Which Markets Are Best for Price Action Trading Strategies

Price action trading strategies are an effective approach to trading that involves looking at recent price movements and trying to determine where the price is most likely to move. Price action traders need to have a firm understanding of market dynamics, along with an ability to make decisive selections with each of their positions.

Suppose an asset were to suddenly increase in value by 10 percent. Should you buy this asset hoping it will increase in value even further? Should you sell this asset knowing that a reversion to “normal” is right around the corner?

In this situation, there is no universally right answer. In some cases, buying makes sense and in some cases, selling makes sense. In others, you might want to hold the status quo. 

Regardless, what is clear is that the price is acting in some specific way. Paying careful attention to how prices act within a given period of time is the foundation of price action trading. When combined with carefully selected technical indicators, an understanding of market geometry, and your fine-tuned instincts, you can trade with a much higher degree of confidence.

Becoming a successful price action trader is something that will require a considerable amount of time and effort. Even if you manage to double your wealth within the first month of trading, this doesn’t necessarily mean there is anything particularly special about your approach. Even if you manage to lose half your money, that doesn’t necessarily mean you have no hope. Markets—especially in this newfound era of extreme volatility—can be both surprisingly rewarding and unforgiving. But the truly successful traders will be able to persist. Successful traders will have trading discipline. 

Once you have refined your price action trading strategy, you’ll surely want to put it into action. The question that remains, it seems, is which markets are best for price action trading strategies?

1. The Forex Market

There are quite a few reasons why the forex market is exceptionally conducive to price action trading strategies. For starters, most of the major forex currency pairs (USD, EUR, GBP, JPY, etc.) trade within a somewhat predictable range—when time frames are shorter, these ranges are even more predictable. While it is conceivable that a stock could lose 90 percent of its value or triple in price within a month, forex currencies are relatively tame. 

Having a definitive range makes it much easier to examine current price actions and predict near-term movements. Furthermore, contrary to some markets, the forex market operates around the world, 24 hours per day. As a result, this helps “smooth” price action and reduces sudden jumps (in the stock market, by comparison, shareholders are often greeted with unwanted Monday morning surprises). In general, the more navigable a given market is found to be, the easier it will be to apply a price action trading strategy.

2. The Bond Market

The bond market is also compatible with price action trading. Bonds, contrary to currencies or stocks, have definitive timelines. When a trader purchases a bond, they do so hoping it will increase in value by the expiration date. Because bonds are irreversibly tied to a set timeline, there will usually be an increase in movement (price action) as the expiration date approaches. 

Bonds also experience increased activity following certain events, such as the release of economic figures and even elections. Short-term price action traders will then be able to quickly jump into and out of positions as needed. However, as suggested, it will be critical to trade bonds with reasonably high trading volumes. Otherwise, you may end up holding onto a junk bond you are unable to sell, even if you know its value you likely decrease.

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3. The Stock Market

Price action trading strategies can be applied to the stock market, though the market itself contains additional layers of speculation. In the world of stock trading, herd momentum often causes a stock to experience dramatic price swings in short amounts of time. Sometimes, these swings might be completely divorced from reality. Warren Buffet choosing to sell all his shares of one stock could have rippling downward effects, whereas a company that runs an effective advertising campaign (but otherwise experiences no tangible changes) might experience a temporary price increase. 

In these cases, it is important to not only pay attention to the price action but also try to understand why these changes are occurring in the first place. Successfully using price action trading in the stock market will require you to be willing to risk moving ahead of the market, but also be able to justify each of your trading decisions.

 4. The Derivatives Market

The derivatives market, as the name suggests, is derived from other markets (such as the stock market). On the derivatives market, traders can purchase options that will give them the right to buy (call) or sell (put) at a specific price at a specific point in time. Derivatives experience price action movements and have characteristics of both bonds (time-sensitivity) and stocks (future price speculation). Navigating the derivatives market can be rather tricky, but many of the same concepts applied to trading other commodities will still apply. 

Derivatives are also excellent tools for managing the risk created by other positions. For example, simultaneously holding a long position in a stock and purchasing the right to sell above the spot price will help limit a trader’s exposure to uncertainty. By paying attention to price action, they’ll be able to adjust the sizes of each respective position accordingly.

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5. The Cryptocurrency Market

Though the cryptocurrency market is relatively new, it has already proven itself to be one that is very compatible with price action trading strategies. In 2017, for example, traders that we’re able to correctly time their entry into the market could have seen their wealth increase roughly twenty-fold within the course of a year. At the same time, those who ignored price action and held onto the cryptocurrency longer than was appropriate would have lost about 80 percent of their wealth over the course of 2018. While it is clear that hindsight is 20/20, it is equally clear that paying attention to sensitive price movements would have made a major difference for many.

6. The Commodities Market

Pretty much anything you can buy can potentially be traded, which is why the commodities market experiences such a high trading volume. Additionally, commodities such as gold and oil often move in the opposite direction of the “economy” as a whole, which helps provide traders with unique opportunities when the broader economy is bearish. Oil is a commodity that experiences seasonal changes in demand—at the beginning of each summer, pay close attention to oil’s ongoing price action. You may be able to spot unique opportunities where this globally demanded commodity is being overlooked.

Conclusion – Which Markets Are Best for Price Action Trading Strategies?

One of the reasons price action trading is so popular is that it can be applied to essentially every speculative market. No matter what you might be trading, current price and recent price movements will help you predict where prices are likely to move. This is the foundation of price action trading and, ultimately, these basic principles may be what helps your trading portfolio reach the next level.

Thanks for reading, if you enjoyed this article be sure to check out our Pitchfork Trading Strategy: Andrew’s Pitchfork blog.

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