What is Price Action Trading in Forex?
If you are a currency trader, then it is important to know what is price action in Forex (FX). Price action trading is the discipline of making all of your decisions in trading from a clear price chart. This implies that there are no lagging FX indicators present, except for, perhaps, some moving averages that may help to determine dynamic resistance and support areas, along with trend direction as well. In this article, we will take a closer look at price action and what it represents in Forex, and we will explain the basic rules and approaches of price action trading.
What is Price Action?
All financial markets create data concerning the movement of market prices over varying time periods - and this data is demonstrated on price charts. Take into account that price charts reflect the beliefs and actions of all market participants, either human or computer, trading a market during a particular period of time, and those beliefs are displayed on a market's price chart in the form of Forex price action.
Since economic data and other world news or events are the catalysts for price movement in a market, we do not need to analyse them in order to trade the market successfully. All economic data and global news that causes price movements within a market are eventually reflected via price action on a market's price chart. Trader's can track this sort of data with our Forex calendar!
As a market's price action reflects all variables influencing that market for any given time period, exploiting lagging price indicators like the MACD (Moving Average Convergence Divergence), the Stochastic Oscillator, the RSI (Relative Strength Index), and others can sometimes be a waste of time. There are traders who might say that price movement provides all the Forex price action signals you will ever need to design a profitable and high-probability trading system.
Those signals are collectively known as price action trading strategies, and they deliver a way of making sense of a market's price movement, as well as assisting in predicting its future movement, with a high degree of accuracy, in order to grant you a high-probability trading strategy.
What Else Do We Know About Price Action?
Simply put, price action is the footprint of money. Financial markets are where money is exchanged between market participants - and this exchange of money leaves a trail. This trail is a market's price movement or price action, and as we now know, it can be observed on a price chart. As a Forex trader, it is vital to learn to define and trade from the clues left behind from price actions, because it makes its trail across price charts.
It is important to learn price action Forex trading, not just for your general knowledge, but to amplify your trading arsenal in general. Earlier we touched on the topic of price action trading strategies. We should admit that they form because price movement in markets have a tendency to be repetitive.
Since human emotions are to an extent predictable when it comes to matters of money, their actions in the market frequently result in price action formations that repeat from time to time. This can be a very accurate predictive tool of upcoming price direction. Therefore, this is where price action Forex indicators come into play.
Furthermore, price action trading encompasses price action strategies from key levels in the market. Sometimes you do not need to create a complex Forex strategy - a plain price chart and some common sense can be enough. Additionally, by combining price action setups with hot points in the market, such as core support and resistance levels and dynamic resistance and support levels, you can learn to pick accurate entries that provide you with the best chance of getting into a profitable trade.
Price action strategies can be traded in any financial market, and on any time-frame you prefer. It is advisable that traders concentrate their efforts on trading higher time-frames first, with the main time frame being the daily chart in particular.
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Why Trade Currencies with Price Action?
The answer is very simple - price is the essence of any financial market. It resembles maths. If you do not understand the terms of the task, you will not be able to provide any solutions. Thus, if you do not know how to read the price action of a market, then you are unlikely to know how to make sense of what a price chart is telling you. As a result, you will not know how to trade Forex using price action.
Every trader who tries to convince you that it is easier to trade from indicators or trading software other than price action indicators, is unaware of the reality of the markets. The reality of the markets is that current price is the ultimate result of all variables connected to the markets. What is the point in concerning yourself with analysing anything but this price movement? FX traders tend to fall into the traps of using unreliable Forex indicators and FX robots, simply because the people selling them exaggerate their effectiveness.
To fully understand Forex price action, it is important to comprehend that there is no easy way to make money in this world. Remember that any shortcuts that you believe you have found in the markets are merely temporary. By learning price action, you are giving yourself a better chance at Forex trading success.
What Are the Best Ways to Learn Price Action?
There are three points to bear in mind when learning Forex price action:
- The first one is that you need to learn to master one price action Forex trading strategy at a time. By mastering one price action setup at a time, you will learn it inside out, and can then proceed to make it your own. A lot of traders jump from one strategy to the next without really giving each the full attention they require.
Moreover, specialists in any field are typically the people earning the majority of money, not just ordinary people who might know a little bit about a range of things. Therefore, try to truly master one setup prior to moving on to the next one.
- The second point is that you have to start to learn trading Forex with price action using higher-time frames first. The foremost reason to concentrate on higher time frames is because it is the best protection we have against overtrading.
Overtrading is an account killer, and no trader is invincible. By focusing your attention on the higher time-frames, you can benefit from their ability to filter price noise on the lower time-frames, and consequently enhance your overall winning percentage.
- The third Forex price action trading rule is to follow the examples of successful price action traders. The most effective, as well as efficient, way to become a specialist in the field of FX price action trading is to actually learn from a successful price action trader.
Many traders have accomplished this, and occasionally they share their experience with novices. In other words, you can considerably reduce your learning curve, and also avoid a lot of trial and error by following the advice of skilled and proven price action traders. In addition to all of these rules, it is vital to explain the best way to trade price action in Forex. It is wise to wait for the best price action setups, rather than trading anything that you think may be a setup.
Furthermore, after you master a successful price action strategy and concept, you should eventually have no doubts with regards to what you are looking for in the market. Forex is a market where you need to demonstrate your patience, to wait for the ideal price action setup to come into view, and to then trade it flawlessly.
It doesn't really matter which strategy or system you end up using. Knowing how to read and trade from price action will improve your overall progress and success rate, even if you don't focus solely on trade price action strategies. If you want to trade Forex successfully, knowing how to trade price action, and how to use price action Forex trading indicators is imperative. You need to understand all the price dynamics within the markets, there is simply no way around it.
Do not deceive yourself by believing you will somehow succeed in currency trading without an appropriate and thorough knowledge of price action trading concepts. Therefore, be prepared with as much knowledge as possible. Do not forget that successful price action traders can become your best mentors - and that they can teach you some valuable lessons.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.