Price Action: What to Know and How to Get Started
What Does Price Action Mean, Exactly?
In it’s simplest term, price action refers to the movement of a stock price over a period of time.
Imagine you’re at a candy store, and you see a vendor selling colorful gum balls. You notice that red color gum balls are priced at $1 each, while the blue gum balls sell at $2. You quickly realize that the red color gum balls are selling quicker than the blue gum balls.
You might interpret this type of price action as that the red color gum balls in higher demand and the blue one’s are not. This could present a buying opportunity, where you purchase the red color gum balls to potentially sell it at a higher price later, based on market demand.
Similar to the blue gum balls, if it starts to sell more frequently, and the red color gum balls are not selling well, you may interpreter this as a sign that the market demand has shifted. This will indicate the trader, where you sell the red color gum balls to purchase the the blue gum balls, anticipating for a higher demand in the future.
How Does Price Action Work?
Every stock chart has an interval that can range from 1 minute to +1 year timeframe, and will be represented by a candlestick for that given timeframe.
Price action comes into play on that given candlestick. Let’s look at a picture to demonstrate what this may look like.
Here are the body parts of a candlestick:
This represents the limit of where the price was pushed for that minute by either buyers of sellers but where there was not enough buying or selling pressure to maintain said price.
- Wick: The wicks are thin lines that represent price action being pushed by either buyers or sellers, but where there was not enough buying or selling pressure to maintain said price.
- Body: The body represents where price action opened and closed for a candlestick.
- Color: The colors, red and green or white and black, represents whether price action is higher then the previous candlestick closing price.
Pros and Cons
Pros
- Provides risk management, since price action trading emphasis on entry and exit points.
- Trading price action can be used on any market, which allows the trader to be in many different markets.
- Trading price action simplifies a traders strategy, but relying less on indicators and putting more emphasis on price action.
Cons
- Requires time and patience because it forces the trader to be wait for the setup to trigger.
- Price action is not beginner friendly, as it requires to study how price action moves on a stock.
To Sum It Up
To recap, price action can be spotted easily on the candlestick chart due to its design. Everything from its colors to its shape is meant to give a trader clear and concise information about the price action of the stock for the time interval being observed.
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