What is Price Action?
From the title, it should already be clear that today we will talk about trading on price action or price movement. This trading method is the most frequently used one in the Forex because the signals generated by the chart itself are the most reliable.
It’s time to take a look at what this trading style is all about. When using price action, you find various candle patterns or models on your chart. You can use those patterns and the main trend of the market to predict the future price movements with a rather high probability.
The hallmark of trading on price action is a clean chart. You will not use indicators here. The only levels you need are the key price levels, such as resistance, support, trend lines, and, possibly, the moving average. The exact list will depend on your chosen strategy.
Main Steps of Price Action Trading
Since we trade on Forex, we can not do without a plan, right? Trading on price action requires accuracy and patience. So, you will need the following:
- Clear the charts of any unnecessary indicators, if any.
- Switch to a daily timeframe, as the signals on this chart are the most accurate.
- Draw the levels you need - support, resistance, channels, etc.
- Now wait for the chosen trading setup - catch the moment when candles form the pattern around the set price levels.
- Wait until the pattern is fully formed and the chart moves in the direction you need.
- Define Take Profit and Stop Loss levels.
- Estimate the ratio of risk to profit. The optimal ratio is 1:3.
- Open your buy or sell order
Which Patterns to Choose?
There is no correct answer to this question. Each trader chooses the option that suits him best. There is a long list of available patterns:
- Hammer candle
- Shooting Star candle
- Pin bar
- Inside bar
- Bearish or bullish engulfing pattern
- Bearish or bullish Harami
- Pinocchio bar
- Head and Shoulders pattern
And that’s not all the models that can provide you a clear signal about the future price movement. No matter which option you choose, it is worth remembering several important points:
- If your plan is to become a professional in price action trading, you should try to master one pattern at a time. This is especially true for novice traders. When you just start working on the charts, all the candles may look the same and it will be difficult to recognize the right model on time. When you are looking for one specific pattern, it is much easier for you to notice it.
- Many patterns, such as the pin bar, work only around the key price levels. A pin bar formed inside the swing body will not give you a sufficiently clear signal.
- Open a trade only when the received signal meets all the aspects included in your trading plan.
Advantages of Trading on Price Action
- The system works in any market - upward, downward, or sideways.
- When working directly with the price, you are more responsive to any market changes.
- Price action signals usually give the most accurate signals, even better than any indicators.
- You better avoid over-trading as the necessary patterns do not appear often in the market.
- Price action trading is suitable for any type of trader.
Trading on price action is only suitable for patient traders. I’ll tell you more, waiting can be the most difficult part of this type of trading. However, you should always remember that only a patient trader can become truly successful. You can use price action trading to train such a crucial quality.
There is one more difficulty that you have to face in this type of trading - strong emotions. When trading solely on price action, you make all the decisions by yourself. In case of a failed trade, many traders begin to blame themselves, their broker, or even the whole market. Usually, that’s the moment when most people leave Forex. Prepare yourself for the inevitable losses, tune in to a positive result, and move forward with a clear head no matter what. That’s the only possible way to go through all misfortunes and linger in the market.
And one more thing: trading on price action is impossible without self-confidence. Doubts can make you miss a potentially profitable trade and such trades appear in the market not that often. First, gain some confidence in a demo account before moving on to real trading. Be consistent and eventually you will succeed.