When you are new to trading, you will mostly hear about fundamental and technical analysis. With fundamental analysis, you rely on interpretations of economic data and news, while with technical analysis, you usually rely on indicators. It is possible to perform technical analysis without any indicators at all, however, and some successful traders do not even put any indicators on their charts. These Forex traders use price action to place their trades. What is price action, and how do you use it to profit?
When you trade with price action, you look at patterns formed by the bars on your Forex chart to try and determine good trading moves. You can add indicators to your chart if you want, but they are not required in order to trade effectively. There are numerous different price action patterns you can look for including consolidating triangles, head-and-shoulders formations, pinbars, double highs with a lower close, double lows with a higher close, inside bars, and more. Each of these formations is relatively simple to learn to identify. What is not as simple is putting price action in an appropriate context for a trade.
Many beginners using foreign exchange price action make the mistake of thinking that any formation is tradable. The fact is, however, that not all price formations are created equally. Some are much neater than others, and context is important as well. A great looking pattern in the wrong location can be a terrible trade. A
How do you find good context? In some cases it is just a question of looking at what the market is doing. Is the market trending? Is it consolidating? From your testing, how have you learned that various price patterns result in different situations? Many people do choose to put indicators on their charts to help them to identify context. For example, if you place moving averages on your chart, you can use them to help you to identify areas of support and resistance. This can help you to figure out whether your price pattern is occurring in the right place. If you have a confluence of resistance below a price pattern indicating to "buy," that improves the odds that the trade will go on to win.
Why do people trade FX price action? For most, it represents a simple, elegant way to trade. With price action, you get your information from the price itself, which is a more direct way to perceive what is going on with the currency market. The other reason is that it can exist as a standalone system. If a lot of indicators or fundamental data confuses you, you might prefer the simplicity of a method which relies only on one thing. It is a great way to remove the clutter from your charts. As always, backtest and demo test and find out what works for you.
If you want to get news of the most recent updates to our guides or anything else related to Forex trading, you can subscribe to our monthly newsletter.