There are trading systems floating around that are highly complex and confusing in nature. Some require heavy mathematical interaction, while others are more simplified. Our stance at ‘The Forex Guy’ is, “simple works better” in the markets, and that’s how we approach our trading – we keep things as simple as possible. Price action trading is the skill of interpreting raw price movements and identify patterns that you can base confident trading decisions on.
Because we like the simple, easy, lazy approach to the market, it’s no surprise that we are passionate price action traders here. Price action trading is a specialized type of technical trading analysis that is the skill of reading a plain price chart to make trading decisions off.
Price action trading doesn’t require anything special, you can use any trading platform you like. You can trade price action from any location in the world and you can do it from home in your pajamas if you really want to. Price action is just so easy to get started with and adopt into your busy life. All you need to do is load up the candlestick chart and you’re ready to start trading with price action strategies.
Price action is the measurement of price movement against time and the interpretation of price behavior. It’s the single most important piece of information in any financial market, not just Forex. It’s the information which every single technical trading system is derived from, because price action is the core foundation of the markets.
Many traders only start to taste the sweetness of trading success after they learn how to trade strictly off price itself and really learn how the market behaves at its very core. By understanding price movements you’re going to become a ‘master chart reader’. You won’t need the aid of indicators or need to rely on other peoples ‘trading tips’ to make your own decisions anymore, you can be your own independent forex trader who listens to no one but yourself.
There is a reason price action trading strategies are becoming an increasingly hot topic amongst traders. It’s because they work very effectively and can be considered the ‘holy grail’ of technical trading. There is many advantages that price action trading has over the other types of forex trading strategies, let me break them down for you…
Price Action Trading is Simple
Price action trading is not hard to understand, a lot of people really believe to become a trader, you really need to have some high level academic achievements because of the misconception that trading is complicated. FALSE!
It’s not a pre-requisite to have any fancy university degrees in physics or economics to become a trader. In fact, the high school dropout has just as good of a chance to become a successful trader as a doctor, or high level mathematician would.
Due to the simple nature of price action trading, it gives everybody an equal opportunity to become a successful trader, regardless if you’re a single mum, whether you’re working full time or studying. Price action trading doesn’t discriminate; it can be learned by anyone! Hey, if I can become a full time Forex trader using price action so can you!
No Indicators are required
Price action trading only need one indicator, and that’s price itself. There is no need to add any external indicators to your chart, they are actually only going to get in the way.
Yes you read that correctly, price action trading requires no indicators what so ever. Some traders find the concept of trading without indicators impossible, well it’s not and it’s actually a much more powerful approach than indicator based strategies.
Indicators are mathematical algorithms that draw squiggly lines all over the price chart, they are designed to “help” traders analyse the market and assist in making trading decisions. Generally, all they really achieve is to confuse traders, generate bad buy/sell signals and eventually cause the trader to go into mental meltdown and burn up all the money their trading account.
Indicators hide the real price feed, obstructing the data you should be taking in. Traders believe there is an edge using indicators or other expensive third party analytic software, but there is no better edge that price itself.
The other major problem with indicators is their outputs lag, which means they are very slow to respond to price changes. It’s not uncommon for an indicator to signal you to buy the market after the entire move is already over, where a price action signal could have positioned you in at the bottom of the move. I see this happen everyday.
Here is an example of a ‘typical’ indicator based trading strategy chart template.
Now this isn’t a chart template we stormed up just to make indicator based trading look bad. This is actually a default template in the most common charting tool used by traders today ‘Metatrader 4’. This chart template was actually called ‘popular’ and it is loaded with most commonly used indicators; RSI, Stochastic and the MACD. This chart is too ‘busy’ and would be frustrating to trade with.
Now here is the price action template that we use every day in the markets.
That’s much better! Straight away this chart displays much more clarity when the indicators are removed.
This is the price action trading chart template that we use, all we need is some key support and resistance lines marked on the chart and we are good to go.
You may have noticed 2 moving averages there. These are the 10 and 20 exponential moving averages that we use to ‘map out’ the mean value of price. The mean value area is where the market generally finds ‘value’. The market considers this to be a balanced or fair price for the currency. Mean value analysis is used heavily with our Price Action Protocol trading system.
