Price action is a term used to describe the sequence of price changes related to a particular security. Any number of factors, including shifts in the marketplace, the issuance of earnings announcements, or changes in the leadership of the issuing company may trigger some type of price action. This ongoing movement is typically presented in some sort of chart pattern, with the candlestick chart being one of the most common patterns used for this purpose.
The main function of analyzing price action is to provide investors and brokers with information about what is happening with a given security, and how certain factors are influencing the upward or downward movement in the security’s price. As part of this technical analysis, every known factor will be considered, and the impact of that factor assessed. By identifying both primary and secondary influences on how the security is performing, investors can make more informed decisions on whether to buy or sell shares of that security under the current market conditions.
A given price action may be the start of a new trend that will continue for some time, or be a short-lived response to various types of events. For example, the price of a given stock may dip slightly when it is announced that a major player in the corporate hierarchy is leaving. With uncertainty about who will replace the departing executive, trading may slow somewhat. Once the replacement is announced and investors have confidence that the company will continue to grow, the trend may reverse and the shares begin to increase in value once again. At the same time, if investors are not inspired by new member of the executive team, the downward price action may continue for some time, until the new team member proves to be effective in his or her duties.
While the concept of price action is considered helpful by a number of investors, others prefer to utilize the charts that provide visual interpretation of the data as one of many sources of information. This is because any two analysts may consider the same information and develop two different understandings of what is influencing the price movement, and even how much influence each of those factors are exerting on the price. By using more than one information source, investors are exposed to more than one opinion on why the security price is moving in a given direction, determine which source appears to be the most accurate, then make a decision on what, if anything, to do with the security.
