How to Trade Forex with Price action
June 29, 2017 |GeneFX
The search for a ‘holy grail’ never ends in the lives of many Forex traders; most of them get excited when they discover a new trading tool to tinker with on their charts. Such traders believe that there is a shiny indicator that can help them to absolutely eliminate anxiety and doubt while making a trading decision. But the real truth is that a ‘holy grail’ in Forex trading is fictitious, and it always leads into a love/hate relationship, when the ‘holy grail indicator’ fails to live up to its expectations. In most cases, a trader’s vicious hunt for the perfect indicator escalates perpetually when one indicator lets them down, resulting into a lot of wasted energy and little or no fulfillment. At some point such traders may think of trading Forex without indicators. Taking such a path always leads someone to Price Action trading.
Price Action Trading is a methodology of using naked candlestick charts to study price behavior and patterns. The goal of a price action trader is to make trading decisions by absolutely basing on the current price behavior, rather than historical patterns. Today, I will usher you into price action trading by arming you with some kick-starter knowledge on indicator-free trading, and to help you extinguish the search for ‘holy grail’ accessories. Those who are already familiar with price action trading are also welcome to keep on reading’ knowledge never goes stale. It’s always important to keep on refreshing the mind by revisiting the basics regularly. The following three steps will furnish you with enough knowledge on price action.
Study the Structure of the Market
Studying the structure of the market is simply tuning you with the price charts and getting yourself a good understanding of where the wind is blowing. Many traders make decisions in the market without first getting a good grip on what is happening in the market. Indicators will definitely not be of help in this stage because most of them focus on what has already happened, rather than what is currently happening.
Since price action does not involve trading with indicators, one can study the structure of the market by first identifying swing points on the chart; these are zones of higher highs and lower lows that are created as bulls and bears fight for dominance in the market. The simple order of swing points can play an important role in helping you to understand where the market is moving, and where it is not moving to. In a nutshell, even the most basic study of the market structure will help you easily decode some significant information that many traders struggle to find. In this stage, you will easily establish whether the market is under the control of bulls or bears, or whether I is ranging between two levels. A trader will also find out whether the market is emerging into a new trend, or forming new lows and highs by studying the structure of the market. Following swing points helps one to form a basic foundation of technical analysis and price action trading. A trader who depends on indicators will most likely struggle to find such information.
Establish the Trend
The question of how to identify the trend of the market is common among many traders who rely on indicators. Most of these traders might try to use sophisticated ‘holy grail’ indicators or mathematical techniques to find out whether the market is trending or not. For a price action trader, trend identification is among the simplest and basic steps of taking a trade. The most important thing in identifying a trend is establishing a definition of a ‘trending market.’ In the simplest form, a trending market is one that is forming higher highs or lower lows. A ranging market, on the other hand, forms when market is keeps bouncing off a certain horizontal level to the low, and to the high, hence price moves sideways. One can also say that price is trapped between two horizontal levels. With these definitions, identifying the trend in any market is as easy as letting water flow down your throat. Incidentally, it can be seen that recognizing the trend is easier when one has already studied the structure of the market.
Swing points help you to know who is in control, between the bulls and the bears. They also reveal whether the market is trending or ranging. Therefore, after studying the structure of the market, it is important to establish the trend or range of the market, and study its structure. Anyone who can identify a simple structure of the market can spot the trend. You want to be looking for long trades when the market is an uptrend, and going short when the market is in a downtrend. While some people successfully take counter trades, many traders burn their fingers whenever they try to fight against the real direction of the market. Trending markets are the most ideal conditions to take trades. However, one should avoid trading out of position; it’s best to buy low and sell high. This means that you want to wait for price to retrace back into swing zones before taking your trade. Identifying the structure of a trend in not only important in taking trades, but also helps a trader to find the best exit points when trading. Ranging markets are messy and turbulent; hence not the best for taking trades.
Find Potential Trade Areas
After reading the charts and understanding whatever is going on, you want to identify high probability trading areas; if at all you have established that it is safe to trade. In this stage, you want to establish the next zone that is attracting the market, and the probability that the price will move in that direction. This is the level where we step up our analysis and introduce chart patterns, and helping tools such as Fibonacci levels, pivot points and psychological numbers. Please note that I personally use none of these tools in my trading. I use the most basic trading techniques, but though these tools can come in handy for a new price action trader. You want to build a case for or against taking a trade at certain levels, depending on how much evidence you can collect from the price action at that level.
In the case below, once strong support and resistance zones have been identified, you want to find a trading zone. Only three things can happen at this level. (1) The market can bounce off the support zone and give a buy signal, (2) Price can break through the support, and retrace back to give a sell signal, (3) Price can establish a ranging zone and begin to move sideways.
If you have to find a buy setup, make sure price has bounced off the support zone, and that you have a confirmation for a buy signal. If price breaks the support zone, forget about going long, and start watching out for sell signals, unless price comes back above the support. This concept is based on the fact that strong support areas always turn to strong resistance zones and vice versa, when broken.
As in the case above, you don’t want to go short as soon as support is broken, but rather it’s ideal to wait for the price to retrace and test the broken support, which then becomes a confirmed new resistance as soon as price bounces of the level; that’s the best time to go short. The above chart also shows how one can use market structure to find out the trend on the price. In the case above, a downtrend is identified by the formation of lower highs and lower lows. Some people trade out of position by simply shorting because the trend is bearish; that is wrong. A good price action trader will want to identify optimal trading zones, as the one marked by the rectangle in the above chart.
Wait for a Trade Set-up
Once you have identified the optimal trading areas, you can now relax and take a sip of your coffee as you wait for an entry signal. Since you are a price action trader, the entry signal will most likely be a candlestick entry signal that signals reversal/rejection, or a breakout. Once you get a good signal, take you trade, without forgetting to employ money management skills, and find something else to keep you busy as the market fills your wallet with some good amount of money.
If you thought price action was rocket science, you have definitely proved otherwise. I believe this article has served as a good introduction to price action for all new traders, as well as a powerful refresher for the old traders, who have been using price action long enough. If you are looking for a mentor to teach and guide you on price action trading, visit: www.genefxtrading.com. At GeneFx Trading Academy, you will find a teacher and mentor, who will hold your hand and practice with you until you are able to decode price action language on your own and make some real money out of Forex trading. Mentor-ship is very important in Forex Trading, just as on-the-job training is significant in other professions. There is more than 80% chance that traders who get mentored by an already successful Forex trader will succeed in the market, and join the 10% lot of prosperous traders. So, if you are thinking of taking your Forex Trading career to the next level, look no further than GeneFx Trading Academy. You will be mentored to the level of a professional trader for an affordable fee, and your trading life will never be the same again.
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