What is Price Action?
Price action is a term often used in technical analysis to interpret and describe price movements of securities.
How Does Price Action Work?
Technical trading revolves around chart and pattern analysis, and when patterns change dramatically, technical traders often refer to this as price action.
Price action isn't just about the amount of a security's price change; it also describes how prices behave when they reach certain high and low points. For example, an analyst might conclude that the market as a whole is going up when a certain security or index price rises above a 52-week high and then keeps setting new 52-week highs over a period of time. Likewise, if the price action is going the other way (i.e., the 52-week lows keep getting lower over time), the analyst might conclude that the market as a whole is going down.
Why Does Price Action Matter?
Technical trading is as much an art as it is a science, and thus no two traders will interpret price action the same way. Accordingly, analysts often have different reasons, expectations for, and interpretations of any particular price action. Analysts who interpret price action correctly, of course, profit the most.