There are many approaches to forex trading.
Some FX traders prefer to make use of indicators, while others prefer using seasonality or other aspects of technical trading. Among the different types of trading, price action trading is one such approach.
The term often evokes complexity in analyzing the chart or the price of the security. However, price action and its concepts are very simple.
Simply put, price action forex trading is a method of technical analysis. In price action trading, a forex trader reads the market based on the recent and historical price movements.
Instead of relying on technical indicators or other technical analysis trading tools, price action forex traders rely solely on price. A major distinction between price action trading and other forms of FX trading is that price forms the basis of the trading decisions.
Price action trading is quite subjective compared to other forms of technical analysis. This is because there are no defined rules. It is partly due to this subjectivity that price action is not as widely popular as indicators.
Therefore, it is quite possible that no two forex traders would be able to interpret price in the same way.
One thing that distinguishes price action forex trading from technical indicator trading is that the former is used as predictive analysis. In other words, FX traders use price action in real-time to predict what the next move will be.
In contrast, indicator-based trading is reactive in nature. Only after a trading signal is triggered, based on the technical indicators, is a trade entered.
Why is Price Action Trading Subjective?
Price action forex trading is subjective because there are many different ways to analyze the markets. Forex traders make use of a host of different techniques before making a trading decision. Even traders who use similar price action tools can often interpret the price chart differently.
Due to the subjectivity of price action trading, it can be cumbersome to come up with a mechanical trading system that uses price action trading.
What Tools Can We Use in Price Action Trading?
There are a number of tools that forex traders use in price action trading. Firstly, price is the most important variable in price action analysis. Therefore, regardless of the various tools one can use, price itself remains the key factor when it comes to decision making.
Price action forex trading techniques involve:
These are patterns that evolve on the candlestick chart. They visually represent the investor or the forex trader’s sentiment in the security. While there are many candlestick patterns, there are a few that are commonly recurring. FX traders use these patterns to predict what price will do next.
Chart patterns involve analyzing certain repeating patterns. For example, price moves into a consolidation phase after a strong rally. Depending on the way the consolidation turns out, it can be deemed a bullish flag or a bullish pennant pattern. Because technical analysis is all about analyzing past price history to predict future price movements, there is considerable evidence that price will once again resume the previous rally.
There are many other chart patterns such as the head and shoulders pattern, double tops and bottoms and so on. One might argue the validity of the patterns. But, in fact, it is the market sentiment that leads to the formation of such patterns.
Support and resistance form the basis of price action. Regardless of the methods used, the price of any security tends to respect the laws of support and resistance. It is also known as supply and demand. Price action forex traders rely heavily upon support and resistance to draw their conclusions.
Who Uses Price Action FX Trading?
Price action trading is primarily used by speculators and day traders. You can also find a few forex trading strategies based on price action techniques. Interestingly, price action can be applied to just about any security and not just forex.
A unique aspect of price action trading is that one can design and develop their custom price action FX trading system.
Many traders might wonder about the pros and cons of price action trading and if indeed one can gain an edge in the markets. The bottom line remains that price action trading is merely one of the many ways to analyze the FX markets.
There is no proven edge with price action trading. In the end, forex trading is all about managing one’s risk while ensuring to make profits consistently. Price action trading is, therefore, just one of the many means available in technical analysis.