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There are a lot of decisions people make going into a trade. We will trade on our interpretations of the strength of businesses or macroeconomic patterns of a country. Individuals can do trades on the basis of their own opinions, forecasts, estimates or personal views. Psychological mistakes, such as fear of missing out on a move, envy, or pride, can also contribute to trading decisions.
But there's a better way of doing business.
With a price action strategy, traders interpret the market and make informed trading decisions based on recent and real price changes.
The market is in an uptrend with higher highs and lows. A downward trend is characterized by lower highs and lower lows. Trading is considered range-bound when price trades within a specified price bracket. Defining which market category you are in will allow you to reduce friction when trading.
The current trend can be shown through how market price reacts to the moving averages of appropriate time frames.
If the market is showing movement in one direction, the MACD will quantify it based on the direction of the crossover signal.
Typically a breach of a previous trading range implies the price will move in that direction.
An entry is positioned where the price reaches a fixed trigger signal. To have any sort of market edge, It must depend on a historical pattern that generates bigger wins than losses.
A market is generally heading towards a price gap.
The best-case scenario is a profit target where the price will trend before the chances of additional profits decline. In your trades, your profit target sets your reward level.
A stop-loss reflects a price level not to be achieved if the trade works for you. You admit to being wrong at this price level and taking a small loss before it becomes a huge loss and the chances of profitability turn against you. The stop loss of your position together with position size represents the risk of the trade.
If a market has moved too quickly in either direction, the RSI will signal it. The risk/reward ratio of long positions at the 70 RSI can be decreased and a short position can be similar to reversal higher back at a 30 RSI.
It is a sign of high volatility thus increased risk when the price range expands twice as much as it has been trading. Trading smaller positions is usually the proper move.
The reality is that every other signal pretends to know something but the current price action is the truth.
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