If you have traded in the financial market, you would know how technical analysis works. It is a process to anticipate the future price of a currency pair by observing its past movement. Traders use many tools and indicators to measure the upcoming movement’s possibility. As a result, they earn good pips at the end of the day. But have you tried trading without any indicators?
Indicators are laggy, so they often provide results after the movement happens. Therefore, if you want to sync with the most recent price activity, you should know the price action. Let’s see how you can utilize the price action in forex trading, including a detailed reliability test.
What is price action in FX?
Price action is a process to anticipate the upcoming price movement just by observing the current price. The most significant fact about price action trading is that it does not require any indicators or tools. If you are fond of indicators, there are no exact rules that you shouldn’t use any indicator in price action trading. It ultimately depends on your strategy and perception of the market. But besides just looking at what indicators say, price action does extensive research on the price. The study may include the strength of the trend, volatility, market context, fundamental effect, uncertainty, and divergence.
Let’s have a look at a practical example of how price action works in the naked chart.
- The number 1 shows that the price moved above the resistance but became volatile due to the lack of buying power. As a result, the price moved down to the support level.
- In number 2, the price became corrective at the resistance and moved lower with an appropriate candle formation.
- In number 3, the price shows exhaustion below the support that pushed the price higher beyond the resistance level.
Overall, if you can read the chart from left to right with price levels, candle formation, and movement speed, you are a price action trader.
Why is price action reliable in forex?
Price action works as an essential tool to the FX that allows investors to make quick trading decisions. It is more reliable and accurate than traditional indicators. Let’s see why price action is reliable in forex.
Understand buyers and sellers activity
The price in the forex market moves with the supply and demand, where buyers and sellers are the key price driver:
- When buyers’ activity exceeds sellers’ activity, the price will move up.
- When sellers’ activity exceeds buyers’, the price will move down.
Therefore, it is better to read what buyers and sellers are doing in the market rather than on indicators.
In the above image, we can see that the price moved above the resistance, which means buyers took control over the price. However, later on, the price failed to make new highs, indicating sellers’ presence in the price.
Understand the whole picture
If you don’t know how to understand the big picture of the market, you will not make proper trading decisions.
One of the methods to understand the big picture is to use multi-timeframe analysis. At first, you have to see the price on the daily chart where above the support is buyers territory and below the resistance is the sellers’ territory.
In the above image, we can see that the price rejected the support and moved above it with a daily close. Now move to the H4 chart at the same time.
In the intraday chart, the price moved higher as soon as it was rejected from the intraday support level. So here, the price direction is up from the daily timeframe, and traders should follow the same trend in the H4 timeframes.
Chart reading techniques using price action
If you don’t know how to read the chart, you will not understand the possible movement. Forex trading requires a logic behind the move. Otherwise, it will be hard for traders to make money consistently.
In price action, four characteristics of the trend are significant, as mentioned below:
The impulsive trend happens when the price moves by making higher highs or lower lows aggressively.
After an impulsive trend, the price starts correction where it barely makes a new high or low.
The trend becomes volatile when buyers and sellers try to take the price in their direction. In this condition, the price violates recent swings.
In the non-volatile market condition, the price moves higher or lower without considerable correction.
Support and resistance
These are price levels that show that they work at a significant price level:
- If the price comes lower and faces support, it is likely to move higher.
- If the price moves higher and reaches resistance, it will likely move lower in the following hours.
Here is the example of support and resistance level in the forex chart.
The support and resistance are a price zone rather than a single line. Therefore, it is effortless to spot in the naked eye that does not require any indicators.
Pros and cons
Let’s have a look at the advantages and disadvantages of the price action:
- It is more reliable than the indicator-based system.
- It works well in all timeframes and all instruments.
- Trades do not require finance knowledge to learn price action.
- It doesn’t provide guaranteed profit.
- It requires a deep understanding and practice to get the outcome.
Should you include it in your strategy?
Price action, a complete trading system that includes entry, exit, and management of trades, is a reliable trading strategy effective in any financial market. You can use price action as your primary trading strategy or beside your existing system to get the ultimate result. Moreover, you can mix price action with the indicator-based system to create a trading strategy according to your requirement.
Many beginners rush to use price action because this method does not require indicators, which may seem too complicated to novice traders. However, seeming simplicity turns into losses, and an inexperienced trader leaves the market, blaming the system for everything.
How to tell the correct setup from the wrong one? How to determine if an inside bar indicates a continuation or a reversal of the trend?
There are no unambiguous answers to these questions, and the trader has to make independent decisions. Some professionals can handle this responsibility. Most newbies are not. Therefore, it is recommended to trade this method only for those traders who already have experience with different systems and can not only analyze the chart but also make difficult decisions, fully controlling their emotions.