What is NOT Price Action ?

[Tams 20]

what is NOT price action ?

 

 

Many people claim to be trading Price Action.

 

A vendor said he teaches Price Action.

 

He describes his chart set up as:

 

"...nothing on the chart except 5 min price bars and a 20 period moving average".

 

 

Do you consider him a Price Action Trader?

[JBWTrader 10]

Lets see Tams,

 

Good Abstract question. i thought I'd give it a go....

 

Well I guess one could say a moving average is just a function with its input as price/time and its output has the same dimension ie price/time but the result only slightly related to the actual last price/time data transaction. One can even drop time from this sentence...

 

The other ie the 5 min candle and is an accumualtion of price point displacements and hence the total displacement is captured over 5 mins.....Displacement I dont believe shows context very well....ie where price has been within that candle (this is important IMHO)

 

I would say he is teaching a variant of true Price action....

 

Well price action for me is just data points over time of where the "market" came together at offer and acceptance of Price. How this data is then manipulated and then used is open to a lot of interpretation..

 

There are many ways to slice data and of course accumulate it...Candles are just one method to aggregate(smooth) data as are moving averages ....

 

So conclusion is he is not teaching true price action but I guess he is teaching a method of smoothing/agregating the data and then applying some principle to this aggregated/smoothing data of price...to come to a conclusion about the future...

 

I guess one of the purposes to your question was to define what is price action....thinking out loud this is not very easy for me...

 

Price action is the last space/time Market transaction and it is also all the previous ones leaving a print ...can the previous ones help determine where the next one will be ? I will leave this for the smarter ones out there...

 

So in my conclusion I would say That techinically he will not be able to show where the next transaction will be in the future using those "tools" unless he has found a method that shows where in the future price has its true highest probability of being next with them...maybe there is something he is not telling us....

 

Best

John

 

sorry I rambled a bit here..

[DbPhoenix 42]

For those who'd like to pursue the subject, it's been addressed at length in a number of threads, primarily Price Action Only and Real Time Price Action.

[Tams 20]

One guy also claims to be a "successful" Price Action Trader.

 

One day he posted his chart... but forgotten to remove the pivot point.

...and disqualified himself as a Price Action Trader.

[JBWTrader 10]

It wasnt me was it mate ? !! lol....

 

Best

John

[thalestrader 14]

I consider myself to be someone whose trading decisions are based primarily upon price action. The majority of my trading is composed of day trading individual stock issues. Most of my trades are based on simple support and resistance breaks. As such, it is undeniable that I trade price action.

 

However, when I day trade stocks, I use a 5 minute chart, and I do keep a 20ema on that chart. Whether I like it or not, it is an undeniable fact, and one that I can prove empirically each and every day, that when a stock is trending strongly from the open on a 5 minute chart, price tends to find buyers in an uptrend and sellers in a downtrend when price pulls back to that 20 ema. Is that the same as "trading price action?" If it is to be considered trading price action, then it is so only derivitively. Does that mean that someone who uses such an indicator is not a price action trader? It means nothing of the sort. After all, if the majority of his or her trading decisions are based primarily on support and resistance, what else would that trader be?

 

You mentioned pivots (and I assume you mean floor trader pivots and not pivots in, say, the Livergood sense). I have a good friend who trades foreign exchange exclusively. No stocks, no options, no e-minis, no bonds - just spot currencies and currency futures (he may use options on currency futures, come to think of it,but not as a primary trading vehicle). He trades one basic price action "set-up." I consider him to be a consummate price action trader. But you should see his chart!

 

He has ema's, fibonacci's, pivots, mid-pivots, trend channels, cci, volume, some other thing I do not even know what it is. But, he trades one "set up" only, and it is entirely a price action, support and resistance based set-up.

