- Price action shows current and past price movements for every transaction in real-time.
- Price Action Trading is a forex discipline of making decisions according to the price chart, unrelated to financial news and sentiments.
- Price action analysis helps Forex traders identify momentum and find support and resistance levels.
- Here’s the complete guide on price action trading in the forex market.
Price action is the backbone of technical analysis for any security, including Forex pairs, stocks, and bonds. Technical analysis is impossible without price action data, and most day traders rely solely on technical indicators and analysis. Understanding price formation is essential, as most forex trading strategies use price action to find sense in seemingly random market movements. What exactly is price action trading, and how can you learn price action analysis in foreign exchange markets?
The price action trading crash course for any level
FX markets display global psychology quantified in numbers and candlestick patterns. Price action is the financial footprint of all the money that exchanges hands in real-time, reflecting all market-moving news, events, and decisions. The software records the new price for every transaction in a currency pair (i.e., USD/EUR). The total of past and current transactions brings a display of what most investors, bankers, and forex traders see on their dashboard — a price action graph.
How does price action trading look like from a dashboard?
- Clean charts (no indicators, a chart displays simple price movement over time, often in the form of candlestick patterns.)
- Comprehensive charts ( indicator-filled charts that tell you more information about the historical price changes.)
Each trader has a different price action strategy
Participants in foreign exchange markets sometimes repeat behavior, creating patterns and similar outcomes that allow traders to execute a forex strategy. The list of FX trading strategies is longer. Forex market collects data from every fiat transaction on the planet, creating immense information wells. And you can easily find extensive reports on swing trading, intraday trading, momentum strategy, reverse trading, moving averages, and many other ways to learn price action.
Price action trading is essential for every Forex trading strategy that relies on technical analysis
Monument, Reverse, and Skimming tactics need historical price movement data to identify when to buy and sell an FX pair. Technical analysis ignores current news, sentiment, and fundamentals and looks for cold data in technical price changes. The price movement does reflect the sentiment and news, but the price action analysis doesn’t take the current economic calendar when determining entry/exit position. However, each strategy has a different set of indicators and tactics that help identify the right entry and exit opportunity. Depending on your strategy, your MT4 dashboard may look different. Price action indicators are often divided into two categories:
- Support and Resistance.
Oscillators are barometers that measure price trends and momentums, signaling if the specific price area is overbought or oversold and helping traders find a good entry/exit position in the market. Support and Resistance indicators are prevalent in technical analysis. The S&R indicators are based on the idea that FX price doesn’t freely move above or below a certain level. Support is a price level that usually creates friction for the price to fall below, and Resistance singles friction on the upper end of the price.
The most popular technical indicators:
- Stochastics — an oscillator that signals overbought or oversold by comparing a closing price against a price range for a specific period.
- Relative Strength Index (RSI) — momentum oscillator that measures the strength of forex price trends.
- Exponential Moving Average (EMA) — indicates the average moving price in longer time charts, usually used for the past 5, 10, 12, 20, 26, 50, 100, and 200 days.
- Moving Average Convergence Divergence (MACD)— compares two exponential moving averages (EMAs), usually for the past 26 and 12 days.
- Bollinger Bands — measures pricing volatility defining outer constraints and a center price point.
- Average True Range (ATR) — calculates current pricing volatility similar to Bollinger Bands by placing the pricing range in context.
- Ichimoku Kinko Hyo (IKH) — gauges momentum and future support and resistance areas. The indicator is often used in JPY pairs with clear trends.
The best indicators are user-friends and precise
The math behind the indicators is confusing for even the most financially savvy traders. Calculating trading averages and momentum oscillators in real-time with raw data would be almost impossible for a single person. Luckily, MT4 software can help everyone understand price action, analyse trends, and support and resistance levels without needing a degree in physics and math. Most traders may choose to follow only one or two indicators to find a personal price action strategy.
The Head and Shoulders pattern is an effective price action strategy for both beginners and experienced traders
Head and Shoulders pattern helps spot trend reversals. When the price action forms a prominent peak between two smaller peaks on the same trend line, the MT4 platform traders can spot an entry and exit position for their next trade. H&S can be a powerful price action trading strategy when executed correctly.
Limitations of Price Action
Price action analysis can only speculate on the currency’s future movement and can’t predict where the price may be in the next 24 hours. Many factors can cause volatility in foreign exchange markets. Global events, country-wide economic performance, innovation, political decisions, environmental catastrophe, health disturbance, and overall sentiment (emotional perspective) can disrupt financial trends. Low liquidity and intense volatility can move the price in new and unforeseeable ways. Your capital is always at risk when you’re trading Forex. Choosing regulated brokers like Rakuten, can helps traders perform better. However, currency trading still carries significant risk, and it’s not suitable for every investor.
Managing Risks and Trading Responsibly
Price action trading is a well-established technical discipline among Forex traders, and it’s essential for day traders that are executing short-burst positions. You can learn price action and practice strategy with a fx demo account that offers real-time spreads, fast execution, and more than 50 trading products. Trade with real money only when you’re comfortable with your skills and have enough put aside for a reasonable investing plan.