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From 2017 to 2019, Tesla was trading between the range of $180 to $400.

All that changed when it broke above $400, then went to $500, then $600, then $700, then $800, then $900, all within the span of a few weeks. Will it hit $1000 next?

In this video, I explain my reasons for buying Tesla stock, how I screwed up the trade, and how you can tackle parabolic charts such as this.

Enjoy the video, and remember to “like” and “subscribe”!

This article is going to be a little longer than usual, as I endeavor to make a balanced view about exactly why price action is preferred in the marketplace.

If you’re keen to expand your mind, deepen your knowledge, or simply learn something new about the financial markets, then please read on.

Throughout the centuries, traders around the world have tried to find every method possible to exploit the market for profits. The search for a trading edge has led to countless hours of research, hard work, and dedication. More recently, programming has become the rage as hedge funds, institutions, and large traders seek to find the optimal way to extract profits from the market.

While the internet is rife with methods, formulas, and patterns that claim to bring in profits, through my years of trading, I’ve found that trading plan or strategies fall into these 3 simple categories.

Most Trading Strategies Fall into 3 Categories

 

1. Trend-following

Many beginners make the mistake of asking these 2 questions: “When should I buy? When should I sell?”

Beneath these two questions, are actually several important questions to ask before deciding when to buy and sell. You see, trend-following is the act of buying in an uptrend, and selling in a downtrend. It sounds simple, but several questions come to mind when a trader attempts to follow a trend:

  • Has the trend started? When did it start?
  • When will the trend end?
  • Where should I get in on the trend?
  • Is it a volatile trend, or a gentle trend?
  • Is it a strong trend, or a weak trend?

All of this has to be taken into account as the market unfolds before a trader’s eyes. The confluence of answers to these questions would allow a price action trader to buy or to sell. While it is impossible to predict what would happen, the better a trader can answer the above questions, the better he or she is positioned to make some money.

Why is price action preferred by professional traders?

Price action involves reading clean price charts, and understanding the motivation of buyers and sellers when taking trades. With proper training, a trader can answer all the above questions, and make the most efficient trade during a trending market situation.

Traders have to process large quantities of information at a go. Making the price chart as clean as possible allows the trader to clearly see what is happening, and simplifies his analysis. For example, in the above chart, buyers are committed during the most recent 10 bars, and a reasonable trade would be to buy on a pullback to the EMA or trendline.

 

2. Mean-reversion

Mean-reversion is simply doing the opposite of a trend-follower. In essence, a mean-reversion trader would be asking the following questions:

  • Has the trend ended?
  • Where might the trend end?
  • Are the traders taking profits, or are they initiating new positions?
  • What price levels are mean-reversion traders looking at?

Based on my experience, beginners should not look to be mean-reversion traders until they are profitable trend-followers. It is much harder than it looks when taking a trade in the opposite direction of the trend.

In my trading foundation workshops, I emphasize time and again that a trade setup must occur in the opposite direction before taking a reversal trade. In fact, instead of going against the trend, I would much prefer that the trend has already changed direction, and then I hop on to that new trend for a lower-risk trade.

Price action traders consider many more options and ask more questions than indicator-based or value-based traders.

The financial marketplace is filled with professional traders seeking to make a quick buck out of unsuspecting, ill-disciplined, or even lazy traders. It is just like in the Olympics; at the highest level of sporting excellence, sportsmen that miscalculate their aim or fail to squeeze out that last ounce of energy could miss finishing in the top 3.

In a bull market, going against the trend is much harder than you think. That is why price action is so important; it helps you decipher when the trend is going to end, and whether it is wise to enter or not.

 

3. Spread-Betting (Betting during volatility)

Spread-betting is used by institutional traders and proprietary funds to make short-term bets during times of volatility. The software and execution technology required is often expensive, and is not suitable for a retail trader. The strategy is complex, because bets are placed on both sides during a volatile event, and it requires strict discipline when trading. I won’t go into great detail on how this is done, but you can read up about it.

 

Why Then, is Price Action Preferred by Professional Traders?

 

1. CLARITY

Price action trading is trading with clean charts. The only information you need is the current price, and these are displayed using candlestick charts. In the charts below, we see that the blank chart is far clearer and easier to read than the complicated one with many indicators.

 

2. SPEED

When trading intra-day, traders need to quickly make a decision when the price action unfolds before them. While checklists and criteria do help, having a solid price action foundation would allow the trader to make a decision quickly. How would you make a trading decision, if you had to look at 12 screens at once?

