Updated: Apr 21
This is one of the most asked questions by novice traders. I would like to clarify this in this blog and try to make it simple and short.
"So, what is price action, and what are indicators? How do they differ? Is price action an indicator itself? "
All these above-asked questions are caused by a lack of understanding. Both these terms are often misunderstood. But you're in the right place. I will lead you on the right path.
It's the movement of a stock, currency, or commodity caused by the buyers and sellers. Price actions are viewed in the chart in the form of candlesticks, bars, lines, etc. The price action of the market gives you the advantage to anticipate its future movement.
Price action is itself not a tool to predict stocks movement. Perhaps, it gives traders the data of their past performances which they can utilize to understand their future moves by patterns and other phenomena.
Indicators are tools that calculate the current market's price movements into another visible form like graphs, lines, or values.
Sounds similar to price action? The difference between both of them is that indicators are derived from price actions. Price action affects indicators while indicators give an insight into the market's current condition
(If we go deeper, we may know that the indicators also play a role that may affect price action)
I understand that you might be a little confused here. Don't you worry!
Traders who claim that they use price action to trade are actually trading with past proven phenomena like chart patterns, trend lines, channels, parallel zones, etc.
For example, if you take reversal patterns like head and shoulders, you may find it is the price action of a market at a specific time period. This type of pattern has repeatedly been seen in many markets before it reverses. That's why a price action trader who completely ignores the indicators would take short positions where a reversal pattern took place.
If the trader is using indicators like RSI, Moving averages, and Ichimoku Cloud, it is derived from the price action and other aspects like volume, open interest, etc. Except it is only it derived its value from the price action.
You may now ask, then what is the difference between both of them? One is the base and another is derived. No big deal, right?
Price action is consistently repetitive over the centuries. Unlike indicators that use a mathematical formula to forecast their moves.
Both the price action and indicators require a human to be interpreted.
Patterns like head and shoulders, triangles, double top-bottom, and flags are considered under price action and help us place a trade.
Relative strength Index, Parabolic Sar, VWAP, and Bollinger Bands use mathematical formulas of the past price action to show us a visible format (easy to interpret) to make entry or exit of positions.
Now we are going to answer which is the best to be equipped to be more accurate.
Price action is the most proven technique which has been created using centuries of past price formations. This means it is most likely being used by most traders around the world.
Indictors are also good but have a slightly lesser success rate than price actions.
So why not use both of 'em together to make better trades?
Yes, you can combine them both based on the market you're dealing with. Use price action as the primary part of the strategy and use indicators for confirmation. But it's your job to figure out which indicator works best for your trading strategy.
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