What is Forex Price Action ?
Using price action in trading is the best step to seeing the trend conditions. Price action is also one of the tangible evidence in recognizing market momentum and volatility.
When you attend a seminar or discussion with the Forex trading community, the term “price action” will surely come out. At first glance, technical analysis with capital only from price movements of this chart seems so simple. However, did you know that the sharpness of the analysis with price action requires high flying hours to be applied to live trading?
Regardless of the myth that price action is able to “project” price with a high degree of accuracy, keep in mind that the real price action using the data of price movements in the past. In other words, relying on patterns of mere puppet price movements can not guarantee where the price will move next . If so, what’s the secret technique of this price action?
Well, to be clear, we will peel thoroughly what is the price action and how to use it appropriately.
What is Price Action?
Price Action is the price movement of an asset or a currency pair. Price action analysis refers to technical analysis based on price movements in the past, where traders attempt to find patterns in price movements that appear at random.
It should be underlined that what we see objectively is only the price dynamics of the preceding data . Meanwhile, our reaction (order or open position) to the patterns of price movement is entirely subjective evaluation.
The question is, how much the subjectivity of a trader will affect the end result of his trading activities (profit / loss)?
Often we are pegged to a pattern (candlestick or chart formation) and expect the next price movement to match the prediction of the pattern. Sounds very simple, right? Just memorize the patterns and then place the order according to the signal reversal or continuity.
Wrong! If you react solely with signals of certain patterns without consideration of other important factors, then what you have done is about the same as gambling
Price Action Basic Application Analysis
So that you do not fall into the malpractice of trading Price Action, you must first understand that Price Action is basically used only as a tool , and not as a final determinant.
So what does it mean?
Price movements on the chart generally will always leave traces with price points you should consider before opening or ending positions. Outline, Price Action is used as a “magnifying glass” to help identify market conditions (trending or consolidation) and where key resistance and support points are likely to affect the price direction.
A. Identification of market conditions.
Market conditions are generally divided into two kinds; trending and consolidating (sideways). Price action can help us identify these conditions by paying attention to high and low prices.
Trending market conditions themselves are subdivided into two kinds; uptrend and downtrend. Uptrend can be identified from high rising price point (HH, higher highs) and higher HL prices (HL, higher lows). While Downtrend is identified from high lows (LH, lower highs) and lower lows (LL, lower lows).
Difficulty or confusion determine where the position of HH, HL, LH and LL because of its position “zig-zag”? If so, then at that time you are facing a sideways market condition.
The process of identifying the above market conditions can help a trader decide to open a position based on the trading style (for example, swinger will prefer trading in trending conditions) and risk management.
B. Identification of resistance and support points.
The second important point of the price action application is to find out the resistance and support price points. These price points are vital to their usefulness because the sustainability of a trend is likely to be back in the direction due to the “repetitive” nature of the market.
Note the candlestick in the first red circle (from the left). It is clear that at that point the price is “pulled” back down to touch the support limit. The first candlestick becomes a strong resistance limit due to its long down-swing (proven in the second red circle).
So is the first blue box (from the left). The price returned “bounced” each time it touched the support limit. The second blue box reinforces the limit. As a result, the blue circle shows a reversal near the support boundary line.
Generally, the inside bar and pinbar patterns are often formed at support and resistance points.
Factor Supporting Price Action
Again, Price Action cannot guarantee 100% accuracy of the signals. It is influenced by various factors, among others:
- Time Frame
The frequency of occurrence of a candlestick bar (or any other chart) is directly influenced by the time frame of your choice. For example, the time frame h4 will bring up the bar every 4 hours, while the daily time frame will only incise the bar once a day. The impact, the lower the time lag (below H4), the risk of the fake signal will be higher.
- Forex Calendar
Market-driven news releases (NFP, GDP, Retail Sales, CPI, etc.) can be a ” double-edged sword ” for traders with a price action guide. Price movements will generally return to normal shortly after the big impact news release. Therefore use the forex calendar to ensure that you do not miss the latest news.
Although the price action at a glance seems simple, but its application to live trading requires hours of flying and high alertness. You should consider several factors at once before reacting to a signal from the patterns on the chart.
Don’t be discouraged, at least you know the basic application of the price action of this article. Furthermore, from there you can develop trading strategy based on price action dynamics .