Price action Forex trading is a method that focuses on analyzing the price charts of financial assets such as stocks, currency pairs, and commodities. Because price change is the main factor that affects profit or loss, traders need to develop a strategy that analyzes trend waves to determine the optimal time to enter and exit a position.
This article discusses techniques, indicators, and price action trading secrets that will help build this strategy. You will learn all the advantages and pitfalls that will allow you to succeed and make good money, regardless of your trading experience.
What is price action in trading?
Before we get into the technical details, let's define some concepts. What is price action in Forex? Price action means the study of the movement of the price of securities, which is used by traders to determine the further movement of the market. So, the price action definition says that the basis of this trade is the analysis of the historical price, in particular the price bars containing the market opening and closing price, and high and low price levels. This research gives traders a unique advantage in making trading decisions.
Price action trading secrets
Key Forex trading tips include the following secrets:
- Use multiple timeframes. Analyzing price action across multiple timeframes can help you better understand the overall trend and potential entry and exit points. For example, you can use a longer time frame, such as a daily chart, to identify a major trend, and a shorter time frame, such as a 15-minute chart, to find potential entry and exit points.
- Identify key levels. Look for support and resistance areas on the charts as these levels are likely to influence future price movements.
- Watch for patterns on the charts. In addition to candlestick patterns, traders often look for patterns such as head and shoulders, double tops, and triangles. These patterns can also provide clues about future price movements.
- Always use stop-loss orders to limit your losses and use position size to avoid taking too much risk in one trade.
Price action trading indicators
Candlesticks are the most popular indicator for price action in Forex trading as they show the opening and closing price of the market, as well as the high and low price levels for a certain period. The color of the candle is also important. A black or red body of the candle indicates that the sellers have won the battle of the trading day because the closing price is lower than the opening price. A white or green candle body, on the contrary, indicates a victory for buyers since the closing price is higher than the opening price.
What do you need to know?
- If the next candle after the seller makes a new low, it means that the sellers are not yet ready to finish selling the market. This weakness will cause some traders to open short (sell) positions or hold existing short positions.
- Instead, if the next candle after the buyer makes a new high, it means that buyers are still willing to buy into the market. This allows some traders to open long (buy) positions or hold existing long positions.
- Fibonacci retracement levels help identify price support and resistance areas.
- The Relative Strength Index (RSI) determines where the price is in terms of its 14-period price range. When the RSI is above 70%, the price is in the upper area where it has traded for the last 14 periods. When the RSI is below 30%, the price is in the lower area where it has traded for the last 14 periods. Traders wait for prices to break out of these zones during trends to confirm trades.
Price action patterns
Forex price action patterns are formed from several candles on the chart and can provide important information about the current market situation. The most common and well-known options:
- Pin Bar
- Inside Bar
- Outside Bar
Each of these formations has its unique characteristics and can provide different signals depending on how they appear on the chart. For example, a Pin Bar indicates a possible market transition from bearish to bullish if it appears at a support or resistance level. The Inside Bar indicates the possibility of a continuation of the current trend in the market if it appears near key price levels.
How to trade using price action in Forex?
How to trade using price action in Forex using this information? You need to choose the most winning and profitable strategy. To do this, you need to decide on the price levels for entry and set a stop loss to minimize the risks. But the most significant thing is to define the goals that you want to achieve. You may be interested in short-term or long-term trading, and it is important to manage the process in such a way as to achieve profitability even in the face of market volatility. In addition (and this is critical), you must learn to manage the situation, especially when the result does not meet your expectations.
Forex price action strategies
There are several Forex price action strategies that are based on the theory that price is the most significant factor that determines market behavior. You can use these Forex strategies to manage your assets in the market. Each of them has its features, so let's take a closer look at each one.
Forex price action scalping is one of the most popular options but also one of the most difficult. To cope with such a burden that falls on a trader when they choose such a trading option, it is worth using the best Forex robots. Then, it remains only to control the situation rather than perform all the difficult and routine work manually.
Scalping is short selling in Forex trading. It is a method in which profits and losses are recorded fairly quickly, as trades usually last a few minutes or less. The main goal of such a price action strategy is to profit from small price fluctuations and trade in the direction of the trend. Most scalpers use 1-minute charts to determine entry and exit. It is best to enter a position during a pullback, when the price begins to move back in the direction of the trend. Traders look for absorption patterns to identify an entry point, such as when a candle in the direction of the trend wraps around a candle in the direction of the pullback.
A price reversal trading strategy involves looking for situations where the price tries to break through an important level but then reverses direction due to a lack of trading momentum. It often leads to sudden and strong movements in the opposite direction. To identify a price divergence, traders should look for certain signs, such as an approach to a key price area (supply, demand, or pattern breakout area), failed price momentum, and a long candle. When the price moves in the opposite direction, it opens an entry opportunity.
The swing Forex price action strategy is based on the fact that the trader takes into account hourly, 4-hourly, and daily charts to make decisions. However, short charts can be used for accurate market entry. If the price enters the supply zone, it usually exceeds the previous high. If you want to sell a stock, you can enter a trade when there is a bearish absorbing pattern or when the price consolidates and then breaks the consolidation to the downside.
Advantages and disadvantages of price action in Forex
Trading price action trends is a popular approach used by Forex traders to analyze market movements and make trading decisions. Price action trading is based on price action analysis and chart patterns. This approach does not require complex indicators or trading algorithms, making it easy for traders to understand and use. However, this approach has certain drawbacks that you should be aware of in advance.
- Performance in all market conditions
- Price action analysis can help traders identify trends, support and resistance levels, and potential price breakouts
- This allows traders to set appropriate stop loss levels and take profit targets to minimize their losses and maximize profits
- Traders can use different charting time frames, trading strategies, and risk management techniques to develop a personalized trading approach that works for them. It also allows you to use the best Forex robots.
- Different traders can analyze the same price action differently, which can lead to conflicting signals and trading decisions
- Price action trading focuses solely on price movements and does not take into account other market variables, such as economic indicators, news events, and geopolitical events
- Traders may find it difficult to distinguish between short-term price movements and long-term trends, leading to incorrect trading decisions
- Price action trading may not provide clear signals for placing a stop loss, which can make risk management difficult
The Bottom Line
Will understanding price action make your trade profitable? It all depends on how you will apply price action trading strategies in practice. Many successful traders have proven that this strategy can be profitable. However, those traders who focus only on price action charts and do not take into account fundamental factors, such as economic indicators and news, may miss key events that can significantly affect the price of their asset. Learning these strategies and identifying trends, patterns, and turning points takes time. Start with small steps; don't try to grasp everything at once. With this approach, your activity on the Forex market will bring significant profits.