How Price Action Trading and Technical Indicators Compare

As a trader you have likely found yourself discussing the case between using Price Action and Technical Indicators to make trade decisions. Some traders, after a prolonged struggle with indicators, find a sense of ease in price action analysis. Others advocate that indicators offer the needed information that can’t be acquired from only price action.

Which technique is a better method of comprehending the market? Is use of indicators a good way to guarantee that you just create systems that works in retrospect? In this post, I look to answer these questions and additionally examine both price action and technical indicators.

Basics of the Two Concepts

Let’s begin by understanding the two concepts. Price action trading is the use of a chart with only price data to make decisions. For instance, one might find support or resistance at prior swing highs and lows identify turning points using candlestick patterns or geometric formations like double bottoms and tops, flags, or pennants. The basic idea is that the charts are going to show you everything you need to know.

Technical trading indicators, Take the analysis of a chart a step further by attempting to look at underlying information such as momentum, volume and open interest, rate of change, relative strength, sentiment, and so on. For instance, the stochastic oscillator examines location of current closing price with respect to the High/Low range for the past X periods and limits all market information to a 0-100 scale.

Facts - Technical Indicators & Price Action

At first glance, it seems that price action trading is better since it does not clutter one’s screen with too much information. Nevertheless, the volume of information in the market that is pertinent for forecasts is little, as the market is staggeringly noisy. Hence, technical indicators give a level of filtering that can be really valuable to derive systems that produce signals, based on real underlying market behavior that is engaging for us, as opposed to the commotion that is above.

Indicators prove valuable as the volume of clamor in price action becomes bigger (as time spans go lower) while they become less helpful as the volume of clamor becomes less. While a price action based system may have a difficult time generating suitable signals in a lower time span, a strategy relying on technical trading indicators might be able to obtain better results, by essentially looking past a lot of noise that makes price action trading harder.

However, this does not mean that price action trading is not in and of itself useful. Most technical indicators are not forward looking, but many price action techniques such as Fibonacci wave projections and retracements are. Price action techniques such as this can give a trader an idea of where the market is going and where it may stall. Thus, they can truly forecast a future outlook for the market.

Conclusion

In conclusion, charts provide traders a road map of where prices have been, what the market currently thinks about itself, and where it may be headed in the future. To that end, there really is no one technique that is better than the other. In fact, through years of experience I have found that combining aspects of price action trading and technical indicators is best. They key is finding the right combination of price action triggers and technical trading indicators that work best for your trading style, risk appetite, and trading goals.