An Introduction to Price Action Trading

What is Price Action?

This is the art of making your trading decisions based off of reading the price movement on the chart. This is done without any indicators, the only thing that really should be on the chart should be your Support and Resistance areas.

Now remember by ‘Action’ in Price Action, we are referring to the movement of price on any given chart. Remember, every single chart tells the story of a battle between the Bulls (the Buyers) and the Bears (the Sellers). This is what every single chart shows (Forex or otherwise). What influences the movement of price is traders making trading decisions (manual or automatic).

Price Action shows you the most up to date market sentiment, because it’s happening right there in front of your eyes! Using indicators are often lagging, which is why sometimes you will enter a trade based off an indicator hoping that it will go well, only to have price turn against you! (Never go in to a trade ‘hoping’ it will go well, we are looking for high probability – low risk trades, in other words it makes sense to execute!).

Price Action = Trading the CAUSE

Once I understood this, it was a real penny drop moment. I had been trading the EFFECT of price movement, which is why I had been inconsistent. Trading this way meant that I could trade the cause of price movement and get in on the potential move very early on.

How to trade Price Action

There are four main elements to trading Price Action:

(1) Fundamental Analysis

(2) Technical Analysis

(3) Support and Resistance

(4) Candlestick Analysis

On the surface this may seem incredibly overwhelming, but once you have a clear understanding of these elements, you will see that they are very simple to do.

Let us now look at each of these four elements in more detail:

(1) Fundamental Analysis

This is extremely important, always keep an eye on the global economic news, remember we are trading Forex, Foreign Exchange. We are trading currency pairs, there are going to be certain global economic news events that will have an effect on the movement of price.

(2) Technical Analysis

Technical Analysis in Price Action Trading, is recognizing certain patterns on the chart that may give an indication for a potential trade. Remember, the charts are subjective, the reason they move in the way that they do is because of traders making trading decisions.

Traders will look at a chart and see that in the past price moved sharply down from a certain area, price is now reaching the same area and so they look for the same thing to happen. As Human Beings we are always looking for patterns and similarities.

So, Technical Analysis is immensely important in understanding and identifying potential trades. We look for those potential trades at areas of Support and Resistance.

(3) Support and Resistance

Support and Resistance are those areas on the chart where we believe there are heavy influxes of Buyers (at Support) and Sellers (at Resistance). These are our areas of trade opportunities, as they offer the highest probability – lowest risk trades.

This leads us to the final piece of the puzzle, Candlestick Analysis.

(4) Candlestick Analysis

Candlestick Analysis, as the name suggests is analyzing the candlesticks. We do this candle by candle in order to ensure we are aware of the latest, the most up to date and therefore the most accurate market sentiment. This is why trading the higher time frames, is key because it shows us Price Action that spans a larger amount of time. If you had two candles, a 5 min candle and a 12 hour candle, the one that would be of more importance would be the 12 hour candle, because it represents a longer period of Price Action.

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