This article addresses Price Action trading and how to apply it to Forex trading. It is one of the most important material you will read in trading financial instruments electronically, and it is one the important methods used in FXLORDS’ Managed Forex Accounts, Forex Trading Signals, and it is among subjects discussed in the Training Course.
What is ‘Price Action’ trading?
Price action trading actually is the art and skill of making all of your trading decisions using a clean or “naked” price chart. Therefore, no indicators are plotted on the charts except maybe a couple of Moving Averages to help identify various supply and demand zones.
Financial markets produce data which affects the price of a financial instrument over a period of time, so price charts reflect all market participants’ trading beliefs during the specified period of time. Economic data leads to price movements in the market, that is because market participants assume that this data will affect the price of a financial instrument. Therefore, these beliefs turn to real actions from traders, which leads to a price move on the price chart. So, a price basically reflects all variables that affect the market at a given period of time. This is also the reason why using lagging price indicators like the Stochastic indicator, MACD, RSI, and others is just a waste of time.
Price movement, or price action, provides all the signals you will ever need to develop a high-probability, profitable trading system. These signals combined altogether are called price action, they provide an easy way to understand market moves and predict the future ones with a high degree of accuracy.
How do I apply price action to the Forex market?
Price action trading can be used to trade any financial market; however, the Forex market has the accessibility to other financial markets and it has the deepest liquidity, therefore, it is the most suitable market to apply the price action trading method.
The philosophy of price action trading is that you only need to master a few solid setups to be consistently profitable. In fact, what differentiate between profitable traders and losing ones is having a simple trading method that consists of the least chart indicators, which reduces confusion and stress to allow you focusing more on the technical aspect of the trade.
Trading using clean vs. messy Forex charts
The first step you need to take when trading “Price Action” in the Forex market is to take off all indicators in order to set-up a clean “naked” price chart. Next, you have to master few technical patterns. They are mainly different shapes of the Japanese candlesticks, such as the Marabuzo, the Hanging man or chart patterns such as the Head and Shoulders pattern and the Double Tops and Bottoms. You can make money consistently by mastering a couple of these setups. The best approach is to work on one at a time, master it, and then move on to the next.
In this way you will develop a price action “tool box” which will provide the tools you need to take advantage of quality price action movements.
Messy charts vs. clean “naked” price action charts
If you have been trading for a while, then you are probably using numerous indicators on your charts that are, at one point, definitely confusing you and, most probably, are one of the main reasons why your decisions are random. Take a look at the two charts up, which one seems more logical and less confusing?
Doesn’t it seem silly to use a messy chaotic chart when you can work on a clean price chart? Trading is hard enough without a messy chart full of lagging indicators. Stop fooling yourself by believing that they are helping you trading or timing entry and exit points properly.
Price action setups are the best way to predict a future price move, All markets operate in “future time”, this means market participants base their trades on what they believe will happen to a certain financial instrument in the future. Price action is the best indicator of the aggregate belief or attitude of all market participants. What happened in the past is in the past; indicators only analyze past data statistically, and therefore they are lagging. The bottom line is that there is just no logic in using lagging indicators. Price action analysis takes all market variables into account.