In our article today we are going to pull back the covers (so to speak) and look at the most basic price action indicator that we need to use when trading. It is very easy to get overwhelmed with trading. There are so many different basic price action indicators and trading strategies out there that many traders, especially new ones, will find themselves drowning in a sea of unneeded trading tools. While the more complex indicators may be useful, oftentimes they cause us to ignore the most important things – the basics.
If we go back to the core of what trading is all about we will find that price is at the center of it all. It won’t matter what the indicators say or what the “analysts” say is going to happen. What matters most is what the price does. If we remember that price is the king of all movement then we can use it to help us trade the best we can. Once we start to place indicators on a chart and put their importance above that of the price action we will find that our trading is not as effective. So regardless of what a specific indicator is doing, if price does not move in the right direction it won’t help us. We need to put price in the correct order of importance and if we are going to use indicators make sure we are using them to confirm what the price is doing.
With that in mind we will look at three things that are basic to almost all successful trader. These things revolve around the idea that price is the most important thing to look at. These three things are: trend, momentum and support/resistance.
First let’s talk about the trend. Many traders will rely on the trend to determine the direction they are going to be trading. In order to effectively use the trend we need to have a way to determine if the trend is bullish or bearish. Looking at the price can easily show us if the trend is up or down. The way most traders will look for the trend is to see if the highs and lows are going higher or lower. This is a quick way to know where the price is likely to be moving in the future.
The second thing, and closely related to the first, is the momentum of the chart. The trend is usually looked at as a longer term directional move while the momentum is the current price movement on the chart. You can sometimes see where the trend is bullish but the momentum is bearish. Putting these first two things together in the right relationship will help you identify better entry areas.
Finally, using areas of price support and resistance will give you added information as to the direction the price may be going. These areas can act as a barrier to price movements as well as identify areas where the price may be getting ready to run. Know your support and resistance and you will also have a better idea of where to place your stops and targets.
Take some time to make sure you are putting price first in your trading. By looking at these three basic thing first you can then use indicators to help confirm what the price is showing you.