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What is FX price action, how can traders identify it and how can they potentially profit from it?

Feb 11 • Forex Trading Articles, Market Commentaries • 1783 Views • Comments Off on What is FX price action, how can traders identify it and how can they potentially profit from it?

FX traders have to rapidly become conversant with many new concepts and the language that accompanies the various concepts. Not only do you have to learn the language of technical and fundamental analysis, you also have to quickly get up to speed with various phenomenon that can have an impact on your trading. Getting your head around the idea of an STP-ECN broker can prove to be tricky for the uninitiated. Understanding the language used on forums and indeed the language used when attempting to input code into your MetaTrader platform (however simple MQL actually is), represents quite a challenge.

Taking on board all the: phrases, words, concepts and ideas relating to trading, can take many months, if not years. And once you’ve finally begun to in effect speak the language of FX fluently, you may then begin a process of mental deprogramming, to rid yourself of all the unnecessary and overcomplicated theories, which you’ve adopted and adapted to. For example; you might begin to abandon your technical trading strategies by decluttering your charts, as your new found experience teaches you that, many of the concepts and strategies you previously placed faith in, have resulted in very little benefit. You begin to consider trading off naked charts, or close to naked; with very little indicators placed on your time frames, other than: the daily pivot points, price displayed by candlesticks and perhaps higher moving averages, such as the 100 and 200 DMAs.

It’s generally at this inflection point, during your trader journey and individual growth, that you begin to consider another trading theory and method, one which you’ve repeatedly seen and heard mention of, it’s referred to as “price action”. This evocative and mysterious sounding concept, is in fact an incredibly simple issue to understand and put into practice, when trading markets. It begins with breaking down the phrase into the two separate words; price and action.

We know what price is, we can clearly see it quoted on our platforms at any given second, or minute on our charts. Price is often referred to as the best technical indicator there is, as it doesn’t necessarily lag, it leads. But what is action, in relation to price? The action simply describes what price is doing, at any given second or minute. It’s worth concentrating on that word action for a moment and perhaps referring to an accepted definition, as quoted by the Oxford English Dictionary. Action; the fact or process of doing something, typically to achieve an aim, a thing done; an act, the way in which something works or moves.

In relation to trading, a relevant definition of action would be the way in which price works, or moves. And how that price moves constitutes price action. To simplify; if price moves quickly or aggressively, in comparison to how it’s moved recently, then the security is experiencing price action. You can, thereafter, easily identify price action on many time frames (low and high) and in many securities. Your challenge is then less straightforward; how to isolate price action, how to possibly predict it and how to potentially build a successful trading strategy, based on it.

One simple method is the observation of basic candlestick patterns, in order to identify bullish, or bearish trading conditions. You could also look for significant and rapid changes, which could be represented by the security whipsawing in a wide, or a narrow trading range. Price action is also generally attributed to breaking news events and or the publication of economic calendar data. Price action can also occur around handles, or round numbers. It is also likely to occur if price is at daily extremes; perhaps the low or high of the day, or when price is significantly above or below the daily pivot point.

After defining what price action is and once you’ve identified the factors which cause price action, you can analyse the reasons why and when price action can occur. You’re then in a position to put this knowledge and your observational skills into your trading decisions, to attempt to successfully put your theories into practice.

You’d identify price action using candlesticks by looking for easily identifiable bullish or bearish conditions. For example; you may be a day trader, who trades off a one hour chart. You note that the last two hourly candles which closed were bullish, closed candles with upward wicks, also often described as tails. You decide that this price action is indicating bullish conditions, therefore you take a long trade. You can then look into combining this into an overall strategy, which is when you come to realise that simply identifying price action is the easy part.

You’ll notice the price action illustrated by the candlesticks, but you’ll also notice this price action had taken price to R2, you also notice that the FX pair is close to a round number and the 200 DMA, when you look on a daily time frame. You know the reason why price action has suddenly developed, is due to a high impact release published during the formation of the first, bullish, hourly candle. You note the highs and lows of the day, you also note the time of the day, as you weigh up the likely continuation of the daily move, if liquidity reduces perhaps late in the New York session. You also take a cursory look at your economic calendar, to ascertain if there’s any upcoming events, which could derail the current bullish momentum.

All these factors, aligned with the price action, are just some of the issues which could influence price action, it’s your challenge and responsibility to then quickly translate all this data, in order to make your informed trading decisions. Once you remove all the confusing clutter from your trading charts, you must have the confidence to trade based on your quick and accurate observational skills, which you’ll only obtain with practice and experience.

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