The Power of Price Action and how it can Transform your Trading

benefits of price action trading candlestick coverForex trading systems come in a variety of complexities. On one end of the scale you, see strategies based off intense mathematical algorithms while at the other end you see systems that are much more simplified in nature.

Eventually, you will come to realize that keeping things as simple as possible in the markets is a much more effective way to trade.

If a strategy seems difficult or complicated, then you’re most likely going to get frustrated and abandon it.

When you focus on keeping trading as simple as possible, you’re rewarded with better clarity in your trading, allowing you to finally move forward instead of feeling like you’re ‘running fast but getting nowhere’.

In this article we will discuss: the benefits of price action, why it is the most popular strategy used in the markets today, and how it can improve your trading.

 

What is Price Action Trading?

naked price chart tradingIf you’re unfamiliar with price action trading – it’s basically the skill of interpreting raw price movements from a naked chart, and identifying patterns that you can use to forecast future price movements to base confident trading decisions on. We are passionate price action traders here because we love the simple, less involved, ‘lazy’ approach to trading.

Price action trading doesn’t have any special requirements that you need to get started – trade using any trading platform you like, from any location in the world. If you really wanted to, you can trade from home in your pajamas. You just need to be able to read a plain Forex chart and use the price movements to anticipate the markets next move with high accuracy.

Getting started isn’t a hard task either. All you really need to do is load up a simple candlestick chart, clear off any unnecessary ‘extra’s like useless indicators (some charting platforms load a lot of indicators onto their default chart template). Once you’ve done that, you’re pretty much ready to get started.

Many traders start to taste the sweetness of trading success, only after learning how to trade strictly off price itself. By focusing on the price action, a trader can learn how the market behaves at its very core. Trading from raw price movements will eventually transform you into a ‘master chart reader’.

There are many reasons why price action trading strategies are becoming an increasingly hot topic among traders. It’s because they work very effectively and are often considered the ‘holy grail’ of technical trading. I’ve already highlighted some of the benefits of price action trading above. Read on to learn more about the benefits that we enjoy as price action traders…

Summary

Price action trading is a methodology that you can use to read simple, naked price charts and interpret what you ‘see’ to anticipate future price movements. Price action strategies are the most popular and some of the most profitable trading strategies used by all tiers of traders.

 

Price Action Trading is Simple

The concept of price action trading is not hard to understand at all. A lot of people mistakenly believe that to become a professional trader you need to have a degree in commerce, mathematics or economics.

This is due to a huge misconception that Forex trading is complicated. FALSE!

It’s not a prerequisite to have any fancy university degrees or other qualifications in any special fields to become a trader. In fact, the ‘high school dropout’ has just as good of a chance of becoming a successful trader as any doctor, engineer, or physicist would.

Actually, the high school drop out probably has a better chance to succeed in the market over a seasoned mathematician, because the humble high school student is able to read things at the surface level and be content, and not over complicate the issue by trying to understand every possible factor that could move the market at once.

When taken at face value, the simple nature of price action gives everybody an equal opportunity to become successful with trading.

Regardless if you’re a single mum, studying full time, or even have a day job. Price action trading doesn’t discriminate, it can be learned by anyone and fit well into your busy lifestyle! The benefits of price action trading have transformed my abilities as a trader, and I am confident it will do the same for you.

benefits of price action and how it is a simple trading method

Summary

A lot of people believe trading needs a complicated approach before you can gain any sort of advantages in the market – whereas the opposite is true. Traders who use complicated trading systems burn out quickly, and self-sabotage their trading out of frustration. The simple nature of price action trading strategies allow even the high school dropout to have an excellent chance at succeeding in the market.

 

Reading The Market Via The Candle Sticks Only

You would be surprised what sort of information the basic candlestick chart can offer.

I get questions from traders everyday – How do I determine the trend? Which way is the market moving? Where are the important support and resistance levels?

These are entry level questions, and the answers are straight forward – but traders are just looking too deep, and not taking in the vital information the charts are offering.

Check out the chart below…

bullish trend basics

By observing the swing highs and swing lows you can read a lot about the market direction. This might seem like Micky Mouse kiddy school stuff, but a lot of Forex traders seem to skip over this simple data, and are continuously looking for deeper explanations where they can’t be found. All the information is right here – don’t ignore what the chart is trying to tell you.

A bearish market is just a mirror image…

bearish simple trend

In the chart above, the bearish moves are stronger than the bullish moves in the market – showing bearish dominance and pushing the chart down through lower lows and lower highs.

