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Technical and fundamental analysis are the two primary forms of analysis used in trading. Technical analysis can be further classified into two categories, namely price action and technical indicators.
In this article, we will explore both types of technical analysis, discuss the similarities and differences between the two, and lastly their feasibility.
Key Points
- Price action relies on candlestick charts for trading insights, whereas technical indicators use past price data to identify market trends and trading signals.
- Price action provides a straightforward view of the market but demands skill to interpret patterns, while technical indicators simplify signal generation yet may lag behind real-time data.
- The preference for price action or technical indicators depends on the trader’s style; some prefer the simplicity of price action, while others favour the clear, calculated signals from indicators.
What is Price Action?
Price action is a type of technical analysis that involves using only candlestick charts. Price action traders rely on candlestick formations to identify support and resistance levels, supply and demand zones, Fibonacci retracements, and other technical patterns.
Traders who use price action prefer clean charts without indicators and focus solely on the formation of candlesticks on selective timeframes. They believe that each candlestick tells a story and provides sufficient information to generate trade ideas.
Figure 1 – Example of Price Action Analysis on GBPAUD H4 (https://www.tradingview.com/x/NcOMVH0C/)
What Are Technical Indicators?
Technical indicators are tools that traders use to showcase financial instruments in a different light. The information produced by technical indicators is based on candlestick formations. Since a candlestick must close before an indicator can register the information, technical indicators are naturally lagging.
Technical indicators can be used to identify trends, overbought and oversold conditions, and potential reversals in price. They can also be used to generate trading signals, either on their own or in combination with other indicators.
Trend, oscillators, and volume are the three major categories of technical indicators. In addition, there are custom indicators that traders can use that produce a unique set of information.
Read more about technical indicators here.
Figure 2 – Example of Technical Indicators on GBPAUD H4 (https://www.tradingview.com/x/n3i4U9Qs/)
So, which is better? Price Action or Technical Indicators?
The answer to this question depends on the trader’s preferences and trading style, each coming with its own set of strength and weaknesses.
Using price action to conduct technical analysis provides a clear picture of price movement and can help traders identify trends and levels of support and resistance. This also allows for the smooth assimilation of other forms of analysis such as fundamental analysis to provide a more complete picture of on-going market conditions.
However, it would take significant amount of time and effort to learn before traders can become proficient at identifying price patterns and interpreting price movement.
For technical indicators, it provides objective, mathematical data that removes some of the ambiguity from trading. An effective combination of certain indicators can aoften generate trading signals automatically, saving time and effort for traders.
The limitations of some technical indicators include, as previously mentioned, lagging as they rely on past price data to generate signals. Due to the ease of using indicators, it can also be over-relied upon, leading to “analysis paralysis” and missed opportunities.
Ultimately, the decision between price action or technical indicators boils down to a trader’s personal preferences and trading style. Certain traders enjoy the simplicity and clarity of price action, while others may appreciate the objectivity of technical indicators. Looking for access to Vantage’s custom indicators? Sign up for a live account here.
