Identifying Favorable Conditions for Price Action Trading

Successfully using price action trading techniques in Forex is arguably the most reliable method for sustained long-term profits. However, simply knowing how to apply them is not enough unless you can also gauge the markets to find the favorable conditions that work best in optimizing price action strategies. Just like the champion surfer who is looking to showcase his or her skills, the ability to perform means nothing if there are not the right waves at sea.

Gauging the market for optimum price action trading conditions is the first and most important step to take, but so many traders simply do not bother or forget to carry this out. You should look at learning to trade the price action way as a multi-step process. Step one, learn to spot the waves...

Trending Markets

The trending market is by far the best scenario for the application of price action signals. Whether it is a bullish or bearish trend, the constant movement in one clear direction will allow price action strategists to accurately spot optimum dips to enter. Beware though, a sudden spike on the 5-minute timeframe is not evidence of a trending market. Even a few hours of movement in one direction after the publishing of interest rates does not qualify. To truly identify a trending market you need to be able to show days if not weeks of sustained and regular movement in one direction. If you do not, you might just find yourself opening the wrong position at the turn of a ranging market.

Ranging Markets

Where trending markets are the best to trade in, ranging markets are the most commonly seen. Currency pair charts fluctuate heavily between upper and lower limits, neither currency having the required strength to break out of the limit lines. Although some traders will choose to enter several positions in these conditions, the most common technique for ranging markets is scalping. This is a practice that is not congruent with price action trading and can lead to some truly negative results for many. Traders can make the mistake of thinking that the upper and lower limits of a range are set lines, when really there are more like areas on the chart. Anyone looking to spot the turns could easily mistake a change as a reversal, when really what might be happening is preparation towards a range break out.

Range Breakouts

This describes the situation when a chart’s price makes a clean break from the limits it had been constrained by. This leads to either a trending market or, equally possible, a new ranging market with higher or lower limits. As with gauging the ranging market (above), it is vital to remember that range limits are areas not set lines. Do not make the mistake of thinking a breakout is about to occur when in fact the line may still be well within the range’s upper limit area.

As with all these market conditions, when you believe you have found a point that represents a trend, a range or a breakout, use the safety net of a slightly later position. This will allow you to be more certain that the movement is real and not simply a brief change of wind. This will be particularly important when it comes to setting pending orders.

Set and Forget

Perhaps above all, the greatest asset that price action traders can have is in the short amount of time needed to be spent in front of the computer. Gauging these favorable conditions for price action analysis can be done just by looking at the daily timeframes for charts at market close. This task takes nothing more than 20–30 minutes and once done, you can use pending orders to have your positions open automatically. You just need to identify the points that show one of the above conditions, look at the price history to test your theory, and then set the pending order. You do not need to sit in front of the computer biting your nails, waiting for the right thing to happen.

When you are comfortable in understanding when and how these favorable conditions appear, then you are ready to start stage two, learning to apply price action analysis strategies to these markets to maximize profits.

How reliable are your current strategies? Are you ready for something you can put your faith and money, into?