Forex Blog Articles

Why Price Action Reigns Supreme in Forex Trading

July 28, 2020 | 5:12 am | Forex Blog Articles
July 28, 2020 | 5:12 am
Forex Blog Articles
Why Price Action Reigns Supreme in Forex

A few reasons why price action is the preferred “indicator” for many forex traders

For a moment, throw out complicated analysis schemes and just look at the market. Just sit and watch the price action go up and down.

Enjoyable isn’t it?

Many traders love using price action as their number one indicator because it’s like watching a sporting event where the outcome is unknown but there is plenty of action along the way. There are ups and downs, and things can change dramatically from one moment to the next.

So why price action is still the “indicator” of choice for many traders?

 

Price Action Meaning

First thing first, let’s understand price action-

Then and Now

Unlike the stock market, prices in forex repeat themselves. If a price was rejected in the past, it will likely be rejected in the future or now.

Understanding historical prices and connecting them to now’s prices is therefore very important for traders. To do so, traders need to take a deep dive into studying prices to uncover the complexities behind them such as behavioral patterns and decisions traders made that influenced the prices.

Easy to See

A simple, no-frills price chart shows us how a particular asset has moved through the market.

While it’s simple in its presentation, the price action shows us so much without overwhelming our eyes and brains with information. Price delivered like this filters out the noise and just shows us the action.

Price in the Present

In previous articles, we laid out a number of different indicators. From stochastic indicators to MACD, the one thing all these other indicators had in common was that they were lagging.

All the information presented by technical tools suffered from a delay that could cause traders who solely rely on them to miss the bigger picture of the market.

Price indicators solve this lag problem as it’s the only indicator that’s real-time. It’s unfiltered, unprocessed, without delay. You see the price as it unfolds, giving you the most up to date tool in your analysis toolbox.

Works Across All Trading Platforms

Let’s say you come to forex after trading another market. Rather than learn an entirely different and new way to read the market, price indicators are the same from market to market.

A stock trader who reads price indicators, speaks the same language as a forex trader who reads them as well.

This overlap is helpful if you’re looking to move in a new direction or simply want to expand your current trading career.

Price action is Fast

Technical traders who use price indicators have a huge leg on fundamental traders when it comes to speed.

While we’re not saying faster is always better, but technical traders just don’t have to worry about things other than the prices flashing across their screens.

Because it’s faster, it requires less research. For those traders who aren’t too keen on pouring over the literature and constantly looking to learn more and more, price indicators can be a less tiring indicator tool.

Price Action in Forex Banner

How to Use Price Action to make money

When price develops, it constantly reaches significant points in price that the market rejects or breaks. Those significant levels are known as support and resistance levels. Those are levels where more institutions and traders are active and making decisions. 

First, you need to know how to identify those levels in the chart. With some practice, your eyes will quickly spot those levels.

Then, build your strategy around those levels in order to be aligned with the big money.

In the image below, you can see some support and resistance levels. Notice how many times the market touches those lines and reverses.

support and resistance levels.

 

The Price Action Strategy With the Highest Success Rates 

Personally, I like to look for a specific bar formation called “pin bar”, a candle with a very long tail and a very short body, near those lines and levels.

Pin bar formations

These candles show us the rejection of those levels and a probable change in direction. 

For more information about the pin bar strategy, read this article.

 

In the following graph, you can see how the Pin Bar looks with the Price Actions

Bearish pin bar at resistance level

 

Watch our part 4 video – Price Action Confirmation

Learning to read the story of the order-flow allows us to better understand price behavior and therefore to become better and reasoned traders.

 

Trading Price Action – Conclusion

This article is not meant to tell you that the price action “indicator” is better or worse than other indicators. It’s merely to point out that it remains a favorite tool for many technical traders. What you decide to use as your go-to indicator will always come down to what you’re most comfortable with and what works best for your unique trading personality.

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