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Price action is a method of analysis of the basic price movements to generate trade entry and exit signals that is considered reliable while not requiring the use of indicators. It is a form of technical analysis, as it ignores the fundamental factors of a security and looks primarily at the security's price history. However, this method is different from other forms of technical analysis, as it focuses on the relation of the security's current price to its price history, which consists of all price movements, as opposed to values derived from the price history.
At its most simplistic, it attempts to describe the human thought processes invoked by experienced, non-disciplinary traders as they observe and trade their markets.[1][2][3][4]Price action is simply how prices change - the action of price. It is most noticeable in markets with high liquidity and price volatility, but anything that is traded freely (in price) in a market will per se demonstrate price action.
Price action trading can be considered a part of the technical analysis, but it is highly complex compared to most forms of technical analysis, and it incorporates the behavioural analysis of market participants as a crowd from evidence displayed in price action - a type of analysis whose academic coverage isn't focused in any one area, rather is widely described and commented on in the literature on trading, speculation, gambling and competition generally, and therefore, requires a separate article. It includes a large part of the methodology employed by floor traders[5] and tape readers.[6] It can also optionally include analysis of volume and level 2 quotes.
A price action trader typically observes the relative size, shape, position, growth (when watching the current real-time price) and volume (optionally) of bars on an OHLC bar or candlestick chart (although simple line charts also work), starting as simple as a single bar, most often combined with chart formations found in broader technical analysis such as moving averages, trend lines and trading ranges.[7][8] The use of price action analysis for financial speculation doesn't exclude the simultaneous use of other techniques of analysis, although many minimalist price action traders choose to rely completely on the behavioural interpretation of price action to build a trading strategy.
Various authors who write about price action, e.g. Brooks,[8] Duddella,[9] assign names to many common price action chart bar formations and behavioural patterns they observe, which introduces a discrepancy in naming of similar chart formations between many authors, or definition of two different formations of the same name. Some patterns can often only be described subjectively, and a textbook pattern formation may occur in reality with great variations.
^Livermore 1940, chapter 1
^Mackay 1869
^Mandelbrot 2008, chapter 1
^Schwager 1984, chapter 23
^Chicago Board of Trade 1997, chapter 8
^Neill 1931, chapter 3
^Eykyn 2003, chapters 5,6,7
^ abBrooks 2009
^Duddella 2008, chapter 10
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