Is price action analysis the same as technical analysis? The answer is ‘yes and no’. Technical Analysis is defined by Wikipedia as “a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume”. However, technical analysis can and usually does include a plethora of ‘technical studies’, as it is essentially comprised of anything that isn’t fundamental or news data.
Are all of these technical studies, i.e., indicators, various chart patterns, etc. really necessary or worth it? Why do some traders become convinced that these various technical analysis studies are the ‘ticket’ to financial success in the market whilst others rely only on raw price action strategies? We will address these and other questions below…
Why all Technical Analysis methods are not created equal
Whilst we appreciate and respect technical analysts, as pure price action traders who focus on reading the raw price action on price charts, we do not subscribe to the idea that ‘any technical study is a good study’. Instead, we stick to a handful of simple but effective price-based principles and don’t look at charts and try to curve fit what we see into matching a text book theory example as many popular technical indicator-based trading systems do. There are hundreds of patterns, technical indicator settings and so on, technical trading even if narrowed down into a niche / specific topic can be very haphazard and hindsight is often the way such technical methods are advertised or represented to the beginning trader. Unfortunately, relying heavily on indicators and other technical analysis methods that largely ignore price action, often leads to dramatic long-term failure for retail traders.
Many technical analysis tools or methods are full of what I call ‘noise’. That means they include numerous unnecessary variables like technical indicators such as RSI, Stochastic, MACD and countless others. The simplest explanation for why these technical indicators are simply a waste of time, is that they are all just derivatives of price action. If you are going to analyse something derived from price action, in order to make a prediction as to where price might move next, why would you not just analyse the raw price action in the first place?
By analysing ‘other’ technical studies, besides price action, you’re simply adding unnecessary variables and cluttering up the trading process, your charts and your mind. It’s simply unnecessary to trade like this. All you need to make market predictions is raw, natural price data that any market supplies you for free. Don’t believe the hype or any website / ‘guru’ telling you that you ‘need’ XYZ trading system, because all you really need is price action
Why price action analysis is the best technical analysis method
I have filtered all the technical analysis ‘noise’ taught around the web and in books, I’ve filtered the crap and condensed it down to what I know works and what is logical. What I ended up with is raw price action, i.e. price movement on an indicator-free price chart.
By ‘price action, I mean focusing just on the raw chart with nothing but candlestick price bars, on watching the key levels of support and resistance, and on determining market bias and trend in the short term and long term. This is done simply by visually observing or ‘reading the chart’, not relying on 3rd party instruments or technical studies.
By using a specific set of price bar patterns or ‘signals’ for entries, and to a lesser extent exits, we can map the market first as price action analysts, then we can massage or locate an entry after patiently waiting for a confluence of factors to align.
A confluence of factors can be easily described by looking for T.L.S. or ‘Trend, Level, Signal”, and by doing so, we can put the odds in our favour. This simply means looking for two of the three TLS factors to align and then looking for an entry at the point where they align; either a trend or a level, or a level and a signal, or a trend or a signal, etc. If you can get two or more of these factors in alignment, you have a potential price action entry on your hands.
Technical analysis doesn’t need to be more complicated than looking for the dominate market trend, identify key chart levels and then looking for price action entry signals. Anyone who tells you otherwise is either trying to sell you something or doesn’t know what they’re talking about.
I hope you’ve enjoyed this price action trading lesson, to learn more visit the price action university.