 

Now, does the fact that he also uses 27 or so of his favorite indicators disqualify him as price action trader? I would say no. I think he is absolutley a price action trader (I also happen to think he could do away with every last one of his indicators and still trade his set up well, but who am I to argue with a guy whom I know to pull in five figures from his trading per week, week after week from the comfort of his sofa).

 

I think one can distinguish between someone who uses indicators to help support a price action based trading approach, and one who uses indicators as a trading approach. In other words, using indicators is not itself an indicator of whether or not someone is trading price action. What makes the difference is whether someone is using the indicators to support his or her reading of price action, or is the trader using the indicators to make trading decisions independently from any attempt to determine the immediate trend from price action itself.

 

Best Wishes,

 

Thales

[aquarian1 10]

However, when I day trade stocks, I use a 5 minute chart, and I do keep a 20ema on that chart. Whether I like it or not, it is an undeniable fact, and one that I can prove empirically each and every day, that when a stock is trending strongly from the open on a 5 minute chart, price tends to find buyers in an uptrend and sellers in a downtrend when price pulls back to that 20 ema. ....

 

He has ema's, fibonacci's, pivots, mid-pivots, trend channels, cci, volume, some other thing I do not even know what it is. But, he trades one "set up" only, and it is entirely a price action, support and resistance based set-up.

 

Now, does the fact that he also uses 27 or so of his favorite indicators disqualify him as price action trader? I would say no. I think he is absolutely a price action trader (I also happen to think he could do away with every last one of his indicators and still trade his set up well, but who am I to argue with a guy whom I know to pull in five figures from his trading per week, week after week from the comfort of his sofa).

...

Best Wishes,

 

Thales

 

Hi Thales,

 

Thank-you for this well thought out post.

 

You highlight a very strong point.

 

Your forex friend makes 5 figures a week consistently. I feel this is very important - he has results. If indicators help support and or clarify his thoughts on price action, then they are helpful aids to his decision-making process.

 

Indicators are derived from price and and sometimes volume information by investors who wanted to see it there was additional insights provided by the indicators to improve their results. (Or in some cases had no results and wanted to write a book or sell their system, though this can apply equally to price action only traders.)

 

I have noticed that some individuals use indicators in ways that may not have been intended by theorists or even the indicators originators and sometimes in junction. That is they may really be using 3 indicators as one composite indicator. However, from their actual trading experience, this was helpful in making profits.

 

Though "price action" purists may say any chart that has any indicator on it invalidates the trader from being a price action trader - they do speak strongly of support and resistance levels and "the action the market takes at those points".

 

If floor traders and market makers use a 20 bar EMA on a 5 minute chart (for example), and if their actions are a major part of "the action the market takes at those points", then their trading using this indicator is an important, and perhaps key part of the "price action".

 

So the feedback loop closes.

 

So I do not believe: Any chart that has any indicator on it invalidates the trader from being a price action trader.

 

For myself, the essential thing is to develop a reliable system that consistently makes profits and hopefully one I can back-test to know when I can apply or not apply that system.

 

Ian

 

(PS I have not read enough of the thread on "price action only" to know what the terms means - in the context of this board.)

[bathrobe 10]

In my own trading I frequently use what I consider to be price action (have not read the threads that define it).

 

The speed of a move, the speed of the pullback, how quickly it moves for or against me all help me decide whether or not I will stick with the trade for a larger gain or a minute one.

 

I use many timeframes and non-timeframe specific charts along with a ma, used to use a macd but I am moving away from it. (thanks Thales)

 

To me what I described above is trading price action as I am trading based on the action of price.

 

P.S. I have read many threads where traders extol the virtues of PA thinking when they master this they will be successful, on other boards it has taken on a somewhat mystical nature. Those who claim to be PA traders are regarded highly on this argumentative board.

Edited July 27, 2009 by bathrobe

[Kiwi 16]

It is an interesting question.

 

I suspect that, if trading in a non-automated manner, most traders move from lots of indicators to few or no indicators. With automated trading, defining some visible price behaviours sufficiently well becomes nearly impossible so indicators because they simplify price or price and volume become more important again.

