What is Price Action?
Price action is a trading strategy that analyses the price movements of the securities to make decisions on the trade. The price changes with respect to the recent past trading are compared and technically analysed to determine the price action. Therefore, we can say that price action forex strategies allows traders to analyse the market and predict the price changes based on recent price movements.
The strategy follows technical analysis and ignores fundamental analysis to focus on the recent and past price movements. The price action trading strategy of forex depends entirely on technical tools. It uses all the technical tools like charts, graphs, trendlines, swings, price bands, support and resistance etc. All these technical analysis tools help traders identify the price movements to use the price action forex strategies.
Price Action Trading Tools
Price action trading in any market requires tools and theories to make the right decisions. These tools and strategies guide traders with the forecast of market trends and changes which could be customised as per the requirement of investors. Here, we have the tools and theories explained that would make price action strategy profitable:
Breakout
The breakout tool is a significant move that takes place in the trading of the forex market. The price or trends of the market move with a tendency where new opportunities could be identified after the tendency breaks. For example, if a currency pair trades between $20 and $22 for a period of 15 days and then it breaks out and moves above $22. The breakout or change in tendency makes the traders aware that sideway movement of the currency pairs has stopped, and the currency has increased its value.
The breakouts could be in various forms like range, flag patterns, triangles, and head and shoulders. However, breakout does not guarantee a specific movement; the price can change its direction and take a different pattern. When such a situation arises, it is termed a false breakout. The false breakout could turn into an opportunity for traders with the direction change of trend.
Breakouts could be small or large but have a significant impact on the trade in the forex market. In short durations, breakouts turn out to be more potential profits for the investors.
Candlesticks
Candlestick charts are the patterns that have been derived from old Japanese techniques. These have proper colour coding and patterns to analyse the price movements. A valuable trading technique that aids traders in price fluctuations with the visual representation on charts could be a trend, open and close price, or low or high price change. The patterns of the candlestick are easy to understand and use in the technical analysis. Traders can study the candle patterns and get updated on the trends and volume of data.
With the main component of the candle body, traders can represent price changes on the charts. The candlestick’s body is the largest part of it that, through colours, depicts the change. For example, the red colour shows the closing price was lower than the opening price, and similarly, the green colour represents that the closing price was higher than the opening price.
Other than this, Candlewick is also important as this is the shadow of the candle. It shows the price range of forex security in a specific time period.
Candlestick has various patterns, some of which are:
- Shooting star
- Hanging man
- Hammer
- Spinning top
Trends
Trends of the forex market could be the factor that has an impact on the price. The securities in the market are traded all day and show various changes; sometimes, the price rises, and sometimes it falls. These changes and fluctuations of values of the securities are termed bullish or bearish trends. In a bullish trend, the price rises and the bearish trend sees a downfall of the value of the security.
The trends are a necessary factor to be considered while trading in the market. As they relate to the price changes, which is the primary factor that drives traders. Price action strategy could not work without studying the trends. These have to be understood for better application of the price action forex strategies.
Support and Resistance levels
The floor and ceiling of the security have a relation with all the above-stated terms. Support and resistance help traders to analyse the price changes and decide on the investment strategy. Support is called floor as it holds the price of the security where the falling prices stop and change their direction towards a rise. In contrast, resistance is the ceiling where the increasing price comes to a stop and starts dropping. It ceases the upward movement of the price of the security. Thus, these provide traders with opportunities to invest.
With support and resistance levels, traders can analyse the entry and exit points of the market. Moreover, the levels show traders with the change and reversal trends of the market. So, investors are well aware of the change and could invest accordingly.
Consolidation
The technical indicator of the price action states that the security is neither continuing nor reversing the larger price trend of the market. The security in such technical study trades within a limited price range and has fewer trading opportunities. Traders in consolidation have to wait for the emergence of new patterns to trade.
Price Action Trading Strategies
Many essential price action trading strategies could be used to analyse the forex price change. The patterns of price action furnish traders with strong ideas about the price movements and future changes. We have incorporated a few of the trading strategies that help traders to analyse the change.
Inside Bar Pattern
The inside bar pattern is easy to understand; it has two main factors: the inside bar and the mother bar. The inside bar occurs between the previous bar’s range that incurs due to the breakout. The mother bar is the prior bar which includes the inside bar contained within the high to low range of the mother bar. In the inside bar strategy, price action is used as a breakout in the trending market but could also act as a reversal indicator due to the key chart level.
