Forex price action has received a lot of hype over the years and for good reason. But what exactly is it, and better yet, is it right for you?
While I can’t answer that for you, I can show you the various forms it takes on and how to identify them. From there you should be able to get a good feel for whether or not it’s the right fit.
Put simply; price action is the study of market movement as it relates to prior levels of support and resistance. The key difference between this and other forms of trading is the absence of technical indicators.
While I do use the 10 and 20 exponential moving averages, my charts remain free from any other unnecessary distractions.
Price action trading refers to the act of trading a financial market without the use of lagging indicators. It typically involves a candlestick chart with perhaps one or two moving averages to assist with various determinations, but for the most part these charts are what we like to call “naked”.
Notice how in the chart above the price action on NZDUSD respects two particular levels again and again. While you may get the occasional false break here and there, this type of analysis is extremely effective and profitable.
In fact, this is how I’ve traded since 2010 and it is the sole reason that I began seeing consistent profits in 2012.
When I began trading Forex in 2007, I tried hundreds of indicators and Expert Advisors. You name it; I tried it!
Like most new traders, I was convinced that the “holy grail” of trading was out there. So with high hopes and an unwavering passion, I marched on and continued to work day and night.
I didn’t know it at the time, but I was partially right – there is a holy grail of Forex trading, just not in the form of a technical indicator. But after three years of trying every indicator ever invented, I still hadn’t found anything that worked, at least not consistently.
I didn’t have my “ah-ha” moment until one day when I removed every single indicator from all of my charts. I instantly experienced a level of clarity that I never encountered while messing about with indicators.
Let’s take a look at how this moment came to be, shall we?
The chart below is the default template in Metatrader 4. Ironically it’s called, “popular.” The sad part is, however, is that this is how my charts used to look (along with everyone else who starts MT4 for the first time).
Pretty darn messy if you ask me. To the novice trader, seeing all of these lines moving in every which direction can be daunting. Luckily, there’s a better way to view your favorite currency pairs.
Now let’s see what that same chart looks like without all the spaghetti.
I don’t know about you, but I feel better already. It’s difficult to believe this is the same currency pair!
Now that we can see what the market is doing and have removed all distractions, let’s take a look at the various forms of price action.
For now, we’re only concerned with how price moves, which is what will ultimately make the greatest difference in your profit potential. We’ll get into why price moves the way it does in later lessons.
The chart below may not look like anything special to the untrained eye. However, there is something important at work as it relates to price action.
Unless you’ve been trading key support and resistance levels for a while, the GBPNZD daily chart above should seem very typical. And in many ways, it is.
The next chart is the same as the one above, only now I’ve drawn a horizontal line to show the area of support and resistance.
Do you see how powerful yet remarkably simple this can be?
Now, I realize you have likely seen horizontal levels before. They are arguably the most common asset among technical traders.
The point I want to make here is that we were able to identify the level above without using six different technical indicators. A clean chart and a few seconds are all that was needed.
An indicator-free chart will also make it much easier to spot the other characteristics that form the price action trading strategies that I use on a weekly basis.
How many times have you heard the saying, “the trend is your friend”?
A lot, I’m sure! But how many times have you been burned by attempting to trade against the trend?
I thought so!
But don’t beat yourself up over it. We’ve all been there.
Although the illustration below is simple and straightforward, it presents a structure that you cannot ignore if you intend to become consistently profitable.
When the market is trending like the USDJPY chart below, you do not want to fight it. Doing so is like trying to swim upstream in a river.
Instead, you always want to trade with the momentum at your back. In the cast of the USDJPY chart below, it would mean only looking for buying opportunities on pullbacks to support.
You’ll find trading Forex much more enjoyable and rewarding once you begin riding the current rather than trying to swim against it.
Notice how the pair formed higher highs and higher lows during the uptrend. This simple technique is an excellent way to determine the strength of any trend.
Periods of sustained directional movement, whether it be an uptrend or downtrend, typically occur after a phase of consolidation.
Take the chart below, which shows the USD/JPY uptrend we just covered. However, now we can see the wedge structure (consolidation) that acted as a technical catalyst to the ensuing rally.
Some of you may have noticed the bullish pin bar that formed immediately following the close above wedge resistance. I took advantage of this very setup and also teach this strategy as part of my trading course.
For those interested in learning how to trade strategies similar to the pin bar above, be sure to check out the following lessons.
As we discovered above, uptrends and downtrends often occur before and after periods of consolidation. Therefore, we know that phases of consolidation occur before and after uptrends and downtrends.
Pretty basic stuff, right?
Below is a daily chart of AUD/NZD. Take note of how the brief periods of sideways price action form between each move higher or lower.
This type of consolidation can be beneficial as it can offer a breakout opportunity once the market decides to begin moving again.
On the other hand, there is a type of consolidation that I won’t trade under any circumstance. It’s commonly referred to as “chop” and can be a trader’s worst nightmare.
The chart below is a perfect example of an unfavorable trading pattern.
Unless you have been trading Forex for some time and can secure a favorable entry on the intraday charts, you are better off avoiding this type of price action.
Next, we’ll look at a similar form of movement that has subtle, yet significant differences.
The concept of a range-bound market is quite simple. It involves two areas of value, one that acts as resistance and the other that acts as support.
These two levels “contain” the market in a way that allows traders to watch for buying and selling opportunities from support and resistance respectively.
Many traders I speak with find ranges difficult to trade because they’re so focused on the pattern that they forget about the larger trend.
Note that because the prevailing trend is down, we would only want to watch for selling opportunities from resistance. While you can technically buy at support, it isn’t the most advantageous choice as you would be trading against the bearish momentum.
In closing, trading ranges can be a bit tricky because you don’t have a clear directional bias. But with practice, patience, and the right approach, it can be a profitable way to trade Forex.
There are many different forms of movement in the Forex market, each with unique characteristics as well as advantages and disadvantages. Knowing the characteristics of each one will give you the upper hand when deciding how to approach a trade.
While it isn’t for everyone, using various price action strategies can be an extremely profitable way to trade. Its simplicity is a huge draw for many traders, especially those who have previously struggled with indicators.
Even if you are partial to other strategies or systems, learning how the raw movement of a market can influence the future direction can have an immediate and lasting positive effect on your trading performance.
What are your thoughts on Forex price action? Is this something you see yourself using in the future?
Leave your comment, question or general feedback below and I’ll be sure to respond.
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