Trading stock price is considered one of the day trading methods where traders make decisions about trades based on price movements rather than indicators derived from technical analysis.
What is Stock Price Trading?
Some traders make their decisions based on the asset’s price movements. This is the basis of stock price trading ‒ following price movements and trading based on actions they believe are the most profitable.
Most stock price traders do not use technical indicators such as moving averages or Bollinger Bands, but if you do use them, you should give them very little weight in the trading decision-making process. A stock price trader believes that the only reliable source of information comes from the price itself and its movement.
If the stock price begins to rise, this indicates that investors are buying. They then evaluate the price movement based on buying aggression; historical charts; and actual price information such as bids, asks, volume, speed, and strength.
Stock Price Trading Tools
Preferred tools for stock price traders include breakouts, candles, and trends. They also use theories such as support and resistance. Traders use these tools and ideas to develop strategies that align with their preferences.
Breakout
When the price of an asset moves in a certain direction, it alerts traders to a potential new trading opportunity once it breaks out of that direction. For example, suppose a stock has been trading between $11 and $10 for the past 20 days, and then it moves above $11. This change in direction alerts traders that the sideways movement may have ended and a possible movement to $12 (or higher) has begun.
Breakouts occur from various patterns, including ranges, triangles, heads and shoulders, and flag patterns. A breakout does not mean that the price will continue in the expected direction, and often it does not. In this case, it is referred to as a “false breakout” and provides a trading opportunity in the opposite direction of the breakout.
Candles
Candles are graphical representations on the chart that show the trend, open, close, high, and low of the asset’s price. Traders use candles in various strategies. For example, when using candlestick charts, some traders employ the engulfing candle strategy.
Trends
Assets can trade throughout the day, with prices continuing to rise or fall. Traders refer to these fluctuations as “bullish” trends where the price increases, or “bearish” trends where the price decreases.
Support and Resistance
Traders use price support and resistance areas to identify good trading opportunities. Support and resistance areas occur when the price has tended to move in the opposite direction in the past. These levels may become relevant again in the future.
Stock Price Trading Strategies
There are many trading strategies to choose from. Some of the most popular include:
- Bouncing at Support
- Inside Candles After Breakout
- Hammer
- Harami
Traders often name their strategies based on the shape created by the indicator used on the chart. For instance, “Bouncing at Support” refers to a sudden rise in the asset’s price after it reaches or approaches the support price, or the lowest market price that supports that asset.
“Inside Candles After Breakout” refers to the candle pattern within the range of the previous candle after a breakout occurs. A “Hammer” is a candle that looks like a hammer. It forms this way because the open, close, and high are close to each other, while the low is long, simulating the handle of the hammer. The hammer is usually considered a reversal of the trend.
The Harami features a bullish or bearish trend with a corresponding decrease or increase in opening and closing prices. A smaller candle sits next to it, with price movement opposite the trend direction and minimal gap in opening and closing prices. Harami generally indicates trend reversals.
Benefits
Advantages and Disadvantages
The benefits and drawbacks of trading stock price are as follows:
- Less time required for research. You cannot automate your trades.
- More preferred entries and exits compared to index trading. Indexes generally lag behind prices.
- Can be tested on simulators. Requires more effort and focus compared to traditional investing.
- Use whatever strategy you want. Every trader will read the signals differently.
Some Final Thoughts
All new traders can benefit from learning stock price trading. Reading and interpreting price movements on their own becomes a trading system in itself. It can help if you decide to implement other analytical tools like statistics, indicators, or seasonality.
If you’re learning to trade, you only need to learn one method to get started. Be profitable with your chosen strategy before attempting to learn more. Trading stock price does not guarantee profits, but it is an excellent trading style with time and practice.
Frequently Asked Questions (FAQs)
How do you read price action?
To read price action, you will need access to a good charting program. Most brokers offer some charting features built into their websites and applications. If you’re not satisfied with the broker’s options, you can use third-party charting software like TradingView or Yahoo! Finance.
What is stock price in the forex market?
Trading stock price works the same way in the forex market as it does in the stock market. The same basic principles of supply and demand apply in both markets, and both markets allow you to gauge market volatility using price charts, volume readings, and momentum indicators. However, although the two markets have many similarities, some subtle differences may affect traders’ strategies. You should not switch from stocks to forex (or vice versa) without practicing your strategies in a demo account.
Source: https://www.thebalancemoney.com/what-is-price-action-trading-1031471
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