It is obvious from the name that the objective of the approach is to analyze price movement, or to be more specific, to find particular patterns in its movement.
As is well known, the history of forex trading is cyclical, meaning that some conditions frequently repeat. Knowing this, we may deduce that a trader can predict the direction of the next price movement if he or she observes a particular pattern in the price behavior.
Traders utilize Japanese candlesticks, a kind of price movement visualization that displays the highest and lowest prices, as well as the starting and closing prices for a given period, to make it easier to recognize such patterns.
The figure below depicts the elements of a candlestick that give traders with valuable trading information.
Essentially, a candlestick reflects the time period during which a price shift occurred. In contrast to the standard line chart, the candlestick delivers information on four indicators simultaneously, as opposed to simply one.
This enables traders to see recurrent patterns in candlesticks. On the basis of the identification of a particular pattern, it is possible to predict future price movements.
The primary advantage of candlestick charts over bar and line graphs is the ability to obtain four crucial indicators for research.
- Price that was the highest for the period
The period’s cheapest price.
Open – the period’s opening price
Close – the period’s closing price
There are two sorts of candlesticks: bullish and bearish. If the closing price of a candle is lower than its initial price, the candle is bearish. These candlesticks are crimson in color.
A bullish candlestick is one in which the closing price is greater than the beginning price. It will appear in green.
There are instances in which a candlestick may be missing some components:
The absence of the body of a candlestick implies that the opening price and closing price of the period were identical.
This pattern is known as Doji candlesticks. If there are no shadows cast by the candlesticks, the beginning price and closing price of the period represent their maximum and minimum prices, respectively.
On every timeframe, the candlestick-based price action technique can be implemented. Its objective is to locate a combination of candles, or a pattern, rather than a single candle.
The good news is that many common candlestick patterns have been compiled, such as:
Twilight star Two crows
Each of these candlestick patterns provides a trader with a distinct call to action. These signals are classified into two categories:
The first kind implies that the current price trend will continue, but the second type predicts an imminent trend reversal.
The origin of a Price Action trading method
Price Action is derived from traditional technical analysis. It is founded on Charles Dow’s thesis, the father of technical analysis.
Dow feels that the pricing accurately represents all factors. It is the culmination of all other market aspects and information. Price Action examines price changes, thereby interpreting the psychology of the market crowd and predicting net action. It is the most reliable trading theory and framework.
Strategies based on the Price Action technique
Price Action techniques are not restricted to patterns alone; they employ a series of filters, and patterns are not necessarily the primary factor. Price Action is a versatile market analysis tool that may be utilized as both a base strategy and an entrance filter. To employ such TS, a trader needs not only understand the correlation between pattern elements, but also be able to “read” them relative to market conditions.
The pattern is of limited value without the accompanying chart. It is crucial to evaluate the position of levels, the nature of chart movement preceding the creation of the pattern, and the formation period of the pattern.
Why are indicators absent from this strategy?
Price values travel through basic mathematical calculations known as indicators. However, technical indicator signals should not be treated the same as traffic light signals (which is the overwhelming mistake of many traders).
The market will never forgive you if you open orders using a basic technique, which is what all indicators do – when the green light is on, open an up trade, and if the red light is on, open a down trade, they say. And regardless of whether an Expert Advisor or an indicator follows the trend or attempts to assess if the market is overbought or oversold, they are all originally based solely on price indications and take nothing else into account.
Similarly, the foreign exchange market can be compared to the weather in that it rarely remains constant, fluctuates, and is never the same as yesterday. The interbank market cannot be computed because it is a nonlinear system influenced by hundreds of global economic and political factors every second. These factors affect asset prices, which in turn affect indicator readings.
It enables the trader to work with the price, i.e., to be closer to the source, whereas the trader who employs simply indicators is essentially one step removed from his or her earnings. However, when utilizing this trading technique, it may be prudent to employ oscillators as an additional safeguard against erroneous transactions. It will not complicate the approach, but will boost its profitability; an example of its use will be shown at the conclusion of this section.
How to use Price Action: A step-by-step practical guide
The foreign exchange market is characterized by trends comprised of large movements and occasional pullbacks; these fluctuations produce waves. The first step in riding these waves is to identify the extreme price peaks and valleys. If one is able to enter a trade on a pullback against the trend, they are in a favorable position. To locate such positions, one must observe the overall trend, which must be validated by rising or falling highs and lows.
To identify a declining trend, watch for low highs (LH – lower high) and low lows (LL – lower low) (LL – lower low).
To determine the ascending trend, one must observe the highs (HH – higher high) and the lows (LL – lower low) (HL – higher low).
The signals should be activated at these important levels, assuming that the trend highs or lows are updating predictable highs or lows. When a price pattern indicates a reversal in trend, one should feel free to place a trade.
The most crucial thing a trader must do while employing this technique is to keep an eye out for candlesticks, or so-called “dojis.”
In forex parlance, a pattern is a chart formation that enables the prediction of future price movements. Such a formation may include one or more Japanese candlesticks (often no more than four) and the development of shapes on the chart.
You should memorize the patterns of interest and post them near your workspace. If you observe such a pattern forming at a support or resistance level on the chart, you can place a corresponding order.
Price Action is a first-rate trading technique. When you are a newbie, you will attempt to make entry points as challenging as possible by employing various on-screen hints.
However, after sufficient time in the market, you will learn that simplicity is the greatest approach to profit Myfxbrokers.