Price Action is the one changing factor that turned my trading from inconsistent, to consistently profitable.
In this article, I want to introduce you to the main elements of Price Action, and the importance of ensuring you have a strong understanding of Price Action Trading.
What is Price Action?
Price Action or Price Action Trading, is the art of making your trading decisions based upon reading the price movement on the chart. This is usually done without any indicators, the only thing that really should be on the chart is your Support and Resistance areas.
Reading Price Action is about having a clean chart setup, similar to this:
A lot of traders are looking at charts that look like this:
Now remember by ‘Action‘ in Price Action, we are referring to the movement of price on any given chart. Remember, every single chart tells the story of a battle between the Bulls (the Buyers) and the Bears (the Sellers). This is what every single chart shows (Forex or otherwise), what influences the movement of price is traders making trading decisions (manual or automatic).
Price Action shows you the most up to date market sentiment, because it’s happening right there in front of you. Using indicators are often lagging, which is why you will sometimes enter a trade based upon an indicator, only to have price turn against you almost immediately. (Never go in to a trade ‘hoping’ it will go well, we are looking for high probability – low risk trades.)
Price Action = Trading the CAUSE
Once I understood this, it was a real penny drop moment. I had been trading the EFFECT of price movement, which is why I had been inconsistent. Price Action trading meant that I could trade the cause of price movement and get in on the potential move very early on.
The following picture explains this in a bit more detail:
The Chart shows two points; ‘A’ which represents Traders Decisions and ‘B’ the actual movement of price. If you had to choose which trade entry to take would it be ‘A’ or ‘B’? It would obviously be ‘A’. You are entering the trade far earlier and so securing far more profits.
We can not trade ‘A’ unless we are trading Price Action, that is if we are reading the charts in real time to identify potential trades. The trader entering at ‘B’ may have entered off an indicator, getting in only when price has moved significantly in the given direction.
How to trade Price Action
And so we come to the main question: How do you actually trade Price Action? Well, there are four main elements to trading Price Action:
On the surface this may seem incredibly overwhelming, but once you start to trade whilst incorporating these into your trading activity, you will see that they are actually straightforward.
We wont go into detail here because:
a) This only serves as an introduction to Price Action and the last thing I want to do is overload you with information, let’s keep it simple!
but more importantly b) Each of these four elements are dealt with in detail in the Forex Beginner Course, so please do check them out.
But just for continuity let’s look at what we mean by these in reference to Price Action Trading.
(1) Fundamental Analysis
This is extremely important, always keep an eye on the global economic news, remember we are trading Forex, Foreign Exchange. We are trading currency pairs, there are going to be certain global economic news events that will have an effect on the movement of price
You can keep up to date on all the latest global economic news events, by using our Economic Calendar. No Price Action trader, should be without it.
(2) Technical Analysis
Technical Analysis in Price Action Trading, is recognising certain patterns on the chart that may give an indication for a potential trade. Remember the charts are subjective, the reason they move in the way that they do is because of traders making trading decisions.
Traders will look at a chart and see that in the past price moved sharply down from a certain area, price is now reaching the same area and so they look for the same thing to happen. As Human Beings we are always looking for patterns and similarities.
So, Technical Analysis is immensely important in understanding and identifying potential trades. We look for those potential trades at areas of Support and Resistance.
(3) Support and Resistance
Support and Resistance are those areas on the chart where we believe there are heavy influxes of Buyers (at Support) and Sellers (at Resistance). These are our areas of trade opportunities, as they offer the highest probability – lowest risk trades.
We must put all this together by adding the final element of Price Action Trading, the art of reading the candles otherwise known as Candlestick Analysis.
(4) Candlestick Analysis
Candlestick Analysis, as the name suggests is analysing the candlesticks. We do this candle by candle in order to ensure we are aware of the latest, the most up to date and therefore the most accurate market sentiment. This is why trading the higher time frames, is key because it shows us Price Action that spans a larger amount of time. If you had two candles, a 5 min candle and a 12 hour candle, the one that would be of more importance would be the 12 hour candle, because it represents a longer period of Price Action.
Click the Candlestick Analysis link for more detail on this vital element of Price Action Trading.
So, there you have it a brief introduction to Price Action. Study it, master it and share with other Forex Traders.