The other type of market environments are ranging markets, where the swing highs and lows are all contained between too major boundaries. The market is consolidating in a ‘sideways moving’ pattern until the boundaries are breached.

ranging market simple

Ranging markets are also easy to identify, it’s just two levels that the market is ‘trapped’ between. Sometimes you will see the market try to breakout of range like in the chart above, but they can often fail and price just falls back down and gets caught up in the range again.

These are commonly known as ‘fakeouts’ and trap many traders into bad positions. Eventually the market will breakout of the range, and when it does the breakouts are usually quite strong.

There is a common rule of thumb that a range breakout length will equal the height of the range itself.

Sometimes the market is just not readable and there is nothing more to it than that, but traders have a tendency to try and understand ‘everything’ and will try to make sense of ‘noise’…

don't try to understand a messy market

This is the gold market mid 2015 – its a very noisy and hostile market. There is no structure here, no trend or range that is clearly definable. What see are looking at is mostly randomness and noise as the market churns away here.

Don’t try and navigate these waters, it’s a ‘no fly zone’ and you should take it as that, and move on. A lot of traders lose their hard earned profits trying to trade in dangerous conditions like this one.

You need to be able to read, and anticipate the market before you can trade with a statistical edge – there is nothing to see here, please move along 🙂

Summary

A lot of traders struggle with simple chart reading because they try look too deep into matters rather than read the chart for what it is. By focusing on the swing highs and lows you can determine trend direction, or lack of. If you can’t read the chart – Stay Out!

 

You Don’t Need Indicators to Make Profitable Trading Decisions

One of the largest benefits of price action trading is the fact you don’t need to worry about indicators to get your trade signals. You only need to concern yourself with one indicator, and that’s price itself!

Introducing external variables like indicators to your chart template will in most cases work against you. You will be surprised how many time they actually get in the way of your trading, rather than doing any good.

indicator nightmare

Some traders find the concept of trading without indicators impossible. Let me reassure you that it’s not, I do it everyday and the difference is night and day. Trading without indicators or other colorful chart tools is actually a much more powerful approach to the markets. Remember what I said before, “simple is better”.

When you dumb it down – Forex Indicators are basically mathematical algorithms that draw squiggly lines all over the price chart. Their function is to “help” traders analyse the market and assist in making trading decisions.

All they really manage to do is confuse & frustrate traders – you’re most likely nodding your head agreeing with me here.

When traders look at indicator data, they tend to come up with exotic analysis that is disconnected with what’s really going on in the markets. Indicators are notorious for generating bad buy/sell signals, especially in rough market conditions. Eventually, the trader goes into ‘mental meltdown’ and sadly burns up their trading account.

Indicators hide the real price feed, obstructing what you should really be focusing on. Many traders believe there is an edge using indicators and other expensive third party analytic software. The truth is, there is no better edge that analyzing raw price movements.

Another common ‘flaw’ in indicator design is their outputs lag. Indicators are renowned for their slow responsiveness to price changes. It’s not uncommon for an indicator to signal you to ‘buy the market’ after the entire rally is already over. A price action based signal would have likely 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.

default indicator chart template in metatrader 4

Just for the record – this isn’t a chart template we conjured just to make indicators look bad. This chart is actually a default template in the most common charting tool used by traders today, ‘Metatrader 4’. The template name was actually called ‘popular’. As you can see it’s loaded with the most commonly used indicators; RSI, Stochastic and the MACD.

This chart is just too ‘busy’ and would be a frustrating environment to trade in. Have a look at the chart template shown below. It is the template that we use every day in the markets.

the benefits of price action trading forex guy chart template

excited faceThat’s much better! Straight away, you can see the difference in clarity. When the indicators are removed it’s much easier to interpret what’s really going on with the market.

This is the exact chart template that we use in our everyday trading. The next step would be to mark some support and resistance lines on the chart, and we are good to go.

You may have noticed 2 moving averages on my chart template. These are the 10 and 20 exponential moving averages used 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 and it works very synergistically with price action trading.

The benefits of price action trading with this sort of clean chart template are clear. It’s simplified, easy on the eye, and brings out the clarity in the market. With this arrangement, we can really start to build a good foundation where low risk, high probability trading opportunities are easily identified.

Summary

Most newbie traders pack their charts full of indicators thinking it gives them some sort of unfair advantage. Indicators are designed to be helpful, but only seem to cause confusion, frustration and anger with the markets. You will find much more serenity and clarity with a naked price chart and be able to trade in a more stress free manner.

 

Forget the News

Many people believe 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.

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.

The bottom line is news calendar event trading is unpredictable. During during an economic data release, a trade order is very hard to execute, and can be expensive if timed wrong.

