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 it reaches a key price level. The key price levels are typically resistance and support areas identified by the trader. After the security has reacted to the level, the security's positive or negative reaction is used to set up or close trades.
- Trade price response is entering or exiting trades based on how the price reacts at key price levels identified by the trader.
- The key price levels are typically support and resistance levels.
- Trade price response can be used on any time frame.
- The guidelines for the strategy 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
Assume that the $25 level of a stock has been an important level of resistance. The last few times the price reached that level it has fallen shortly after. A trade price response would be the setting up of a trade based on what the price does once it reaches the $25 level again.
If the price moves close to $25, and then starts to drop, a short position may be initiated, since the initial evidence suggests that the resistance is holding once again.
On the other hand, if the price moves above the $25 level, a trader may enter a long position in anticipation that the price will head higher after breaking through this critical level of resistance.
Trade price response can also be used to close trades. A trader may be holding a long position, but if the price moves below a support level, they close the position. If the support level holds, or the price rises off support, the long position is held.
The technique can be used on any time frame. Swing traders could use the entry or exit method on 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 opts to trade it. For example, if the price moves above a resistance level, they may enter long. If the price drops back below the resistance level they may close their long and enter short.
Each trader must determine how they will react when the price reaches a key level. For example, if a stock is in an uptrend, they may wish to only take long positions, but never take short positions. They may also opt to give each trade some room, controlling risk with a stop loss, and not exiting every time the price crosses back below a key level as this could result in multiple whipsaws.
Guidelines for how a strategy is traded is laid out in a trading plan.
In addition to entry and exit rules, a strategy must also consider position size—how much capital is allocated to each trade and how much of that capital is put at risk.
Example of How to Use Trade Price Response
Trade price response 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 an overall uptrend and created a swing high near $1365. The price moved above this level, triggering a long trade. A stop loss is placed below the recent swing low.
These are examples, and could be adjusted based on how the trader opts to trade around the level.
The Difference Between Trade Price Response and Price Action Trading
Trade price response is a form of price action trading. Price action trading is a broader term used to describe trading based on price movements, which trade price response does.
Limitations of Using Trade Price Response
The price won't always move as expected when the price reaches a key level, and it won't always move in only one direction. The price may whipsaw back and forth across a key level. The trade response trader must determine if they enter and exit, and possibly reverse, their position on each of these price moves, or if they give the trade some room by placing a stop loss a set distance away from the key level.
Using trade price response can limit the profit on a trade. Price rarely moves vertically for long; rather, price moves up and down constantly, but makes progress in one direction more than the other. If the trader only opts to exit near key levels, they may miss their opportunity to take profit if the price reverses before reaching a key level. They also could limit their profit potential if they exit every time the price makes a small wiggle against their position.
Trade 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.