Forex trading systems come in a variety of complexities.
It’s overwhelming for a beginner trader to find the ‘strategy (needle)’ from the internet haystack.
Today we are going to talk about price action trading, a simple strategy that you will fall in love with once you get a taste of it.
When you research trading strategies, you often come across systems based off intense mathematical algorithms, which at first look complex and attractive.
At the other extremes you see systems that are much more simplified in nature, and look too basic to actually work.
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 the simple, easy things – you’re rewarded with better clarity in your trading analysis, 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 trading from a simple chart, why it is one of the most popular strategies used in the markets today, and how it can improve your trading… fast.
Why Trade This Way?
The general idea is to identify recurring patterns that have proven themselves in the past to produce a profitable outcome.
You can then use these same patterns to forecast future price movements when they appear in real time.
We we love the simple, less involved, ‘lazy’ approach to trading here at the The Forex Guy.
Once you learn the skill of reading a plain Forex chart, you will start to really learn how the market move, and before you know it, you will be anticipating the markets next move with higher accuracy.
To get started, 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 only start to taste the sweetness of trading success, only after learning how to trade strictly off price itself.
By focusing on the candlestick themselves, 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 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.
Price Action Trading is Simple, And That Works In Our Favor
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.
The humble high school student is able to read things at the surface level and be content – not over complicating the issues by trying to understand every possible factor that could move the market at any given time. #headache
When taken at face value, the simple nature of plain charts 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 – the markets don’t discriminate.
The benefits of price action trading have transformed my abilities as a trader, and I am confident it will do the same for you.
Reading The Market Via The Candlesticks 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 simple, but traders are searching for a deep complex answer – not taking in the vital information right in front of them on the plain chart.
Check out the chart below…
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…
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 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.
Price action traders know these as ‘fakeouts’ which 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’…
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 🙂
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.
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 achieve in the long run is to 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 output 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 based signal would have likely positioned you in at the bottom of the move. I see this happen everyday. That’s why with price action trading we focus on the ‘now’ data, rather than having to rely on lagging indicator data.
Here is an example of a ‘typical’ indicator based trading strategy chart template.
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.
That’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 Forex trading system and it works very synergistically with price action trading.
The benefits 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.
Seriously, 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.
The thing is there is macro economics, and micro economics.
Sure, central bank policies are the catalyst for large trends and powerful market moves, but you can’t just trade central bank news announcements, the volatility can destroy you.
But traders sometimes get involved with the micro economics releases – which are things you would find on the news calendar at Forex Factory.
Things like unemployment figures and interest rate decisions, can produce short/medium term volatile swings in the market.
Price can 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 on of the largest economic data releases, which causes disturbing amounts of volatility in the markets. Scalping NFP is very reckless, and a quick way to Forex trading failure.
You don’t need to be ‘in tune’ with the news to trade profitably. This is actually one of the key benefits of technical analysis and why traders make to the switch to price action trading.
Most people would prefer to trade technical 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 candlestick 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. It could just as easily go the other way, and the news could explode your trade into heavenly profits.
As part of the simple trading mantra and philosophy, its better to just ignore the micro news releases.
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 technical signal on the chart you should end up basing your trading decision from.
Candlestick Signals are Easy to Identify
There is a mountain of candlestick patterns out there appearing on the charts all the time, but we’ve gone and isolated the price patterns that yield the best results.
Some are derived from our own original observations. We use these candlestick patterns to accurately anticipate future price movements like the rejection candle, and the outside candle – two powerful reversal signals.
Above are some bullish rejection candles which are simple straight forward bullish reversal signals.
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.
Here is an example of one of our trade setups, the Breakout Trap & Reverse trade.
The 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 trading setups.
Here is an example of a bearish breakout trap and reverse trade triggered on a live chart…
The chart above shows a bearish breakout trap and reverse 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.
Are you Ready To Make Your Trading Easier, Less Stressful & More Profitable?
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, they 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 simple methodologies like we’ve shown in this guide to keep your finger on the market’s pulse, and start 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 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 – and you’re interested in learning more, you might be interested in becoming a War Room Trader.
The war room contains our Forex course that was rated #1 and goes much deeper into the price action concepts we’ve talking about in this guide.
The war room also now comes with an indicator (I know that sounds ironic), but it is tool that monitors the charts for the candlestick patterns we use, and sends you mobile phone notifications when it finds a high quality pattern. To find out more, look at the Battle Station for Mt4 page.
Check out the testimonials and feedback from traders after they learned how to trade with plain charts.
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!