Price Action Forex Trading: Part I

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In trading, decisions can be made from a stripped down chart. This is a discipline developed over time where the trader decides not to use lagging indicators outside a given range of moving averages to help him identify support and resistance levels in the market. The movement of price over a given duration of time is captured as a set of data and is displayed on price charts. Every financial market has loads of these data captured over varying periods of time. The data represents the actions and beliefs that the traders in that particular market have while trading for that specified time period. Price action therefore is a portrayal of the action and beliefs of Forex traders.

 

Price movement is influenced by a number of things amongst them economic data and various global news items. In the currency trading market, economic data resulting from the performance of various sectors of economies tend to have a driving role as far as the trading of the affected currencies is concerned. Bad economic projections would mean that appetite for a given currency goes down relative to others. That said, we do not as traders need to individually analyze these economic and global news so that we can trade successfully. The rationale behind this is that the price movement in itself captures all the sentiments on a market’s price chart.

 

The use of lagging indicators in the face of price action charts is of no use. The reason is, the price as reflected on the charts already embodies all the variables as seen by the traders in their actions and beliefs. The movement of price is so powerful such that in the event you want to develop a trading strategy that is based on high probability and profitability, price action will be sufficient to help you achieve that. The signals you use to develop the trading strategies can be collectively referred to as price action trading strategies. They not only help you to analyze and understand the price movement in the market but they also help you to project the likely future price movement with a high degree of certainty.

 

Price action charts are the primary sources of any indicators. This means that for you to formulate any indicator, the data for such modeling comes from the price action; raw as it is. The implication of this is that you do not need to overburden your price charts with so many indicators for it to make sense. Putting so many indicators on your price charts has severe impacts and can even affect the quality of analysis. The space allocated for the price chart will be squeezed to create room for the indicators meaning that the price action will not be as clear as it would have been were it few or no indicators were included on the price chart. The inclusion of indicators also tends to shift the focus from the real price action to the indicators which are secondary sources of information. This creates confusion and makes the analysis vague.

 

Price action has been so instrumental to help identify trending and consolidating markets. The ability of a trader to identify these kinds of market is very crucial if his strategies are to work. For the trending market, there can be an uptrend or a downtrend. An uptrend is easily recognized by higher highs and higher lows while a downtrend on the contrary is identifiable by lower highs and lower lows.

In view of all this, price action remains to be an instrumental tool for any trader who want to make strategies that are going to yield substantial returns and benefits from trading in the Forex Market.