What is price Action Forex Trading?
Simply put price action is the study of price, and how it moves and reacts to different areas in the market, like support and resistance. price action involves either candlestick charts(my favoured type) or bar charts. We are looking to identify patterns in price which can help make informed trading decisions.
Technical indicators such as RSI and MACD’s are lagging indicators, they are simply formulae that represent the market in a different manner, they are mostly based on price(some include volume in their equations like the OBV) and because they are based on price they lag. Price is the most important, and most the up-to-date information we can get about the market. If you look at a live forex chart it will show you the price right there and then. This is as close to seeing the future as we can get, but from this information and the previous information that price has generated we can make decisions about where the market may go.
Price action trading works and it will not lose its edge in time like so many systems have done in the past. Price action 10 years ago worked and it will work 10 years from now because the market is driven by humans and humans do the same thing over and over. Even computer automated trading systems are developed by humans. The market is driven by the traders beliefs about whether price is high or low. Because they act on their beliefs they move price in recognizable patterns. These patterns repeat themselves over and over, and once we learn to spot them they can give us an edge in the forex market.
Price action for example can show us what traders think about a support or resistance level. Suppose price has come down to support, you could guess that the support will hold. Or you can wait for a price action signal like a pin bar. A pin bar is another name for a hammer bar. A pin bar with a long lower tail is a bullish single candle stick formation. What happened during the particular time frame was that price went down, but was bought up aggressively by traders. When you see such a formation on a support level, it shows us that there was buying pressure at this level. Think about it if there wasn’t buying pressure would price have closed off its lows and perhaps even above the open? No! Now I know some of the buying pressure is caused by short traders covering their positions but a lot will be fresh buyers coming in. Experience and gut feel will let you know what to do, pin bars work really well at swing lows and highs in the direction of the dominant trend.
Price action may not be the most profitable strategy in the world, but it does work, and as long as you are willing to take some time to learn price action, I believe anyone can become profitable. Since starting trading price action over a year ago I haven’t looked back, and I am slowly looking to build my account so that in a few years time it will provide me will a very good living. I love price action because it is simple, I never look at economic reports or listen to the news, this is because price action shows you how the traders are reacting to every piece of news that hits the market. It is basically a map of the sentiment that is in the markets. once you start to see the psychology and the thoughts of other traders by looking at the charts you are on holy ground.
I urge you, if you are struggling with the normal indicator based systems to take a look at price action, There are plenty of free books on trading and websites offering free information and education. No need to spend a fortune on education like some would have you believe, practice and practice some more. Experience is by far and above the most important thing a trader can gain.
John @ Forex Trading Uncut