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Indicators Vs PRICE ACTION trading

Today’s article will be a comparison between “TRADING WITH INDICATORS Vs TRADING WITH PRICE ACTION”. There are lot of traders in market( specially newcomers ) get involved themselves with indicators to find a buy or sell signal – is that the right approach???? If i talk about my own experience,i spent almost 2 years of my trading career in my early days trading with indicators & it was disaster. When i started learning price action trading, i came to know the difference between these two different types of analysis & i’ve chosen what is right finally.

What is an indicator ??

More or less, everyone reading this article must be knowing what is called an indicator.I’ll write a few lines to describe this part for the newcomers here.

= Indicator is a technical analysis tool used to predict market momentum.

= An  indicator is made up with a particular formula by it’s creator & as per the formula calculation it generates buy/sell signals on chart & trader trades based on those signals. There are thousands of indicators available in market & here is a shortlist of indicators where you can read about different form of indicators.

Now, i’ll explain you both form of analysis (indicators & price action trading)using different charts so that we can realize the difference between using these two forms of analysis & chose the best finally.

Lets start,

In below posted chart, i’ve placed some indicators on it to show that how it looks like on charts.For me it’s noisy & messy & we cannot even see the price chart properly due to the indicator:

Now , Lets talk about another form of technical analysis, my favorite >>>> PRICE ACTION TRADING !!!!!!!!!!

As the name states, in price action analysis , we analyze the plain simple candlestick chart only — that’s it. It looks clean & we can see the price chart properly below:

Now lets see a chart with a popular indicator called “stochastic” . Let me tell you how this indicator is generating signals on chart > there are two levels as per the formula defines : overbought area & oversold area.You’ll find two levels marked on this indicator 20 & 80 area ( highlighted yellow on chart ). Whenever those two lines known as moving averages(red & blue) reaches to the overbought area(80 level) , indicator says”look for sell entry as price is overbought” with a target of oversold level(20 area) & whenever those two line (red & blue) reaches in oversold area(20 level), the indicator says”look for buy entry” with a target of overbought area(80 level).

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Now, lets place this indicator on a stock chart & check what signals it generate over time & how much it makes sense.

I’ll explain below ARVIND chart where i’ve analyzed both indicator & price action analysis together on the same chart for better understanding.

Now Lets start with the basic first >> What we really see in a stock before deciding a buy/sell signals ? or the question could be like this ” what is the first thing we try to see after opening a chart ? ” It’s obviously “THE DIRECTION” . We need to find out which way the stock is heading — upward(uptrend),downward(downtrend) or flat(trendless). Once we decide the direction,then only we can do further analysis about where to enter a trade,stoploss,target etc.(pls read how to identify market direction here using raw price action )

Below,On a first look on the price chart only(ignoring stochastic indicator), any eye can catch the directions or trends of the market.The GREEN marked box shows an uptrend,RED marked box shows a downtrend,BLUE marked box shows a sideways or flat market condition.Now can you identify the trend/direction of market looking at the stochastic indicator only ????You CANNOT !!! I can bet no indicator can show you the market direction properly except price action analysis (some people will say “moving average” can show us the trend– i’ll prove that thought also wrong at the end of this article) 

Now, if foundation or basic structure of an analysis is wrong,does it make sense to trust such form of analysis? Anyway we’ll do further investigations. Now Lets check out above ARVIND chart again & check the signals stochastic generated.In a strong uptrendy momentum (which is shown by price chart) we always look for buy entry opportunities which makes sense as the trend is up only.But here stochastic generated 3 sell signals(marked in green box on stochastic area as 1,2,3) during the uptrend !!! Again it generated multiple buy signals (marked in black in stochastic area as 5,6) when the price is strongly trending down & we should look for sell signals only.In a flat market condition,it generated some signals which were profitable(7,8,9,10) but this indicator itself will give you an early exit in all these profitable trades like in signal-4,you can find a buy signal but it gives again an exit signal when the lines(red & blue) touches overbought area(80 level) & after the indicator’s exit, you can see how far price pushed up leaving you with those small portion of profits in hand.Anyway, do you see any difference in signal generation between flat & trendy market by this indicator ? It looks the same all the way, but you can find & trade price transition from upmove to downmove or downmove to flat using price action analysis (learn – How to find a price direction).

