and Technical Analysis Indicators
By using technical analysis indicators, we can begin to make sense out of the charts. Indicators can help us, but will not work all the time because the markets can be unpredictable, especially over 60 seconds. If you are trading binary options and using technical analysis, be sure to extend the expiry to at least 30 or 60 minutes. Technical analysis is almost useless when trading on a 60 seconds expiry, due to the inability to forecast a trend over such a short time period.
Popular indicators for binary options include MACD, RVI, RSI and Bollinger Bands®. Setting up an indicator on the charts doesn’t require any technical expertise and in most cases, such as with Free Stock Charts or MT4, the indicators are already available on the charts menu and you can select the one you wish to view on the charts. It’s important to get familiar with popular, proven to work indicators and you can find an article for each of these indicators on the blog section.
Technical Analysis Indicators replace the need for calculators and trend formulas, as indicators automatically computes all the relevant price data and provide us with an approximated trading signal. This signal, unlike an Alert provided by a signals service, does not provide with clear instructions on how to enter the next trade, Call or Put, and instead it requires us to make the decision on when to enter the trade, based on the information provided by the visual representation of the indicator set on the asset’s price chart.
“If the trend is strong, the indicator will respond”
Price Action and Candlesticks Charts
One of the great advantages with Charts is the ‘Candlesticks Charts’ View! The candle is made up of one body and two wicks. One wick is a close and the other is an open. The wick is represents the low and high for the candle at one specific time. The body of the candle represents the price movement from the opening price. The size of each candle’s body will vary, depending on whether the candle is moving up or down from the opening price; That will determine whether the candle is bullish or bearish. As each candle is placed on the chart, the chart begins to take on a visible pattern of price movement that can be used to make successful trading decisions.
To determine a ranging market, take a look at groups of candles that are within a certain price range. There will be highs and lows within that range, but the highs are at about the same price and the lows are all around the same lower price range. It’s best to avoid trading during a ranging market because it’s too unpredictable to guess which way it will go. There is too much price volatility during a ranging market to make a good trade.
Now you want to look for support and resistance zones on the candlestick chart. Support zones are those areas that show that the price has fallen, but once it fell to a certain area called the “support zone,” it rose back up. The support zone is a sort of cushion stop point for that price, and it always rises when it hits that spot. Resistance zones are those places on the candlestick chart that the price goes up, and when it hits that zone as it’s rising, it is pushed back down again. It’s the opposite of the support zone. These areas are pretty easy to identify, and practice will make it all easier. You will be trading online like a pro in no time.
For detailed articles on all the popular technical analysis indicators for binary options as well as additional information on free live charting solutions visit the – Technical Indicators Page