Whether you want to be a fundamental trader or technical trader, you need to have a sound understanding for how markets work. As a price action trader, economics major and trading educator, I fully understand how markets work, but do you?
There are tens of thousands of trading websites and thousands of different trading methods being sold on them, most of which never really explain to you, the trader, exactly how or why they work. To me this is just shady business practices from these companies, and is more times than not due to the fact that these methods either don’t work or the person in charge of marketing these methods doesn’t know how they work. I am writing this article wearing the shoes not only of a full time trader and economics major, but more importantly for you the shoes of a trading educator.
While there are tens of thousands of traders, some with very successful and profitable methods, there are only a small handful of traders willing to share their strategy, and even a smaller number of these traders are actually able to be good teachers and explain their strategy so that others can utilize it.
So just how do markets actually work?
Well as we all know, supply and demand rule the marketplace and are the only things that make price move. No matter what the catalyst may be, supply and demand are impacted by that catalyst and are the cause behind any price movement. So naturally no matter how we trade, we must understand supply and demand because again they are the only things that make price move. Changes in the amount and balance of supply and demand can cause price to move great distances, and some of these movements can be very predictable if you fully understand how the market works. This is where price action, volume, and support/resistance come into play.
I have tried dozens of trading methods along my road to success, however the only one that actually left me with a consistently profitable outcome was price action. I believe this is because price action focuses exactly on the core principles behind how markets work, and utilizes these areas of supply and demand to place trades. All 10 of my trading strategies are based on trading at areas of supply or demand, and all 10 of my strategies have shown me profitable outcomes when the market is moving up, down, and sideways. I truly believe that price action is the key to trading success simply because it is what the majority of professional traders utilize and it is focusing on exactly how the market actually works, which the vast majority of other methods do not even take into consideration.
Now I understand not everyone wants to be a price action trader and they think they look a lot cooler if they have a whole bunch of crazy lines and indicators drawn all over their charts. I would be a fool if I didn’t acknowledge this fact and if I didn’t accept that there will always be other traders with other methods. However, I think it is critically important to incorporate price action into whatever your method may be and you will likely improve your method and results if you do this. So for all of you that don’t think you can incorporate price action into your current method, I am going to provide 5 steps to successfully incorporate price action into your trading.
5 Steps to Incorporate Price Action into Your Trading
1 Never forget that supply and demand rule price movements
If your method is telling you to buy but you are at an area of supply, you need to make sure you follow what the market is telling you. Remember that the market is never wrong, so when we fight with areas of supply and demand we are fighting in a battle that we cannot ever win.
2 Incorporate volume
Again if your method is telling you to buy but you are at an area of supply with rising volume, price is likely to reverse due to the introduction of supply, so we need to make sure that we are always following the crowd on our trades and not going against what the market is thinking.
3 Follow the trend
If price is trending upward but your method is telling you to get short, always follow what the rest of the market is doing and telling you to do. Again it is important to not fight the crowd but to ride the momentum of the trend and the crowd to lock in the largest profits.
4 Understand candlestick sizes
While supply and demand rule price movements, different amounts of supply and demand and convey very strong signals. We always want to place our trades at areas of large amounts of supply or demand and make sure again that we are trading with the rest of the crowd.
5 Ideally, drop the indicators
Also drop other methods and gain a full and complete understanding of price action. It is a sophisticated methodology yet extremely simplistic and common sense based, and I truly believe that anyone with the proper mindset and dedication can learn these strategies.
As a full time and successful price action trader, I of course ideally would like to see every trader become a price action trader, but at the very least I want to see them incorporate price action concepts into their own trading. I have seen dozens of traders successfully incorporate price action into their strategy, and dramatically increase their method’s accuracy rate and their overall success rate. So before you place your next trade using your current method, make sure you pause for a moment and remember that supply and demand rule the marketplace, which is precisely why I am a price action trader.
Brendan Egan can be contacted at 123LearnToTrade