Price Action vs Indicators – Which One Suits Your Trading Style?

DLMvn > Trading Indicators > Price Action vs Indicators – Which One Suits Your Trading Style?

In the world of trading, the big question always revolves around whether you should rely solely on price action or combine it with technical indicators. Can price action deliver better results without the need for additional tools, or does integrating indicators increase accuracy and help you make better decisions?

Price Action Trading – Streamlined and Focused on Price

There is no denying that price action trading holds great appeal for many investors. They believe that price action provides all the necessary information, and there’s no need to complicate things with indicators. Everything is already reflected in the market’s movements. From this perspective, all indicators are merely derivatives of price action, offering no real value beyond creating unnecessary noise. However, those who support this viewpoint often overlook an important fact: indicators are tools that help quantify and measure price action, not separate elements. They can provide a different perspective, helping you assess the market situation more objectively.

Both Provide Lagging Signals

Another common perspective is that both price action and technical indicators offer delayed signals. In fact, both methods reflect what has already happened in the past rather than predicting the future. Price action is simply chart patterns that reflect the price’s movement process. Similarly, technical indicators like moving averages or RSI only measure and reflect price action that has already occurred. Therefore, there’s no guarantee that these patterns will repeat in the future. This leaves many investors confused when trying to predict market movements.

The Benefits of Technical Indicators

However, it cannot be denied that technical indicators can sometimes be a wise choice during periods of high volatility. In such phases, indicators like MACD, RSI, or moving averages help filter out small fluctuations and focus on more significant signals. This can help you avoid misleading price action signals. For example, a trader relying solely on price action might encounter five false signals when prices break support and resistance levels in a sideways market, while a trader using indicators like moving average crossovers may only receive one clear signal to enter a trade. Moving averages can smooth out price fluctuations within trends, making it easier to identify the prevailing trend.

Too Many Indicators – The Risk of Overuse

Of course, everything has its drawbacks. Using too many indicators can make your chart chaotic and lead to confusion in decision-making. Your perspective may become blurred when too many conflicting signals appear. Therefore, one of the best strategies is to use only a few basic indicators to support your trading decisions. These could be a moving average to confirm the trend, an RSI to measure overbought/oversold conditions, and an indicator like Bollinger Bands to assess market volatility. These three indicators can help you understand the market’s current position in its cycle.

Professional Traders Also Use Indicators

One argument often made by price action purists is that professional traders don’t use technical indicators. However, this isn’t entirely accurate. Many well-known traders like Paul Tudor Jones, Jerry Parker, and Ed Seykota have shared how they use technical indicators in their trading strategies. They use indicators like moving averages to manage risk and develop effective trading systems. This proves that indicators are not secondary tools but can play a vital role in the strategies of professional traders.

Price Action and Technical Indicators – A Harmonious Strategy

Ultimately, whether you are a price action enthusiast or a fan of technical indicators, both methods can be quantified and tested. These approaches can become effective trading signals when used correctly. Therefore, no matter which method you choose, the combination of price action and technical indicators always leads to better results compared to trading based solely on intuition or subjective views without a solid analytical foundation.

It’s clear that you cannot separate these two methods without encountering certain limitations. When combined properly, they will give you a distinct competitive edge in the market.

The Impact of Market Psychology in Price Action Trading

One of the greatest strengths of price action trading is that it immediately reflects the market’s psychology. The stock market, whether in a growth or recession phase, is driven by emotions like fear and greed. The price of an asset on the chart is the result of these decisions.

For example, in the case of GameStop in early 2021, price action showed the “frenzy” of retail investors as they collectively pushed the stock price to unprecedented levels without referring to technical indicators. The indicators at that time merely reflected the high volatility and overtrading of the stock, but price action was the primary force driving the market. This event clearly demonstrated how price action can help you better understand the irrational movements in the market.

Technical Indicators and the Theoretical Perspective Behind Trends

On the other hand, technical indicators like Moving Averages (MA), Relative Strength Index (RSI), and Moving Average Convergence Divergence (MACD) provide a more theoretical view of trends and potential trade signals. This is especially helpful in environments where the market seems unpredictable, or when faced with strong volatility where you cannot rely solely on intuition. For instance, when the RSI indicator shows that a stock is in the “overbought” zone, it can provide an early warning to minimize the risk of loss.

A typical example is in the U.S. stock market, where indicators like MACD and RSI have proven effective in predicting future trends. For instance, in 2018, when the global stock market faced difficulties and the Dow Jones Industrial Average (DJIA) dropped more than 10%, some technical indicators, including MACD, gave clear signals of a short-term recovery, helping investors avoid significant losses.

The Necessity of Combining Price Action and Technical Indicators

It’s undeniable that price action and technical indicators can complement each other very well. DLMvn always advises investors to maintain a flexible outlook and combine both methods to gain a comprehensive view of the market. For example, when trading in a clear trend and a price pattern, such as the head and shoulders pattern, adding confirmation from an indicator like RSI can boost your confidence in making a trade decision.

One of the major benefits of combining these methods is that it helps minimize the risks of false signals. During times of strong market fluctuations, relying solely on price action can make you susceptible to “false signals” when the market doesn’t react the way you expect. However, with confirmation from indicators like MACD or Bollinger Bands, you can reduce this risk and make decisions with more confidence.

Counterpoint: Technical Indicators Can Stifle Creativity

Some professional traders argue that an overreliance on technical indicators can stifle creativity and the ability to react quickly to the market. These traders believe that, rather than relying solely on technical tools, they need the ability to sense and analyze the market more intuitively. In such cases, indicators are merely “shells” that distract from the essence of trading, which is the balance between logic and emotion.

In reality, in situations where there are no clear signals from indicators, only price action can guide you to make the right decision. The market is always changing, and sometimes the ability to read short-term price movements can be the key to your success.

The Balance Between Fundamental and Technical Analysis

DLMvn firmly believes that the combination of fundamental and technical analysis is an effective long-term strategy in stock trading. Relying solely on price action or technical indicators may help you in the short term, but when combined with fundamental analysis, you can have a broader view and make more informed investment decisions.

For example, if you are trading the stock of a large company like Apple, you need to consider not only the price chart but also fundamental factors like financial reports, revenue and profit growth trends, or macroeconomic influences. This will help you avoid making rash trading decisions based solely on a technical indicator or a price pattern without a solid foundation.