What is Price Action Trading? The Holy Grail For Forex Traders
Price action is the king of the Forex technical world.
It offers traders essential knowledge that strengthens any technical strategy, and enhances forecasting ability.
Have you ever just wanted to look at a naked price action chart and be able to tell where price is likely to move next… with confidence?
Price action is widely considered a compulsory learning step for Forex traders, as it’s the life blood, soul, and backbone of the technical analysis world.
With a serious adoption of price action analysis, a trader can be accelerated towards becoming a ‘master chart reader’ – no doubt.
Most retail and institutional traders use it, or at the very least use the skill of price action to enhance their own technical trading strategies.
Price action analysis is very dominant in the industry because:
- Price action trading methods are easy to understand
- Price action analysis is very minimalistic, so there is no ‘analysis paralysis’
- No indicators or extra data are required
- It can be a very stress free way of trading
- Consumes very little of your time once you know the strategy
- Any form of technical analysis is reinforced by the understanding of price action
- Most importantly – It works
It’s not hard to see why traders fall in love with it easily – it’s a type of trading that doesn’t care ‘why’ something happened on the chart, but more ‘what is likely’ to happen next.
This is the motto I follow: “Trade what you see, not what you think”.
If you’re keen to learn more, read on…
Price Action Explained for Beginners
Price action analysis is a big compliment to technical analysis.
The term “price action” refers to making trading decisions exclusively from a “naked” chart – a chart which has no indicators or other data loaded (which may influence the trader’s decision).
It is all about going back to basics and working with key elements on the charts like:
- Market structure
- Support & Resistance
- Channels, Ranges, Trends
- Price and candlestick patterns
- Breakouts and fake outs
All this information is readily available to us in a simple candlestick chart!
One of the main reasons traders are drawn to a price action system is because of the simplicity and minimalism.
But another major reason for the move to price action is the escape from crippling anxiety and headaches from a stressful indicator heavy system…
If you’re a new trader, you might find public Forex forums a gold mine of information, and get lost in the strategies shared in all the threads for days.
While a lot of good information is shared on forums, there are a lot of strategies being pushed that really are a headache to trade, and difficult to make work.
If you’re a frustrated trader – it’s time to hit the reset button and go back to the basics…
Price action is the study of price over time. This is called ‘time series data’. It doesn’t get any more raw than this.
With a nice clear chart, we can focus on the things that matter. Time and price 🙂
Price action encapsulates the analytical study of historical price movement and using that knowledge to find repeating patterns to help forecast future price movement.
Essentially, we look in the chart history to see what happened ‘before’ to recognize and prospect predictable, repeating patterns.
We wait for these predictable patterns to occur again in live markets, so we can forecast where the market is likely to move next – this is the basis for a price action trade ‘signal’.
Look at the price action below. We see the market continuously rejecting this support level – when bullish rejection forms off this level again, where do you think the market is likely to go?
We capitalize on this repeatable and exploitable behavior.
Because the market is driven by a crowd mentality – the same patterns keep occurring and producing the same result thanks to this crowd psychology.
Once you learn to the read the charts directly (without indicators) – you will develop the crucial skill of translating the ‘price footprint’, empowering you with the knowledge you need to transform yourself into a very confident trader.
Make the step towards increasing your understanding of price action and I promise – you will look at the market from a whole new perspective. I want you to think of reading plain charts as interpreting the ‘language’ of the market.
The charts are trying to communicate to you through the price movements, you just need to be receptive to what’s being communicated.
When you think back to your dark trading days, you will wonder how you were ever able to survive trading without the knowledge of understanding price action!
How Does Price Action Trading Work?
As we discussed already – technical analysis involves observing a security’s historical patterns and placing trades that assume the patterns will repeat themselves in a similar way.
The basic assumption is that history repeats itself, because of the herd mentality of the market place.
But price action is more of a methodology rather than a term for a singular strategy. There is no ‘one way’ to trade it, in fact there are many.
Well you really start to dig in, it seems like there are endless ways to evaluate price action. I think this diversity is what draws in so much of the trading community.
Forex price action is more of a mix of art and science – a skill based system that makes it very subjective.
You could give two traders the same price action strategy, and they would both probably personalize them to their own way of evaluating the market.
But the process still remains the same. We use what information we have on the chart to establish a directional bias, and wait for signals to confirm our belief.
As a technical, or even a quantitative analyst, it’s your task to look at current price behavior and compare it with past behavior.
The comparison of what’s happening now vs. the history of price behavior can arm you with the knowledge needed to accurately forecast future price movements – this is quantitative analysis 101.
The same price action candlesticks and patterns occur repeatedly, and tend to produce the same reaction over and over again. This is exactly the type of behavior we want to exploit.
