Understanding how the market “communicates” (and learning how to “communicate” back with appropriate trades) is the key to becoming a great trader. Price action is the language of the market.
Think back to your high school French class when your teacher was trying to talk in all kinds of crazy words while you were daydreaming about the girl in the next row. When it came time for test day, you likely didn’t do so well. Imagine your homework is studying price action and test day is trading day. You have to learn price action language in order to score well on your trading exam.
When explained in bare-bones language, price action trading is the trading technique used to read plain candlestick charts and identify patterns in order to anticipate future price movement. It is the acquired skill of reading raw price movements on which you base your trading decisions. In price action trading, a trader analyses candlestick patterns as well as the market’s reaction of price when it interacts with support/resistance levels and trend lines. It’s basically the Holy Grail of Forex.
With price action knowledge, a trader can perform a better range of analysis with no need for messy indicators. As a trader, your primary job is to manage risk. This can be hard to achieve with some other trading systems if they aren’t based of logical conclusions, don’t you just hate it when you’re guesstimating where your stop loss should go.
The price action trader can easily assess risk management by clearly identifying logical stop loss levels. In other words, when you’re trading with price action there are clearly defined levels where if price is crossed, then the trade setup is no longer valid.
Knowledge of price action is the most important resource a trader has. It’s like your trading passport. You’re not going to make it to Success City without it.
We have seen countless Forex traders jumping around from system to system becoming frustrated because they thought that last indicator they downloaded was their ticket to Easy Street. In reality, these newbies have just thrown money down the drain when the answer was starting them plainly in the face: price action.
No need for indicators anymore
Gone are the days of busy monitor screens and messy charts. The only indicator you really need is the purest indicator of them all which is the price movement itself. Traders assume that because they have obtained the newest, trendiest indicator that was endorsed by Mr. I-think-I’m –such-an-awesome-Forex-guy that they have an edge over the market.
In reality, all indicators are simply interpreting price action in the first place. They move in response to price action, not predict it. Often, an indicator won’t signal you to enter or exit a trade until it is too late. When you use an indicator, did you know you are actually receiving second-hand lagging information?
Indicators are bad for clogging up your chart template and loading up your trading system with way too many variables, so much to the point the actual candlesticks are hard to make out. Check out this typical overloaded indicator chart…
The indicators clutter a trader’s chart like some sort of Kindergarten art project gone wrong. Indicators simply cover up the price. All you need to begin price action trading is a plain price chart. There is something nice and serene about a clean, fresh chart.
Check out the chart template below, it’s the price action based template we use to trade the markets with everyday…
Now how much cleaner does that look, it really brings out the clarity in the market and you can already start to get a much better picture of what the market is really doing.
Did you know that Indicators use algorithms that feed off price action data? So it’s no surprise that most of the trading firms and hedge fund traders are using price action trading strategies. It’s time to cut to the chase and trade directly from raw price action.
Price Action trading is easy to learn
Forex trading can be simple. Let me repeat that. Forex trading does not have to be a complicated task. Many newbies often think that trading is supposed to be difficult, but it’s really not. Learning the basic fundamentals of price action trading will take you far in your Forex career. You do not have to be a Harvard PhD in Neuroscience to trade using price action.
Forex is an equal opportunity where anyone and everyone can learn to be a great trader. Even a college dropout can be successful. Imagine yourself as the next Steve Jobs genius of Forex. But, in order to embrace the possible simplicity of trading, it’s best you approach the market with a simple and effective trading strategy like price action trading.
Price action methodology is the best simplified strategy for trading available. Complex is not always better. Have you ever encountered that guy you ask for directions and regret it the moment it comes out of your mouth? All you need to know is how to get to the supermarket, and this guy is telling you to turn by the SlurpieMart on your right, if you pass the run-down yellow school bus you’ve gone too far, make a U-turn by the tree that looks like Jesus. Remember the old adage K.I.S.S. Keep It Simple Stupid. In order to get control of your trading, learn price action and stop placing bets with your trading account turning over control to the Forex robots and signal providers.
No need to trade the news
The general uneducated consensus is that you need to be really clued in with the global economics and understand the fundamental side of trading to be successful. So traders sit there and watch the economic news calendar and try to trade GDP or interest rate releases hoping to catch the volatility it causes.
