Price action trading is a method used by traders to predict the profitable entry and exit points for any specific asset. As the name suggests, its purely based on the price movement for the particular asset. All the market forecast and predictions in any form can be boiled down to basic price action and the complex strategies use multiple layer of analysis over the basic price action patterns before arriving on a trading decision.
Since it ignores the fundamental analysis factors and focuses more on recent and past price movement, the price action trading strategy works solely based on the relationship between the current price and price at historical point. Since price action trading relates to recent and past price movements, technical analysis tools like charts, trend lines, price bands, high and low swings, technical levels (of support, resistance and consolidation), etc. are taken into account as per the trader’s choice and strategy fit. The tools and patterns observed by the trader can be simple price bars, price bands, break-outs, trend-lines, or complex combinations involving candlesticks, volatility, channels, etc.
A traders approach towards a particular asset based on price action will be unique for any trader, since it also involves the individual trader’s behavioral interpretations and subsequent actions, as decided by the trader. Every individual has a their own levels and bench marks based on their observation and unique decisions are made by result of the mix of observation and personal metrics.
No two traders will interpret a certain price action in the same way, as each will have his or her own interpretation, defined rules and different behavioral understanding of it. On the other hand, a technical analysis scenario (like 15 DMA crossing over 50 DMA) will yield similar behavior and action (long position) from multiple traders.
In essence, price action trading is a systematic trading practice, aided by technical analysis tools and recent price history, where traders are free to take their own decisions within a given scenario to take trading positions, as per their subjective, behavioral and psychological state.