Price action is a broad term meant to indicate any movement, or lack thereof, in the price of a stock that is the product of some technical or fundamental factor, or both, as opposed to merely the product of randomness or ‘noise’.
The concept of price action is extremely important to all traders, as everyone is constantly attempting to identify the drivers behind past, current and future price movement, and being able to read the price action of a stock is essential to making successful predictions of the future course of that stock’s price.
Price Action in Practice
In practice there will usually be a number of possible explanations for any perceived price action. One trader may perceive a period of low volatility as the calm before the storm of a major announcement, while another may see it as a short term trough before a longer term increase in price due to the psychological constraints of a technical pattern.
Furthermore, both traders may be accurately predicting the future course of the stock’s price based on current price action, but be using alternative perspective to interpret and analyze the data.
Successful trading involves being able to ‘read’ the price action of a stock and use that information to create a narrative of the stock’s price movements that offers insights into potential future changes in price that can be profited from.
There are many different ways to approach the analysis of any price action, and successful trading involves finding an approach that works consistently for you.
Price action is the essential ingredient to all active trading strategies, which rely on the belief that there are identifiable reasons for the movement of a stock’s price that can be used to make successful and reliable predictions about future price changes.
The capacity to create effective narratives for a stock’s price action is the core skill of any trader, regardless of their background and personal trading strategies.