News trading is very hard to execute, very stressful and has very little edge in the market. We know the news is fuelling market movements, but the movement is reflected in the price action anyway. By interpreting price action movement caused by news releases we can start to forecast future price movements.
A certain government official may stand up to present an important speech or information about a country’s interest rate may be released. These types of news events may cause price to move, and with price action trading, we capitalize on this. I am not saying trade while the market is in a frenzy during the news release, but by observing how the 4 hour or daily candle closes we may be able to spot a trading opportunity.
Build confidence in yourself as a trader
In price action trading, you will be able to build your confidence as a trader by seeing the bigger picture of what the market is doing and base your trades off that knowledge. You will be using candlestick data to base your decisions, determining logical positions for entry trades and stop loses, rather than the lagging indicators.
A price action trader can easily distinguish the difference between trending environments, ranging markets, or just a consolidating up and down mess. As mentioned, you will abandon those unreliable external tools for deciding whether a trade is a good idea or not.
Trading price action with give you experience in learning to “read” the market. It will help establish your chart reading ability until you become a skilled enough trader to just know which direction the market is going to go. It’s like developing your Forex “Spidey Sense” or exercising “Jedi Mind Tricks.” Rather than blindly jumping into the market, you will be making trades based on logical conclusions from your experience and understanding of market movement.
Price action trading signals are easy to identify
It has already been established that price action trading is much simpler than walking into the market blindfolded with indicators. The price action signals that give you an early warning sign of market movement are easy to identify.
We favour the higher timeframes because they produce higher quality signals and are less prone to noise and market whipsaws. By using the higher timeframes we only really need to spend min 15 minutes per day analysing the charts.
In the chart below we identified a potential long opportunity. One of our favourite price action setups the ‘inside day’, which is a breakout trade setup, was spotted on the AUDCAD chart. In fact there were two inside days in a row which built much more value into the setup.
An Inside day is one of the catalysts we use for our breakout trading. The idea is to catch the breakout, preferably in the direction of the trend. In the example blow on the AUDCAD chart shown, our bias was bullish with the established trend, so we were only interested in bullish positions.
The trade trigger is when price moves past the inside day setup and ‘breaks out’ of the inside day formation. We use stop orders to automatically trigger us into the trade, this way we’re not stuck in front of the computer for hours waiting for the breakout to occur.
As we anticipated a breakout to the upside did occur and the trade was triggered. The setup produced a bullish breakout which lasted two weeks…
This setup only took about 5 min to identify, plan and execute and that’s one of the beauties of trading price action setups on the higher timeframes.
There is no need to sit around wasting your days with your eyes glued to the computer waiting for signals. Market behaviour is repetitive. By observing the market’s past movements you can identify low risk/high reward signals that indicate a significant move in the market before it happens resulting in a smart trading entry.
Your risk can easily be defined with price action signals taking the guess work out of placing trade stops or trade targets.
How to trade with price action
So, you may be asking yourself, “How exactly do you trade with price action?”
There are hundreds of different price action strategies available, but as we mentioned earlier we like to keep things as simple as possible in the markets. We use candlestick signals like pin bars, inside days, outside candles, indecision candles and power candles to signal is to potential trade setups.
Price action trading begins by stepping back to gain a big picture view of the market, mapping out key reversal points on daily and weekly timeframes. A price action trader looks at historical price action reversal patterns for the market, to identify low risk/high reward trading opportunities.
We have recently been following the gold spot market, which has consistently been producing bearish price action off a falling trend line that was acting as the main turning point in the market.
These are very easy trades to identify once you know how. We combined low risk, high reward candlestick signals with key hot spots on the chart to build our trade ideas from. The candlesticks offer a great frame work for entry and stop placement so there is no guess work.
In price action trading, you will be able to easily apply principles of high risk/reward money management methods to your price action signals to ensure that your winners will always outperform the losers.
Conclusion
Bottom line, we believe price action is the clear winner in Forex for effective and successful trading. If you want to live stress-free during your trading career as well as have a life outside your computer trading cubicle, price action is the way to go. It is our “holy grail” of Forex.
Price action is foundational and nearly every trading strategy can gain some kind of benefit from gaining price action knowledge. Once you dive into price action trading you will wonder how you ever survived in trading without it.
For more information, or to expand your knowledge of price action trading, feel free to stop by our blog at The Forex Guy
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