No, don’t take it literally…it means you trade what you see based on price action without or with very minimal use of forex indicators.
PRICE ACTION TRADING DEFINITION
What is Price Action?
Definition: Price action trading means you are making all your trading decisions based on what you see on your forex trading charts just based purely on price action…which means just candlesticks or price bars. This means there is very minimal use of lagging forex indicators and the only exception is that you may use one or two moving averages basically to help you identify dynamic support and resistance levels and trend.
Forex markets, like any other financial market, price is displayed on price charts over varying periods of time. When you see those price on your charts how it has traveled in the past, whether it has gone up or gone down, it only tells you one thing:
- price charts reflect what the market participants believed and what actions they took trading the market during a specified period of time and this is seen on the price chart in the form of price action.
Occasionally, you will have global news events and the economic news that will move the forex market but regardless of that, all that information will is ultimately reflected with price action on a price chart.
So this essentially means that if you are using lagging forex indicators like the MACD, stochastics, RSI and others then its like just you getting a nice clean shirt freshly, throw it down on the dirt make it dirty and then wear it and think that it is clean!
In price action you pretty much have all the trading signals you need to create and develop trading strategies. Any forex trading strategy that is a result of price action signal is called a Price Action Trading Strategy.
So with price action, you see what and how the market has reacted in the past and predict how price will react and move in the future.
PRICE ACTION TRADING MEANS CLEAN CHARTS OR WOULD YOU LIKE A MESSY CHART?
If you went looking to buy a house and the first one you saw was modern, lots of room, spacious, has a refreshing feel about it and then you checked the second house out and even though it was a modern house, it felt confined, did not look spacious and it just didn’t feel right…
Which of these houses would you have chosen?
Obviously the first house.
The same thing applies to trading with price action…now look at these two forex charts below and tell me which one would you like?:
Forex Chart #1: Clean
Forex Chart #2: Messy
Now, which chart would you choose?
Notice also that one the second forex chart, you are sacrificing some space on the chart to give to all those forex indicators on the bottom of the chart…thus making them look more prominent on your chart and reducing your attention from the natural price action of the market which are the green and red candlesticks on your charts!
If you really think about it…the first chart is much easier to analyze and trade from and everything there is purely price action.
The second forex chart, all the indicators or almost all are derived from underlying price action, which means all are calculated based on underlying price which essentially means when you add all these other indicators on your chart, you are creating a derivative or other variable to the price action which unfortunately reduces the raw power of trading natural price action.
SOME EXCELLENT EXAMPLES OF PRICE ACTION TRADING STRATEGIES IN ACTION
Now, there are some excellent price action trading strategies that I’ve listed here for you to learn. I will give chart examples of trades that could have been highly profitable as well as trade setups that have failed because remember that not ever trade you take based on price action trading strategies will be a winner.
I’m not here to preach to you that price action trading is the holy grail of trading…far from it.
Here’s another one…
And this…pin bars (gotta love em!)…
PRICE CHART REFLECTS ALL THE EMOTIONS AND BELIEFS OF TRADERS ALL OVER THE WORLD
When you see a price chart, all the emotions and beliefs of the traders all over the world is reflected there-on that price chart or on each individual candlestick that forms at any given time.
What does this mean?
It means that if you see lots of red candlesticks and only a few green ones once in while, it means only one thing: there are lots of forex traders that have a strong belief to sell and the combined result of all that belief is that the market is currently in a downtrend and the price action (right now) is reflecting that belief.
WHAT MAKES UP THE PRICE CHART?
When you open up your trading charts, what do you see? Red & Green candlesticks Right? Or Blue and Red Candlesticks…
Or if you are fan of bar charts, red and green bar charts.
Generally, if a candle is green, that means that the price closed higher than its opening price. If a candlestick is red, it means the exact opposite.
Now, why does a candlestick close as red or green? What is the underlying factor that causes these changes in price which results in a candlestick turning red or green?
Answer: buying and selling…its all about the simple economics of supply and demand.
To further understand price action, there’s something called the order flow…
WHAT IS ORDER FLOW ANYWAY?
Order flow refers to all these transactions that are causing the market to flow. That means all the market order, limit or stop orders cause this order flow.
Price only moves when there is an order flow. In simple terms, price action is the result of order flow. No oder flow=No price action
Now you may be wondering, what if Ben Bernanke makes and economic announcement? Doesn’t that make the market move resulting in price fluctuation?
Actually no and here’s why: none of that announcement makes the market move, its the execution of the transactions(orders) in the market that causes price to move.
