Price action trading is often considered one of the most difficult methods of trading while this might be true to some extent but we must also know that price action puts the fundamental pillars of technical analysis and provides one to find perfect entry and exit points without depending on the news or opinions of the experts.
Here is what to consider before taking a trade
Market structure is the behavior of the price over a time frame which can go upside forming an uptrend market, downside forming a downtrend market and if the price decides to go neither of these directions and keep fluctuating in a price range or sometimes refer to as price bands is called a sideways market.
Support and Resistance
After observing the current scenario of a market, the price action is supposed to decide whether to go long (buy) or go short (sell) on a trade.
If the market seems to be going in an uptrend it’ll be bringing buying opportunities, if the market is not in the favor of bulls then it’ll pop up shorting opportunities.
The next key step is to look for support and resistance levels, i.e. the area of demand and supply or the buying and selling pressure zones.
Support is a level or a zone of value where buyers could enter the market and push the price to the new highs similarly, Resistance is the zone where shorters or sellers could enter and take the market downside.
Entering a trade
Technically, when a breakout happens then it brings an opportunity for the traders to enter and take control of the market, but one should not enter a trade right after a breakout.
Instead, wait for the price to sustain at that level after a breakout. If it’s a breakout then buyers will look for the price to retest that previous level and if it’s a breakdown the sellers will look for the price to retest that previous resistance level and if it follows a bearish trend then one should enter the trade.
Stop loss, a savior
Entering a trade is a good thing but managing one’s risk could be a terrible experience as it holds the power to wipe out the whole account in very little time.
So, where to put a stop loss?
If one sees a breakout forming and it sustains the higher levels and they decide to enter that trade, the stop loss varies from trade to trade but in general, it is okay to put a stop-loss slightly below the previous swing low.
So far so good but, is the trader aware of trends in a higher timeframe?
A trader needs to be well aware of the higher timeframes as they show the actual direction of a market in a long run, a direction where it is heading. So it becomes very important to check onto a higher timeframe before entering a trade or making a position.
Volume, another key component
Yes, volume is another key component of trade because if a breakout happens and the trader is looking for a buying opportunity but doesn’t see any volume. At this point, the trader must not enter that particular trade because it could be a fake breakout that captures new buyers at higher levels. So make sure to have decent volume before entering that trade.
This one is the final phase of the whole trade but it should as well be planned and calculated before entering the trade.
For those who are buying in a trade, they should target the previous resistance level or better slightly below that. Not putting the proper exit target could end up as losing all the profits made, try to put realistic exit points.