When it comes to reading a chart, many traders are divided in their opinions as to which method is most profitable: Trading with indicators or Trading Price Action. Both methods are proven in being profitable, however Price Action Trading can be a much simpler and more profitable way of looking at the market.
Indicator based trading consists of the trader introducing indicators onto their charts helping them predict what the market is going to do next. Indicators in their most basic form indicate the direction or lack of direction of trend. There are two types of indicators; Leading and Lagging.
Leading Indicators indicate to the trader before a trend or reversal of a trend is about to occur.
Lagging Indicators indicate to the trader after a trend or reversal has occurred.
There are 100’s if not 1000’s of different leading and lagging indicators. Many are generic and can be found on most charting platforms; however some are customized and require specialized knowledge before use.
Price Action trading consists of the trader using the most basic of all information available, the Price, before making any trading decisions. Similar to indicator based trading, price action trading helps the trader determine what the market is going to do next. This type of trading in its most basic form includes using specific charting patterns and support and resistance levels.
The most common mistake made by most novices and a handful of experienced traders is trading using too many indicators. Many traders will make the mistake of ‘cluttering’ their charts with complex indicators believing they gain an ‘edge’ over the market. They believe the more information they have available the better their analysis will be. This is a common misconception which often leads to traders being unable to make definite decisions leading to mistakes and poor trading. Having a chart filled with too many indicators simply confuses the trader and covers the only real information they need to trade; the PRICE! Take a look at the chart below which has only 4 of the most common indicators used by indicator based traders. It’s clear to see how ‘messy’ and confusing this chart looks. Where would one begin to analyze this chart?
Although indicator based trading can be profitable for some traders it’s not the only way to trade. Often indicators give conflicting signals; for example a MACD can be giving a sell signal and an RSI can be signaling a buy. How does the trader know which indicator to believe? Indicator based trading can become very confusing and with the often conflicting signals can become very frustrating often leaving the trader missing out on trading opportunities.
Price action trading on the other hand clears the ‘mess’ indicators produce leaving the trader with the only real information they need to trade. When trading we are analyzing what the PRICE is going to do next which is why it makes sense to only concentrate on what the price is doing now. Take a look at the same chart seen above but this time notice how clean and easy to read it is. With only one simple horizontal level (resistance) drawn on its quite obvious which chart is easier to analyze.
As you can see Price action trading can be a much simpler and a more profitable way of looking at charts. On a price action chart the PRICE is easy to see. Knowledge of chart patterns and the ability to identify horizontal support and resistance areas can greatly improve a trader’s analytical skill.
Cons of Indicator based trading –
Cluttering your chart with often needless information
Lagging information. We’re not trading the past, we’re trading the present
100’ if not 1000’s of different indicators. Which are best?
Very time consuming in learning how different indicators work and which combinations work best together.
Conflicting signals. Maybe one indicator is saying buy while another is saying sell.
Pros of Price Action Trading –
Only a few simple and easy to understand chart patterns are required to start price action trading.
No need to spend hours and hours learning about different indicators.
Clean charts. No ‘mess’ cluttering your chart, leading to less confusion.
Professional traders use price action.
We’re trading the present not the past. PRICE DOSNT LIE!