WHERE WILL PRICE MOVE? UP , DOWN OR SIDEWAYS?
The direction of price movement depends largely on the balance between buyers and sellers and secondly, the volume (the size of the position). Which simply means that:
- if there are more buyers than sellers, price goes up.
- The exact opposite if there are move sellers than buyers.
- if the number of buyers and sellers or the volume/size of orders balance out, this would create a range-bound environment.
In terms of volume (or size of position) it it a well known fact that Banks and Financial Institutions can open transactions with a multimillion dollar positions (big volume/size trade) that can significantly influence the direction of where price moves.
We individual forex traders would like to think that we impact the forex market with our orders but we are a tiny fish in the massive currency trading ocean.
As a matter of fact, it is the big banks and the big financial institutions that have the deep pockets that move the market with their orders.
The role of individual forex trader is to piggy back or jump in and take the trades in the direction where the these large banks and financial institutions taken their positions.
PICTURE THIS…
There is a freight train travelling at 100km per hour on a straight railway track, can you be able to stop it? Are you able to stand in front of it? Or if you placed something(an obstacle) in front of its path, will you be able to stop its momentum?
You know what? The train will go right through as if nothing was there!
This is a good explanation of Order Flow.
Determining where these massive order flow happens because of these big banks and financial institutions are taking positions is a skill every forex trader should learn to develop. In its truest and simplest sense, its simply means to trade with the trend.
HOW DO YOU DETERMINE ORDER FLOW?
So You Can Piggy-Back on the Price Move Created By The Big Banks?
The answer is in your charts. You go and do a research and try to find out where the big moves in price action occur. I can bet you that they will occur mostly around:
- levels of horizontal support and resistance
- levels of diagonal support & resistance provided by trendlines
- pivot &Fibonacci levels
Other forex traders may have their own trading strategies to determine the optimum points of entry during the order flow.
But you see the real issue it your cannot really tell when there’s going to be a big move or not. The only thing that can help you with that is just using naked price action trading.
Now, here’s the thing about price action…when price moves up and down the price chart, it creates levels of prices where either buyers come in and push the price up (support levels) or sellers come in and push the price down (resistance levels).
Regardless of how much information or how complex you want to get to so you can learn about price action trading, there are only one thing price action tells you:
- price action tells you who is in control of my market the bears or the bulls at any particular point in time (based on one single candlestick) or a a time interval, example, in a downtrend, the bears will be in control of the market most of the time pushing prices down…
Now one important aspect of price action trading for you as a forex trader is to know about horizontal support and resistance levels, dynamic support and resistance levels, Diagonal support and resistance levels & pivot and Fibonacci levels.
Lets get into a bit of detail about each of them here.
HORIZONTAL SUPPORT AND RESISTANCE TRADING
In simple terms(or definition), support is defined as the price level where price has bounced up from after it had been going down for some time. Now, if it bounces more than once on this price level every time it comes to this level, it makes this support level more significant.
A resistance level is a price level where price after going up for some time, falls down.
And similar to the support level, if price tries to go up back to this level and break it but keeps getting knocked back down by more than once, this makes this resistance level a significant level.
As a forex trader you should develop the ability to scan your forex charts and easily identify these support and resistance levels.
DIAGONAL SUPPORT AND RESISTANCE TRADING
Diagonal support and resistance trading is a bit different in comparison to horizontal support and resistance. The best way to determine diagonal support and resistance is through the use of Trendlines.
Trendlines are simply lines drawn one price charts connecting a minimum of two lower swing highs or higher swing lows.
- A downward trendline is drawn when you connect a minimum of two lower swing high points on the price chart.
- An upward trendline is drawn when you connect a minimum of two swing higher swing low points on a price chart.
Now, if you do a simple back testing on your charts now and draw trendlines, you can see the price does have an uncanny ability to bounce off these trendlines and obey them.
These trendlines(when drawn properly) will give you an indication of where price may react and head the opposite direction.
DYNAMIC SUPPORT AND RESISTANCE LEVELS
And example of dynamic support and resistance levels is when price for example, if price is in a downtrend, it will rally back up, make lower swing high peaks and then fails to go anymore past that peak and then continues to fall lower.
Many forex traders use moving averages to help them at least know when these can happen…because usually when price comes back up and touches these moving averages, it bounces back down.
And some forex traders think that price is reacting these way because of the moving averages! No way, man! The moving averages only help to at least give an indication of when these dynamic resistance levels will form and they usually form around the touch of these moving average lines. That’s the only reason for the use of moving averages to determine dynamic support and resistance level in this case.
