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There is more than one way to approach Forex trading. For example, some Forex traders make use of indicators. Others turn to various aspects of technical analysis such as seasonality. Also, among the many different trading types is price action Forex trading.
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The concepts behind price action trading are quite simple. However, some traders avoid this form of trading because they believe it is complex, requiring a lot of technical analysis.
But price action Forex trading is simply one method of technical analysis. With this method of trading, a Forex trader simply reads the market, looking for recent as well as historical price movements.
In other words, price action traders rely solely on price instead of on technical indicators or other technical analysis trading tools. Additionally, a major difference between price action trading and other forms of Forex trading is that it is just the price that forms the basis of the trader’s decisions.
Therefore, price action trading is subjective, especially as compared with other forms of technical analysis. Basically, there are no set rules. Therefore, it is possible that no two Forex traders would interpret the price in the same way.
Basically, Forex traders use price action in real time to predict the market’s next moves. This is chiefly what distinguishes price action Forex trading from technical indicator trading.
Indicator-based trading, on the other hand, reacts to the market. Traders who rely on technical indicators will enter a trade only after the indicators trigger a trading signal.
What Tools Do Traders Use in Price Action Trading?
There are lots of different ways to analyse the markets. And because price action Forex trading is subjective, even traders who use similar price action tools might interpret the price chart differently. Moreover, no one has yet come up with a mechanical trading system that is useful with price action Forex trading.
However, Forex traders who rely on price action trading do have some tools they can use. For example, price is obviously the most important variable in price action analysis. In other words, price itself is the key factor in this form of trading.
In addition, traders who use price action trading also turn to other tools, including:
Candlestick Patterns
Many traders, including price action Forex traders, rely on patterns they discern in the candlestick chart. There are many candlestick patterns. However, only a few are commonly recurring. These patterns help price action traders predict what the price will do next.
Chart Patterns
Technical analysis is about analyzing past price history to predict future price movements. Therefore, price action Forex traders analyze certain repeating patterns in the chart. For example, say the price moves into a consolidation phase after a strong rally. Then, based on the evidence, a trader might assume that the price would resume its previous rally.
There are many other chart patterns as well. For example, there is the head and shoulders pattern. Also, there are patterns called double tops and bottoms and more. The patterns get their various shapes from the overall sentiment of the market at that particular moment in time.
Support/Resistance
Support and resistance form the basis of price action. Regardless of the methods a trader uses, the price of any security tends to respect the laws of support and resistance. These terms are also referred to as supply and demand. Price action Forex traders rely heavily on support and resistance to draw their conclusions.
Which Traders Use Price Action Trading?
Primarily, it is speculators and day traders who use price action trading. Additionally, there are some other Forex trading strategies that are based on price action techniques. Interestingly, price action can be applied to almost every security, not just Forex.
A unique aspect of price action trading is that a trader can design and develop their own custom trading system. However, many traders might wonder about the pros and cons of price action trading. Can this form of trading allow a trader to make headway in the markets?
The answer to this question is that price action trading is only one of many ways to analyze the Forex markets, and no one has yet proven that it can give traders an edge.
Finally, Forex trading is all about managing risk while striving toward consistent profits. And price action trading is just one of many avenues toward that goal.
