If you are a currency trader, then it is important to know what is price action in Forex. Price action trading is the discipline of making all of your decisions in trading from a clear price chart. This implies that no lagging FX indicators are present, except perhaps for some moving averages that may help to determine dynamic resistance and support areas, along with trend direction as well.
In addition, all financial markets create data about 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 to trade the market successfully. All economic data and global news that causes price movement within a market is eventually reflected via price action on a market's price chart.
As a market's price action reflects all variables influencing that market for any given time period, exploiting lagging price indicators like MACD, Stochastics, RSI and others can be a waste of time. There are traders who will 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 and assisting in predicting its future movement with a high degree of accuracy in order to grant you a high-probability trading strategy.
In this article we will take a closer look at price action and what it represents in Forex, and explain the basic rules and approaches of price action trading.
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 off 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.
Above, we touched the topic of price action trading strategies. We should admit that they form because price movement in markets has 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, 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 common sense can be enough. Additionally, by combining price action setups with hot points in the market, such as core resistance and support levels and dynamic resistance and support levels, you can learn to pick sniper accurate entries that give you 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. We do however suggest traders concentrate their efforts on trading higher time frames first, with the main time frame being the daily chart.
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 solution. 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 (or other source) who tries to convince you that it is easier to trade off indicators or trading software than price action, 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. Thereby, 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 these things make them sound like the 'holy grail' of Forex trading.
To understand Forex price action explained, it is important to understand 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 just temporary. By learning price action, you are giving yourself a better chance at Forex trading success.
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 make it your own. A lot of traders jump from one strategy to the next without really giving each the attention it needs. Moreover, specialists in any field are typically the people making the majority of money, not just ordinary people who know a little bit about a lot of things. Therefore, try to truly master one setup prior to moving on to the next one.
The second one point is that you have 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. Such traders have accomplished the first point we mentioned, and thus it is great if they can 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.
Beside 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. In addition, after you master a successful price action strategy and concept, you should eventually have no doubt on what you are looking for in the market. Forex is something where you need demonstrate your patience, wait for the ideal price action setup to come into view, and then trade it flawlessly.
It does not really matter what strategy or system you end up using. Knowing how to read and trade off price action will improve it, even if you don't focus solely on trade price action strategies. If you want to trade successfully, knowing how to trade price action and how to use price action Forex trading indicators is imperative.
You have to understand all the price dynamics in the markets, there is simply no way around it. Do not deceit yourself by believing you will somehow succeed in currency trading without an appropriate and thorough knowledge of price action trading concepts. Thus, be armed to the teeth with knowledge. Do not forget that successful price action traders can become your best mentors - and that they can teach you some valuable lessons.