Price Action Trading Myths: Did You Fall For Any Of It?

[filatovarthur]

In my previous post…

I said if you want to be a consistently profitable trader, you need to avoid indicators, news, and opinions.

Now you’re wondering:

“So what should I focus on?”

Price action.

I’ll explain…

Price action trading is a methodology that relies on historical prices (open, high, low, and close) to help you make better trading decisions.

Unlike indicators, fundamentals, or algorithms… price action tells you what the market is doing—and not what you think it should do.

But first, let’s dispel the biggest myths surrounding price action trading…

Myth #1: Price action trading doesn’t work on stocks or cryptocurrencies

The term price action is popularized by Forex traders.

Thus, it’s not surprising that stock (or even crypto) traders think it won’t work for them.

But don’t be fooled.

Price action trading can work across different markets.

Here’s why…

Price action trading takes into account the historical movement of prices, and then, use that to make an informed trading decision.

So…

If a market is in an uptrend, then a price action trader can look for buying opportunities.

Here’s an example:

THC (Daily Timeframe)

As you can see, THC has made a series of higher highs and lows—so it’s in an uptrend.

As a price action trader, this is a market condition where you want to look for buying opportunities so you can trade along the path of least resistance.

Now…

If the market is in a downtrend, then a price action trader can look for selling opportunities.

Here’s an example:

Bitcoin (Daily Timeframe)
As you can see, Bitcoin is in a downtrend.

So if you want to put the odds in your favour, you should look for selling opportunities.

And finally…

If the market is in a range, then a price action trader can look to buy at support and sell at resistance.

EUR/GBP (8-hour Timeframe)

As you can see, EUR/GBP is in a range market.

So in this market condition, you can look to buy low and sell high using tools like support and resistance.

The best part?

Price action trading can be applied across different timeframes.

Earlier, you’ve seen charts from the daily timeframe, 8-hour timeframe, and 4-hour timeframe.

Now, let’s move on and destroy the next price action myth…

Myth #2: You must pay attention to fundamental news

I wish news trading could be as easy as…

• Good news = buy
• Bad news = sell

Unfortunately, that’s not the case.

Because the market can go up on bad news and go down on good news.

Let me repeat that once more.

The market can go up on bad news—and go down on good news.

Here’s an example…

During the 2016 presidential election, many thought if Donald Trump won the election, it’ll be bad for the country.

That’s because he has no experience in politics, doesn’t know what he’s doing, and is more emotional than logical.

But guess what?

He won the 2016 presidential election.

The day the election results came out, the US stock market dropped 100 points in a matter of minutes—as most pundits predicted.

Interestingly…

Within the next few hours, the market recovered from those losses and closed higher—and over the next few days, the market broke out to all-time high.

Here’s what I mean…

S&P 500 (Daily Timeframe): Presidential election

So now the question is…

How do you “predict” the market reaction to the news?

Well, the secret is this:

Just follow the price.

That’s because if the market is in an uptrend, it’s likely to continue higher.

So if you want to predict what the market will do, predict it will move higher (and vice versa).

When you look at the market in this manner, news release no longer matters.

Why?

That’s because the market usually makes its move before the news.

Here’s an example…

European Central Bank rate cuts

On September 4, the European Central Bank cut interest rates to combat low inflation—which is bearish for the Euro.

But if you look at the chart above, the EUR/USD has been in a downtrend for a few months before the news release.

So based on the market’s price action, you can predict the news will be bearish for the Euro—even before it’s out.

But don’t take my word for it.

Study a trending market (on a daily timeframe or higher) and pay attention to how the news affects the price.

Does the price lead the news or, does the news lead the price?

Myth #3: You need to watch the markets all-day

You might think you need to watch the markets all day…

To stay updated with the news and to analyse every candle on the chart.

But the truth is, you don’t.

Here’s why…

The price leads news

As you’ve seen earlier, you don’t need to follow the news if you follow the price.

That’s because the price leads news (at least that’s my belief).

Higher timeframe

And what about analyzing every candle on the chart?

Well, you can pay attention to every candle on the chart without watching the markets all day.

How?

By trading off the higher timeframe like the 4-hour and above.

This means a new candle is “painted” once every 4 hours—which means you don’t have to watch the markets all day.

And because you’re on the higher timeframe, your stop loss is wider and it’s enough to withstand most news releases in the market.

This means you get to stay in your trade longer without getting stopped out unnecessarily.

Here’s what I mean…

EUR/USD (5 Minutes Timeframe): Non-farm payroll (NFP) news release

As you can see, the price spiked up and down on the 5 minutes timeframe and you’ll likely get stopped out of your trade.

However, look at the daily timeframe…

EUR/USD (Daily Timeframe): NFP news release

You can see the NFP news release is only a small blip on the daily timeframe.

So if you set your stop loss based on the daily timeframe, it’s unlikely you’ll get stopped out.

I’ll teach you how to set a proper stop loss in my next post.

But for now, let’s move on…

Myth #4: You need a lot of capital to start with

This is true in the early days when technology isn’t as advanced and commissions were high.

But today, things have changed.

Here’s why…

You can start Forex trading with as little as $200

Yes, you read me right.

You can open a Forex trading account with as little as $200 (and some brokers require less than that).

Also…

You don’t have to pay commissions when you buy/sell stocks

That’s because brokers like Robinhood and TD Ameritrade offers commission-free trading.

