Price Action Forex Trading
Price action refers to the price changes of a security, which is represented on a chart. All forms of technical analysis are based on price action since these methods are used to analyze the changes in price.
Making decisions based on price action means that your actions are based on the movement of price on a chart. In Forex trading, this means focusing on the fluctuation of the exchange rate between two currencies.
The Forex market is the most liquid in the world, this makes price action trading more attractive because market movements are a lot cleaner, and as a result, easier to trade.
Why should you implement price action in your trading? Ask yourself this question, how do traders make money? That’s right, we profit through the difference between entry and exit prices, so everyone can agree that price is what pays.
Since price determines our profit or loss, it is a smart idea to prioritize price action when making decisions. Yes, other tools are important in trading strategies, but they should serve to validate the picture that price action paints.
How to use price action in Forex trading?
Trading using price action simply means that a trader uses price fluctuations to gauge the supply and demand of the market to decide when to enter positions, to visualize price action traders use charts.
But what is the difference between this and normal trading based on technical analysis?
Trading price action does not mean that other tools must be abandoned, rather it means that price changes are the most important factor in decision making, by gauging the battle between bulls and bears.
To provide an example, a trader blindly using technical analysis would buy at a support level without any confirmation that the level should hold, in contrast, a price action trader will wait for confirmation of demand at the level before placing a trade.
Where does that confirmation come from? It comes from the reaction of price at that level, there are different ways that a trader may use to determine this such as tape reading or the use of candlesticks.
Candlesticks are the easiest to use, the most common but are also extremely effective because these charts show all the relevant price points (high, low, open and close). Read our in depth article to learn more about candlesticks.
It has already been mentioned that this methodology involves putting price first, but what does that mean? What does that look like? Next up we will look at the same period on a GBPJPY chart to make the distinction.
Pure price action
This can be referred to as pure price action trading, all that is taken into account is the current price relative to previous historical prices, the chart is “pure”. Breakouts are one way that pure charts can be traded and often scalpers will have basic charts such as this and tape read to determine when to enter.
Technical analysis with price action
Above is an example of a chart with levels and a trendline in place. Here the technical analysis tools show the favorable areas to enter and price action can be used to time entries.
Obstructed price action
One word describes this chart, nightmare! Indicators can be a useful tool in trading but should always come second to the market’s actual movements. In this case there are too many indicators, making it impossible to gauge the fluctuations.
Summarizing how to use price action it is about using past price movements to forecast future movements in the market, furthermore, it is ideal to use price action in conjunction with other technical analysis tools. But it still begs the question, why should you use price action?
Advantages of price action
1. Best way to gauge supply and demand
Using actual market fluctuations is the best way to gauge the balance of supply and demand in the market. If bulls keep lifting prices then there is demand present, if bears keep pushing the exchange rate down then there is excess supply.
2. Acts as the best timing method
As mentioned, gauging price action in the current moment helps a trader to time entries, further putting the probabilities in their favor.
3. Determining the market environment
A no brainer. Market environments are determined by the movement of price over a certain period, therefore, by analyzing price action a trader can deduce what environment they are trading currently. Why is this important? Because the performance of strategies depends on the environment that is present, so knowing the conditions is essential.
4. Keeps it simple
Following a trading plan is a challenge due to the psychological war games that the market plays with us, however, a simple system is easier to execute objectively since the rules are clear cut. You cannot get a simpler form of price action since trading decisions are based on actual market movements, instead of the derivatives of price.
Disadvantages of price action
1. Requires experience
Reading the flow of the market takes chart time and experience, without this is can be difficult to make real-time decisions. Once a trader is experienced, this disadvantage falls away.
2. Hard to succeed using price only
Let me start with a disclaimer. Many traders make insane profits by trading order flow/ tape reading, which as pure as price action trading comes. Take that with a pinch of salt though, trading in this way takes a certain type of person and skillset, meaning most people will need a combination of price action and other techniques. But that is not the end of the world.
We have arrived at our destination. It is easy to get caught up in all the derivatives of price that are provided to make decisions, too many of these tools just end up clouding what is most important- THE MOVEMENT OF THE MARKET. Going forward try and pay more attention to the price action and slowly you will notice yourself picking small things up. They may be small but in the long run those will make a big difference.
Price is what pays!