Many novice traders are bewildered with notions that financial trading is simply too complicated, and that we must all know exactly what those financial experts are talking about when explaining market performance on Bloomberg Television. The truth is, trading can be simplified with a modest understanding of price action.
Any topical discussion in financial trading will debate the familiar conflicts between fundamental and technical analysis. The two schools of thought, resolute in their application of strategy are of course very different, and both are effective means of trading. One thing a person can never do however, is come to an immediate conclusion that one is better than the other. This is a decision for the individual trader, based on personal lifestyle and trading style.
Let’s take a step back and revise both approaches before looking at price action. Methods involved with fundamental analysis include balance sheet assessment, growth potential, business competition, and macroeconomic demand. If we choose an equity market like Barclays Banking Group PLC for example, all these factors will have an effect on the asset’s price. The motive for sound analysis on such factors; is to profit from a move in this price.
Technical analysis on the other hand uses a range of charting tools to analyse the movement of previous price action in an attempt to ascertain future price direction. So the motives between the two methods are evidently the same, it is how they formulate their trading decisions that set them apart. The key to price action trading lies in the belief that the current market price is at equilibrium, and fairly represents the interaction of supply and demand on the asset’s price.
If all news is readily available to the marketplace, can we not assume this news is embodied in the price and that the price of that asset is fair? This is the assumption of the technical trader. Trading on news that is not available to the market is ‘insider trading’ and illegal, so as technical traders we believe unequivocally in fair markets and trade the price action to speculate on future movement. This simple approach facilitates trading to traders willing to learn technical analysis. Observation of price action unveils market trends, strengths and weaknesses over time, and a clear opportunity to capture momentum over various timeframes.
A quick look at the WTI Crude Oil market over the last year can show us that we are able to observe the price action to make informed trading decisions. Even with the modest technical analysis on the chart we can see clear trading opportunities.