In the fast-moving environment of financial markets, Indian traders find more value in strategies that give them clarity and confidence in their decision-making. Price action trading is quickly becoming a well-regarded approach, based solely on price movements instead of complex indicators. Price action trading is an approach to trading the traditional stock market or even foreign exchanges, as it uses real charts to analyse the actions and behaviours of the market. Price action trading shows significant promise in trading all equities listed in India, including stocks, indices such as the Nifty 50, or forex pairs such as USD/INR. This article introduces price action trading strategy, its core principles, and how Indian traders can begin their journey to learn price action trading.
What is Price Action Trading?
It is about analysing a security's price movements on a chart to predict future trends. Traders observe price action on a chart and can avoid using lagging indicators such as moving averages. They look for candlestick patterns, price action at support and resistance levels, and trend structures. This trading method is particularly beneficial for Indian traders, as it lends itself to diverse markets, including relatively volatile stocks such as Reliance Industries and more stable forex pairs. By observing how a price reacts when it approaches key levels like support or resistance, traders can begin to understand the sentiment or psychology in the market, specifically, who is in control (buyers or sellers).
For starters, a "bullish engulfing" candlestick pattern at a support level on the barebones Nifty 50 daily chart could represent a potential upward move. There is no hiding that price action trading can be straightforward, making it attractive to beginner traders who do not want to use more indicators, if we can call candlestick patterns indicators. In price action trading, the strategy is based on trends, key levels, and candlestick patterns.
Trends: Identifying the direction of the market can be beneficial. An example of an uptrend with higher highs and lower lows can be seen in a stock during a bullish market environment. You will see lower highs and lower lows in a downtrend during corrections. Many Indian traders will use daily or 4-hour charts to identify trends, allowing them to trade with the market's directional sentiment.
Key Levels: The price levels where the market pauses or reverses. For example, if USD/INR consistently bounces off the price level 83.50, we can consider the 83.50 level as support. Traders can enter the closest support/resistance level areas, ascertain patterns such as pin bars (candlesticks with very long wicks and small bodies), and realise a trade from there.
Candlestick Patterns: A pattern such as a doji, hammer, or shooting star often shows that the market is indecisive or signals a reversal. The appearance of a doji on a stock could signal that a pullback is forthcoming if the doji is at resistance. Traders could use this to avoid making premature entries in an uptrend.
When traders combine all these aspects, they can build a rule-based system that they can consistently use. For example, the rules might be to only buy after a bullish pattern form when the pattern is at support and in an uptrend. The stop-loss should be below the support area.
Getting Started: How to Learn Price Action Trading
If you are an Indian trader looking to learn price action trading, getting started involves disciplined practice. Here are practical steps you can take to begin your journey:
1. Choose a Market: Stick to assets you are familiar with, such as Nifty 50 stocks or forex pairs, like EUR/INR, which are traded in liquid markets.
2. Use Demo Accounts: Some platforms provide demo accounts for CSV files so you can identify patterns without capital risk.
3. Get Actionable with Charts: Review charts and identify past movements. It is essential to see how past trends and levels worked. Take, for instance, how Infosys stock would behave near the 200-day moving average, even if you're not using it as an indicator.
4. Keep a Trading Journal: Record trades, including the reasoning behind your entry and exit, so that you can improve your strategy with your experiences, with a special focus towards mastering the nuances of the market.
5. From Resources: Books like Japanese Candlestick Charting Techniques by Steve Nison and free YouTube training made for the Indian Markets can help you learn better.
Use extended time frames, e.g., daily and weekly charts, and try not to trade intraday, as there is so much noise. As you feel more comfortable and gain Confidence, you can explore shorter time frames for day trading.
Why Indian Traders Should Embrace Price Action
Price action trading is perfect for Indian traders because it is inexpensive (there's no need for pricey software), can be used in local markets and caters to India's new focus on technical analysis. If trading in Mumbai or a small town, you only need a solid internet connection and a charting platform.
Conclusion
Price action trading gives Indian traders a straightforward approach to understanding their world in the financial markets. Once you know trends, key levels and candlestick patterns, you can use them to develop a solid price action trading plan for stocks, forex or indices. You can learn price action trading with a commitment to practice, proper risk management, and an open mind for continuous learning. With a growing trading community in India, price action can be your aqueduct to financial freedom, one chart at a time.