What is trade price response?
Trade price response is a trade entry or exit technique based on what the price of a security does after reaching a key price level. The key price levels are usually the resistance and Support areas identified by the trader. Once the security has reacted to the level, the positive or negative reaction of the security is used to establish or close trades.
Key points to remember
- Trade price response is the entry or exit of trades based on how price reacts to key price levels identified by the trader.
- The key price levels are usually the support and resistance levels.
- Trade price response can be used on any time frame.
- The strategy guidelines are loose, so traders must specify exactly how they will trade based on the signals generated and under what conditions.
How Trade Price Response Works
Suppose the $25 level of a stock had been a significant level of resistance. The last times the price reached this level, it fell soon after. One response to trade price would be to set up a trade based on what price does once it hits the $25 level again.
If the price gets close to $25 and then starts falling, a short position may be building up, as early evidence suggests that resistance is again holding.
On the other hand, if the price breaks above the $25 level, a trader can enter a a long position in anticipation that the price will rise after breaking through this critical level of resistance.
The trading price response can also be used to close trades. A trader can hold a long position, but if the price drops below a support level, they close the position. If the support level holds or the price breaks above the support, the long position is maintained.
The technique can be used at any time. Swing traders could use the entry or exit method on the daily or hourly price charts. Day traders could use it on one-minute or five-minute charts.
A trade price response strategy could end up being quite active, depending on how the trader chooses to trade it. For example, if the price moves above a resistance level, they can go long. If the price drops back below the resistance level, they can close their long position and enter short.
Each trader must determine how he will react when the price reaches a key level. For example, if an action is in a uptrend, they may wish to take only long positions, but never short positions. They can also choose to give each trade leeway, controlling risk with a stop lossand don’t exit every time the price breaks below a key level again, as this could lead to several scroll saws.
The guidelines for how a strategy is traded are set out in a business plan.
In addition to entry and exit rules, a strategy must also consider post size—how much capital is allocated to each transaction and how much of that capital is put at risk.
Example of using trade price response
The trading price reaction could have been used to trade Alphabet Inc. (GOOG) as it moved above a short-term resistance level (blue horizontal line). The price was in a general uptrend and created a swing high nearly $1365. The price broke above this level, triggering a long trade. A stop loss is placed below the recent low.
These are examples, and could be adjusted depending on how the trader chooses to trade around the level.
The difference between price response trading and price action trading
Trade price reaction is a form of price action trade. Price action trading is a broader term used to describe trading based on price movements, which is what trading price response does.
Limitations of using trade price response
The price will not always move as expected when it hits a key level, and it will not always move in one direction. The price can go back and forth through a key level. The trade response trader must determine whether to enter and exit, and possibly reverse, their position on each of these price moves, or to give the trade some leeway by placing a stop loss at a set distance from the trade. key level.
Using the trade price response can limit the profit on a trade. Price rarely moves vertically for long; on the contrary, the price constantly goes up and down, but progresses in one direction more than the other. If the trader only chooses to exit near key levels, they may miss the opportunity to take profit if the price reverses before reaching a key level. They could also limit their profit potential if they exit whenever the price makes a small move from their position.
Trading price response is best used in conjunction with trend analysis, other forms of price action trading and potentially the use of other technical patterns or technical indicators.