Price Action vs. Technical Analysis: The Choice
Price Action or Technical Analysis? Which one is better for making money? In this article, I’ll show you all the advantages and disadvantages of Price Action and technical analysis and provide the main references for each of these approaches to save you months of research on the internet.
And I’ll reveal… why I abandoned one of these technical approaches, don’t want it in my life anymore, and I’ll explain why… maybe the explanation will surprise you. So, let’s get into it!
Two Graphic Approaches
First of all, Price Action and Technical Analysis are the two main approaches to analyzing charts to profit from price fluctuations of an asset. Period. But what asset are we talking about? Any asset, whether stocks, currencies, indices, cryptocurrencies, or cattle.
Both Price Action and Technical Analysis work in all markets. This is because price fluctuations result from the actions of thousands of humans buying and selling, guided by emotions. Regardless of the market we’re talking about, crypto or futures, it’s always humans driven by the same emotions.
That’s why a chart from 100 years ago has the same characteristics as a current chart, presenting the same patterns.
Price and Probability
These two methodologies are used by speculators to determine the right time to buy and sell with the odds in their favor. If you don’t understand the concept of probability, you won’t have the credibility to put “Trader Profession” in your Instagram bio.
I have a video where I explain the concept of probability.
The central idea behind both Technical Analysis and Price Action is that price discounts everything. So, you don’t need to look at news, company earnings reports, everything is already reflected in the price. Therefore, you only need a price chart to make your investment decision.
But let’s define what Price Action and Technical Analysis are, to begin with.
Defining Market Strategies
Technical Analysis is an approach used by investors or speculators, whichever you prefer, that observes price behavior along with other metrics, such as trading volume, moving averages, all with the aim of finding evidence of the current market trend, so we can take advantage of it. No need to make a Nazaré face, I’ll simplify this thing.
Technical analysis uses indicators and not just price alone. And what does Price Action do? The translation of Price Action is “price action,” that is, the behavior of price. Price Action restricts itself to analyzing price exclusively; it doesn’t seek further evidence for decision-making in graphical indicators like moving averages, trading volume, or stochastic. Price Action is only concerned with price.
Indicators and Decision Making
Great, but which one is better for making money? So, let’s analyze this issue more deeply, let’s think about the advantages and disadvantages of Price Action and technical analysis to decide which one is better for me to clean up, burst the balloon, I want to be worth my weight in gold! Sorry, folks, got carried away.
The problem with technical analysis is that most indicators are lagging, and decision-making needs to take into account a series of things and not just price movement like in Price Action.
Simplifying the Decision-Making Process
Have you ever seen those charts that have so many lines, so many indicators, that you can hardly see the market trend, which is the basis of everything, remember that price discounts everything? So why add a Bollinger Band, MACD, Ichimoku Clouds… it ends up making it harder to make money in the market.
Because each indicator is saying something different, and if you wait for all indicators to signal it’s time to buy, the buying opportunity will have passed. Price Action is used by many traders because it simplifies the decision-making process, reducing variables and focusing all attention on price, on price behavior.
Advantage: Confluence of Evidence
But I won’t just criticize Technical Analysis and praise Price Action. It has its advantages too. I mentioned earlier that people put too many indicators on the chart, which ends up hindering.
But let’s say you held back on the indicators, stopped drawing imaginary lines on the chart {slap}, just added a moving average to help see the market trend, as it smooths out noise. And then you add an RSI to the chart to avoid divergences and to avoid buying in an overbought region, then we start to see some advantages of technical analysis over Price Action.
The biggest advantage is the confluence of evidence. When we talk about evidence in Technical Analysis, we’re talking about information contained in the chart that reveals something about the battle between buyers and sellers. The more evidence we have pointing in a direction, the more convinced we’ll be to place a buy or sell order and to determine the size of the position we’ll enter the trade with. If there are many pieces of evidence, I enter with 50 thousand reais; if there are few pieces of evidence, I enter with 15 thousand.
Tops and Bottoms as the Greatest Evidence
The first and most important evidence in Technical Analysis is the progression of tops and bottoms because that’s how we determine the market trend. The market moves in zigzags, and because of that, it forms what we call tops and bottoms. The definition of an uptrend is the progression of higher tops and bottoms, meaning each bottom and each top the market establishes will be higher than the previous tops and bottoms. And the downtrend is the progression of lower tops and bottoms.
And as I promised, passing references throughout the article, here are the top 3 references for you to study Technical Analysis:
– Martin Pring’s book “Technical Analysis Explained”;
– Marcio Noronha’s book “That’s It“;
– And the third reference, a YouTube playlist I put together called “Best trading and technical analysis classes.”
The Right Approach for Your Profile
And how do you choose the best approach for your profile? Simple. If you, for example, suffer from decision paralysis, can’t make a decision due to the excessive number of tools and indicators on the chart, Price Action fits better with your profile.
Now, if you seek more evidence, more confirmations for your decision-making, don’t suffer from decision paralysis, you’ll end up being attracted to technical analysis. I abandoned Price Action. Why?
Well, because in my operational methodology, there’s a buying and selling criterion based on trading volume and the 20-day moving average. How am I going to use Price Action if I have a methodology that involves indicators?
But if you want to use Price Action because it fits better with your profile, the references are Al Brooks’ works, start by reading “Trends,” and another reference is a guy here in Brazil, my buddy actually, Felippe Aranha, you can find him on YouTube. The best approach to making money, without a doubt, I say this without fear of being happy, the best approach to making money is the one that best fits your profile. To not just stay in theory, let me show you Price Action versus Technical Analysis in practice.
Check out the video I made to explain it to you (from minute 8):
>> See also: