Are you struggling to understand technical analysis and price action trading?
You’re not alone.
While the two are similar, there is a big difference between them.
So what exactly is the difference between technical analysis and price action trading?
In this article, we will talk about technical analysis vs price action and their relative strengths and weaknesses.
Technical Analysis vs Price Action – Are They the Same?
A lot of beginners get confused when they first start learning about price action trading.
And rightly so, because it’s a different avenue for them to venture down.
To put things in perspective:
Technical Analysis covers everything from Price Action trading to Trading Indicators.
Anything that involves reading a chart, where you can time your trades, is technical analysis.
Whereas, price action is a sub-section of technical analysis.
Most beginners think that technical analysis is just loading up trading indicators on their chart and reading off of them, when in fact, this is just 1 of many methods of performing technical analysis.
Here is the difference between the two:
Price action is a technical analysis strategy that involves the analysis of prices.
It involves looking at how an asset’s price has moved over time, comparing it to previous movements and looking for patterns that might indicate future price movement.
Price action is often used in conjunction with other technical analysis techniques, such as volume and candlestick analysis, to help identify buy/sell signals.
Price action refers to looking at the prices of individual assets and identifying the trend by either looking at the slope of the price chart or at the movement of the price in relation to time.
This can lead to the identification of trends.
Most traders use price action because it doesn’t involve using any technical indicators, thus they are trading “naked” and can read what the market is doing without any distractions.
On the other hand, the use of trading indicators is to help draw out trading opportunities by having a set of mathematical rules to help simplify market movements.
These can give a rough estimate of how strong or weak the market is currently, or give you a moving average over the past 20 trading periods.
Each will help a trader gain an insight into what the market is doing right now.
These mathematical approaches try to calculate the market strength to make reading charts easier.
Which Is Better Price Action or Trading Indicators?
To be blunt, neither are “better” than the other.
It’s down to preference.
Some people can read the markets like a book using price action, whereas others are able to lock in highly profitable trading opportunities using trading indicators.
You should demo your trading out to see which fits you best.
There is no harm in combing each of them, for example with divergence trading – one of the best trading methods combines both trading indicators and price action.
The key to being a profitable trader is to not lock yourself down into a specific role, but instead be fluid like water.
Some days price action may show nothing to trade, but the indicators may highlight something you have missed and can make a few trades.
On other days the indicators may show nothing, but the price action may provide an opportunity to profit. The key is to find out what works best for you.
While the best forex traders are well aware of the benefits of using trading indicators, they are also aware of their limitations.
In fact, there’s been a great deal of research done in recent years to understand the limitations of the various indicators, why they work, and how they can be used.
Here are some of the strengths and weaknesses of each:
Trading Indicators Strengths
- Can be automated.
- Gives a key visual representation of potential ideas.
- Easier to understand and trade with.
- Able to quickly analyse a trading opportunity.
Trading Indicators Weaknesses
- Too many are tempted to automate their indicators which can see their trading suffer
- The indicators calculate their outputs AFTER the candlestick has closed, this is called a lagging indicator.
- Over-reliance on technical indicators to understand the market movements can lead to loss of trading opportunities.
- Traders are always looking for a holy grail indicator that does 99% of the work for them.
Price Action Strength
- A leading indicator, you are following the price that is forming the patterns immediately.
- Price action dominates over trading indicators because without price there is no indicator, so it’s best to learn to get an understanding of the underlying market.
- Once mastered, you are able to see what is happening with the market easily and able to set up positions using supply and demand zones in the future.
Price Action Weaknesses
- Can be easy to overlook price patterns and execute too early.
- May execute a signal moments before a news release that could affect the market.
- Not all patterns are created exactly the same every time, so you may jump the gun or chase a trade.
So now you know which one of the two is right for you.
When looking to develop an edge in forex trading, it is important to choose the right type of analysis. There is no single right answer to this question; each approach has its pros and cons.
However, one approach that will work well for a majority of traders is a combination of the two.
If you’re an active trader and want to avoid being swayed by false signals from random noise, you’ll want to focus on trading indicators rather than price action.
That said, if you want to understand what’s happening in the market and how to trade it, price action may be a better choice.
Now you know the answer to technical analysis vs price action.
Check out the articles below to find out more about the pros and cons of each method: