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Can I be a profitable trader by basing my trades solely on price action analysis?

Can I be a profitable trader by basing my trades solely on price action analysis?
Asked by
Benjamin Schmitz time-icon4 weeks ago
1 Answer Answer Question

Steve Walters
Answered time-icon4 weeks ago

The short answer to this question is a resounding yes. You can be a very profitable trader by trading based solely on price action analysis because everything in the markets is reflected in an instrument’s price. In fact, many successful price action traders do not use any indicators or fundamental analysis because whatever conclusions you reach based on these other methods is reflected in the price.


Why you can trust price action analysis

Let’s say a trader thinks that the price of oil is going higher based on his fundamental analysis of geopolitical events. In that case, the trader will translate his analysis into a buy order.

However, let’s say another trader thinks that the price of oil is quite overvalued based on his own analysis, so he places a short trade on oil.

The individual analysis done by the two traders will translate into actual trades, which will be reflected in oil’s current price as millions of other traders place their orders. Therefore, price action is the great equaliser that provides insight into what other traders are thinking and doing, especially institutions, which are the biggest players in the financial market.

Chart 1: Price action analysis on GBP/USD daily chart

The above chart is a perfect example of how price action analysis can help you predict price moves long before they happen and get positioned ahead of a major profitable trend.


Analysing the GBP/USD daily chart using price action principles

Using price action analysis, we could have seen the bounce that occurred in the GBP/USD currency pair on 3rdSeptember as price reversed and headed higher. The fundamental driver was the fact that the UK Parliament was on track to prevent Boris Johnson’s government from pushing through a hard Brexit. However, from a price action perspective, the price was approaching a major support level that had held for almost two years, which meant that it would not be easily broken. This fact presented traders with an excellent opportunity for a reversal trade almost a month before the second touch resulted in a major reversal.

Chart 2: Price action entries on NZD/USD daily chart

The NZD/USD daily shows how a single support line interpreted using price action analysis can provide multiple trade opportunities. The line above acts as support for the two bullish trades and is converted into resistance once price crosses below it, creating bearish opportunities.

The single line above represents a crucial support/resistance level that is based purely on the price action that we can see within the chart snippet presented. The level’s importance is based on how price behaves around this level and nothing else.


Breaking down the chart

The above charts highlights several trade setups, but there is one monster trade opportunity highlighted by the last arrow. We can see that price initially crossed below the level effortlessly, indicating that the bears were in full control, and kept falling to create a new low before the bulls stepped in and pushed the price higher.

The price rallied but failed to reach the level as the bears came in and pushed the price lower before ceding ground to the bulls, who then pushed the price higher. We can also see that the final push by the bulls actually breached the level, leading to a false breakout. However, the bears soon came in and pushed the price back below the level and into a massive bear trend.


Why price action analysis works

Price action analysis is based on the simple principle that market participants vote with their wallets, which is what matters most. By analysing the price movements of an asset, we can understand what most of the market players are doing and use this information to trade with the trend without using indicators.


The bottom line

As price action traders, we are directional traders looking for high-probability trade setups based on what the big players in the market (institutions) are doing. Using price action analysis helps us to react faster to changes in market sentiment; most indicators, in contrast, have a time lag. Therefore, you can be a profitable trader by trading based solely on price action analysis.

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