Image Source: LifeHacker.com

In contrast, I can make my trades on a single laptop computer, or even on my mobile devices. Something like this is more than sufficient:

Image Source: MyCompas.com

 

3. UNIVERSALITY

Perhaps the biggest reason why price action is preferred, is that price action is universal. You can trade commodities, currencies, stocks, bonds, ETFs, REITs, futures on just about anything, and even options, because every product has a price chart. You can be just as sure that Coffee Futures have the same price action mechanics as Apple stock, and you wouldn’t have a problem transiting between products.

Trading is very much like selecting from a diverse menu in a fancy restaurant; while there are many products to trade, many traders settle on trading a few products and get proficient at them.

Price action works on just about anything with a price chart and a liquid secondary marketplace.
Image Source: TheActuary.com

 

How Can I Get Started On Price Action Trading?

For a start, I recommend using the old-school way by getting your hands on a few solid price action books. Many of these are available in public libraries, and if you have some spare cash, you can consider buying them on amazon.

Next, is to practice! While reading books and watching others trade is a great way to learn, nothing beats learning to trade by actually making trades yourself.

If you currently use many indicators and are not profitable, perhaps the question to ask yourself is whether you would like to understand what is behind the price chart and the indicators. It is not enough to use a formula, because market conditions change over time.

Here’s to wishing you all the best on your trading journey, and I hope this article has expanded your mind just a little more!

In this latest video series, watch as Spencer answers the top 20 most commonly-asked questions by new traders & investors!

For those just starting out, this will be a big help in avoiding a lot of “beginner pitfalls” which 90% of all traders get stuck at.

 

Here is the full list of Burning Questions:

  1. What is the difference between trading and investing?
  2. Do you believe in the buy-and-hold value investing approach?
  3. What is your long-term investment strategy?
  4. Trading is risky, shouldn’t I just buy stocks with good fundamentals?
  5. What is your trading strategy?
  6. What products should I trade? How many different products should I trade?
  7. What is the difference between TA (technical analysis) and FA (fundamental analysis)?
  8. Do you use fundamentals in your trading?
  9. What technical indicators do you use to trade?
  10. What type of charts do you use to trade, and what timeframe do you use? What is your holding period?
  11. How much capital do I need to start trading?
  12. How can I become more consistent in my trading results?
  13. How can I predict the price of a stock? How do I know when the price will turn and start going up/down?
  14. What is a good % return per year I should aim for? How much returns can I expect from trading?
  15. When should I trade? During the day, or the night? When is the best time to trade?
  16. How do you trade the news? What news should I look at and how can I profit from news?
  17. Is trading safe? Can I end up losing all my capital and more? How do you manage your risk?
  18. If everyone uses the same trading strategies (your strategies), will they stop working?
  19. What is the difference between trading for a fund and trading your own money?
  20. How can I get started on trading and investing? Any good resources?

Click here to download for free: http://bit.ly/2D9j6gk

In collaboration with TradeHero (now Ayondo) & SGX (Singapore Exchange), we have developed a series of 15 animated video tutorials that will make learning fun & easy for all beginners!

I have been tasked as the mastermind behind the content, drawing from my knowledge of the 200+ books I have read and 10,000+ hours of professional market experience as mentioned in the video.

The videos are divided into 5 parts:

When it comes to trading, most people think that trading is stressful and boring because it involves staring at a screen the whole day and watching prices move, and then having to execute trades at lightning speeds to make any profits.

That is quite often what is shown in the movies, and very much dramatized.

In reality, there are many different kinds of trading, and here is a simple infographic depicting the main categories.

Source: Forex Useful

 

Generally, what you see in the movies tend to depict scalpers and day traders, which is the most stressful kind of trading. I myself tried it for a couple of years, but it started to take a toll on my health, which I decided was not worth the money, even though it was pretty good.

Position trading is more useful in timing the market to build your long-term portfolio, as I mentioned in my previous blog post: https://synapsetrading.com/2018/05/how-to-build-a-1m-dollar-portfolio-by-30-the-practical-stuff/

Hence, I find that the most useful kind of trading for anyone who is doing it part-time, or does not want to get too stressed out, is to use a swing trading approach. This means taking tactical positions to capture the medium to long-term trends.

With just 15 minutes a day, it is more than enough for me to place and manage my swing trades, which leaves me more free time to focus on the things that matter in life.

Of course, there are some drawbacks to swing trading as well, for example your income will be more lumpy as compared to intraday trading, and you will need a ton of patience in waiting to enter the perfect trades, and also waiting for trades to play out.

In summary, the type of trading style really depends on each individual personality and amount of free time, but personally I prefer to use the swing trading approach because it gives me the best returns for my time and effort.

Do you know what is your preferred style, and does it play to your strengths? 😀