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When it comes to forex trading, price action is one of the most relied upon methods for delivering consistent results. After all, price determines everything in the financial markets, and forex is no exception.

 

What Is Price Action?

In its simplest form, price action describes the characteristics of a forex pair’s price movement. The movement is usually analyzed with respect to price changes in the underlying security.

As a trading methodology, price action allows you to read the market and make trading decisions based on recent price movements. Although price action is a technical strategy, it forces you to look beyond the technical indicators in reaching an investment decision. It also ignores fundamental analysis, so you shouldn’t spend too much time looking at the economic calendar.

 

How to Trade Price Action?

Since price action relies on historical data, all technical analysis tools are fair game. Charts, trend lines, swing highs and lows and technical levels are encouraged in analyzing price action.

In terms of charting techniques, you can use simple price bars, candlesticks, changes, price bands or others in your analysis of price action. The candlestick and price bar are often cited as the two most significant tools for analyzing price action because they allow you to visualize price movements.

Since active forex pairs always move, they leave behind a “trail,” which is itself a price action that gives you clues about where the market is heading next. These trails are important because they give you a trading signal – i.e., whether to buy a currency pair or sell it.

Against this backdrop, it’s now time to observe whether a trend reversal is occurring in the market. This will give you the “buy” or “sell” signal you are so coveting. One of the easiest ways of doing this is to pick a currency pair that’s in an uptrend or downtrend. Your goal is to identify if and when the trend breaks, thus giving you entry into the market.

If the currency pair is no longer making higher highs and higher lows, then the uptrend may be broken and about to reverse. Likewise, if a currency pair is no longer making lower highs and lower lows, then the downtrend may be ready to reverse. Price action helps you identify whether this is the case, and whether you should enter the market.

Price action is a broad strategy that gives you the flexibility to use multiple charting techniques in executing trades. The most important thing is realizing the importance of recent price history in dictating future patterns. That is the crux of price action.

 

[1] Shobhit Seth. “An Introduction to Price Action Trading Strategies.” Investopedia.

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