“Ladies and Gentleman, Boys and Girls. People of all ages. Join us for tonight’s heavyweight contest. In the red corner we have the purveyor of patterns, Price Action. In the Blue Corner the Napoleon of Numbers, Technical Analysis. “
“The question on everyone’s lips………. Which one is the undisputed king of trading technique?”
“Let’s find out.”
Round 1 – The three types of trader
Any trader looking to learn how to be successful will need to create a strategy that works for them. And to create a strategy, you need to decide what type of trader you are going to be.
There are two types:
- Price action trader – These traders are the “nudists” of trading. Their charts are bare. Instead of fancy lines and numbers, these traders focus on what price is telling them i.e. what a market does when it gets to a certain point.
A price Action trader will use Candlestick Patterns, Support and resistance levels and Momentum to decide market direction.
- Technical Trader – These guys are the “Boy Racers” of trading. Just like a “rev head” has neon lights and furry dice, this type of trader will need all the bells and whistles on their charts to determine direction. Technical indicators are king and technical traders have their choice of literally thousands of Oscillators and Trend tools.
Verdict – Looks like the first round is a cagey one. Let’s call it a Draw and move on to Round 2
Round 2 – Advantages of Price Action
Trading price action is a bit like “sensing” where a market is going to go……albeit with a few handy tools at your disposal.
The upsides are clear:
Beginner Friendly – The majority of traders dipping their toe into financial markets are put off by the seemingly complex nature of technical analysis. By trading with Support and resistance, Candlestick patterns and volume traders can get involved from the offset.
Simplicity – Unlike technical traders, those that rely on reading price action do not need to wait for multiple indicators to align to give the go ahead to enter a position. If the market has rejected a level before the chances are it could reject again and price action traders use this to their advantage.
Less white noise – Have you ever been sent to the Supermarket for Sugar by your girlfriend? You walk up the aisle where the attendant said the sugar is, convinced you are going to grab the first bag you see and get the hell out of dodge.
But when you arrive, things become a lot more difficult. Standing in front of you is not just a shelf with one bag of sugar. There are ten different types. White, Brown, Caster and more. Which one do you buy?
Technical indicators give you tools to analyse market conditions but, because the choice is so vast, they can confuse a trader and prevent entry and exit. Price Action ignores the white noise.
Get in from the Start – Technical indicators are lagging tools. This means that they rely on price to form and sentiment to change before giving you ai signal. This means potentially entering a trade after the fact, missing vital profit.
More Trading opportunities – Because there is less white noise there are likely to be more trading opportunities, Basic candlestick patterns ned just one completed period of trade. If you have a 1 minute chart opens this means there are 60 potential scalping opportunities in 1 hour!
Versatility – Price action can be used to trade multiple asset classes. Support and resistance and candlestick patterns are a universal concept and as such can be used on any asset class. Some technical indicators favour slower markets, some only work in trends and some need to be tweaked if volatility changes. Prie Action does not. Think of Price action as being like that annoying kid at school who was always good at everything.
Verdict – Looks like Price Action has fought back and has Technical Analysis on the ropes……..Let’s move on to Round 3
Round 3 – Advantages of Technical Indicators
With all those numbers and lines on your charts, people would be forgiven for thinking that you worked for NASA. However, using technical indicators to trade is a lot more than just having a pretty looking market chart.
The advantages are:
Power in numbers – Price Action relies on looking at a chart and determining what the market you are trading around a certain point. Technical indicators on the other hand are far more precise telling you exactly when a market is overbought, over sold or entering a trend.
Choice – As the old saying goes “Variety is the Spice of life” and with thousands of Technical indicators you have the ability to development unlimited strategies that, you can start trading at the flip of a switch.
Objectivity – Price Action relies on the trader to interpret signals that are given to trade. There is no second guessing with technical analysis. Indicators are objective. If you are trading a Moving Average cross over strategy your entry occurs when the shorter period crosses the longer period. Simple right?
Automation – Think Skynet but, without the murderous robots. With technical indicators you can set defined parameters for trading and go off to frolic in the Autumn sunshine.
Although you may want to have a kill switch handy in case your trading algorithm decides it is now alive.
Verdict– Price Action is beginning to look tired. Technical Indicators have done enough to win this round. Looks like this fight is going to go the distance.
Round 4 – The Third Way
Ever wondered how couples that have been married for 50 years do it? A couple that remain as solid as a rock despite, the husband leaving the toilet seat up or the wife inviting her mother over when the football is on.
Well the answer is straight forward. The answer is of course COMPROMISE.
In trading, Compromise can be king. Both Price Action and Technical Indicators have their advantages. But, like with everything they also have their disadvantages.
Technical indicators can clog a chart up and confuse a trader. Price Action can give too many weak signals to trade. Price Action can get you into a trade before confirmation of a trend change and technical indicators can give the signal too late.
With this in mind it is worth considering a hybrid system.
This argument makes perfect sense when you look at the fact that technical indicators derive their signals from Price Action. Technical Indicators read what price is doing and decides whether a market is ranging/trending/overbought/oversold. The two are intertwined, much like the cable on your headphones after they have been in your pocket for a few minutes.
Why sell because the Relative Strength indicator is in overbought territory when, you can check if there is a key Resistance area where market might reverse lower from?
Why buy a breakout just because a big Bull Candle has formed when, you can use the ADX or Moving Average to see if a trend is about to form?
Verdict – At the end of the fight it really is too close to call. Looks like we are going to the judge’s scorecards.
The question of whether Price Action is better than Technical Indicators and vice versa really is a personal choice. Both systems are popular. If they weren’t, there would not be an argument.
The reality is that some traders prefer the simplicity of Price Action whereas others like the objective approach of indicators. However, there are those traders that believe that in order to be the most rounded trader you need to employ the best of both systems.
However, at the end of the day trading is not about what other people think is best. You need to do what works for you. With this in mind, the question you should be asking is not which system is better but rather,
“which system is better for you? “
The Result – After an epic contest between the two competitors the result from the judges is in……..Technical indicators and price action have drawn this contest.