Price Action: The Power of History
Learn to recognize trends using only price actions
There are many different indicators that you can arm yourself with to distinguish trends and benefit from them. Most traders waste time and money on incorrect trading systems and indicators, which all just results in confusion and complicates the process of finding trends.
It’s always best to stick to the price action method because it is the easiest and most effective way to recognize the desired trend. Note that the method itself is not a strategy, but in the right combination with other components, it can positively affect the probability of a good deal. As soon as the market shifts up or down, the previous indicators become a benchmark for determining the trend. The easiest way is to find out whether the trend is up or down is based on where the highest and lowest points are. All you need to do is simply look at the trend in the market, with no calculations or indicators. Just look at the chart below, which clearly shows how to identify the highest and lowest points in a trend.
Such a simple observation is the first thing you should pay attention to when studying a trend. If it is impossible to determine the highest and lowest points and the price seems to be moving without much focus, the market is most likely just fluctuating in a certain range.
Do not complicate the process of determining the trend. If you patiently follow common sense, it’s easy to understand whether you’re seeing a trend or just a simple price fluctuation.
Characteristics of market trends
As a rule, the market changes strongly in accordance with the trend direction after the trend has strengthened and partially reverses until its next change. Such a pattern can be observed in either direction of a trend. The most important thing is to avoid losses when the trend slows down slightly.
As seen in the chart above, trends tend to move in jerks, first following the trend direction and then slightly slowing down in the opposite direction. Of course, not all trends are the same, but the pattern of powerful jerking motions with small deviations in the opposite direction is applicable to any trend. These deceleration periods can also be used to your advantage. It often happens that the market returns to about the same point where the trend began, which is clearly shown in the first diagram. In an uptrend, you see a support line, and in a downtrend, you see a resistance line. You should also check the chart above, where you can clearly see that before moving into an upward position, the market bounces in the opposite direction.
Note the direction between the points in the uptrend. As soon as the market reverses slightly, you need to focus on signals of the trend going up again. A similar situation can be seen in a downtrend, and it is also possible to make profitable trades there.
Price action trading
The main mission of any trader is to forecast the probable level to which the market will return after the next breakthrough. It is necessary to look for opportunities to trade the value that has developed from the circumstances.
For example, in an uptrend, the price is growing, so the main strategy is to buy now, warming up the price growth. In a downtrend, the price is going down, so you can make a profit by selling before the price goes down. These actions can be considered trading based on the average value or average price. Therefore, moving averages act as dynamic indicators of support or resistance lines.
By using the 8- or 21-day exponential moving average (EMA), you can find the value of the moving averages and identify the merging points on the chart. For example, the 21-day EMA lines up the levels of the market, which can be considered a single level influenced by many factors. You can then make a price forecast for a highly probable trade.
See below:
Please note that these moving averages should not be used as the only source for analysis. They should be used only to see the support and resistance lines in the dynamics and to recognize the trend direction. The main focus should be on the visual market price research without the use of EMAs.
Many traders get stuck looking for breakouts, but this is not an effective long-term strategy because big players always know that the majority of traders are constantly following that type of strategy. Instead, it is better to use indicators of the market price level, the price action method, and EMA.
Bottom line
Try to take advantage of the concrete opportunity in either trend. It is never absolutely clear how long the next trend will last, and there are no specifics, so if you have an opportunity, you should try to seize it. On average, market trends appear around 25% to 35% of the time, and the rest of the time, the market is just fluctuating. The most important thing is to recognize a trend when it occurs and try to make the most out of it.
The original story was published on the official Xena Exchange blog
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All indicators, studies, and trading signals provided on the platform are based on technical analysis and are predefined algorithms that use the history of prices, the state of the order book, and other data as input. These tools are to only be used along with thorough market analysis. No tools can guarantee future profits or predict the movement of markets with absolute precision.
