Price Action Trading Explained
In the fast-paced world of forex, price action is the foundation stone for technical analysis.
Many short-term traders depend only on price action to make trading decisions.
This guide will explain what price action trading is and how you can boost your trading strategies with the price action.
Table of contents
What is price action trading?
Price action is the price data of the forex market without indicators. The analysis part is learning to read these and make a trade based upon patterns.
Price action trading is a trading method in which you base all of your trading decisions on a naked price chart.
This means that no indicators should be utilised, or at best, only a handful of moving averages to identify support and resistance levels.
As you can see on the chart above, the price action illustrates an uptrend and a downtrend. There are no indicators involved, just a simple explanation of the price movements.
A key point to note is that although global news events and economic reports impact currency prices, they are only one part of the narrative. This is because all-important announcements and economic data eventually become a component of price activity on the forex chart.
This removes the need to add indicators individually because price action displays the effect of all factors, including indicators, across any time.
All you’ll need are price action signals to build your own trading system, which will increase your chances of making profitable trades.
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Price action trading essentials
As price action trading is based on recent historical data and past fluctuations, all technical analysis tools such as charts, trend lines, price bands, high and low swings, technical levels (of support, resistance, and consolidation), and so on are taken into account according to the trader’s preference and strategy.
You may observe simple price bars, price bands, break-outs, trend lines, or advanced combinations, including candlesticks, volatility, channels, and so on.
Psychological and behavioural decisions play a crucial role in price action transactions.
For example, if a currency pair sits around 1.4080 and crosses the personally-set psychological barrier of 1.4100, you may expect a further upward advance and enter a long position.
Other traders may hold the opposite perspective — once 1.4100 is reached, they expect a price reversal and thus enter a short position.
It is wise to note that no two traders will read the same price movement in the same way because everyone has their own interpretation, set rules, and behavioural understanding of it.
In a nutshell, price action trading is a systematic trading practice aided by technical analysis tools and recent price history. You are free to make your own decisions within a given scenario to take trading positions based on subjective, behavioural, and psychological state.
How to use price action?
Price action tends to repeat in diverse patterns due to the repetitive nature of forex market participants and how they react to global economic variables. Price trading strategies are another name for such patterns. Price action patterns that repeat indicate the continuity or change in market sentiment.
Simply said, by learning to recognise price action patterns, you can acquire insight into where a currency’s price is likely to move next.
To begin trading price action, you must first remove all irrelevant data from your chart. So, remove all of the indicators and expert adviser signals, leaving only the plain price bars.
Keep in mind that, depending on your preferences, you can use traditional bar charts or candlestick charts. The ability of candlesticks to convey price data more dynamically makes them more popular than traditional bars.
After removing all indicators and unnecessary factors from your charts, you can begin drawing key chart levels and looking for price action setups to trade from. One major use of price action trading is learning how to tell the difference between a consolidating and a moving market.
Why trade with price action?
The reason for using price action is simple: the price is at the heart of any financial market. It’s similar to math. You will be unable to propose solutions if you do not comprehend the conditions of the work.
As a result, if you don’t know how to interpret a market’s price action, you’re unlikely to understand what a price chart is telling you. So, you won’t be able to trade forex using price action.
Every trader who tries to persuade you that it is easier to trade using indicators or trading software other than price action indicators is ignorant of the market’s realities. The market’s truth is that the present price is the sum of all variables associated with the market.
Limitations of price action trading
Price action interpretation is a very subjective process. When two traders analyse the same price action, it is highly common for them to draw radically opposite conclusions.
One may see it as a potential near-term turnaround, while another may see it as a bearish trend.
Moreover, the timeframe under evaluation influences how traders understand future currency price changes.
To keep in mind, predictions based on the price movement analysis of any timeframe are only theoretical.
Other tools can be used to confirm the correctness of the forecasts. The more tools you employ, the more confirmation you will receive for your trade.
Who is price action trading for?
Compared to long-term trading, price action trading is better suited for short-to-medium-term traders like scalpers or day traders.
Most traders feel that the market behaves randomly and that there is no obvious systematic way to design a strategy that will always work.
Price action trading can work wonders by combining technical analysis tools with recent price history to uncover trade opportunities depending on the trader’s own interpretation.
So, there you have it. Don’t get the notion that you will somehow succeed in forex trading without a proper and thorough knowledge of price action trading concepts.
Therefore, be prepared with as much knowledge as possible.
Heinrich is a forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best forex brokers in Africa. Join him on his Journey!
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