Price Action: More Accuracy, More Profits

I am sure that this article will be one of the most important concepts you will read in trading financial instruments electronically based on a charting system, and it is one the main strategies used in managed Forex accounts. We’re going to talk about is an introduction to ‘Price Action’ trading and how to apply it to Forex trading?

What is ‘Price Action’ trading?

Price action trading actually is an art and a skill of making all of your trading decisions using a clean or “naked” price chart. Therefore, no indicators are plotted on the charts except maybe a couple of moving averages to help identify various supply and demand zones.

Financial markets produce data which affects the price of a security over a period of time, which is basically the Price Charts. Price Charts reflect all market participants’ trading beliefs during the specified period of time. Economic data leads to price movements in a market, and that is because the human mind assumes that this data will affect the price of a security. Therefore, these beliefs turn to real actions from a trader which leads to a price move on the price chart. So, a price basically reflects all variables that affect the market at a given period of time. This is also the reason why using lagging price indicators like stochastic, MACD, RSI, and others is just a waste of time.

Price movement, or Price Action, provides all the signals you will ever need to develop a high-probability, profitable trading system. These signals combined altogether are called price action and they provide an easy way to understand  market moves and predict the future ones with a high degree of accuracy.

How do I apply price action to the Forex market?

Price action trading can be used to trade any financial market; however, the Forex market has the deepest liquidity and the lowest startup costs, not to mention accessibility to any financial market, for these reasons and more it is the most popular market today among retail traders.

The philosophy of price action trading is that you only need to master a few solid setups to be consistently profitable. In fact, in my opinion what differentiate between profitable traders and losing traders is having a simple trading method that consists of the least chart indicators, which will reduce confusion and stress and allows you to concentrate more on the psychological aspect of trading.

Trading using clean vs. messy Forex charts

The first step you need to take when trading “Price Action” in the Forex market is to take off all indicators in order to set-up a clean “Naked” price chart. Next, you have to master a few patterns used as technical indicators, They are mainly different candle shapes such as the pin bar, the inside bar, the fakes, and chart patterns such as the Head and Shoulders, Double Tops and Double Bottoms. You can make money consistently by mastering just one of these setups, I suggest you work on one at a time, master it, and then move on to the next.

In this way you will develop a price action “tool box” which will provide more tools than you need to take advantage of quality price action signals.

• Messy Charts vs. clean “Naked” Price Action Charts

If you have been trading for a while, then most probably you are using numerous indicators on your charts that are, at one point, definitely confusing you and, most probably, are one of the main reasons why your decisions are random. Take a look at the two charts up, which one seems more logical and less confusing?

Doesn’t it seem silly to use a messy chaotic chart when you can work on clean price chart? Trading is hard enough without a messy chart full of lagging indicators. Stop fooling yourself by believing that they are helping you trading or timing entry and exit points.

What happened in the past is in the past; indicators only analyze past data statistically, and therefore they are lagging, not to mention that they display it to you in a format that is less clear and less precise than the price action itself. The bottom line is that there is just no logic in using lagging indicators. Price action analysis takes all market variables into account.