Price action refers to analyzing and interpreting the raw movements of price on a chart without relying on indicators. It focuses on understanding patterns, key levels, and market sentiment based on price behavior.
Traders use tools like support and resistance levels, candlestick patterns (e.g., pin bars, engulfing bars), and chart formations (e.g., double tops, triangles) to make informed decisions. Price action is favored for its simplicity and effectiveness, allowing traders to adapt to market changes quickly. It’s widely considered one of the most authentic ways to understand market dynamics.
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Traders base their trading decisions on recurring price patterns that, once established, tell them which way the market is most likely to move.
Chart patterns, candlestick patterns, trendlines, price bands, support and resistance levels, consolidations, Fibonacci retracement levels, pivots, and market swing structures like upswings and downswings are some of the instruments used in price action trading.
The underlying component that drives the markets, fundamental analysis, is typically disregarded by price action traders. Why? because they think the market price already accounts for everything.
One item, though, that I think you should not overlook are significant economic news announcements, such as the FOMC, interest rate decisions, and non-farm payroll.
I assert that “the publication of economic news can be both a friend and an enemy for your trades” based on my personal experience and observations.
What I mean by it is this:
Because economic news releases frequently lead prices to move swiftly either up or down owing to heightened volatility, you stand to gain a lot more money very quickly in a short period of time if you perform a trade in line with the results.
However, if you bet against the news, you might lose all of your money or walk away with a significant loss because markets can move so quickly at that time that there is a risk your stop loss will not be triggered.
An illustration of what may occur following a significant forex fundamental news release is provided in the chart below:
I will always remember this event. I made a trade with a beautiful price action setup, and it went as planned. However, the market fell sharply a few minutes later.
The price level I initially selected for my stop loss was never reached.
I made as many attempts as I could to close that deal, but the price fell so much below my stop-loss price that it was impossible! My stop loss was jumped by the price.
I did nothing but watch helplessly. After what felt like a lifetime, the broker concluded the trade at the lowest price possible—way, way, far below!
My trading account was all but destroyed by that one trade. I lost over half of my trading account instead of just 2%. I did not comprehend or know what transpired that evening to cause the market to move in that manner. I had trouble falling asleep that night.
I later learned that the market was influenced in that way by a significant economic news release.
I now check the news calendar on the Giant Hunter AI before making a trade
Even if there is a legitimate trade setup, I will not enter if I notice that a significant announcement is about to be made.
On rare occasions, if I can position my stop loss behind a significant level of support or resistance, I will enter a trade.
Red is used to indicate significant impact news. You search for that (see figure below):
What you can do is as follows:
- If there is a legitimate trade setup, make sure there are not any significant news announcements coming up that could affect your trade by checking with forexfactory.com.
- You have two options if there is news to be released: either wait until the markets resume normal trading following the news release and avoid trading, or if you do choose to trade, trade modest contracts because the market is extremely volatile at that time. You can use this to your advantage or disadvantage.
In these situations, you must be aware of what you are doing. - In the event that the market moves against you after the news is revealed, consider tightening your stop loss or pulling some profits off of a trade that has been active (before the news release time) and profitable for a while. Ideally, you would have made this trade a long time ago, when the market price was much lower than your trade entry price. You would have already locked in some profits, and you would profit greatly if the market moved in the direction of your trade following the news announcement.
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Three Important Reasons Why You Must Be Trading Price Action
- Price action is a representation of human behavior in general. Certain patterns are produced on the charts by human behavior in the market. Therefore, exploiting those patterns to understand the market’s psychology is the main goal of price action trading. This explains why the price hits support levels and rises again. This explains why the price meets resistance levels and declines.
Why? Due to the human response as a whole! - The FX market is structured by price action. There is no way to know with absolute certainty where the market will move next. On the other hand, you can somewhat forecast the direction of the market using price activity. The reason for this is that price action provides structure. Therefore, you may somewhat lessen the uncertainty and make some educated guesses about the market’s future direction, provided you are aware of the structure.
- Price action aids in lowering erroneous signals and noise. Trading utilizing stochastic or CCI indicators, for example, can result in a lot of erroneous signals. This also applies to a large number of other indicators. These erroneous signals are lessened by price activity. Although price action is susceptible to false signals, it is still a far better choice than other indicators, which are simply based on the raw price data. Additionally, price action aids in lowering “noise.” What is a noise? Simply put, market noise is all the price data that warps the image of the underlying trend; volatility and minor price corrections are mostly to blame for this.
Trading from longer timeframes rather than shorter ones is one of the best strategies to reduce market noise. To understand what I mean, look at the two charts below:
Next, examine the four-hour chart’s market noise (see the white box there?). That corresponds to the above 5-minute chart’s area!
Because they do not realize that the major trend in the longer timeframe is what really influences what occurs in the lower timeframes, many traders become confused while trading in smaller timeframes, which often include too much noise.
However, I do use trading setups that occur in longer periods to trade in shorter timeframes. I do this in order to tighten my stop loss and enter at a higher price.
This is known as multi-timeframe trading, and I will go over it in detail in Chapter 16 to demonstrate how it works.
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Is Price Action Applicable To Any Other Market?
Yes, is the response. This blog’s description of price action trading is applicable to all markets.
Although I will mostly discuss exploiting price action in the currency market in this article, the ideas are general and applicable to many financial markets.
Price Action Trading Allows You To Trade With An Edge
Price action trading is about trading with an edge. What is a trading edge?
It basically indicates that you should trade when the chances are in your favor.
For example:
- Following the trend when trading
- Using Price Action in Trading: Utilizing trustworthy candlestick and chart patterns.
- Trading with levels of support and resistance.
- Making your victories larger than your lost trades
- Only trading over longer periods of time
- Avoiding trade chasing and patiently waiting for favorable trade setups.
All of the aforementioned factors provide you with an advantage when trading. Even if these are not new and you have undoubtedly heard of them before, the difference between winners and losers is this stuff.
What Price Action Trading Is Not
- Although price action trading will not make you wealthy, it can make you a successful trader if you manage your risk well. While some of you will follow this course, learn a lot, and become wealthy, others will not. That is the nature of things.
- Although price action trading is not the best option, it is still superior to employing other indicators, the majority of which are generated from price action and frequently lag.
- Trading price movement will not make you a millionaire overnight. You will be rewarded if you work hard, watch how the price moves, and recognize such recurring patterns. Then, you must have the courage to trade them.
I applaud you and encourage you to “go and prosper” if you are among those who will use the knowledge you gain from this course in your forex trading.
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Chart time
Chart time is necessary to comprehend price action. Some of you might pick things up quickly; others could take a long time to understand.
Pay attention to the market’s price movement. Examine historical data to see how the market has performed. Why did it act in that manner? Until you accomplish this, you cannot trade price action with confidence.
You would have a significant edge if you could just read the charts well enough to be able to enter at the precise moments when the move would take off and not return.
My trading tools include trend lines, particular candlestick patterns, particular chart patterns, Fibonacci retracement levels, and support and resistance levels.
You will quickly start to comprehend and realize how everything fits together if you invest the time and energy to learn them.
Begin studying naked price action trading.
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