Price action basically refers to anything relating to an asset’s price. Obviously, that is a pretty big definition, and in practice price action is a fluid, dynamic, and somewhat subjective term. There are many useful terms for measuring and studying price action, so let’s dig in.
For example candlestick charts are great charts for understanding price action. A candle stick chart will tell you whether a stock gained or lost value. It will also tell you the opening and closing price of an asset, helping you understand how big price movements were throughout the trading day. If you want to keep an eye on price action, consider candlestick charts.
Every investor has to pay attention to price action on some level. After all, the whole point of investing is to tap into price action movements that will benefit you as an investor. If you buy an asset, for example, you obviously want prices to gain in value. For some investors, however entire investment strategies can boil down to data revolving around price action. For others, on the other hand, it is only one of many factors considered.
Let’s go over two important schools of thought: fundamental investing and technical investing. These two schools of thought are very different, and how they treat price action varies quite widely.
Fundamental Investing and Price Action
Price action can be thought of both in fundamental and technical terms. Fundamental analysis refers to trying to uncover the actual intrinsic value of a company. In other words, you are trying to figure out how much a company is worth, and to discover if it is perhaps being under or overvalued.
Three years ago, when Google stocks were valued at about $500 dollars, a fundamental investor could have studied Google and seen that their industries and areas of growth looked very bright. Google, according to this analysis, might have been undervalued, and thus the investor would have invested. GOOG has since surged above $700 dollars a share.
Fundamental investors often have a very wide scope of thought and analysis when it comes to price analysis. There are so many factors and so much data that goes along with fundamental analysis. For this reason, fundamental investing and price analysis can be very subjective.
In order to conduct sound fundamental investing, you need to understand the industry, the company, its products and/or services, and the overall economy, among many other things. Understanding all of these concepts is very difficult, but they can each have a huge impact on price action.
Technical Analysis and Price Action Trading
Price action trading and technical analysis are completely different concepts from fundamental investing. Technical analysts don’t care so much about the intrinsic value of a company. Instead, they are more concerned with price movements themselves.
Technical analysts try to uncover data and information directly concerning price action, and the rise and fall of prices. For example, a trader might notice that when stocks drop by 10% or more within an hour, prices will likely rebound within the next hour. (For the record, this is an example, not a necessarily true statement.)
A price action trading system will focus on price action factors, such as the rise and fall of prices. This price action trading system can be automated to conduct trade automatically when certain conditions are met. Using a price action indicator (or indicators) trading price action can be a very effective way to trade.
Technical analysts often don’t dig deeply into companies themselves, but instead into massive quantities of data. Perhaps more so than fundamental investors, technical analysts pay a lot of attention to price action and any movements in prices.
For fundamental investors, studying companies holistically is essential. For technical analysts, the concern is more closely focused on charts and such quantitative data. Tech analyst investors are thus very concerned with price action, and will develop and deploy elaborate tools and formulates to try to uncover patterns and predict price action movements.
Learning About Price Action
Whether you are a fundamental investor, or technical analysts, you will have to pay attention to price action. One easy way to do so is to pick a handful of stocks, and to then study their movements, or price action, very closely. You should look for patterns in data, and also keep an eye on current events so you can understand what events can have an impact on prices.
This is a difficult and time consuming process. Over time, however, you should be able to develop a much better understanding of price action and the movement of stock prices.
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