Price action is replacing opinions and predictions with valid signals. A signal is a quantified reason to enter a trade, stay in a trade, and exit a trade.
- An entry signal can be based on price alone or a technical indicator. An entry signal should give you a better chance of profits than randomness.
- A stop loss should be placed at a price level that tells you that the trade is not going to work out. A stop loss is to keep your losses small so you have a better chance to be profitable. A stop loss helps you figure out the risk in your risk/reward ratio.
- A trailing stop can be used to tell you when it may be time to take profits because a winning trade may be reversing against you. It is also useful to maximize gains.
- A profit target can be the technical level that your trade begins to have a bad risk/reward ratio due to the extension of price into overbought territory or an extension from a normal trading range.
Trading price action requires a quantified system that you create when the market is closed to use when the market is open. Your system has to be something you believe is a profitable process based on your data. It must meet your own risk tolerance levels and potential goals for returns.