The strategy is easy to use and could be profitable in the price action forex trading.
Pin Bar Pattern
A pin bar is a thin candlestick that reflects the reversal and rejection of price in the market. The pattern is basically used for range-bound markets and trending markets and could even be traded through the counter-trend with support and resistance levels. It consists of a tail point and bar which signals the direction of the price. The price could move in the opposite direction of the tail point in the pin bar. All these signals are vital to be understood for implying the strategy.
Fakery Pattern
As the name suggests, it’s a fake breakout pattern of the inside bar. The inside bar of the candlestick breaks out and then reverses to close back on the mother bar or the inside bar. This is termed the faker pattern, as the traders think it will break out, but contrastingly, the opposite happens. These are a good source of trend analysis and could guide investors.
Spring at support
It is a sudden rise in the value of the security when the price hits or comes closer to the support level. Conversely, the market’s lowest price supports the security and helps traders decide over the entry and exit.
Hammer
The candlestick forms the shape of a hammer, where the open, close and high prices are close to each other, and the low price is long. Thus, forming a hammer shape. The pattern is used for the reversal trends of the market.
Pure Price Action
The term pure price action means to use the price in the trades how they are visible in front of the trader. It is also referred to as naked price action due to the fact that it is taken as it is. Traders do not use formulas or any other kind of analysis and rely on their understanding of the market to make decisions. A straightforward method to trade in the price and market fluctuations.
Who uses Price Action Forex Strategies?
Price action forex strategies are used for technically analysing the price changes in the securities of the market. Traders based on these make predictions and speculations to earn a high profit. Users of the technique include:
- Retailers
- Trading firms
- Speculators
- Arbitrageurs
The strategy is even used for securities such as forex, stock, commodities, derivatives and many more.
How to use Price Action Forex Strategies?
To use the price action forex strategies in the forex trade, investors have to follow certain steps. Here, we have discussed the steps that would allow traders to access the strategy:
- The first step is to create an account with a reputed broker, or if one already has an account, they can directly login. Some of the recommended brokers are ROInvesting, TradeATF and ETFinance.
- The second step is to identify the market where the trader wants to invest. The broker that has been chosen should have the facility of that market and the instrument to trade. All these need to be confirmed before starting the trade process.
- The third step is to build an individualised strategy or plan to trade in the forex market. The strategy that a trader would be using for the particular instrument should go with that. Therefore, investors need to know the market and its instruments well. Price action strategy alone won’t lead to victory so, traders must incorporate other strategies and indicators for better results.
- After deciding the strategies, traders have to determine whether they want to go long or short. It is the trading position that a trader would hold for a long period or a short period. The market analysis would be of great help in this decision.
- Lastly, traders have to invest and wait patiently. Traders have to review and monitor the market changes and factors affecting the price to invest or decide. Investors on this basis choose if they want to exit the market to stay for some time. If the security price is about to rise, traders wait for that time and buy security, and if the opposite happens, they sell the security instantly. So, monitoring the market changes is quite helpful.
Traders of the price action forex strategies are professionals and have experience of the forex trade because a novice trader won’t know the market dynamics that easily. It requires effort and understanding to trade with strategies to gain profits. Traders have to recognise many factors of the market like patterns, range, entry and exit levels, stop-loss/take profits and observe the market with knowledge. To take sufficient advantage of the market, traders have to use more than one strategy as one indicator won’t provide many trade opportunities and profits. Here, we have the steps of identifying the trade:
Scenario: Identifying the scenario is a difficult task as traders have to be alert. To manage such situations, traders must know about the range, bull or bear trends and breakout, etc.
Opportunities: What is the primary motive of the trade is the opportunities to earn profits. Traders, after identifying scenarios, focus on the opportunities of the market. Every trader finds different opportunities in various conditions; therefore, it depends on the individual needs of the traders or investors.
Benefits and Drawbacks of Price Action Forex Strategies
Benefits:
- Identifies entry and exit
- Requires less time
- Testable on simulators
- Usable anytime trader wants
- Available 24 hours
- High liquidity
- Leverage and spreads benefits
Drawbacks:
- Requires effort and knowledge
- Depends on traders viewpoints
- No automatic trading
- Risky
Conclusion
Forex markets are traded 24 hours and five days a week, making them available for traders and, with its high liquidity, is one of the most traded markets. So, using a price action strategy in the forex trade is pretty relevant. Price action forex strategies relate to pricing movements and fluctuations, and they work best in the forex trade.
