When it comes to trading in the financial markets, there are two main schools of thought: price action and trading indicators. Price action traders believe that the price of an asset is the only relevant piece of information needed to make trading decisions, while indicator-based traders use technical indicators to identify trends and make buy and sell signals.
Both approaches have their strengths and weaknesses, and the choice between them ultimately comes down to personal preference and trading style. In this blog post, we’ll take a closer look at the differences between price action and trading indicators to help you decide which one is right for you.
Price Action Trading
Price action trading is a method of trading that involves analyzing the price movements of an asset without the use of any indicators. Price action traders believe that the price of an asset reflects all the relevant information about its underlying value and that analyzing the price movements themselves can provide valuable insights into market sentiment and future price movements.
Price action traders use various chart patterns, candlestick formations, and support and resistance levels to identify trends and potential trading opportunities. They also pay close attention to key price levels, such as round numbers, pivot points, and previous highs and lows, to help them make trading decisions.
One of the main advantages of price action trading is its simplicity. Since it doesn’t rely on any indicators, price action trading can be used on any asset and in any market condition. It also allows traders to develop a deep understanding of market dynamics and develop a keen eye for identifying trends and patterns.
However, price action trading requires a significant amount of skill and experience to be successful. Traders must be able to interpret price movements accurately and have a solid understanding of market fundamentals to make informed trading decisions.
Trading Indicators
Trading indicators are mathematical calculations based on an asset’s price and/or volume that are used to identify trends and generate trading signals. There are many different types of indicators, including moving averages, Bollinger Bands, RSI, MACD, and many more.
Indicator-based traders use these indicators to identify trends and generate buy and sell signals. For example, a moving average crossover, where a shorter-term moving average crosses above or below a longer-term moving average, can signal a change in trend and a potential trading opportunity.
One of the main advantages of indicator-based trading is that it’s easy to use and can be automated using trading algorithms. Indicators provide a clear visual representation of market trends and can help traders make quick, informed decisions.
However, indicator-based trading also has some drawbacks. Since indicators are based on past price movements, they may not always accurately predict future price movements. They can also generate false signals, which can lead to losses if traders act on them.
Which One Should You Use?
The choice between price action and trading indicators ultimately comes down to personal preference and trading style. Some traders prefer the simplicity and nuance of price action trading, while others prefer the clarity and ease of use of indicators.
Ultimately, the key to successful trading is to develop a strategy that fits your personality, risk tolerance, and financial goals. Whether you choose price action, indicators, or a combination of both, make sure to backtest your strategy and continually refine it as market conditions change.
There are five most commonly share opinions on Price Action Vs Trading Indicators and give traders a new perspective on the age-old debate:
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Price Action is Better Than Indicators
Price action traders claim that it is a much better trading method in general. But if you dig a little deeper, price action and indicators are not that different. Candlesticks or bar charts are tools to visualize price information on your charts. Indicators take the same price information and apply a formula to it. Indicators don’t add or take away anything from the price information you see in your candlesticks – they just process the information in a different way. This will become more apparent in the next points.
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Indicators are Lagging – Price Action is Leading
A trader who claims that indicators are lagging hasn’t understood their true meaning and purpose. An indicator takes past price action (the amount is defined by the indicator setting) and then visualizes the result after applying a formula to it. Thus, what your indicator shows you are a result of past price action.
However, a trader who analyzes pure price patterns does the same thing; if you are looking at a Head and Shoulders or a Cup and Handle pattern, for example, you are also looking at past price action and the price has already moved away from the potential entry point.
As you can see, both use past price information and are, thus, ‘lagging,” if you want to call it that. To overcome the lagging component, you would have to set your indicator to a shorter time setting or only use a handful of past candlesticks to make your analysis. However, the analysis becomes less and less significant the less information you include.
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Price Action is Simple and Better for Beginners
Is it? In trading, it’s rarely true that one thing is better than the other and it usually comes down to how you use your tool. It’s like saying that a hammer is better than a screwdriver; both tools work very well if you understand when and how to use them, but neither will help you if you don’t know what to do with it.
Without experience or proper guidance, it’s very easy to feel lost as a beginner price action trader. Trading candlesticks are not as easy as it sounds and lots of components often get overlooked, such as the size of candlesticks, how they compare to previous price action, and the component of momentum and volatility in wicks and bodies. Don’t make the mistake of choosing price action because it looks simple; a trader who doesn’t understand the nuances of price action trading can easily interpret charts in the wrong way.
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Naked Trading is Better Because Indicator Charts are Messy
This is an extension of the previous point. The old argument that indicator charts are messy does not hold up. Of course, if you apply five oscillators and ten moving averages to a chart, you can quickly clutter up your screen, but that’s not how indicator trading works. When it comes to indicator trading, traders usually pick one oscillator to analyze momentum and another indicator for chart studies; a good combination is the Stochastic (which is a momentum-based oscillator) and the Bollinger Bands (which is a volatility and momentum-based chart study tool with a moving average).
Indicators can provide guidance and help traders make objective trading decisions. There is very little room for subjectivity when it comes to analyzing an indicator. On the other hand, price action traders who look at blank charts can easily feel lost, lacking clear reference points or tools to help them make trading decisions, resulting in acting emotionally or impulsively. It’s also possible for price action traders to create too much noise on their charts by using too many support/resistance lines, trend lines, and candlestick components.
As always, such an argument does not hold up when we take a closer look. Whereas some traders feel more comfortable using indicators to take away some of the subjectivity, others prefer price action analysis.
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Price action is the real way of trading
The final argument is that “professionals” don’t use indicators. Again, it is very hard to validate such a claim, and it all comes down to personal preferences. Indicators can save time, and they only look at very specific aspects of a chart – momentum indicators solely focus on analyzing momentum – to help traders process data faster and without much subjectivity. I know profitable traders using two indicators alone and they are consistent in their winnings. However, I have other friends who are profitable using the price action strategy while others use a combination of both strategies.
I myself am a divergence trader using RSI with a combination of ICT/SMC strat and Price Action.
In my humble opinion, it is important to approach this topic with an open mind and not get too carried away. It is important that a trader chooses his trading tools wisely and that he understands the pros and cons of the different approaches. There is no better or worse when it comes to price action vs. indicator trading. It all comes down to how the trader utilizes his trading tools to make trading decisions and become consistently profitable.
It’s really your choice as a trader and your personal preferences. No one else knows you better than yourself !!! Whether you choose Price Action or Trading Indicator Strategy, or a combination, your consistency and profitability are the most important at the end of the day.
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