“Why?” should be asked by every trader who comes across a new method. Why trade this way? How is it better than other methods? Does it have any disadvantages? I will attempt to answer all of these questions relating to price action trading.
First of all, price action should be clearly understood ( Wikipedia – Price Action ) as studying what the movement of price can tell us about what is happening in the real world.
1. Why Trade This Way?
This is the best question to ask about any method, and should be the first. Price action offers insight into how price is currently moving. How many times have you seen a spot where support or resistance has held before, and decided to trade there only to see price blow right through and move against you? That would be considered touch trading, which is very dangerous and hard to do in my opinion. Think of support and resistance more as just points of interest instead of places where price will turn.
If you look at things this way, you will realize that you have to analyze the price action before entering into a trade. Maybe price action is telling you that price is falling at an increasing rate from the area of resistance, or maybe it is telling you that it is speeding up and breaking through to the other side. Whatever the case, you need to look at how price is interacting with the areas of interest (support and resistance or whatever else)
2. How is it better than other methods?
Other methods just take an area of interest and say trade when price gets to this area, but how are you supposed to know which direction. Sure it has fallen from there before, but today is a new day, and that past area is just history. Everyone has heard that past performance does not indicate future results, yet if you practice touch trading, then you are ignoring that piece of information and entering dangerous territory. Price action trading tells you “Ok, this is an area of interest AND price has just indicated that it does want to move in the given direction.” The and is the important part, without it, there is not much to trade on.
3. Does it have any disadvantages?
Nothing is perfect, there will be flaws in every methodology. The main disadvantages of price action are that you may miss out on some possible moves because it may be too late. In waiting for price to give an indication that it wants to fall, you may miss out on the short, and not be able to get in because it fell too far too fast or because there is not enough room before another point of interest where price will have to make a decision. Overall though I find that the trades I miss are not usually A+ setups to begin with. Waiting for the good trades with confirming price action takes a lot of patience, but in my experience it yields some pretty high “at least breakeven” probability trades when coupled with defensive trading techniques.