The Top Price Action Strategies for Forex Trading Over the past few years, there has been a lot of talk about Price Action Trading b oth on Wall Street and throughout the rest of the trading world. While most price action trading strategies draw on principles that have been used by traders for decades, there are still quite a few things about price action trading that make it different from its alternatives. Simply put, price action trading is an approach to the trading world that emphasizes current price patterns above all other indicators. Price action traders believe that while most other technical indicators have their merits, these indicators are consistently “lagging behind.” Price, it is claimed, is the only indicator that is entirely up to date. As a result, focusing exclusively on current price (as well as the price history leading up to it) will lead traders to make the most lucrative decisions. Identifying the current price of any given asset is easy—all you will need to do is look at a specific price chart. Generating rough explanations of the recent price trend is also pretty easy, as long as you are willing to generalize. The challenge for most traders will not be determining what the price actually is, rather, it is deciding what to do with the specific information. Suppose a currency is currently valued at $1.50 per unit. How can I take this information and put it to immediate use? Should I open a new position? Should I close any existing positions? This is where having an effective price action strategy will be very important. In this article, we will discuss some of the top price action trading strategies for individuals trading in the foreign exchange market. This include forex price action strategies you can use to increase your rate of return and become a more dynamic trader. What are the pros and cons of price action trading? As you will quickly discover when learning about any trading strategy, price action trading has both positive and negative aspects. Whether this specific approach to trading will be right for you will depend on your personal goals and preferences. The pros of price action trading include: · Amazingly Simple: instead of needing to use complex formulas, sophisticated trading software, or multiple technical analysis indicators, price action traders are only concerned about price patterns. Learning how to trade using price action strategies requires relatively little time.
· Accelerated Decision Making: because price action trading requires a limited level of analysis, deciding whether to open a new position will demand very little of your time. This may allow you to “beat the market” to exploiting certain price trends. · Universally useful: because all tradeable assets will have a specific market price attached to them, price action trading can be used in any speculative market. This includes forex, the stock market, bond markets, commodities markets, and many others. While the pros of price action trading make it very appealing to new traders, this approach to the market will have some cons attached to it as well: · Limited Market Depth: b ecause price action trading solely focuses on price movements, you may be missing the bigger picture. With limited information, it can be easy to mistakenly open a negative position. · General exposure to risk: no matter what the current price of an asset may be in the status quo, it is still impossible to guarantee w here that price may move in the near future. Instead of looking for guarantees, price action traders simply look for where value increases are most likely to occur. Additionally, it will be important to note that price action trading is ideal for individuals operating within a short-term time frame. Day traders will consider this fact to be a “pro” while individuals saving for retirement will be better off using a different trading strategy. Why is price action trading particularly useful in the forex market? Before we dive into the list of specific price action trading strategies, it will be important consider why—perhaps more than any other market—price action trading strategies have become so popular with those involved in the forex market. · Compatibility with the 24 hour trading clock · Usefulness with currency pairs that have historically high levels of volatility · International “delayed reactions” will create multiple price action opportunities each day · Most forex traders operate using a relatively short time-frame · Price action trading is ideal for high volume markets (forex is the largest in the world) These are just a few of the ways that price action trading can increase your daily forex returns. However, even keeping these things in mind, price action strategies can still be applied almost anywhere. What are the top price action trading strategies for forex trading?
Price action charts are fairly straightforward, but it will be important to remember that—at least when looking at historical data—you will always have the benefit of hindsight. It can be very easy for you to look at a price action chart and think “I should have invested earlier this morning.” The purpose of developing a price action trading strategy is so you can have this exact sort of wisdom in advance. 1. Springing Away from Support As the price of an asset moves towards instances of support, that means that the asset is likely oversold and that a price increase is about to occur. But instead of simply trying to enter a position as the price returns to normalcy, you can make even more money by investing prior to a breakout period. Currencies that quickly “bounce back” after nearing instances of support are more likely to break out and continue increasing value. As a response, price action traders will consistently look for any currency springing away from support. 2. Long Wick Candles When you are trading using a short term strategy (ideally within a single day), then volatility will almost always be your friend. In order to determine whether a currency is highly volatile, you should study its historical price changes throughout the course of a day. Long wick candles will often formulate when this apparent level of volatility is being kicked into motion. Anytime you see a long wick candle beginning to form on a price chart, you can be confident that a strong trend is about to occur. 3. Limited Retractions before Breakouts Most currencies will have a relatively flat daily movement, meaning that they will consistently move up and down without experiencing any major changes. But when a currency is experiencing limited retractions (small downward movements), this means that a breakout is very likely to occur. As the currency continually takes two steps forward and only one step back, the value of that currency may have fundamentally changed. 4. Historically Repetitive Price Swings Even in a market as large as forex, it is still very possible for individual entities to have a major impact on currency values. Many of these “major players” will enter into the market at specific times of the day. If it seems that a given currency’s value increases can be traced to a specific event—such as the opening and closing of competing markets—then you may be able to enjoy consistently profitable positions with a limited exposure to risk.
Conclusion Price action trading is surprisingly simple to grasp, though becoming a successful price action trader will still require plenty of hard work. In order to exploit changes in currency values to the greatest extent you are comfortable with, it will be important to familiarize yourself with the market as a whole. Considering any of these price action trading strategies can help get you pointed in the right direction.