Despite critics from Warren Buffett, who is considered to be one of the biggest investors of all time, price action trading could be profitable. Even though he said that focusing on price for investing is not what he could do, we must also consider that not any of us has several billion dollars to invest in the stock market like him.
Because technical analysis and specifically price action strategies could be profitable for stock trading, we would like to discuss one of the main principles of price action trading aka impulsive vs. corrective moves and see how it can work in the stock market.
For those of you that are not too familiar with price action trading, one of the basic concepts is as follows:
In a trending market, an impulsive move is generally followed by a corrective move, which is supposed to be followed by another impulsive move.
An impulsive move is generally characterized by the following details:
- Candles are very large and cover significant ground.
- The number of with-trend candles is generally higher than the others.
- Little wicks or rejection on the other side of the market.
On the other hand, a corrective move:
- Has smaller candles which cover less ground
- There is no dominance in terms of the number o with-trend and counter-trend candles
- Choppy trading could be seen in this kind of moves.
What any price action trader tries to do is to spot and anticipate a series of impulsive and corrective moves and enter the market before an impulsive move begins.
Could someone apply this to stocks?
Absolutely! Stock trading is not different to other markets. Prices are set based on supply and demand principles, so impulsive and corrective moves can be spotted in the stock market on a daily basis.
What any beginner needs to understand is that by understanding the principle of impulsive vs. corrective moves a deeper understanding of the market can be acquired. In this way, a trader can understand how the order flow behind the chart is evolving and have a picture of how the other market participants are trading.
Just relying on fundamental analysis for stocks, could result in a bad timing and you losing money, when in fact, by combining it with price action trading, better results can be achieved. Technical skills should not be ignored, as they can really make a difference in your trading performance.