Below is one more example of this indicator(stochastic) which did not move from it’s oversold area(80 level) at all keeping it’s followers out of the market during the index’s entire upmove.

 Lets see, How we could have traded above chart using raw price action analysis. Using raw price action, we can see price is trending strongly up & we can also draw a bullish equidistant channel(learn – Trendlines & Trendchannels strategy).Now in a strong trend,we always look for a price action continuation signal to trade the trend & the signal we use is “INSIDE BAR” formation(learn : INSIDE BAR strategy).Here we got 3 buying opportunities(marked as box 1,2,3 in red) during the upmove to join the trend & make money.Once the equidistant channel is broken & price came out of the channel it shows a pause in existing uptrend & maybe a start-up of a new downtrend & flat market condition.Price again formed an inside bar sell signal after coming out of the uptrend channel & had a large sell-off.So this is how we could have traded the index with the help of price action momentum instead of depending on some formula based indicators which does not understand what the real & core price is doing. 

Below is another example where i’ve used two indicators called “parabolic stop & reverse(sar)” & “relative strength index(rsi)”. Firstly lets start with SAR indicator which is placed on the price chart with green & red dots.So the usage of SAR is – whenever you see a red dot,it’s a sell signal & a green dot gives you a buy signal.On chart, you can see the signals are generating(marked with red & green arrows). After making money from first few dots, you’ll end up loosing it all( & more from capital) while following upcoming dots buy & sell signals.Lets have a look at RSI indicator now which is placed at lower part of chart.How to use RSI? > like stochastic it also has two levels- overbought level(70) & oversold level(30). The rules are simple – when the zigzag line in between(called as moving average) reaches 70 area & starts falling from there it’s a sell signal & when the same line starts rising from 30 area it’s a buy signal.I’ve marked all the sell signals with a blue horizontal line connecting with price to show you where the signals were generated.Now compare the indicator’s signal with price chart momentum – first sell signal generated when price was trending up & second,third signals generated when price was moving flat. 

 Now have a look on the same chart based on price action analysis & lets see how simple but effective price action analysis is. There are two different ways we could have traded this chart based on price action analysis.Here is the first way of looking at it :

In below chart,the red boxes i made joining the lows & highs of multiple days & it created a flat channel.So price clearly shows it’s moving flat.In a flat market,if you are an aggressive trader,you can look for trades using the bottoms or tops of the flat price channel otherwise if you’re a defensive trader,i suggest you should stay sideline & wait for price to breakout from that consolidation period,then start riding the trendy momentum.Here we’ve traded the chart both the way, being an aggressive as well as defensive trader. A PIN bar sell signal formed on resistance area & then had a large sell-off afterwards which could be traded based on flat market trading strategy using tops & bottom.

 Now, here is another way to see the same price action on above chart being a defensive price action trend trader.Price formed a bullish PIN bar(learn : PIN BAR strategy) buy signal on 12600 area of flip support (learn : FLIP level strategy)& reached target area of resistance around 12900 shortly.12600 was the area of previous consolidation area’s top/resistance part which was broken out later on & on a retest of the same resistance breakout zone(learn : support-resistance strategy),we found a buy signal. So even though price was moving flat overall but it was moving in a trend itself.So sometimes we trade the flat market even being in a trend like this & all these sort of analysis is seen using raw price action only as no indicators can show you what’s really going on in overall market based on price behavior.

 Below is chart where i used moving averages crossovers indicator which is widely used by indicator followers as a trend indicator. If you’re a follower of my blog, you must have seen me using 20ema on my charts which shows i use moving average indicator too but there is a way defined to use it.Let me explain you first, how this indicator is being used by most of it’s followers & how this indicator generates signals for them.The blue line is 10day moving avg & light pink line is 20day moving avg.So whenever 20ema line crosses 10ema it generates a sell signal & 10ema crosses 20ema it generates a buy signal.On below chart, i’ve marked all the crossovers within red boxes as 1,2,3,4,5,6 & marked the entry candle where the buy/sell signal was generated by the indicators (circled with green & highlighted with yellow).You can see all the trades ended up with either losses or at breakeven with huge up/down moves after all the entries.  

