A whole lot of fuss has been going around in the recent past as to what is the proper way to trade with the biggest battle being indicators vs. trading price action. Which of the two is better? Which one makes the most profit? These are some of the questions in most Forex traders’ minds with a concrete conclusion as to which one comes out on top of the other still yet to be reached. The only way to find the answers to these questions is by defining each of them at length and getting to establish their differences.
Just as the name suggest, Price Action trading is a strategy that is based on the prices of the various commodities. These prices are the ones used to determine the rewards as well as the risk, both in real-time. When it comes to online trading of which majority are involved in, Price Action involves accessing the movement of price over a period of time using the chart. The various prices over time are plotted on the chart showing the flow of prices in the market. The most common kind of Price Action nowadays is the 5 minute chart. The bottom line is that in Price Action trading, no external tools are required, be it indicators, software or even plug-ins. All that is used is the price action chart. Apart from the chart, price action is also based upon a strict set of rules and theories of which one is required to understand fully in order to succeed as a Price Action trader. A good price action trader has the ability to keenly identify and analyze the price behavior as well as follow all the expected rules of price action trading. To the rest, a Price Action chart is nothing but some random arrangement of bars but to a proper Price Action trader, it is a means to make good money!
As for indicators, they are more of 3rd party kind of extensions used to help traders trade. They main work is to summarize data on behalf of traders and offer them with advice as to how and when to go about trading. There are indicators for all trading software platforms used today. They deal in volume averages, moving averages, oscillators, stochastic and all the other aspects of trading. There are no indicators for price action trading. However, the few indicators used in price action have to have the following characteristics:
- Give out signals that are not contradicting to whipsaw traders
- Give out real-time signals and not those based after facts
- Have a 100% compatibility with price movements on the chart
At first glance, indicators look really pretty, with multi-colors all over. However, are they just but pretty irrelevant add-ons to trading? Analysts have come out to state that indicators tend to build some sort of dependency in traders since all one does is rely on the information relayed to them by the bars, graphs, lines and points. It gives the traders the information and tells him or her what to do with the information. If one did not know any better, they would claim that indicators turn traders into puppets! The same cannot however be said about Price Action trading.