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What is price action trading?

We could play semantics all day and never define or understand what price action trading really is. So we're going to keep it clean and simple. Price action trading can take different forms and includes several types of techniques. However, one thing all of these methods have in common is that the primary focus is kept on both the historical and current movement of price, or in other words, price action. This is given priority over what any indicators or oscillators show.

Let's begin with perhaps the purest form of trading - tape reading. A good tape reader doesn't rely 100% on charts, although most will glance at a chart occasionally, especially if they're in a position - they may be looking for support or resistance areas to take profits. However, you will rarely find a tape reader using any indicators or oscillators. Their primary tools will be the Time & Sales window and perhaps a DOM if they can multi-task. Nothing else is needed. Trades are taken on the basis of order flow, so in essence he/she is trading pure price action. From the Time & Sales window they see what actually happened, from the DOM they see and track the games bigger players are playing, or, as we might say, 'what didn't happen' - something you cannot see on any chart.

In fact, as we discuss on our tape reading page, many of the largest and most successful traders in the world don't give a rip about the chart other than to glance at it in the morning and memorize a couple of price levels - they will use these levels to trap you and take your money, but more on that later.

Next, we have traders who don't understand how to read order flow from Time & Sales. So they use a chart to track the executions, sort of like tracking an animal by its footprints in the snow, except here we're tracking the historical movement of money by the footprints on the chart. The chart will usually look very clean, making it easy to spot support and resistance.  This type of price action trader is not reliant on indicators and oscillators to confirm their trades - they may draw trend lines, support and resistance zones, and use line drawing tools like Fibonacci retracements, but their primary entry signals will come from the movement of price.

Finally we have price action traders who use a few extra tools like moving averages. They do not use them like most traders do - they will typically take their entries based on price action but only around certain price levels defined by moving averages.  They are not using them for crossovers or actual entry signals. Or perhaps they use one indicator as an entry trigger instead of using price action as a trigger. Yet everything else they do is price action trading.

We would be foolish to engage in an argument about whether a trader is a price action trader if he uses one moving average to help him focus on a trend - after all, what really matters is that you are profitable in your trading. So while some forums have turned into angry discussions of whether this or that technique is 'price action trading', we encourage our students to keep things simple and clear for them. If that means using Fibonacci retracements, a moving average, or even an indicator in a unique way as a trigger, the bottom line goal is to make a profit.

We will discuss the pro's and con's of each of these methods on our Comparison page.

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