Traders who engage in this type of trading put themselves through negative psychological pressure and high levels of stress.  We’ve actually come across people who try to scalp the Non-Farm Payroll. NFP is the largest economic data release which causes disturbing amounts of volatility in the markets. Scalping NFP is very reckless, and a quick way to Forex trading failure.

news trading danger

You don’t need to be ‘in tune’ with the news to trade profitably with price action. This is actually one of the key benefits of price action and why traders make to the switch to price action trading.

Most people would prefer to trade price action data from the charts to make confident trading decisions instead of stressing out over what the news is going to do. We actually don’t even look at the economic calendar. If we do it’s just out of curiosity.

The news can be a catalyst for large price movements.

The beautiful thing is, there is generally a price action signal that will get you into a trade before the news event. Sometimes the news can work against you, and trigger your stop loss, but that’s something out of your control. We believe it’s better to be ignorant toward the news and focus on the candlesticks.

Some traders like to understand the larger fundamentals of the market, like the stance of central banks and the policies they are implementing. This can be helpful in forecasting longer term trends, but it’s always a signal on the chart you should end up building your trade idea from.

Summary

Some traders follow and trade the news with suicidal levels of risk. Unseasoned traders chase the Forex news calender events generally for an adrenaline rush – but it’s not a viable way to trade long term. Long term fundamentals are great to keep on top of, but generally there will always be a price action signal to usher you into a trade.

 

Price Action Trading Signals are easy to identify

There is a mountain of price action setups out there, but we’ve gone and isolated the price patterns that yield the best results.

Some are derived from our own original observations. We use price action patterns to accurately anticipate future price movements and target single candlestick patterns, like rejection candles as the framework to build our trades off.

bullish rejection signals

Above are some bullish rejection candles which are simple straight forward buy signals when reading the chart using a price action approach.

By lining up strong looking rejection candle with important areas on the chart you can build a high probability, low risk, high reward trade setup.

range trade signals

Here is an example of one of our price action signals is the Breakout Trap & Reverse trade.

breakout trap and reverse simple exampleThe breakout trap and reverse trade is a two candle setup. The second candle is the ‘trigger candle’. This particular example is a bearish breakout trap and reverse trade setup. The basic principle of the trade works like this.

First the market breaks out above the previous candle high’s. The initial breakout encourages buyers 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 less resistance for the market to move lower due to the fact all the buyers just got washed out in the initial bullish breakout trap.

Price likes to follow the path of least resistance.

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…

benefits of price action audusd breakout trap and reverse trade live example

The chart above shows a bearish breakout trap and reverse price action trade setup on the AUDUSD daily chart.

Notice the explosive price movements from this setup. This is how we can generate high return, from low initial risk. This concept is the backbone of all our money management plans. We like to aim for at least 2-3 times what we risk on the trade. We call this concept ‘positive geared money management’, and it marries well price action trading system.

Summary

Price action signals are really easy to identify. You don’t have to sift through complicated charts or grind mathematical data, just simply ‘read’ the chart and let the candlesticks communicate to you where the market wants to go. By lining up price action signals with important areas on the chart – you can build high probability, low risk, high ROI trades that continuously keep repeating themselves on the chart over and over again.

 

Are you Ready To Make Your Trading Easier, Less Stressful & More Profitable?

breaking bad cashAs 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 have an expiration date. They are generally tailored to the market conditions at the time making them obsolete when market conditions change.

You’ve got to remember that markets are dynamic in nature, they’re always changing and adapting. Robotic, or rigid strategies which break when bent don’t survive when the market changes.

By learning the skill to read naked price charts – you can interpret what the market is doing, where it is going, and use price action methodologies to keep your finger on the pulse and make confident trading decisions.

We’ve been using price action for many years, utilizing it mostly during strong trending conditions, ranging markets and even through market crashes with continued success. The benefits of price action are the reasons why we love it so much and will continue to passionately trade it – so long as the markets are available to trade.

If indicators are making your nose bleed, or you want to move away from the very stressful news trading scene – you can learn how to trade with price action in our advanced price action course that you get access to by becoming a War Room Trader.

I’ve helped many traders familiarize themselves with price action trading, and it’s usually the first time they see any success in the market after jumping around from system to system. Go to the War Room Information Page and check out the testimonials and feedback from traders after they learned how to trade with price action by studying the price action protocol course.

I hope this article has been an eye opener for you, and made you realize there is a better way to go about your trading. If you enjoyed this article, please share using the buttons below. Cheers to your future trading success!

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