Price Action Trading Explained
1- The Definition Of Price Action
– Trading with “Messy” Vs “Clean” Forex Charts
– How to trade Forex with Price Action Trading Strategies
How to use chart confluence and Price Action Signals
Definition OF Price Action: My definition of price action is the act of studying, reading and interpreting the market over time, which involves no indicators(the use of raw price chart to trade the market). By learning to read the price action of a market, we can determine a market’s directional bias as well as trade from reoccurring price action patterns or price action setups that reflect changes or continuations in market sentiment.
In simple terms. This means you are making all of your trading decisions based purely on the price bars on a “naked” or indicator-free price chart.
“Clean” charts VS “Messy” indicator laden Charts
Next, to demonstrate the stark contrast between a pure P.A. chart and one with some of the most popular forex indicators on it, I have shown two charts in the examples below. The chart on the top has no indicators on it, there’s nothing but the raw P.A. of the market on that chart. The bottom chart has MACD, Stochastics, ADX and Bollinger Bands on it; four of the most widely used indicators AKA “secondary” analysis tools as they are sometimes called:
The image example below shows a clean price chart, with no mess, and no indicators, just pure price bars:
The image example below shows a messy price chart, with lots of clutter, indicators, and mess:
It’s worth pointing out how in the indicator-laden chart you actually have to give up some room on the chart to have the indicators at the bottom, this forces you to make the P.A. part of the chart smaller, and it also draws your attention away from the natural P.A. and onto the indicators. So, not only do you have less screen area to view the P.A., but your focus is not totally on the price action of the market like it should be.
If you look at both of those charts and think about which one is easier to analyze and trade from, the answer should be pretty clear. All of the indicators on the chart below, and indeed almost all indicators, are derived from the underlying P.A. In other words, all traders do when they add indicators to their charts is produce more variables for themselves; they aren’t gaining any insight or predictive clues that aren’t already provided by the market’s raw price action.
How to Trade Forex with Price Action Trading Strategies
So how exactly do we trade Forex with price action? It boils down to learning to trade P.A. setups or patterns from confluent levels in the market. Now, if that sounds new or confusing to you right now, sit tight and I will clarify it soon. First, we need to cover a couple more things:
Due to the repetitive nature of market participants and the way they react to global economic variables, the P.A. of a market tends to repeat itself in various patterns. These patterns are also called price action trading strategies, and there are many different price action strategies traded in many different ways. These reoccurring price patterns or price action setups reflect changes or continuation in market sentiment. In layman’s terms, that just means by learning to spot price action patterns you can get “clues” as to where the price of a market will go next.
The first thing you should begin P.A. trading is to take off all the “crap” on your charts. Get rid of the indicators, expert advisors; take off EVERYTHING but the raw price bars of the chart. I prefer to use candlestick charts because I feel they convey the price data of the market more dynamically and “forcefully”, if you are still using classic bar charts and want more info on candlesticks then checkout this candlestick trading tutorial.
I like the simple black and white charts the best, as you can see below. In metatrader4 you simply right click on the chart and adjust the “properties” of the chart to get it looking like mine below. If you want more info on how to set up your MT4 trading platform checkout this MetaTrader 4 tutorial.
After you’ve removed all the indicators and other unnecessary variables from your charts, you can begin drawing in the key chart levels and looking for price action setups to trade from.
The image example below shows examples of some of the trading strategies I teach in my forex trading course. Note the key support/resistance levels have been drawn in:
How to trade price action from confluent points in the market:
The next major step in trading Forex P.A. is to draw in the key chart levels and look for confluent levels to trade from. In the chart below we can see that a very obvious and confluent pin bar setup formed in the USDJPY that kicked off a huge uptrend higher. Note that the pin bar trade setup showed rejection of a key horizontal support level as well as the 50% retrace of the last major move, thus the pin bar had “confluence” with the surrounding market structure…
In the image example below, we can see a pin bar setup that formed at a confluent point in the market:
All economic variables create price movement which can be easily seen on a market’s price chart. Whether an economic variable is filtered down through a human trader or a computer trader, the movement that it creates in the market will be easily visible on a price chart. Therefore, instead of trying to analyze a million economic variables each day (this is impossible obviously, although many traders try), you can simply learn to trade price action, because this style of trading allows you to easily analyze and make use of all market variables by simply reading and trading from the P.A. trail they leave behind in a market.
I hope today’s introduction to Price Action Forex Trading has been a helpful and enlightening lesson for you. No matter what strategy or system you end up trading with, having a solid understanding of P.A. will only make you a better trader. If you’re like me, and you love simplicity and minimalism, you’ll want to become a “pure” P.A trader and remove all unnecessary variables from your charts. If you’re interested in learning how I trade with simple price action strategies, check out Price Action Forex Trading Course for more info.