By learning these recurring patterns – we gain a statistical edge needed to become profitable over the long run!
Some price action nuances to consider are:
- The behavior of the market you’re trading
- What session the signal/event formed in
- The structure of recent price action
- If the market is at a major decision point or not
Take a look at an example trade below. We are looking at a bearish rejection candle that forms off a lower high.
A very simple sell signal – no complicated analysis necessary.
I know from my experience in the market, when we start to see weakness off lower highs after clear a bounce off a weekly resistance, the market is likely to continue with it’s downtrend…
Paying attention to historical movements vs ‘the now’ can make a life or death difference in helping you forecast future price movement.
If you want to trade price action like a boss, study the chart history, collect data. Know your signals in and out – you will be able to trade with a high degree of accuracy and confidence.
You would be surprised how many times these kind of price action events allow you the opportunity to position yourself ahead of the moves.
Price Action Vs Indicators
Because we are very analytical creatures, indicators draw on our temptations.
An indicator usually visualizes one aspect of price action, or many combined together.
You would be surprised how many ways you can get data from price action, therefore we have an endless supply of indicators – extending into the thousands.
They draw on the ‘shiny new object’ syndrome – giving us a new ‘special’ way to view the market.
While my feelings are mixed these days about indicators, the truth is ‘lost’ traders tend to pile the indicators onto their charts, overloading their brain with too many inputs.
Or another common symptom is the ‘pogo stick hop’ from one indicator to the next – chasing the ‘shiny new object’, hoping the next will be the ‘one’ to bring endless riches.
That’s why I generally discourage traders from using indicators and to first become good with reading price action instead.
It is my belief that most traders fail with indicators because they don’t really understand the data that is being represented.
Most traders are looking for the ‘buy on green arrow, sell on red arrow’, no thinking required kind of tool. But most of those are usually deceptive by ‘re-painting’, or produce really low quality signals.
Whenever you’re using an indicator, you should really make an effort to understand how it’s calculating its data so you can interpret what it is meant to be telling you.
Lets look at the Relative Strength Indicator as an example. I am going to show you how to read the same information the RSI tells you, directly from the price action.
The RSI is really simple. In simplistic terms: it counts how many bullish candles, and bearish candles there were during the calculation period (how many candle’s it looks back at in history).
That number is converted to a ratio and printed as the final output. Basically a 0-100 number of a bull vs bear candle ratio.
A 100 output would mean only solid bullish candles were found in the calculation period – which is super rare.
You can see when there are more bull candles counted in the calculation period, the number will be higher.
But what about divergence? This is the part of the indicator that traders find mystic and powerful…
The divergence is occurring because the price action is still making new highs, but the RSI is reflecting less bullish candles being printed. Is this really magic?
No – take a second look at the chart with the RSI out of the picture…
Although the market was officially printing new highs, they were not much higher than the previous – this is a statement of weakness from the price action.
Also, the momentum of the bullish trend has completely died off, and you can see price has now just stalled by drifting sideways – not a sign of weakness, but a sign the market has lost momentum.
When you think about this logically, it is easy to see why the divergence occurred. The RSI was weakening because of the sideways price action.
You only need to look at a plain candlestick chart and examine the swing highs/lows, and look at price momentum to spot strength and weakness in the market without using an indicator.
It’s not magic, and I really think the RSI is pretty useless in today’s markets.
I believe ditching the indicators like the RSI, and learning to read the information from the price action itself will make you a much better technical analyst.
You will also have the benefit of cleaning up your charts!
Some indicators out there may be more complex, and viable to use – especially now we move into the age of big data, and machine learning.
But most of the common indicators just give you second hand information that you can already get from looking at the chart properly yourself.
Want to Learn More About Price Action?
If you’ve made it this far, you’ve probably gotten a clearer understanding of price action trading.
You should be starting to realize by now that a price action based approach to Forex trading is a very powerful and lucrative skill to invest the time in learning.
Any trading system that has a price action based methodology as its foundation is probably going to be around for the long term too.
I hope the guide here has been a nice ‘kick starter’ into your journey.
The price action I explained here is only the tip of the iceberg.
If you’re one of those ‘hungry for knowledge’ types, you might like to move on to my tutorial which takes things to the next level: examining price action strategies further.
However, if you’re really serious about learning price action, and want to dedicate yourself to learning everything, check out our Forex course – in my private war room for traders (which also contains all my custom MT4/5 tools).Don’t forget to leave your comment below, your feedback on these tutorials is important to me and gives me the positive motivation to make more tutorials like this.
Look forward to hearing from you, best of luck on your new price action journey!
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