Price Action Trading Every Forex Trader Must Know
Becoming a professional trader in the Forex market is a very challenging task. As a market's price action reflects all variables influencing that market for any given time period, exploiting lagging price indicators like the MACD (Moving Average Convergence Divergence) , the Stochastic Oscillator , the RSI (Relative Strength Index) , and others can sometimes be a waste of time.
The resulting picture that a trader builds up will not only seek to predict market direction, but also speed of movement, duration and intensity, all of which is based on the trader's assessment and prediction of the actions and reactions of other market participants.
After the style of Brooks, 8 the price action trader will place the initial stop order 1 tick below the bar that gave the entry signal (if going long - or 1 tick above if going short) and if the market moves as expected, moves the stop order up to one tick below the entry bar, once the entry bar has closed and with further favourable movement, will seek to move the stop order up further to the same level as the entry, i.e. break-even.
There could be many reasons as to why the price has been rejected at these levels; accumulation of buy orders (at a support level), or sell orders (at a resistance level); buyers are attracted by the lower Forex Price Action Trading levels (support level), or sellers attracted by the higher levels (resistance level); buyers think or feel the market will go higher (support), or sellers think or feel the market will go lower, etc.
Price action trading is based on trading the naked price chart and uses no indicators whatsoever - there are no momentum indicators such as the RSI or stochastic, no moving averages and no volatility indicators, you simply look at the chart trade support and resistance and look at the open, high, low and close on a bar or candlestick chart.
Since all the moves we see on a chart is the movement of price (even indicators need price to move first), it makes sense that beginners to advanced traders alike, learn how to use price action as setups for their strategies not only in Forex, but Futures, Stocks, and commodities.
It is important to understand, that although those traditional technical analysis indicators are helpful, all of those indicators are considered to be "lagging indicators." A lagging indicator appears only after the price pattern has changed or a new trend has already been set.
When a market has been trending significantly, a trader can usually draw a trend line on the opposite side of the market where the retraces reach, and any retrace back across the existing trend line is a 'trend line break' and is a sign of weakness, a clue that the market might soon reverse its trend or at least halt the trend's progress for a period.
For example, an ascending triangle pattern formed by applying trendlines to a price action chart may be used to predict a potential breakout since the price action indicates that bulls have attempted a breakout on several occasions and have gained momentum each time.
Instead of taking responsibility for the decisions they make and learning how to lose properly (which is a major part of trading), often traders will learn how to hide behind other things or follow others or use indicators so they can internally blame them if things don't go their way.
One trader may see a bearish downtrend and another might believe that the price action shows a potential near-term turnaround Of course, the time period being used also has a huge influence on what traders see as a stock can have many intraday downtrends while maintaining a month over month uptrend.