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Price Action Forex Trading

Price action is a type of technical Forex trading that is based on the bare prices and charts instead of the usual indicators. Traders that employ various price action trading techniques believe that bare prices and charts can tell us everything we need and that indicators, while being helpful for calculating some statistical dependencies, create a time lag, which can be critical in Forex. In fact, all indicators and any other methods are based on the data that is a part of a price action. So, price action is just a broad definition for using the market's rather raw technical data. The four techniques that are presented here do not represent the complete set of price action trading methods; they are just the most popular and interesting ones.

Tape Reading. The term refers to the times when the stock quotes came to the trading houses (more like the modern betting firms) in form of a tape telegram. Traders analyzed the changes in the quotes, their speed and volume, and based on this analysis, issued their trade orders. Modern tape reading in Forex is somewhat different — you just analyze the quote as it is displayed in your broker's terminal and then trade using your analysis of the data. It is the most basic way of trading, and some new traders start with it without knowing how it is called. Tape reading is mostly suitable for scalping and cannot be used for long-term entries.

Japanese Candlestick Patterns. Many different patterns, formed by the Japanese candles, are recognized by Forex traders. Such patterns are usually quite small (they consist of 1–4 candles) and can be spotted on all timeframes. Japanese candlestick patterns are not too reliable but the abundance of signals compensates the low winning rate. This type of trading is a part of price action and requires some basic chart analysis.

Chart Patterns. Patterns formed by the price fluctuations of the chart are numerous — triangles, wedges, double-tops, double-bottoms, head-and-shoulders, and many others are all part of this trading technique. Unlike Japanese candlestick patterns, these patterns are usually formed by many chart bars and often serve only for the long-term market evaluation. Chart patterns sometimes have a strong fundamental basement and are thus valued by the professional traders, and the Forex market tends to follow them simply due to their popularity.

Point-and-Figure Charts. This type is a bit more difficult than everything else in the price action domain. It is also arguable that point-and-figure can be considered a price action technique at all. P&F charts are built based on the price changes, independently from time. Columns of X's are formed when the price is rising, while columns of O's are formed during falling trends. The columns of X's and O's follow each other. A price should pass a certain amount to form an O or X or reverse in an opposite direction for a significantly higher amount to start forming a new column. Trends can be easily read in such charts, and many Forex traders use the strategy to buy and sell exactly at the new column's start to catch the new trend.

Not all traders can use price action techniques successfully. Same as not everyone can trade with the indicators profitably. Price action can be used alone but it also can be interesting in confirming other methods. With price action techniques, you can always scale in and out and flexibly change your strategies as well.