 

I'm automating some things currently and I have found that I can automate (imperfectly) price pattern recognition but some elements are very difficult.

 

I think that's why people who have moved a long way on the path still like one or two mas or maybe keltners, bollingers, or vwaps. Or perhaps they use market profile. All these tools provide an additional view of "value" and "extension from value." Those views complement Support and Resistance in providing a basis to determine when price action is meaningful. Just as a pin bar becomes relevant at S&R but not in the wide open spaces between, the same relevance may occur at VWAP, the 20 ema, or the edge of the value area.

 

So, personally I prefer to minimize the use of indicators, but the presence of an ema or a vwap doesn't mean you're not trading price action - it just means that you get useful information from a derivative of said price action as well.

 

However, if one wants to claim pure price action trading, then they should only have price (bars or whatever) and volume on their charts. No channels. No trendlines. Nothing else --- because a trendline is no less a derivative of price than a ma or keltner.

[thalestrader 14]

Just as a pin bar becomes relevant at S&R but not in the wide open spaces between, the same relevance may occur at VWAP, the 20 ema, or the edge of the value area.

 

Not to take away from the rest of your fine post, Kiwi, but the above quote is an excellent point that deserves to be highlighted.

 

Best Wishes,

 

Thales

[Hlm 10]

Nice post.

 

However, if one wants to claim pure price action trading, then they should only have price (bars or whatever) and volume on their charts. No channels. No trendlines. Nothing else --- because a trendline is no less a derivative of price than a ma or keltner.

Couldn't you take it as far as one [pure PA trader] having to only use a single tick chart. Anything more is wrapping price into a nice little summarization just like channels, trendlines, etc. Also, going back to the thread title of "what is NOT Price Action"...volume.

[zdo 20]

Tams,

Good question

The topic question is basically “how much latitude is in the collective’s definition of PA?” and the answer is “as much as you can tolerate or get away with in your current PA conversation”. You’ll be in PA conversations where the illustrations are filled with indicators. You’ll be in conversations where the other disavows anything but a certain type of PA but a little bit later you start perceiving he’s running uncharted fuzzy wet ware indicators outside his own awareness…

 

No one gets away from patterns

On one extreme, they may be patterns restricted to just a chart - a line chart, a bar chart, a candle chart, a renko chart, a profile chart…

In the other extreme, they may be indicators only.

Most traders use some combination.

Also, the trader may be using a lot of past action in the scans for pattern or virtually none. Examples: an Elliott waver needs ~100 bars to differentiate pattern, some tape readers need sub 12 seconds of data

All traders are using their own (hopefully unique) admixture of all of the above…

 

other related, possibly important, questions …

what patterns am I most attracted to?

what patterns am I naturally good at seeing?

what is the best (visual in most cases) representation of market auctions to facilitate me to stay in flow.

what patterns would I like to get better at seeing?

what blocks me from seeing certain patterns real time that I would like to trade?

[DbPhoenix 42]

As we pointed out repeatedly in the links I provided earlier, it's all price action since everything is derived from price movement. But then one must decide just how many filters he wants and how far from the source -- or the "territory" -- he wants to be. I've found greater success by focusing on the continuous tick by tick movement of price, but others may prefer to be further separated from that, either by using summary bars or candles 5m, 15m, 244 tick, CVB, etc) or by using indicators or by focusing on patterns or by some other means.

 

So is someone who's trading 15m candles with an 8p EMA trading price action? Yes. Is he seeing the same thing as one who is following the continuous tick by tick movement of price? No. Most of the latter is in fact invisible to him.

 

Trader's choice.

[BlowFish 10]

Nice post.

 

 

Couldn't you take it as far as one [pure PA trader] having to only use a single tick chart. Anything more is wrapping price into a nice little summarization just like channels, trendlines, etc. Also, going back to the thread title of "what is NOT Price Action"...volume.

