The up and down movement in the prices of the assets over time is generally termed as price action. Surprisingly, such up and down activities create trends and patterns when the prices are plotted in a chart. The trends and patterns are then converted into trading strategies for modern traders to gain profit from the Forex market. Today, we will talk about the impact of price action in the Forex market and how using the price action can improve your overall trading plan.
Figure 1: Price Action Chart with volume and candlestick
In the above figure (1), we can see that the price of the AUD/USD currency pair and timeframe is given in the two axes. The price movement in different timeframes creates candlesticks, marking the high, low, open and close positions of the currency pair. When the price is moving upwards and downwards, green and red candlesticks are created subsequently. Hence, we get different bullish and bearish patterns that can be used to lock a profitable position again and again in the future. To get more out of the price action, many technical analysts use the data from price action and take efficient entry-exit positions. For instance, professional traders can see a triangle shape forming in the bar chart and with the help of some simple indicators they can time the best entry in the market. So once we know about the importance of price action in Forex trading, one question remains on the table- is price action a difficult strategy to implement?
The answer is price action is not at all difficult and can be used many times to improve the profitability of Forex trading. Especially, a few groups of Forex traders like Swing traders and trend traders use the strategy in their every day trading strategies. The terms like breakout, support and resistance levels, and consolidation are constantly used by the traders. Rather than, creating random positions these strategies help them to make more profit and reduce the risk of losses.
In the next figure (2), we have outlined a few price action strategies that are helpful to understand the overall pulse of the Forex market and make profits each time you exit the market. The probability of having a loss from the Forex market diminishes significantly when the price action strategies are used frequently. Unfortunately, a group of Forex traders believes that understanding the price action strategy is difficult. They rely on numerous economic data, events and global headlines to plan a successful trade. Moreover, another group uses complex technical indicators like MA, EMA, MACD, RSI, Stochastic Oscillator, etc to setup a perfect trade. Luckily, only following the price action a trader can easily outperform the fundamental news and indicator-based strategies with less effort and more profit. A trader only needs to gain substantial knowledge about the structure of the market, draw a good entry and exit strategy, and manage the trade, risk, and profitability using a structure. As a result, new doors open for the trader with no time.
Some of the ways to use the price action in the Forex markets are outlined below:
- Firstly, learn strategies of price action one at a time. Spend some time with one strategy and gain confidence in using it. Then start learning another strategy.
- Secondly, start price action strategies with the higher timeframe in the beginning. The fast speed of the lower timeframes is not good for amateur traders. The chances of overtrading also reduce when higher timeframes are chosen.
- Finally, follow the examples of successful traders who use price action to make perfect trading decisions. Internet is a huge library of successful traders using different kinds of strategies. So, to use the price momentum just search for the top traders and incorporate their approach to your Forex trading.
In conclusion, using both news headlines and technical indicators can’t ensure desired success in the Forex market. To understand the anatomy of the market you need to learn how to read and trade from price action. Once the knowledge of price dynamics is obtained the next goal is to use the results to become the top gainer in the Forex Market.