See example chart below:
PIVOT LEVELS AND FIBONACCI LEVELS
The only proper reason I can think off that why prices have a tendency to react to pivot levels and Fibonacci levels is due to “crowd mentality”.
What I mean by that is that if many traders all over the world respond to a particular price level, than price action that follows will be quite predictable, right?
That means the randomness in price action is minimize when majority of traders react to a particular pivot level or Fibonacci level in the same way(manner) so that means as a swing trader, if you are watching these price levels, there is a certain degree of predictability in price action where you can capitalize on and make money.
PRICE ACTION TRADING IN ITS SIMPLEST FORM
The meat of price action trading is in candlesticks that you see on your forex charts. If you like bar charts, than it those price bars that you have on your trading charts.
You see, price action trading is really about understanding “the story” that these candlestick are telling you. To understand this story, you need to know the reason behind what is driving these prices either up or down. If the price is falling, what does it mean? Or if the price is rising, what does that mean?
Well, the answer to these two questions is simple: Buyers and Sellers (or some traders say Bulls and Bears!)
If there are too many buyers, price will rise as there is a lot more demand for the particular currency so traders are buying it. If there are too many sellers then the price will fall, as there is less demand for it and traders are selling that currency pair.
Now, price action trading is nothing if you can’t determine what type of price information you need to see on your charts to take action to trade.
What you need are price patterns that are formed by candlesticks on the price charts.These price patterns may be continuation patterns or reversal pattern.
These price patterns have a certain degree of predictability about them(by how much?…I don’t know) that’s why you need to watch out for them to trade them when they happen.
Now an important point to mention is this: these price action patterns are pretty useless if they happen (or form) anywhere on a price chart except on support and resistance levels, pivot or Fibonacci levels etc.
When price action patterns happens around these levels (support and resistance levels, pivots, fib levels etc) they have much more significance than anywhere else on a price charts.
So when you use price action trading, always keep this at the back of your mind, ok?
To read more about price action and into the detailed stuff of what type of candlesticks form what type of price patterns, head over to Top 10 Reversal Candlestick Patterns section.
This post cannot cover all the aspect of Price Action Trading. However there are price action trading strategies in here where you learn how to apply price action trading to the forex market with the help of these trading systems. Here are a few that you can check out:
42 PRICE ACTION TRADING STRATEGIES LIST (TAKE YOUR PICK)
- daily chart forex trading strategy
- inside bar forex trading strategy
- Outside Bar Forex Trading Strategy
- horizontal channel pattern forex trading strategy
- Three White Soldiers-Three Black Crows Pattern Forex Trading Strategy
- Daily Pin Bar Low Risk Entry Forex Trading Strategy
- Third Shortest Candlestick Forex Trading Strategy
- Railroad Tracks Forex Trading Strategy
- 34ema with trendline forex trading strategy
- 4hr gbpusd forex trading trading strategy
- channel pattern forex trading strategy
- head and shoulder pattern forex trading strategy
- inverse head and shoulder pattern forex trading strategy
- double top forex trading strategy
- double bottom forex trading strategy
- descending triangle pattern forex trading strategy
- ascending triangle pattern forex trading strategy
- symmetrical triangle pattern forex trading strategy
- James16 Forex Trading Strategy
- 123 Pattern Forex Trading Strategy
- Floor Traders Forex Trading Strategy
- MACD Forex Trading Strategy
- Trendline Breakout Forex Trading Strategy
- Trendline Trading Forex Trading Strategy
- Support And Resistance Forex Trading Strategy
- Support Turned Resistance And Resistance Turned Support Forex Trading Strategy
- Bullish Pennant Pattern Forex Trading Strategy
- Bearish Pennant Pattern Forex Trading Strategy
- Pin Bar Forex Trading Strategy
- DeMark Forex Trading StrategyThird Strike Forex Trading Strategy
- Best Forex Trading Technique For Catching Trend Changes
- Two Simple Steps For Trading Price Action Reversals
- london-breakout-forex-trading-strategy
- Floor Traders Method With No Stop Loss Forex Trading Strategy
- Currency News Trading Forex Strategy For Non Farm Payroll
- Ross Hook Pattern Forex Trading Strategy
- Forex Interest Rates News Trading Strategy
- 20 Pips Asian Session Breakout Forex Trading Strategy
- Best Trend Trading Strategy For All Timeframes
- Gravestone Doji Trading
- Best Trend Trading Strategy For Capturing An Insane Amount Of Pips!
- False Breakout Forex Trading Strategy On Support & Resistance Levels
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