The barriers to trading financial markets have been falling. There are more independent traders now than ever before. And one popular market approach used by these traders is price action trading.
However, over the years, myths and misconceptions have arisen about price action trading. To make matters worse, these claims often end up obscuring the basic idea of price action trading.
Here’s the truth about some common—and stubborn—myths you hear about price action trading.
1. Price action trading is the only path to trading success.
You can easily find cults of traders proclaiming price action trading as the only path to success. Their favourite pastime is deriding anyone who uses indicators to trade.
There are many well-documented profitable trading methods. They include algorithms, fundamental analysis, indicators, price action, news, and other secret sauces.
To claim that what has worked for you is the only viable method is an arrogant display of ignorance.
Ignore this sweeping claim; focus on finding a trading tool that makes sense to you – price action or otherwise.
That’s the surest way to trading success.
2. Price action trading is a cover for trading education scams.
This is a half-myth.
I must admit that “price action trading” is overused. With its popularity, it makes good marketing sense to use “price action trading” to label trading products. Thus, at times, you will find this term abused.
However, it does not always trigger a scam alert. Remember that “price action trading” is a descriptive term.
It describes trading with a focus on price, and assigns the great analytical weight to price movement. That’s all.
If that’s what is offered, then “price action trading” is the right term to use.
Don’t treat all price action products as scams. Instead, look out for incredible promises of guaranteed profits. Beware of words like:
- “Just click and earn”
- “Guaranteed return”
Cliche, but if it’s too good to be true, it probably is. If you need more help, Ken Fisher has a great book on identifying fraud.
3. Price action trading is easy to learn.
Basic price action trading concepts are easy. You can pick them up with these articles.
But it is not easy to trade profitably with price action.
Price action is a simple tool. But the simplest tool requires the highest level of skill to operate.
You need an expert chef to slice your favourite sashimi with a simple knife. But anyone can press the “on” button on a fish slicing machine.
Price action trading is a discretionary approach. You need to hone your skills. It’s simple, but not easy.
4. Price action is all you need to trade.
Price action is just a way of understanding the market. To make money from the market, you need to understand more than the market.
You need to understand yourself. This means that you need to learn about trading psychology.
You need to understand risk. You need to size your position well to avoid risk of ruin.
Ultimately, you need to combine analysis with risk management to form a trading plan that accounts for your psychology.
In essence, you need much more than just price action to trade profitably.
5. Price action is the only leading indicator.
Price action is by definition, a current and past indicator. It is responsive, yes, but to say that it leads the market is plain wrong.
The market is made up of prices. Price is the market. How can the market lead itself?
Price does not lead the market, but it does keep us close to what’s happening in the market. And that’s extremely useful for a trader.
6. Price action trading is a high probability approach.
Regardless how you trade, your winning probability depends on the type of trades you look for.
Whether you use price action or not, generally:
- Scalping for small profits within a ranging market is a high probability approach.
- Trading retracements in a trend has lower probability.
- Trading reversals has the lowest winning probability.
And of course, high probability always comes at the expense of your reward-to-risk ratio.
Anyone who says that price action offers high winning probability needs to add a qualifier.
7. Price action trading is about candlestick patterns.
But they are over-hyped as mystical patterns. Websites and books introduce them are money-making tools, infused with miraculous powers of profit. Simply because they have fanciful names with Oriental origins.
Most importantly, price action trading is not about candlestick patterns. Price action trading is not about rigid price patterns. It’s about learning when and why they (don’t) work. This is an important skill that takes practice and experience.
Many of these myths are perpetuated by “trading gurus”. (Except #2.) They are more interested in selling price action courses than tell you the truth.
I offer a price action trading course too. But I want you to look at it from a realistic perspective, away from these comfortable myths.