Price Action is one of the forex basics you can use in trading and as s a new trader, you’re strongly encouraged to develop a basic understanding of the technical charting patterns before you progress to more complex techniques.
In other words, charts with fewer squiggly lines are probably the best approach at first.
What is Price Action?
Price action is the strategy of making all of your trading decisions from a “naked” price chart. In its simplest form, price action is a form of technical analysis that focuses exclusively on past prices.
Price action never tries to tell you what will happen – only what has happened. For that reason, you can think of it as the only indicator that will never tell you a lie.
One of the most critical aspects of learning to trade with price action is identifying a trending market versus a consolidating market. In general, an uptrend is observed if a market is making higher highs and higher lows. On the opposite side of the spectrum, a downtrend occurs when the market is making lower highs and lower lows.
Using Price Action to Focus on the Swings
Once you’ve understood how price action works and have identified a trending market, it’s time to focus on the swings. By identifying higher highs and lower lows, for example, you are in a better position to trade in the direction of the emerging trend. Key fundamental events, such as a monetary policy statement or important data release, often trigger the emergence of a new trend.
Using Price Action to Locate Support and Resistance
Price action also enables you to pinpoint valuable support and resistance levels, which help you price entries and exits into the market. To do so, you must be able to read market swings.
In general, support levels are the point at which demand outstrips supply. They can be identified by a swing low. Resistance levels are the point at which supply overtakes demand, creating a swing high in the market. Traders who enter the market at a support level are often said to be buying an uptrend “cheaply”.
Price Action Works Better on Longer Time Frames
When setting up your forex chart for price action trading, it’s best to focus on longer time frames, such as the 1-hour, 4-hour and daily charts. These time frames are not only the most profitable from a price action perspective but also allow you to spot patterns more easily.
This was only a brief introduction to price action trading. There are tons of price action techniques that can help you time your entry and exit into the market. For now, it’s important to consider the role past prices play in formulating your analysis. This will serve as a launching pad for more complex trading strategies down the road.
Forex4Noobs. Forex Trading Strategy: Nick’s Forex Price Action Strategy.
James Stanley (October 4, 2013). “Four Simple Ways to Become a Better Price Action Trader.” DailyFX.