Forex Price Action Trading Strategy
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In the financial world and in any business, price is what determines everything. Forex trading is no exception, but it comes with specifics. Price action is one of the core aspects of the foreign exchange market, but what does it represent? Price action is the movement of a security's price.
Additionally, price action is included in technical and chart pattern analysis that attempt to discover an order in seemingly random price movements. Examples of price action comprise of swings (high and low), tests of resistance, and consolidation. You should understand that no two people will analyse every bit of price action identically, and that is why many traders find the concept of price action elusive.
Price action is simply everything that a security's price does, and just like every other facet, it is entirely subjective. There are many ways you can apply price action knowledge in Forex. One of them is by trading with Forex price action trading strategies. The purpose of this article is to explore price action strategy basics, and provide traders with some examples.
Important Terms in Price Action Trading
Before starting off with the topic of price action strategies, we will clarify the most commonly used terminology when it comes to price action. The candlestick and price bar are significant tools for analysing price action, as they assist traders in visualising price movements. The term candle describes trading with candlestick charts.
In a basic Forex price action strategy, you will often see 'candle bar' used interchangeably. Also, a 'bar chart' is a form of charting that does not use candles, but rather simple bars that demonstrate the same information as a candle, but in a less visually appealing manner. We should also mention an 'up bar'. An up bar or 'bullish bar',is a bar with a higher high and a higher low than the preceding bar. The up bars marked over are in an uptrend.
Often, the close is higher than the open on an up bar, but sometimes you can have the close lower (rather than the open) and it can still be an up bar - this might occur in aggressive trends. It's worth knowing that up bars show that 'bulls' or buyers are still in control. Next comes the down bar. A down bar or a 'bearish bar' is a bar with a lower high and a lower low than the foregoing bar. Down bars demonstrate that 'bears' or sellers are still in control.
An inside bar is sometimes called a 'narrow bar'. An inside bar is a bar with a high that is lower than the prior bar's high, and a low that is higher than the previous bar's low. Some Forex traders do not consider an inside bar that has either an equal high or an equal low as an inside bar, while others do. Inside bars often represent market indecision. As on any particular bar, the closer the open and close are to each other, the more undecided the market is, as neither the buyers or sellers are in control.
We now come onto the 'outside bar', which you will also meet while reviewing Forex price action strategies. Also sometimes called a 'mother bar', 'engulfing bar', or a 'wide range bar', an outside bar is a bar with a high that is actually higher than the preceding or next bar - and with a low that is lower than the foregoing or next bar, thereby engulfing either the previous bar or the next bar.
If the close is considerably higher than the open in the outside bar, it demonstrates that buyers are in control. In addition, when the open is in the bottom third/quarter of the bar and the close is in the top third/quarter of the bar, it is said to be bullish, engulfing with buyers in control. Moreover, when the open is in the top third/quarter of the bar, and in turn the close is in the bottom third/quarter, it is said to be bearish, engulfing with the sellers in control.
As a side note, another definition applied for this bar, especially if candlestick charts are used in Forex trading strategy price action, is that the open and close have to engulf the preceding bars' open and close - and not just simply the high and low of the bar. With this definition, the wide range bar or engulfing bar does not need to have either a higher high or a lower low in order to qualify. In fact, the first definition possibly came about with bar charts, where it is more difficult to notice the open and close.
Price Action Trading Signal in Forex
Since markets always move, they also leave a 'trail'. This trail is a price action and it sometimes leaves clues as to which direction it is heading in next. Those clues are known under different names such as: price action patterns, price action setups, price action trading signals, and finally, price action Forex trading strategies. What a Forex trader is seeking is a price action signal to provide them with some confirmation for an entry into the market.
Forex Price Action Strategy: Trading Price Action With Confluence
Confluence is a point in the market where two or more levels intersect each other, consequently forming a 'hot point' or a so-called 'confluent point' in the market. In other words, when we look for confluent areas within the market, we are actually seeking areas where two or more levels or analysis tools are actually intersecting. It is important to exemplify a price action Forex trading strategy that involves trading price action with confluence.
A confluent level or point in the market is one that provides some weight to the trade setup. Imagine that the pin bar is demonstrating rejection of an obvious horizontal resistance level in the market, just as well as the dynamic resistance between the 8 and 21 day EMAs. Another factor of confluence in the chart can be the downtrend itself.
If you have a price action setup that is aligned with the trend, that is also considered to be a point of confluence. Returning to our example of a price action Forex strategy, we have three factors of confluence strengthening and validating the case for a short entry from the imaginable pin bar setup:
- Rejection of horizontal resistance
- Rejection of dynamic resistance
How to Use Price Action in Order to Identify a Market's Trend
Imagine a chart that has the swing highs and lows marked in both an uptrend and a downtrend. Imagine also that the price on a given timeframe is in an uptrend if it is making higher highs (HH) and highers lows (HL); and it is also in a downtrend if it is making lower highs (LH) as well as lower lows (LL). If the price is doing anything else, then it is in a consolidation pattern - i.e a range, pennant, triangle, and rectangle.
The trend is considered in place solely until the price is no longer making higher highs and higher lows in an uptrend, or lower highs as well as lower lows in a downtrend. Take into account that after a trend is broken, there is commonly a period of consolidation that is easier to observe on a lower time frame. If you practise a lot, you will be able to visualise this going on without even looking at the lower time frame.
This will be important if you wish to use Forex strategy price action. When the price is in a tight consolidation pattern, it will frequently be referred to as a chop or a sideways price movement. The moment that the price is in a larger consolidation pattern, it is said to be in a trading range with no trend pattern to the swing lows and highs.
Applying Price Action to Trade With a Consolidating and Trending Market
Trading with the trend is a general statement that frequently confuses Forex novices that have not yet discovered an effective FX strategy for trend-trading. You just need to look for high-probability Forex trading strategies in order to form with the daily chart trend. Trading in a consolidating market is best done when a market is range-bound. Tight consolidation can be traded, however, it should be performed on lower time frame charts and is best left until you are experienced and proficient at trading the daily chart first.
Knowing the basics of price action and its strategies is of paramount importance if you want to achieve success in Forex. There a lot of theories and strategies available on price action trading that can be quite useful. Your primary task is to find the best Forex price action strategy that will answer all of your needs. In addition, do not forget that there are a lot of professional price action traders that can share their experience and trading strategies with you as well.
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.