Price action is the foundation of technical analysis for trading any assets, including crypto. Price action, which is the movement of an asset’s price over time, creates all the forms of technical analysis, such as the support and resistance levels, uptrends or downtrends, and others.
Understanding price action is important to become a profitable trader, since it is the most basic form of analysis. It requires nothing else than simply looking at the price chart. The action of the price and the various patterns that emerge can tell a trader where the market is going.
Price action is mostly used for traders who are looking for a short term trade and not investors who plan to hold for several months or years. However, price action on a higher time frame, such as the weekly or monthly charts, can also provide long term investors information about the trend of the markets.
The most popular method to observe price action is by looking at a candlestick chart. A candlestick chart provides information on the opening price, closing price, and highest and lowest price for the timeframe, such as for every hour or every day.
Using the candlestick chart, a trader can tell whether a market is in a trending market or entering a consolidation phase. A trending market is easier to trade than a consolidating market since the price has a strong direction in one way.
An example of price action on a candlestick chart showing a strong trend is if there are higher highs and higher lows. If the price of the recent high is higher than the previous high, and the price of the recent low is higher than the previous low, then the market is in an uptrend.
We can see this pattern on the ETH/USD daily chart from the beginning of the year until May, just before the crash in July. The price of Ether (ETH) showed a higher high and a higher low in March than in January, and also the same pattern in May.
Other than that, price action includes certain candlestick patterns that traders use to determine their positions. These patterns include the bullish or bearish pin bar, bullish or bearish harami, bullish engulfing and bearish engulfing, and many other patterns.
Price action can be used together with support and resistance levels or other technical analysis to give a trader more complete information to make a decision to go long or short on derivatives platforms such as BigoMex.
For example, during the month of March, the higher low on ETH/USD coincided with a previous resistance level turned support, making it a strong signal for a bullish ETH market.
However, as you can see, the price of ETH failed to break the previous high on February, as if giving a reversal signal, before printing a higher low and then continuing the bullish trend. Traders should be careful when trading price action since it can also give false signals that could result in a loss.