This means you don’t need a large amount of money to trade stocks as commissions no longer “eat” into your transaction cost.

And finally…

It’s smart to start small

When you’re new to trading, you’ll make many mistakes along the way (like pressing the sell button instead of buy, using the wrong position size, etc.).

The good news is…

If you start with a small account, the cost of your mistakes is small (in monetary terms).

However, if you start with a 6-figure account, the cost of your mistakes is a lot more expensive.

So, if you want to pay lesser tuition fees to the market, then it’s smart to start small.

Agree?

Myth #5: You need a lot of time to learn price action trading

Can you recall the toughest exam paper you took?

No matter how long you stared at the question paper, you can’t seem to find the answer to it.

And let’s be honest, even if you were given 10 hours to complete, you still can’t get it right.

Agree?

Now, it’s the same when learning price action trading.

If you don’t know what to look for, you can spend years trying to figure out how it works—without success.

But the good news is…

You don’t need to spend years to learn price action trading.

Because once you’ve learned the formula behind it, everything will instantly make sense—and you’ll never look at price action trading the same way again.

[CraigForex2020]

Very nice post, clears up a lot of misconceptions

[ThePipTrapper]

Hi,

Great tips overall. Thanks for sharing your thoughts!

I would advise beginners to avoid trading high-impact fundamentals unless they really know what they’re doing. There is a lot of interest from institutions during the news periods. As a newbie, it’s very easy to get trapped into a loss without having any idea of what or why did it happen.

Also, the smartest way to start trading is using a demo account for at least a few months, until your strategy is completely refined and provides consistent earnings. It’s all about patience and hard work. Once you move to a live account, the best way to grow it is by thinking and taking each step in percentages, without focusing on the current capital.

I hope that makes sense.

[Hassan_Salloum]

I realised late that this is true, when i saw that most of my trades based on price action and candlestick paterns are profitable while indicators and fundumentals led me to many many traps and fakeouts…
Is there any book you suggest to learn everything about price action?

[filatovarthur]

I would like to give you my book reference But as per the guidelines I can not promote my books over here… So Just follow me I will upload some important things from my books for you.

[Svupich]

The tips described in this post are really nice and I believe that the thoughts expressed here can influence some traders’ perception of the trading.
However, I don’t really agree with the point that a trader doesn’t need any decent amount of money to trade. I mean that technically, it is possible to trade $100 or even $10, but what’s the point in that? You can trade microlots, but will earn extremely little so that you are highly likely to lose all the motivation to improve and develop your skills further. I believe that a trader should start with at least $1000 in order to make the trading more or less sensible. SUrely, in the beginning it is better to concentrate on the consistency of trading rather than good results, but I have experienced such a situation when I worked a lot but I received very little in return for my labour. That is very discouraging, that is why I do realli advise newbies to start with more or less decent money. I personally feel, that the best starting capital should be $5000-$10000. In this case you’ll be able to get good money if you are successful enough and you’ll pay more attention to money and risk management because you will be interested in preserving your money and secure the risks in order to avoid losing all of the deposit right away within a few minutes.

[MattyMoney]

Excellent post, @filatovarthur. Thank you.

[Manath]

These tips are pretty fine and rather promising, however, I don;t agree with your opinion concerning the starting budget.
You’ve mentioned that $200 will be alright for trading, but I don’t think so. Technically, it is possible to start even with $10, but what is the point in that? At the best of times, you will be able to earn $10 within a month, but you will have to spend lots od time and efforts on analysing the charts and what is more, you’ll have to be lucky in order to reach the profit of 100% a month. I do understand if you make $10000 a month, but if all of your efforts, time and good luck would bring me only $10 or even $200, I would be very disappointed. I believe that a newbie should start with more or less decent amount of money in order to learn how to trade properly. If you start with $2000, you’ll have the opportunity to learn money and risk management, psychological control let alone trading knowledge and skills. And your rewards will motivate you to move firther because you’ll make decent and consistent profits. If you deposit $200 and you’ll make $10 per months (which is a good result) you’ll definetely find it better to find a conventional job and make $20 an hour.

[lumber]

the amount of money shouldn’t be as big of a deal as is your motivation and drive to succeed. Money management and trading psychology are far more critical than the amount you start with. If you’re not right between the ears than $100 or $100,000 won’t help you. Trade what you can afford and scale up with profits. $200 isn’t far off from $2000 if you’re a consistent trader.

[Haukk]

I actually feel that price action is one of the most reliable trading strategy ever.
Surely, it is cool to use indicators and oscillators but they are also about price action. They are just the formulae which operate with the prices. So, in order to be good at analysing the signals provided by indicators, you need to learn how to determine the price action as well. More than that, the indicators can be wrong and it happens quite frequently on the market. I use indicators only to prove and double-check my decisions, but the prices are the key feature which you should pay attention on the market as there is nothing as objective as they.

[greenscorpio]

Solid points but most people should already know all this after say a years trading

[Excel04]

Greetings, thank you for your highlightings , please I could like to beg you to teach me about this “price action” as I’m new to FOREX TRADING. Your explanation check my interest , once again thank you.

[charissaeason]

A very educational post with completely logical counters for the myths. I also believed the exact same for the first myth because price action strategy is a method used on charts. It does not matter if it is a forex chart or a crypto one. Also, fundamental news is helpful in long term investments and not in day trading. All the other points also seem to be quite convincing to me. I would suggest every trader to go through this information.