So all your really need is a stripped down, ‘raw’ price chart template to start trading successfully with price action. It’s simple, easy on the eye, and brings out the clarity in the charts, giving you a good foundation to start making low risk, high probability trading decisions from.
No need to worry about news events or economic data.
It’s common belief for non-traders (and some even some active traders), that it’s key to know what’s going on economically and keep on top of world events to be able to make sound trading decisions. Things like central bank interest rate decisions, monetary policies and keeping up to date with cross country relations.
Economic data releases, like unemployment figures and interest rate decisions, can produce crazy unpredictable volatile swings in the market. The market can move dramatically in a matter of seconds causing extreme widening of spreads (the commissions you pay) to unrealistic levels.
News event trading is unpredictable, hard to execute and can be expensive if timed wrong. Who would want to put themselves through such psychological pressure and expose themselves to high levels of stress like this.
We’ve actually come across people who try to scalp the Non-Farm Payroll release, which an economic data release that causes disturbing amounts of volatility in the markets. We’ve actually seen traders try to ‘scalp’ the NFP news release. This is beyond idiotic and this a quick way to become a trader who washes themselves out of the market.
It’s a common misconception that you need to be ‘up-to-date’ with fundamental economic releases, this is far from true. You don’t ‘need’ to know or follow any of these things to trade profitably with price action. This is actually one of the key advantages of price action, you only need learn the skill of reading the price action on your chart to make confident trading decisions and that’s it. We actually don’t even look at the economic calendar releases; if we do it’s just out of curiosity.
The news releases will create large price movements, but funny enough there is generally a price action signal before the new event. Sometimes the news will trigger your stop loss, but that’s just the nature of these news events, no one knows what’s going to happen. So, we believe it’s best to just avoid getting involved with it.
Price Action Trading Signals are easy to identify.
There is a mountain of price action setups out there that you can learn to trade with, but we’ve isolated the price action signals that yield the best results in the market, some are derived from our own original observations. We use price action signals to anticipate future price movements and use the signalling candlestick as a framework to base our trades off.
An example of one of our price action signals is the Breakout Trap & Reverse trade.
The breakout trap and reverse trade is a two candle price action formation setup, where the second candle is the trigger candle.
This particular example is a bearish breakout trap and reverse trade condition. The basic principle of the trade works like this.
First the market breaks out above the previous candle high’s, this encourages breakout trades to jump on board with the bullish momentum. However this is not the true intent of the market. The breakout collapses back in on itself and the sellers take full control. There is now less resistance for the market to move lower because all the buyers just got washed out in the initial breakout trap.
The small resistance and aggressive selling can cause explosive price movements on the chart. The trigger to go short is when price breaks out the other side of the previous candle’s range. The explosive nature of the breakout trap and reverse signal makes this one of our favorite price action setups.
Here is an example of a bearish breakout trap and reverse trade triggered on a live chart…
This chart above shows a bearish breakout trap and reverse price action trade setup on the AUDUSD daily chart.
You can see the explosive nature of this setup can generate high return on your initial risk. That’s one thing we always try to enforce in our money management plan, aim for at least 2-3 times what we risk on the trade. This is called positive money management and goes hand in hand with a good price action trading system.
As you can see price action trading is a versatile and logical way to approach trading, in our opinion it’s the most consistently profitable method used by traders in the markets today.
Most trading systems out there have an expiry date, they are tailored to the market conditions at the time. Unfortunately when the market conditions change these crude trading systems don’t work anymore and start burning up traders hard earned money. The markets are dynamic in nature, which means they are constantly changing. The great thing about price action is that it is compatible with changing market conditions. We’ve been using price action for many years and used it during strong trends, ranging markets and even through market crashes with continued success. These are the reasons why we love price action trading and will continue to use so long as the markets are available to trade.
If you would like to learn more about our price action trading strategies, or our money management models, you may be interested in joining our war room and becoming a War Room Trader.
Until next time, remove the indicators from your chart and make the switch to price action trading. Keep things simple n logical, and you will wonder how you ever traded the markets without it!