The discussion about price action trading and whether it’s better than indicator trading is as old as trading itself. This article will debunk the five most commonly shared opinions on Price Action Vs. Trading Indicators and give traders a new perspective on the age-old debate.
#1 Price action is better than indicators
Price action traders claim that it is a much better trading method in general. But if you dig a little deeper, price action and indicators are not that different. Candlesticks or bar charts are tools to visualize price information on your charts. Indicators take the same price information and apply a formula to it. Indicators don’t add or take away anything from the price information you see in your candlesticks – they just process the information in a different way. This will become more apparent in the next points.
#2 Indicators are lagging – price action is leading
A trader who claims that indicators are lagging hasn’t understood their true meaning and purpose. An indicator takes past price action (the amount is defined by the indicator setting) and then visualizes the result after applying a formula to it. Thus, what your indicator shows you is a result of past price action.
However, a trader who analyzes pure price patterns does the same thing; if you are looking at a Head and Shoulders or a Cup and Handle pattern, for example, you are also looking at past price action and price has already moved away from the potential entry point.
As you can see, both use past price information and are, thus, ‘lagging,’ if you want to call it that. To overcome the lagging component, you would have to set your indicator to a shorter time setting or only use a handful of past candlesticks to make your analysis. However, the analysis becomes less and less significant the fewer information you include.
#3 Price action is simple and better for beginners
Is it? In trading, it’s rarely true that one thing is better than the other and it usually comes down to how you use your tool. It’s like saying that a hammer is better than a screwdriver; both tools work very well if you understand when and how to use them, but neither will help you if you don’t know what to do with it.
Without experience or proper guidance, it’s very easy to feel lost as a beginner price action trader. Trading candlesticks are not as easy as it sounds and lots of components often get overlooked, such as the size of candlesticks, how they compare to previous price action and the component of momentum and volatility in wicks and bodies. Don’t make the mistake of choosing price action because it looks simple; a trader who doesn’t understand the nuances of price action trading can easily interpret charts in the wrong way.
#4 “Naked trading” is better because indicator charts are messy
This is an extension of the previous point. The old argument that indicator charts are messy does not hold up. Of course, if you apply five oscillators and ten moving averages to a chart, you can quickly clutter up your screen, but that’s not how indicator trading works. When it comes to indicator trading, traders usually pick one oscillator to analyze momentum and another indicator for chart studies; a good combination is the Stochastic (which is a momentum based oscillator) and the Bollinger Bands (which is a volatility and momentum based chart study tool with a moving average).
Indicators can provide guidance and help traders make objective trading decisions. There is very little room for subjectivity when it comes to analyzing an indicator. On the other hand, price action traders who look at blank charts can easily feel lost, lacking the clear reference points or tools to help them make trading decisions, resulting in acting emotionally or impulsively. It’s also possible for price action traders to create too much noise on their charts by using too many support/resistance lines, trend lines and candlestick components.
As always, such an argument does not hold up when we take a closer look. Whereas some traders feel more comfortable using indicators to take away some of the subjectivity, others prefer price action analysis.
#5 Price action is the real way of trading
The final argument is that “professionals” don’t use indicators. Again, it is very hard to validate such a claim, and it all comes down to personal preferences. Indicators can save time, and they only look at very specific aspects of a chart – momentum indicators solely focus on analyzing momentum – to help traders process data faster and without much subjectivity.
In our opinion, it is important to approach this topic with an open mind and not get too carried away. It is important that a trader chooses his trading tools wisely and that he understands the pros and cons of the different approaches. There is no better or worse when it comes to price action vs. indicator trading. It all comes down to how the trader utilizes his trading tools to make trading decisions.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.