Lets analyze the same above chart using raw price action in it.Using raw price action only, we can define a proper channel adding the highs & lows of the overall market & we could have traded the channel here(learn – Trendlines & Trendchannels strategy).There is a bullish equidistant channel we could have traded formed within the broader trend channel itself.Once the channel is broken, we see a large selling pressure coming in which could also be traded as the channel got broken & price came out of the lower trendline at point 3. So this is how pure price chart helps you to see the real thing going on there in market & trade with it.

 Below is the chart example i’ve shared placing one more popular indicator called “Bollinger Band”. In this indicator, it has two bands as shown in chart – whenever price reaches the upper band it’s called overbought area to have a sell entry & when price reaches to lower band it’s called oversold area to have a buy entry.Chart shows below what happened with the followers of this indicator.When price was trending higher & it reached it’s upperband & showing signals to have a sell entry for 6 to 7 times & all the signals failed & the same happened when price was in lower band with a downtrend momentum generating buy signals.

 Lets analyze the same chart using price actions now.First off all, connecting the highs & lows we can draw a bearish equidistant channel easily here marked as 1.Once this bearish equidistant channel is broken , we got a signal of trend change from bearish to bullish & price started trending higher making higher high – higher lows.When the trend is up, we always look for support areas to look for buy entry so that we can join the uptrend as much as we can.Now here i use 2oema (learn : 20ema strategy)as a support area in a trend which i discussed earlier that i too use indicator(moving avg) in a defined way when it is in-line with core price action setup.You can see how well price supported 20ema & pushed back up from those areas giving us trading opportunities.I did not use 20ema here as crossover buy/sell signals(how most of the indicator traders use it) but i used it as a price retest support area to pick up buy signals.To understand this concept of moving average how i use it only in a strong trend pls read the article dedicated to 20ema trading only.

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Finally,

If you are a great fan of using indicators & cannot leave it,no worries . Follow those indicators inline with price action behavior on charts.Use your indicator as an added advantage for your trading like when the price is trending higher, look for indicator’s buy signals only & ignore sell signal & vice-versa. Though i recommend trading price action only on your charts & ignore all sort of indicators as it will create your overall analysis thought process very much complicated in long run & TRADING SHOULD BE SIMPLE for me. No kind of analysis can be simpler than price action analysis & no form of indicator can give you accurate buy/sell signals than price action as all indicators are formulated by the behavior of price action movement only & when you can understand price action movement itself, do you really need those indicators anymore.Frankly speaking, i’ve seen 90% people using indicator as an easy way to make money as you just need to see the buy/sell signal sitting in front of your screen & no need to use your brain at at ll & there is no shortcut for making money & having success in life hence leave those indicators aside & start learning price action using the best gift of god – your brain!!!!

I’ll show you how price action can make you profitable only spending just 30min a day(before market opens). Let the money work for you now instead of we keep on working for making money throughout the day sitting in front of trading system & searching for a buy/sell signal all day long and price action trading is the way towards this form of money making process.

Checkout My FREE VIDEO TRAINING COURSE SERIES on PRICE ACTION TRADING in Forex & Indian stock market. 

December 29, 2014

3 responses on "Indicators Vs PRICE ACTION trading"

  1. Your article proving how tech indicators in stock trading are
    not very fruitful was very interesting I have been trading for long but earning and then losing all the money by using tech. indicators. I have used stochastics, rsi, Bollinger etc. but earnings vanish soon and I am back to square one. Patterns like triangles are at times useful but fail at other
    times. Kindly guide and help with simple method to make good earning and minimise losses

  2. Hello, Story is same here Rashid.I wasted two years of my trading career following indicators and finally price action analysis made money for me.I’ll advise you to complete my “FREE BASIC COURSE” which covers complete basic education of price action analysis – hopefully this will help you to startup.

  3. Jaba Forex TraiMay 23, 2018 at 4:09 pm

    Thanks for sharing this informative blog. Keep Posting.

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