Price action is one of the most charismatic and enigmatic definitions to describe a mechanism for trading the markets, particularly the forex market. Whilst many traders and ‘price action aficionados’ may disagree on the interpretation of the ‘raw’ data generated off the vanilla charts they will agree that price action is their only preferred method given it allows them to trade as close to the action in the market as possible.
Price action (PA) could be defined as the closest relative to order flow in FX (and across all markets) that any trader can visualise and then put to use given that PA is the direct result of order flow. Even traders who use indicator based strategies will often have elements of price action as an essential support ingredient to their trading decisions. For example, using the daily pivot, support and resistance combined with leading and lagging indicators as part of your overall method, is arguably part price action trading as is identifying the highest high and lowest low of the session, or the turning (reversal) point in order to place your stop. In short, whatever your preferred trading method a basic understanding of PA and its benefits is a critical success factor for any FX trader.
Price action has at its core; bias, the speed of buying or selling, where buying and selling is occurring (principally support/resistance), when a breakout is genuine and where a likely reversal is occurring. Due to the continuous flow of price action which bleeds onto our charts, all indicators are ‘created’ and thus dependent upon price action. Interpreting price action is an essential component to our trading.
Many traders adopt the KISS principle to trading (keeping it simple stupid). Price action traders can be described as technical traders that rely on technical analysis, but do not rely on conventional indicators to establish the direction of price movements and trading opportunities. These traders rely on a combination of price movement, chart patterns, volume, and other raw market data to gauge whether or not they should take a trade. This is often described as a “simplistic” and “minimalist” approach to trading, however, it should not be regarded as easier to implement than any other trading methodology. PA trading requires a sound background in understanding how markets work and the core principles within a market, it can take months (in some instances years) to become proficient at PA.
Price action is the pattern of movement of the price of a security over time. The skill of price action analysis involves using the trail of raw price data on a chart to make predictions about the future direction of the forex currency pair or security you are analysing. Price action trading is free from what purists may describe as the “clutter and confusion” of overly complicated indicator based systems. When traders learn how to read this ‘price trail’ they can clearly identify and interpret the price movements of any forex currency pair at any given time.
Price action analysis is the visual illustration of the current supply and demand condition of the forex currency pair, or other security for the specific period of time a trader is analysing. It could be considered straight forward and more efficient to learn how to analyse the supply and demand situation of a specific security, by learning to read its price action trail on a simple price chart, rather than attempt to interpret and make use of the other economic variables, indicators or chart patterns that traders could analyse. The movement of the price of any security is simply a reflection of the aggregate beliefs of all the players engaged in the market; speculators, investors and traders, forex traders can take advantage of this trail of beliefs by learning to analyse and trade off simple price action setups.
Many dedicated followers of price action believe that indicators add an unnecessary layer of confusion to trading forex, they contend that learning how numerous lagging or leading indicators combine, in order to enable trading decisions, is unnecessary when compared to developing the skill of analysing a naked price chart and taking advantage of the predictive capacity it contains, price action purists insist this is a skill set that traders should be developing over and above indicator proficiency.
PA traders often suggest that using indicators is a psychological issue; They would contend that not only are traders looking for crutches, the suspicion is that traders often want to over-complicate trading as trading off a naked price chart can appear to be far too simplistic. This does have an element of truth given that many traders put more emphasis on the technical side of trading and ignore the more important issues of money management and psychology.
Fledgling traders can be guilty of over complicating their forex trading by using trading strategies based on indicators or trading software that makes trading appear to be far too complex. If we took a fairly large and broad sample size of professional forex traders you’d quickly discover that the majority employ simple trading methods utilising core market price data, this could be primarily because they believe there are no advantages to be gained by over complicating the trading strategy, or the fact that the higher up the food chain you are you tend to react to the fundamental news and use the barest of charting elements. The majority of lucrative and successful trading strategies involve trading with the dominant trend direction, price action trading can provide you with an excellent method for trading with and into these trends at the optimum times.
The goal of retail forex traders is to take advantage of the price action trend created by big market players – the institutional traders are the force who create and maintain forex trends. As a consequence of this activity price action setups repeat themselves in the market on a fairly regular basis. Traders can learn to spot these repeating setups and trade the trend created by bigger market players.
Typical Price Action Candlestick Formations
Using forex price action techniques works very effectively on the higher time frames, whilst the words “price action” suggest immediacy traders can efficiently trade the forex market with simple price action setups on either the daily or weekly charts together with lower time frames. Trading intra-day, price action is a very effective strategy to employ, signals can be generated on the one hour and four hour time frames. FX price action trading is an adaptable trading method that can be sculpted to fit any individual schedule or trading style.
Traders who have actively traded the forex market for any significant period of time (and as a consequence are more likely to have been successful) will testify that their trading success is a result of psychology and money management. Traders often begin their career by thinking that method (technical strategies) is the more important element over and above the psychological and money management aspects of trading. What forex price action trading can provide is a simple, logical, and effective trading strategy allowing more time to focus energy on the important psychological and money management aspects of forex trading.