 

I was thinking the same thing though just looking at time and sales (or the tape if you like). By plotting bars you are embarking on a data sampling exercise.

 

Practically, anyone who uses 'price' to make trading decisions is a PA trader, so what if they like to have a 20ema VWAP floor pivot or PoC to remind them which way up they are.

 

Good thread title it is often clear what is not PA trading (like just trading from the CCI ) more debatable what is.

[VolumeJedi 10]

...Practically, anyone who uses 'price' to make trading decisions is a PA trader, so what if they like to have a 20ema VWAP floor pivot or PoC to remind them which way up they are...

 

I would have to disagree with this BlowFish.

 

...I think one can distinguish between someone who uses indicators to help support a price action based trading approach, and one who uses indicators as a trading approach...

 

Any definition of price action trading would take into account the use of price and possibly volume in the 1st order. In other words price and volume in and of themselves. MA's, RSIs and other indicators are 2nd order as they are derivatives of price.

 

Take a look at the below chart. Can anyone using this chart truly be considered a price action trader?

 

This method uses Momentum and momentum is a 2nd order derivate of price (and time). Even the pivot points (green lines) are defined by changes in momentum and not price itself. Although they do a good job of visually accentuating these price points, they are a function of price and not price itself. Thus can one accurately say they are based on Price Action?

 

True price action traders don't have 15 different indicators on their charts. Price action trading is about getting closer to price, not further way from it. Indicators move you further away.

[RichardTodd 10]

Take a look at the below chart. Can anyone using this chart truly be considered a price action trader?

 

Discussing what kind of trader someone is by looking at their chart convinces me that we are way too focused on surface details. This is like figuring out what kind of cook someone is by looking in their pantry. At best you can paint broad strokes, you know?

 

I think this (imho) misplaced indicators-or-not focus hurts newbies, who often come away from these religious discussions thinking that cleaning up their charts will somehow make them profitable. Every time I see them chanting the "indicators are not the answer" mantra, I sigh, because I know that a bare chart isn't the answer, either.

 

Too often, we're diverting attention from the central issue of being a winning trader. That is, a trader needs an understanding about the way the market works which gives him an edge, and he needs to find opportunities to exploit that understanding. Whether he spots his opportunities with raw data or derived data isn't very important compared to the concepts behind the trade.

 

I recognize that it's good to warn newbies about the pitfalls of indicators, because they are so attracted to silly recipes like "set it on 14 and buy when the squiggly line crosses -50." But, I've also seen folks proudly remove their indicators, only to proudly drain their account spotting faux "support" and "resistance" all over the place. What's missing in both cases is a working understanding of what the market is trying to tell them. Imagine how much more helpful it would be to keep the focus on that!

 

Just my two cents.

[TIKITRADER 10]

Here is a 5 minute ES chart consolidated from June 16.

There are containers for price, and some horizontal zones marked from previous price congestion areas and end points.

Would this chart be considered price action, or do the addition of trendlines change that ?

[Kiwi 16]

Tiki,

 

Its easily overdone. If you make a trade because of what price is doing it is price action.

 

That's different from making a trade because (say) the RSI turns up.

 

Horizontal and diagonal forms of support and resistance indication (trendlines, channels, horizontal zones, mas, vwmas, vol@price, and market profile) help you to figure out where people might perceive value. Perceived value makes price action that might not be relevant in the wide open space between areas of perceived value worth trading.

 

Eg. at the trendline you get an inside bar and then a bullish engulfing bar ... so the probability of the entry resulting in an up move rises. The pa also defines when you are wrong (stop under the beob) nicely so you can define risk reward as well as knowing probability is higher.

 

So, if you trade because price (ticks, bars, candles, etc etc) is doing x rather than derivative (ma xover, rsi, stoch turn up) is doing y then you trade price action. The fuzzy argument tends to be around the question of this S&R vs that S&R (horizontal only is most pure )